SELECTED FINANCIAL DATA
---------------------
Year Ended December 31,
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
(dollars in thousands)
Summary of Operations:
Interest income $ 8,353 $ 8,008 $ 6,602 $ 5,996 $ 5,680
Interest expense 3,491 3,610 3,607 2,862 2,730
-------------------------------------------------
Net interest income 4,862 4,398 2,995 3,134 2,950
Provision for loan losses 60 50 350 26 25
-------------------------------------------------
Net interest income after
provision for loan losses 4,802 4,348 2,645 3,108 2,925
Other income 145 114 127 111 125
Other expenses (1) 2,514 2,123 1,605 1,495 1,202
-------------------------------------------------
Income before tax expense 2,433 2,339 1,167 1,724 1,848
Income tax expense 901 858 430 617 700
Cumulative effect of a
change in accounting
principle (24)
-------------------------------------------------
Net income $ 1,532 $ 1,481 $ 737 $ 1,107 $ 1,124
=================================================
Selected Year-End Balances:
Total assets $108,092 $105,807 $87,751 $81,560 $75,826
Loans receivable, net 92,967 82,992 75,097 65,973 55,890
Investments (2) 11,483 18,945 8,884 12,693 17,022
Deposits 66,973 66,564 73,035 69,140 64,282
FHLB Advances 7,800 - 1,000 - -
Stockholders' equity 31,076 37,368 12,562 11,729 10,719
Average Balance Sheet Data:
Total assets $105,617 $103,874 $83,921 $78,890 $70,256
Total earning assets 101,909 102,336 83,058 76,125 67,128
Loans receivable, net 87,489 78,797 70,397 61,301 52,288
Investments (2) 13,696 22,907 12,481 14,825 14,840
Deposits 66,520 68,684 70,541 66,713 59,301
FHLB Advances 2,788 83 167 - -
Stockholders' equity 33,869 33,115 12,283 11,317 10,219
Selected Financial Ratios:
Return on average assets 1.45% 1.43% .88% 1.40% 1.60%
Return on average equity 4.52% 4.48% 6.00% 9.78% 11.00%
Average equity to average
assets 32.07% 31.88% 14.64% 14.34% 14.54%
Interest rate spread (tax
equivalent basis) 3.16% 2.62% 2.86% 3.59% 3.86%
Net interest margin (tax
equivalent basis) 4.77% 4.32% 3.62% 4.12% 4.39%
Dividend payout ratio 55.22 54.32 N/A N/A N/A
Cash dividends declared
per common share (3) $ 4.45 $ 0.44 N/A N/A N/A
Earnings per
share--basic(4) $ 0.82 $ 0.82 N/A N/A N/A
Earnings per
share--diluted (4) $ 0.82 $ 0.82 N/A N/A N/A
(1) In 1996, a one time special assessment of $456,000 was imposed on Savings
Association Insurance Fund (SAIF) insured institutions to recapitalize the
SAIF.
(2) Includes investment securities, mortgage backed-securities, interest-bearing
deposits, and federal funds.
(3) Includes a $4.00 special return of capital dividend paid on July 11, 1997.
(4) Earnings per share--basic and diluted for 1997 was calculated using weighted
average shares outstanding of 1,872,451 shares. Earnings per share for 1996
was computed as if the 1,825,050 shares issued on March 29, 1996 had been
outstanding on January 1, 1996.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------
Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of Stone Street Bancorp, Inc. and Mocksville Savings Bank, Inc., SSB
(collectively referred to as the "Company"). It should be read in conjunction
with the audited consolidated financial statements and accompanying notes
included in this report and the supplemental financial data appearing throughout
this discussion and analysis.
ANALYSIS OF RESULTS OF OPERATIONS
The Company's results of operations depend primarily on net interest income,
which is the difference between interest income from interest-earning assets and
interest expense on interest-bearing liabilities. Operations are also affected
by non-interest income, such as income from customer service charges, loan fee
income and other sources of income. The Company's principal operating expenses,
aside from interest expense, consist of compensation and employee benefits,
federal deposit insurance premiums, data processing expenses, office occupancy
costs, equipment expense and income taxes.
In 1997 the Company completed its year once again with record earnings. Net
income increased to $1.53 million for the year ended December 31, 1997 compared
to $1.48 million in 1996 and $.7 million in 1995. Growth in net interest income
combined with an increase in other income outpaced an increase in other expense
to make 1997 the most profitable year for the Company.
Income and Expense
----------------
Net interest income is the Company's primary source of earnings. Table 1
shows that tax-equivalent net interest income increased by $464,000 or 10.6% in
1997 to $4.9 million from $4.4 in 1996. Tax equivalent net interest income in
1996 was $4.4 million as compared to $3.0 million in 1995, an increase of $1.4
million or 46.7%. Net interest income is analyzed on a tax-equivalent basis to
adjust for the nontaxable status of income earned on certain investments such as
municipal bonds.
The increase in tax-equivalent interest income in 1997 as compared to 1996 was
primarily the result of the increase in the weighted average yield from 7.87% in
1996 to 8.20% in 1997 combined with an increase in the average balances.
Average loans increased by $8.7 million or 11.0% to $87.5 million. Average
investments increased by $1.9 million or 24.9% as stock conversion proceeds
which were initially invested in liquid interest-bearing deposits in the FHLB
were used to purchase investments. The weighted average yield on interest-
earning assets increased by 33 basis points in 1997. In 1996, tax-equivalent
interest income rose 21.2% primarily due to increases in the average balances of
interest-earning assets of 22.7% increasing from $82.9 million in 1995 to $101.7
million in 1996.
Interest expense decreased by $119,000 in 1997 due primarily to a reduction in
the weighted average rate paid on interest- bearing liabilities of 19 basis
points. The balance of average interest-bearing liabilities increased $541,000
or .78% primarily due to the $2.8 million increase in average balance of
borrowings from the FHLB net of $2.2 decrease in average deposits.
Interest expense increased by only $4,000 in 1996. Average interest-bearing
liabilities decreased by $1.8 million or 2.74% in 1996 while the average rate
paid on those liabilities increased by 14 basis points. As a result, the
increase in interest expense in 1996 was due primarily to increases in deposit
rates.
Interest rate spread (on a tax equivalent basis) increased to 3.16% in 1997 from
2.62% in 1996 due to the increase in the yield on interest earning assets
combined with the decrease in average rate on interest bearing liabilities. Net
interest margin increased to 4.77% in 1997 from 4.32% in 1996. Interest rate
spread declined to 2.62% in 1996 from 2.86% in 1995 as the increase in the cost
of interest-bearing liabilities outpaced the increase in the yield on interest-
earning assets. Despite the decline in interest rate spread, net interest
margin (on a tax equivalent basis) increased to 4.32% in 1996 from 3.62% in
1995. While Conversion proceeds were invested at yields somewhat less than the
weighted average yield on total interest-earning assets, those investments
contributed to the increase in net interest margin.
4
- --------------------------------------------------------------------------------
Table 2 shows the effect of variances in volume and rate on taxable-equivalent
interest income, interest expense, and net interest income. The table shows
that increases in net interest income were due to volume and rate changes in
1997 while increases in net interest income in 1996 were primarily due to volume
changes.
Table 1: NET INTEREST INCOME ANALYSIS-TAX EQUIVALENT
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------- --------------------------- --------------------------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1) $ 87,489 $7,490 8.56% $ 78,797 $6,662 8.45% $70,397 $5,980 8.50%
Investment securities (2) 9,517 519 5.45% 7,617 607 6.75% 8,646 383 4.43%
Interest-bearing deposits 4,179 291 6.96% 14,645 692 4.72% 3,273 198 6.04%
FHLB common stock 724 53 7.32% 645 47 7.29% 562 41 7.30%
--------------------------- --------------------------- --------------------------
Total interest-earning assets 101,909 8,353 8.20% 101,704 8,008 7.87% 82,878 6,602 7.97%
Non-interest-earning assets 3,708 2,170 1,043
-------- -------- -------
TOTAL $105,617 $103,874 $83,921
======== ======== =======
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts $ 66,520 $3,345 5.03% $ 68,684 3,604 5.24% $70,541 $3,607 5.11%
FHLB advances 2,788 146 5.24% 83 6 8.43% - - -
--------------------------- --------------------------- --------------------------
Total interest-bearing liabilities 69,308 3,491 5.04% 68,767 3,610 5.25% 70,541 3,607 5.11%
Non-interest-bearing liabilities 2,440 1,992 1,097
Stockholders' equity 33,869 33,115 12,283
-------- -------- -------
TOTAL $105,617 $103,874 $83,921
======== ======== =======
Net interest income and interest
rate spread $4,862 3.16% $4,398 2.62% $2,995 2.86%
====== ====== ====== ====== ====== ======
Net interest- earning assets
and net interest margin $ 32,601 4.77% $ 32,937 4.32% $12,337 3.62%
======== ====== ======== ====== ======= ======
Ratio of interest-earning assets
to interest bearing liabilities 147.04% 147.90% 117.49%
====== ====== ======
(1) Includes nonaccrual loans
(2) Interest earned on tax-exempt investment securities has been adjusted to a
tax-equivalent basis using the applicable federal rate of 34% and state
rates in 1997 and 1996 of 7.50%, and 7.75% respectively, and reduced by the
nondeductible portion of interest expense.
Table 2: RATE/VOLUME ANALYSIS
- --------------------------------------------------------------------------------------------------------------
1997 vs 1996 1996 vs 1995
----------------------------- --------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
----------------------------- --------------------------------
(dollars in thousands)
Interest income (tax-equivalent) on:
Loans $ 734 (86) (8) 828 $ 714 (31) $ (4) $ 679
Investment securities 151 (191) (48) (88) (45) 306 (37) 224
Interest-bearing deposits (494) 328 (235) (401) 687 (43) (150) 494
FHLB common stock 6 - - 6 6 - - 6
----------------------------- --------------------------------
Total interest income 397 223 (275) 345 1,362 232 (191) 1,403
----------------------------- --------------------------------
Deposit accounts (113) (151) 5 (259) (95) 92 - (3)
FHLB advances 228 (3) (85) 140 7 - - 7
----------------------------- --------------------------------
Total interest expense 115 (154) (80) (119) (88) 92 - 4
----------------------------- --------------------------------
Increase (decrease) in net interest income $ 282 377 (195) 464 $1,450 $140 $(191) $1,399
============================= ================================
5
- --------------------------------------------------------------------------------
INCOME AND EXPENSES Continued
Provision for Loan Losses
The provision for loan losses is charged to earnings to maintain the total
allowance for loan losses at a level considered adequate to cover loan losses
based on existing loan levels and types of loans outstanding, nonperforming
loans, prior loan loss experience, industry standards and general economic
conditions. Provisions for loan losses were $60,000 in 1997 compared to $50,000
in 1996, and $350,000 in 1995. During 1995, the provision and resulting
allowance for loan losses were increased based on management's efforts to
reflect industry practices regarding the allowance for loan losses. During 1996
and 1997, the provision was lowered, largely as a result of an improved level of
the relationship between the allowance and outstanding loans.
Other Income
Other income increased from $114,000 in 1996 to $145,000 in 1997, and was
$127,000 in 1995. The increase in other income was primarily in customer
service charges and other fees which increased $30,000 in 1997 from the 1996
level. Other income in 1996 decreased $8,000 over the 1995 amount. This
decrease was primarily in loan fees and charges that totaled $45,000 in 1996
compared to $53,000 in 1995.
Other Expenses
Other expenses increased by 18.4% in 1997 compared to an increase of 32.3% in
1996. As a percent of average assets, other expense for 1997 was 2.4% as
compared to 2.0% in 1996 and 1.9% in 1995.
Other expenses totaled $2,514,000 in 1997 compared to $2,123,000 and $1,605,000
in 1996 and 1995, respectively. This significant increase was primarily
attributable to large expenses that occurred in the second quarter of fiscal
year 1997 related to the ESOP and MRP plans of the Company. First, in 1997, the
Company recorded $351,000 of compensation expense related to the Company's
employee stock ownership plan ("ESOP"), primarily associated with the release
and allocation of approximately 23,617 shares of common stock of the Parent to
participants of the ESOP during 1997. The special dividend paid on the Parents
stock on July 11, 1997 and management's decision to use the special dividends
paid on the unallocated shares of the Parent's common stock held by the ESOP to
pre-pay the ESOP loan from the Parent to the ESOP resulted in a significant
portion of that share release, approximately 15,869 shares. As a result,
approximately, $171,000 of the ESOP-related compensation expense is deemed to be
of a non-recurring nature.
Without the effect of the non-recurring portion of ESOP-related compensation
expense, other expenses would have totaled $2,343,000, a $220,000 increase from
1996. Compensation and fringe benefits, excluding non-recurring items,
increased by $569,000 to $1,582,000 compared to $1,013,000 in 1996, primarily
related to the ESOP and the Company's management recognition plan ("MRP"). The
ESOP, which was established in conjunction with the Conversion in 1996 provides
a potentially higher level of retirement benefits to employees than the previous
retirement plan. The recurring portion of ESOP-related compensation expense for
1997 totaled $180,000 compared to $175,000 recorded for 1996. Also contributing
to the increase in compensation expense was $353,000 of amortization of deferred
compensation associated with the MRP implemented May 9, 1997.
"Other" other expenses increased $113,000 to $390,000 in 1997 from $277,000 in
1996 due to increases in marketing expenses, shareholder reporting expenses, and
franchise tax expenses. These increased expenses are mitigated to a degree by a
$535,000 decrease in FDIC-insurance premiums to $46,000 for 1997 from $581,000
for 1996 which included a special one time assessment of $456,000. Deposit
insurance premiums decreased starting with the quarter ended December 31, 1996.
The reduced level of FDIC-insurance premiums is anticipated to continue into the
future.
Occupancy and equipment expense increased by $45,000 or 20.8% in 1997 over 1996
as the Bank improved its customer information technology. Professional fees
increased $28,000 from 1996 which included costs associated with the conversion
and regulatory filings.
6
- --------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION
---------------------------
Other expenses increased by 32.3% in 1996 compared to an increase of 7.4% in
1995. As a percent of average assets, other expense for 1996 was 2.0% as
compared to 1.9% in 1995.
Compensation and fringe benefits in 1996 representing over 47.72% of total other
expenses increased by $56,000 or 5.9% over 1995. Retirement expense increased
by $24,000 in 1996 over 1995. Retirement expense in 1996 reflects the
implementation of the Bank's Employee Stock Ownership Plan ("ESOP") which
provides a higher level of retirement benefits to employees than the retirement
plan which was in place in previous years. Director's compensation increased by
$21,500 in 1996 due to extra meetings associated with the Conversion and
employee benefit programs.
Occupancy and equipment expense decreased by $26,000 in 1996 from 1995. Reasons
for the increase in 1995 included investments in technology primarily the
installation of an ATM machine, and related costs. Deposit insurance premiums
increased $423,000 over the 1995 level due to the special one time assessment by
the FDIC in September, 1996. Professional fees increased by $5,000 in 1996
compared to 1995 as the Company obtained assistance in making the transition
from mutual to stock ownership.
Management continues to look for ways to improve cost efficiency while offering
new services to its customers.
Income Tax Expense
Income tax expense increased $43,000 or 5.0% to $901,000 in 1997 from
$858,000 in 1996. The effective tax rate was 37.0% in 1997 to 36.7% in 1996.
Income tax expense totaled $430,000 in 1995, and the effective tax rate was
36.8%. Changes in income tax expenses were caused primarily by changes in net
income.
ANALYSIS OF FINANCIAL CONDITION
---------------------------
On March 29, 1996 Mocksville Savings Bank, Inc., SSB (the "Bank") completed
its conversion from a mutual to a stock savings bank through the sale of
1,825,050 shares of no par common stock of Stone Street Bancorp, Inc. (the
"Parent"). Total proceeds of $27,375,750 were reduced by Conversion expenses of
$1,116,905. The Parent retained 50% of the net conversion proceeds after
deducting the proceeds of a loan to the Bank's Employee Stock Ownership Plan
("ESOP") and paid the balance to the Bank in exchange for the common stock of
the Bank issued in the Conversion. The increase in assets from $87.8 million at
December 31, 1995 to $105.8 million at December 31, 1996 is directly
attributable to proceeds of the Conversion which were invested in loans and
investment securities.
Loans
The Company's primary source of revenue is interest and fee income from
lending activities, consisting primarily of one-to-four family residential
mortgage loans located in its primary market area. The Company also makes loans
secured by improved nonresidential real estate, construction loans, loans
secured by undeveloped real estate, home equity loans, and consumer loans, both
secured and unsecured.
At December 31, 1997, the net loan portfolio totaled $93.0 million and
represented 86% of total assets. During 1997, loans increased by $10.0 million
or 12%. Loan originations increased from $23.3 million in 1996 to $27.6 million
in 1997, largely in response to the Company's efforts to expand its loan
programs into adjacent counties. The relative composition of the Company's loan
portfolio has remained consistent during recent years, with residential one-to-
four family loans comprising approximately 82% of the portfolio as of December
31, 1997. Table 3 sets forth the composition of the loan portfolio at the dates
indicated.
7
Table 3: TYPES OF LOANS
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------- ------------------ ------------------ ------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(dollars in thousands)
Real estate loans:
Residential 1-4 family $76,894 82.71% $67,844 81.75% $63,329 84.33% $54,321 82.34% $45,724 81.81%
Nonresidential real estate 9,541 10.26 5,716 6.88 4,260 5.67 4,987 7.56 5,312 9.50
Home equity and other
second mortgage 2,675 2.88 2,473 2.98 2,185 2.91 1,423 2.16 1,447 2.59
Construction 8,571 9.22 12,492 15.05 11,735 15.63 11,589 17.56 8,033 14.37
--------------- --------------- --------------- --------------- ---------------
Total real estate loans 97,681 105.07 88,525 106.66 81,509 108.54 72,320 109.62 60,516 108.27
Other installment loans 632 .68 372 .45 222 .30 197 0.30 133 0.24
Less:
Unearned fees 1,058 1.14 1,009 1.22 962 1.29 1,095 1.66 711 1.27
Loans in process 3,718 4.00 4,385 5.28 5,211 6.94 5,334 8.09 3,959 7.08
Allowance for loan losses 570 .61 511 .61 462 .61 115 0.17 89 0.16
--------------- --------------- --------------- --------------- ---------------
Total reductions 5,346 5.75 5,905 7.11 6,635 8.84 6,544 9.92 4,759 8.51
--------------- --------------- --------------- --------------- ---------------
Total loans, net $92,967 100.00% $82,992 100.00% $75,096 100.00% $65,973 100.00% $55,890 100.00%
=============== =============== =============== =============== ===============
- -----------------------------------------------------------------------------------------------------------------------------------
In order to protect the Company's net interest margin, management has, as part
of its interest rate risk management program, placed an emphasis on increasing
adjustable rate mortgage loans and home equity lines of credit in its portfolio.
This strategy will result in more consistent net interest income and lower
interest sensitivity than experienced by traditional fixed-rate residential
mortgage lending.
The following table sets forth the time to repricing or contractual maturity of
the Company's loan portfolio at December 31, 1997. Loans which have adjustable
rates are shown as being due in the period during which rates are next subject
to change, while fixed rate and other loans are shown as due in the period of
contractual maturity. Demand loans, loans having no stated maturity and
overdrafts are reported as due in one year or less. The table does not include
prepayments or scheduled principle repayments. Amounts in the table are net of
loans in process.
Table 4: LOAN MATURITIES
- -----------------------------------------------------------------------------------------------
December 31, 1997
------------------------------------------------------------------
Over 1 Over 3 Over 5
One Year Year to Years to Years to Over 10
Or Less 3 Years 5 Years 10 Years Years Total
------ ----- ------ ------- ------- -------
(dollars in thousands)
Fixed rate 1-4 family $ 89 $475 $2,934 $31,027 $45,154 $79,679
Adjustable rate 1-4 family 1,247 1,247
Adjustable home equity 2,438 2,438
Fixed rate-nonresidential 1 41 709 3,858 4,932 9,541
Other loans 632 632
Less:
Allowance for loan losses (570) (570)
------ ---- ------ ------- ------- -------
Total Loans $3,837 $516 $3,643 $34,885 $50,086 $92,967
====== ==== ====== ======= ======= =======
- -----------------------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
Asset Quality and Allowance for Loan Losses
The following table sets forth information with respect to nonperforming assets
including nonaccrual loans and real estate owned at the dates indicated.
Table 5: SUMMARY OF NONPERFORMING AND PROBLEM ASSETS
- --------------------------------------------------------------------------------
December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- -------- --------
(dollars in thousands)
Total nonaccrual loans $ - $ - $ - $ - $ -
Total restructured loans - - - - -
-------- -------- ------- ------- -------
Total nonperforming loans - - - - -
-------- -------- ------- ------- -------
Real estate owned - - - -
In-substance foreclosures - - - - -
-------- -------- ------- ------- -------
Total foreclosed property - - - - -
-------- -------- ------- ------- -------
Total nonperforming assets $ - $ - $ - $ - $ -
======== ======== ======= ======= =======
Accruing loans, delinquent
90 days or more $ 295 $ 423 $ 201 $ 280 $ 292
======== ======== ======= ======= =======
Nonperforming loans to
total loans 0.00% 0.00% 0.00% 0.00% 0.00%
Nonperforming assets to
total assets 0.00% 0.00% 0.00% 0.00% 0.00%
Total assets $108,092 $105,807 $87,751 $81,560 $75,826
Total loans, net $ 92,967 $ 82,992 $75,097 $65,973 $55,890
- --------------------------------------------------------------------------------
The allowance for loan losses represents management's estimate of an amount
adequate to provide for potential losses inherent in the loan portfolio. The
adequacy of the allowance for loan losses and the related provision are based
upon management's evaluation of the risk characteristics of the loan portfolio
under current economic conditions with consideration to such factors as
financial condition of the borrowers, collateral values, growth and composition
of the loan portfolio, the relationship of the allowance for loan losses to
outstanding loans, and delinquency trends. Management believes that the
allowance for loan losses is adequate. While management uses all available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
The provision for loan losses is calculated and charged to earnings to maintain
the total allowance for loan losses at a level considered adequate to cover loan
losses based on existing loan levels, types of loans outstanding, nonperforming
loans, prior loan loss experience, industry standards and general economic
conditions. Provisions for loan losses were $60,000 in 1997 compared to $50,000
in 1996, and $350,000 in 1995. During 1995, the provision and resulting
allowance for loan losses were increased based on management's efforts to
reflect industry practices regarding the allowance for loan losses. During 1996
and 1997, the provision was lowered, largely as a result of an improved level of
the relationship between the allowance and outstanding loans.
9
- --------------------------------------------------------------------------------
The following tables describe the activity related to the allowance for loan
losses and the allocation of the allowance for loan losses to various categories
of loans for the periods indicated.
Table 6: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
Year Ended December 31
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(in thousands)
Balance, beginning of period $ 511 $ 462 $ 115 $ 89 $ 65
Provision for loan losses 60 50 350 26 25
Charge-offs 1 1 3 - 1
Recoveries - - - - -
----- ----- ----- ----- -----
Balance, end of period $ 570 $ 511 $ 462 $ 115 $ 89
===== ===== ===== ===== =====
Allowance as a percentage of loans .61% .62% .62% .17% .16%
Table 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
December 31,
---------------------------------
1997 1996 1995 1994 1993
---------------------------------
(in thousands)
Residential 1-4 family $ 154 $ 138 $ 127 $ 45 $ 35
Nonresidential real estate 171 153 138 23 19
Home equity and other second mortgage 58 52 46 12 10
Construction 143 128 115 24 16
---------------------------------
Total real estate loans 526 471 426 104 80
Other loans 44 40 36 11 9
---------------------------------
Total allowance for loan losses $ 570 $ 511 $ 462 $ 115 $ 89
=================================
The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations. Refer to Table 3 for percentages of loans in each category to
total loans.
Investment Securities
Interest and dividend income from interest bearing deposits and investment
securities generally provides the second largest source of income to the Company
after interest on loans. The Company's interest bearing deposits primarily
include deposits with the FHLB of Atlanta and federal funds, while its portfolio
of investment securities includes U.S. government and agency securities,
mortgage-backed securities, obligations of states and local governments and
mutual funds. The mortgage-backed securities consist of collateralized mortgage
obligations issued by the GNMA and FHLMC which are secured by mortgage-backed
securities guaranteed by the GNMA or FHLMC.
Interest bearing deposits totaled $2.5 million at December 31, 1997, a decrease
of $5.4 million from 1996. These funds were used to pay the special dividend of
$4.00 per share in July 1997 to the stockholders. The Company also had
$1,034,000 of federal funds sold at December 31, 1997, an increase of $464,000
over 1996.
10
Investment securities totaled $7.7 million at December 31, 1997, a decrease of
$2.7 million from $10.4 million at December 31, 1996. Proceeds from matured
investments were also used to fund the special dividend paid to stockholders in
1997. At December 31, 1997, net unrealized gains of $4,678 were included in the
carrying value of securities classified available-for-sale compared to net
unrealized losses of $7,600 on such securities at December 31, 1996. Net
unrealized gains or losses were caused by fluctuations in market interest rates
rather than by concerns about the issuer's ability to meet their obligations.
Table 8 shows maturities of investment securities held by the Company at
December 31, 1996 and the weighted average tax-equivalent yields for each type
of security and maturity. Further information about the Company's investment
securities as of December 31, 1996 and 1995 is presented in Note 2 of the notes
to the consolidated financial statements.
Table 8: INVESTMENT SECURITIES - MATURITY/YIELD SCHEDULE
- ---------------------------------------------------------
More than
One Year or Less 1 Year to 5 Years 5 Years to 10 Years Over 10 Years Total
------------------- ------------------- -------------------- ----------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- --------- -------- --------- --------- --------- -------- -------- -------- --------
(dollars in thousands)
Held-to-Maturity:
U.S. government and agency $ 2,749 5.59% $ 740 5.22% $ - -% $ - - $ 3,489 5.53%
Mortgage-backed securities (1) - - - - - - 2,400 7.38 % 2,400 7.38
-------------- -------------- ---------------- ---------------- ---------------
Total held-to-maturity $ 2,749 5.59% $ 740 5.22% $ - -% $ 2,400 7.38 % $ 5,889 6.28%
-------------- -------------- ---------------- ---------------- ---------------
Available-for-sale:
State and local government (2) $ 1,090 5.69% $ - - $ 764 6.28% $ - - $ 1,854 5.93%
-------------- -------------- ---------------- ---------------- ---------------
Total available-for-sale $ 1,090 5.69% - - 764 6.28% - - 1,854 5.93%
-------------- -------------- ---------------- ---------------- ---------------
Total investments
at carrying value $ 3,839 5.63% $ 740 5.22% $ 764 6.28% $ 2,400 7.38% $ 7,743 6.20%
============== ============== ================ ================ ===============
(1) Mortgage-backed securities are shown at their weighted average expected
life obtained from an outside evaluation of the average remaining life of each
security based on historic prepayment speeds of the underlying mortgages at
December 31, 1997.
(2) Yields are stated on taxable equivalent basis assuming statutory tax rates
of 34% for federal and 7.50% for state purposes. Book yields without regard to
tax-equivalent adjustments are: one year or less, 5.18%; two to five years,
5.22%; six to ten years, 4.60%; more than ten year, 7.38%; total, 5.81%.
In addition to the investment securities discussed above, the Company also earns
interest on its correspondent bank account at the Federal Home Loan Bank
("FHLB") of Atlanta and dividends on its FHLB stock. The Bank is required to
maintain, as a condition of membership, an investment in stock of the FHLB of
Atlanta equal to the greater of 1% of outstanding home loans or 5% of its
outstanding advances. No ready market exists for such stock, which is carried
at cost. As of December 31, 1997, the Company's investment in stock of the FHLB
of Atlanta was $741,000.
Funding Sources
Deposits are the primary source of the Company's funds for lending and other
investment purposes. The Company attracts both short-term and long-term
deposits from the general public by offering a variety of accounts with varying
maturities. Deposit inflows and outflows are significantly influenced by
general interest rates and other market conditions, primarily competition. As
competition for deposits has increased both from larger financial institutions
in its local market place and from mutual funds and other investments,
borrowings have provided an additional source of funding. The use of borrowed
funds to provide liquidity assists the Company in matching the interest rates on
its assets and liabilities because the interest rates on most borrowed funds are
fixed and therefore more predictable than the costs of deposits which are
subject to change based upon market conditions and other factors.
11
Deposits
- --------------------------------------------------------------------------------
Deposits totaled $67.0 million at December 31, 1997, compared to $66.6
million at December 31, 1996, an increase of approximately $409,000. The
following table sets forth certain information regarding the Company's average
savings deposits for the last three years.
Table 9: AVERAGE DEPOSITS
- --------------------------------------------------------------------------------
1997 1996 1995
----------------- ------------------ ------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
----------------- ------------------ -----------------
(dollars in thousands)
NOW and money market deposit account $ 4,260 1.71% $ 3,996 1.80% $ 4,521 1.81%
Savings account 11,928 3.00 9,270 3.51 9,525 3.02
Certificates of deposit 50,332 5.79 55,418 5.84 56,495 5.73
---------------- --------------- ----------------
Total deposits $66,520 5.03% $68,684 5.24% $70,541 5.11%
================ =============== ================
As of December 31, 1997, the Company had outstanding $5,514,098 in time
certificates of deposit of $100,000 or more. Maturities of certificates of
deposits of $100,000 or more at December 31, 1997 were as follows: three months
or less, $2,480,837; over three months through six months, $794,089, over six
months through twelve months $1,607,599; and over one year through twenty-four
months, $528,495; and over twenty-four months, $103,078.
Borrowings
The Company's principal source of long-term borrowings are advances from the
FHLB of Atlanta. As a requirement for membership, the Bank is required to own
capital stock in the FHLB of Atlanta and is authorized to apply for advances on
the security of that stock and a floating lien on its family residential
mortgage loans. Each credit program has its own interest rate and range of
maturities. At December 31, 1997, the Company had outstanding FHLB advances
totaling $7,800,000, compared to no advances outstanding at December 31, 1996.
Additional information on borrowings is provided in Note 6 of the notes to the
consolidated financial statements.
Liquidity and Interest Rate Risk Management
--------------------------------------
Liquidity is the ability to raise funds or convert assets to cash in order to
meet customer and operating needs. The Company's primary sources of liquidity
are its portfolio of investment securities available-for-sale, principal and
interest payments on loans and mortgage-backed securities, interest income from
investment securities, maturities of investment securities held-to-maturity,
increases in deposits, and advances from the FHLB of Atlanta. At December 31,
1997, the Bank had an additional $4 million of credit available from the FHLB
which would be collateralized by a blanket lien on qualifying loans secured by
first mortgages on family residences. Additional amounts may be made available
under this blanket floating lien or by using investment securities as
collateral. Management believes that it will have sufficient funds available to
meet its anticipated future loan commitments as well as other liquidity needs.
Interest rate risk is the sensitivity of interest income and interest expense to
changes in interest rates. Management continues to structure its assets and
liabilities in an attempt to protect net interest income from large fluctuations
associated with changes in interest rates. Table 10 shows the amount of
interest-earning assets and interest-bearing liabilities outstanding at December
31, 1997 which are projected to reprice or mature in each of the future time
periods shown. At December 31, 1997, the Company had a negative cumulative one
year asset-sensitive gap position of $47.6 million or 45.14% of interest-earning
assets. This generally indicates that net interest income would decrease in a
rising rate environment and would experience upward trend in a declining rate
environment.
12
- --------------------------------------------------------------------------------
A static interest rate "gap" analysis may not be an accurate indicator of how
net interest income will react to changes in interest rates. A static gap
computation uses contractual maturities and does not make assumptions for
prepayments, scheduled loan principal payments or deposit decays. Income
associated with interest-earning assets and costs associated with interest-
bearing liabilities may not react uniformly to changes in interest rates. In
addition, the magnitude and duration of changes in interest rates may have a
significant impact on net interest income. For example, although certain
assets and liabilities may have similar maturities or periods to repricing,
they may react in different degrees to changes in market interest rates.
Interest rates on certain types of assets and liabilities typically fluctuate
in advance of changes in general market interest rates, while interest rates
on other types may lag behind changes in general market rates.
It should be noted that this table reflects the interest-sensitivity of the
balance sheet as of a specific date and is not necessarily indicative of future
results. The computations were made without using assumptions for loan
repayments or deposit delays. Except as stated below, the amounts of assets and
liabilities shown which reprice or mature within a given period were determined
in accordance with contractual terms of the assets or liabilities. In making
the computations, all adjustable rate loans were considered to be due at the end
of the next upcoming adjustment period. Fixed rate loans were considered to
reprice at their contractual maturities with no consideration given to
prepayments or scheduled payments. Liquid interest-earning investments with no
contractual maturities are assumed to be subject to immediate repricing.
Statement savings and money market accounts are subject to immediate
availability and repricing and have been placed in the earliest gap category.
In addition, fixed maturity deposits were assumed to reprice at their
contractual maturities without consideration for early withdrawals. The
interest rate sensitivity of the Company's assets and liabilities illustrated in
the following table would vary substantially if different assumptions were used
or if actual experience differs from that indicated by such assumptions.
Because of these and other limitations, management also monitors interest rate
sensitivity through the use of a model which estimates the change in net
portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest sensitivity measures as of
December 31, 1997, management realizes its need to improve the Company's
interest rate exposure and has developed strategies to address this issue.
Table 10: INTEREST SENSITIVITY
- --------------------------------------------------------------------------------
December 31, 1997
-------------------------------------------------------------------------------------
More than More than Over
3 Months 4 to 12 1 Year to 3 Years to 5 Years to Over
Or Less Months 3 Years 5 Years 10 Years 10 Years Total
---------- ---------- ----------- ------------ ------------ --------- ---------
Interest earning assets (dollars in thousands)
Mortgage loans:
Fixed rate residential 1-4 family $ - $ 89 $ 475 $ 2,934 $ 31,027 $45,154 $ 79,679
Adjustable rate residential 1-4 family - 1,247 - - - - 1,247
Adjustable home equity 2,438 - - - - - 2,438
Fixed rate-nonresidential - 1 41 709 3,858 4,932 9,541
-------- -------- -------- -------- -------- ------- --------
Total mortgage loans 2,438 1,337 516 3,643 34,885 50,086 92,905
Other loans 632 - - - - - 632
-------- -------- -------- -------- -------- ------- --------
Total loans 3,070 1,337 516 3,643 34,885 50,086 93,537
Interest-bearing deposits(2) 3,531 - - - - - 3,531
Investment securities (1) 3,838 - - 740 770 2,400 7,748
FHLB common stock 741 - - - - - 741
-------- -------- -------- -------- -------- ------- --------
Total interest-earning assets $ 11,180 $ 1,337 $ 516 $ 4,383 $ 35,655 $52,486 $105,557
-------- -------- -------- -------- -------- ------- --------
Interest-bearing liabilities
Deposits:
Fixed maturity deposits $ 12,522 $ 25,954 $ 14,603 $ - $ - $ - $ 53,079
NOW accounts money market accounts 4,704 - - - - - 4,704
Savings accounts 9,190 - - - - - 9,190
-------- -------- -------- -------- -------- ------- --------
Total deposits 26,416 25,954 14,603 - - - 66,973
FHLB advances 7,800 7,800
-------- -------- -------- -------- -------- ------- --------
Total interest-bearing liabilities $ 26,416 $ 33,754 $ 14,603 $ - $ - $ - $ 74,773
-------- -------- -------- -------- -------- ------- --------
Interest sensitivity gap per period $(15,236) $(32,417) $(14,087) $ 4,383 $ 35,655 $52,486 $ 30,784
Cumulative interest-sensitivity gap $(15,236) $(47,653) $(61,740) $(57,357) $(21,702) $30,784 $ 30,784
Cumulative gap as a percentage of
total interest-earning assets (14.43 %) (45.14%) (58.49%) (54.34%) (20.56%) 29.16% 29.16%
Cumulative interest-earning assets as a
percentage of interest-bearing liabilities 42.32% 20.80% 17.43% 23.29% 70.98% 141.17% 141.17%
(1) Includes investments and mortgage-backed securities
(2) Includes interest-bearing deposits and federal funds
13
- --------------------------------------------------------------------------------
Capital Resources
---------------
Stockholders' equity decreased from $37.4 million at December 31, 1996 to
$31.0 million at December 31, 1997, largely as a result of the $4.00 special
dividend paid to stockholders in July, 1997 which totaled $7,592,000.
As a state savings bank holding company, the Parent is regulated by the Board of
Governors of the Federal Reserve Board ("FRB") and is subject to securities
registration and public reporting regulations of the Securities and Exchange
Commission. The Bank is regulated by the Federal Deposit Insurance Corporation
("FDIC)" and the Savings Institutions Division, North Carolina Department of
Commerce ("the Administrator").
The Bank must comply with the capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier I
capital to total risk-weighted assets and total capital to risk-weighted assets
of 4% and 8%, respectively. Tier I capital consists of total stockholders'
equity calculated in accordance with generally accepted accounting principles
less intangible assets, and total capital is comprised of Tier 1 capital plus
certain adjustments, the only one of which applicable to the Bank is the
allowance for loan losses. Risk weighted assets reflect the Bank's on-and off-
balance sheet exposures after such exposures have been adjusted for their
relative risk levels using formulas set forth in FDIC regulations. The Bank is
also subject to a leverage capital requirement, which calls for a minimum ratio
of Tier I capital (as defined above) to quarterly average total assets of 3% to
5%, depending on the institution's composite ratings as determined by its
regulators. The Administrator requires a net worth equal to at least 5% of
assets.
At December 31, 1997 and 1996, the Bank was in compliance with all of the
aforementioned capital requirements as summarized in Table 11. Refer to Note 7
of the consolidated financial statements for a discussion of other matters that
may affect the Company's capital resources.
Table 11: REGULATORY CAPITAL
- --------------------------------------------------------------------------------
At December 31,
------------------------
1997 1996
------------------------
Risk-Based and Leverage Capital (dollars in thousands)
Tier I capital:
Common stockholders' equity $ 26,030 $ 24,967
Unrealized holding loss (gain) on securities
available-for-sale (3) 7
------------------------
Total Tier I leverage capital 26,027 24,974
Tier II Capital:
Qualifying allowances for loan losses
Tier II capital additions 570 511
------------------------
Total risk-based capital $ 26,597 $ 25,485
Risk-weighted assets 61,531 48,072
Fourth quarter average assets 102,598 96,363
Risk-based capital ratios:
Tier-I capital as a percent of risk-weighted assets 42.30% 51.95%
Minimum Required Tier I capital 4.00% 4.00%
Total risk-based capital as a percent of
risk-weighted assets 43.23% 53.01%
Minimum required total risk-based capital 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital as a percent of fourth
quarter average assets 25.37% 25.92%
Minimum required Tier I leverage capital 3.00-5.00% 3.00-5.00%
North Carolina regulatory capital:
Total risk-based capital as a percent of fourth
quarter average assets 25.92% 26.45%
Minimum required North Carolina capital 5.00% 5.00%
14
- --------------------------------------------------------------------------------
Impact of Inflation and Changing Prices
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 effects of inflation.
Accounting Issues
---------------
The Company prepares its consolidated financial statements and related
disclosures in conformity with standards established by, among others, the
Financial Accounting Standards Board (the "FASB"). Because the information
needed by users of financial reports is dynamic, the FASB frequently has new
rules and proposed new rules for companies to apply in reporting their
activities. The following discussion addresses such changes as of December 31,
1997 that will affect the Company's future reporting.
In August 1996, the Financial Accounting Standard Board ("FASB") issued
Statement of financial Accounting Standards No. 125 ("SAFS 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and does not
recognize financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
pledge of collateral. This statement is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. The Company adopted this statement on
January 1, 1997 without any impact on its consolidated financial statements.
In February 1997, the financial Accounting Standards Board issued Statement
of financial Accounting Standards No. 128 ("SAFS 128"), "Earnings Per Share".
SFAS 128 establishes standards of computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings
per share previously found in APB Opinion No. 15, "Earnings Per Share", and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior period EPS data presented. The Company
adopted SFAS 128 in fiscal year 1997 without any significant impact on its
consolidated financial statements.
In February 1997, the FASB issued Statement of financial Accounting Standards
No. 129 ("SFAS 129"), "Disclosure of information about Capital Structure". SFAS
129 establishes standards for disclosing information about an entity's capital
structure and is applicable to all entities. It contains no change in
disclosure requirements for entities that were previously subject to the
requirements of APB Opinion No. 10, "Omnibus Opinion - 1996", APB Opinion No.
15, "Earnings Per Share", and Statement of Financial Accounting Standards No.
47, "Disclosure of Long-Term Obligations". SFAS 129 is effective for financial
statements for periods ending after December 15, 1997. The Company adopted SFAS
129 in fiscal 1997 without any impact on its consolidated financial statements.
15
- --------------------------------------------------------------------------------
In June 1997, the FASB issued Statement of financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in the financial statement
and (b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The company
plans to adopt the SFAS 130 is fiscal year 1998 and has not determined the
impact on its consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 established standards for the way that public businesses
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement is effective for
financial statements for periods beginning after December 31, 1997 and in the
initial year of application, comparative information for earlier years is to be
restated. The Company plans to adopt SFAS 131 in fiscal year 1998 without any
significant impact on its consolidated financial statements.
Year 2000 Issue
-------------
The Company has completed its assessment of the Company's vulnerability to
Year 2000 issues. The Company's most critical computer system is utilized by
its subsidiary, Mocksville Savings Bank, for loans, deposit and accounting
functions, and is maintained by a third party service bureau. The costs of
compliance will be borne by the vendor under the contract. While this system is
presently substantially Year 2000 compliant, Bank personnel will participate in
tests of the system during 1998 to ensure full compliance. Failure to prepare
this system for the Year 2000 would materially affect the Bank's ability to
operate and serve its customers. The Company's other information technology-
controlled systems have also been identified and are in various states of
readiness. Progress is under way to address these issues, with an estimated
cost of $60,000; the actual amount will depend on choices made by management in
the coming months. This amount could increase materially if problems are noted
in the testing processes that have not yet been identified. The majority of
these costs are expected to be incurred during the calendar year 1998; all such
costs will be charged to expense as incurred.
16
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
Stone Street Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Stone Street
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stone Street
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Weir Smith Jones Miller & Elliott
Weir Smith Jones Miller & Elliott
Statesville, North Carolina
January 30, 1998
17
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 1997 and 1996
1997 1996
-------- --------
(dollars in thousands)
ASSETS
Cash $ 968 $ 1,319
Federal funds sold 1,034 570
Interest-bearing deposits in other
financial institutions 2,701 7,916
Investment securities (note 2)
Held-to-maturity (Market value:
$5,940 in 1997 and $7,780 in 1996) 5,889 7,736
Available-for-sale (Cost: $1,854 in
1997 and $2,731 in 1996) 1,859 2,723
Loans receivable (net of allowance
for loan losses of $570 in 1997 and
$511 in 1996) (note 3) 92,967 82,992
Federal Home Loan Bank stock at cost 741 667
Premises and equipment (note 4) 824 900
Accrued interest receivable 284 310
Deferred income tax 412 376
Refundable income tax 126 77
Prepaid expenses and other assets (note 8) 141 93
Cash surrender value of life insurance 146 128
-------- --------
Total assets $108,092 $105,807
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 5):
Savings accounts 9,190 8,861
NOW and MMDA 4,704 3,932
Other certificates of deposit 47,565 48,626
Certificates of deposit, $100,000 and over 5,514 5,145
-------- --------
Total deposits 66,973 66,564
Advances from the Federal Home Loan Bank (note 6) 7,800 -
Amounts payable under remittance service agreement 1,175 636
Accrued interest payable 144 170
Accrued expenses and other liabilities 924 667
Accrued cash dividends payable 0 402
-------- --------
Total liabilities 77,016 68,439
-------- --------
Stockholders' Equity:
Preferred stock, no par value, 5,000,000 shares
authorized; none issued (note 1) - -
Common stock, no par value 20,000,000 shares authorized:
1,898,052 and 1,825,050 shares issued and outstanding,
respectively (note 1) 20,611 26,333
Unearned ESOP shares (1,948) (2,198)
Unamortized deferred compensation (1,518) -
Retained earnings, substantially
restricted (notes 7 and 8) 13,928 13,241
Unrealized holding gains (losses) on
available-for-sale securities, net 3 (8)
-------- --------
Total stockholders' equity 31,076 37,368
-------- --------
Commitments and contingencies (notes 3 and 9)
Total liabilities and stockholders' equity $108,092 $105,807
======== ========
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED FINANCIAL STATEMENTS OF INCOME
-------------------------------------------
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- -------------- -------------
(dollars in thousands, except per share data)
Interest income:
Interest on loans $7,490 $6,662 $5,980
Interest on deposits in other
financial institutions 291 692 198
Interest and dividends on
investment securities:
Taxable 486 563 336
Non-taxable 86 91 88
------ ------ ------
Total interest income 8,353 8,008 6,602
------ ------ ------
Interest expense:
Interest on deposits (note 5) 3,345 3,604 3,607
Interest on borrowings 146 6
------ ------
Total interest expense 3,491 3,610 3,607
------ ------ ------
Net interest income 4,862 4,398 2,995
Provision for loan losses (note 3) 60 50 350
------ ------ ------
Net interest income after
provision for loan losses 4,802 4,348 2,645
------ ------ ------
Other income:
Loan fees and charges 49 45 53
Customer service and other fees 86 56 57
Other 10 13 17
------ ------ ------
Total other income 145 114 127
------ ------ ------
Other expenses:
Compensation and related
benefits (note 9) 1,753 1,013 957
Deposit insurance premiums 46 581 158
Occupancy and equipment expense 261 216 242
Professional fees 64 36 31
Other 390 277 217
------ ------ ------
Total other expenses 2,514 2,123 1,605
------ ------ ------
Income before income tax expense 2,433 2,339 1,167
Income tax expense (note 8) 901 858 430
------ ------ ------
Net income $1,532 $1,481 $ 737
====== ====== ======
Net income per share--basic (note 1) $0.82 $0.82 N/A
====== ====== ======
Net income per share--diluted (note 1) $0.82 $0.82 N/A
====== ====== ======
See accompanying notes to consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
For the Years ended December 31, 1997, 1996 and 1995
Unearned Unamortized Unrealized Total
Shares Common ESOP Deferred Retained Holding Stockholders'
Outstanding Shares Shares Compensation Earnings Gains/Losses Equity
----------- -------- --------- ------------- --------- ------------- --------------
(in thousands, except shares outstanding)
Balance at
December 31, 1994 - $ $ - $11,826 $(97) $11,729
Net income - - - 737 - 737
Change in unrealized
holding gains (losses)
net of income taxes
of $24 96 96
----------- -------- --------- ------------- --------- ------------- --------------
Balance at
December 31, 1995 - - - $12,563 (1) 12,562
Net income - - - 1,481 - 1,481
Net proceeds from issuance
of no par common stock 1,825,050 26,333 - - - 26,333
Common stock acquired
by ESOP - - (2,198) - - (2,198)
Cash dividends declared
($.44 per share) - - - (803) - (803)
Change in unrealized
holding gains (losses),
net of income taxes of $3 - - - - - (7) (7)
----------- -------- --------- ------------- --------- ------------- --------------
Balance at
December 31, 1996 1,825,050 26,333 (2,198) 13,241 (8) 37,368
Net income 1,532 1,532
Common stock acquired
by ESOP (329) (329)
Release of ESOP shares 579 579
Cash dividends
($4.45 per share) ** (7,593) (845) (8,438)
Change in unrealized
holding gains (losses)
net of income taxes
of $4 11 11
Issuance of restricted stock 73,002 1,871 (1,871)
Amortization of unearned
compensation 353 353
----------- -------- --------- ------------- --------- ------------- --------------
Balance at
December 31, 1997 1,898,052 $20,611 $(1,948) $(1,518) $13,928 $ 3 $31,076
=========== ======== ========= ============= ========= ============= ==============
** Includes $4.00 special return of capital dividend paid on July 11, 1997.
See accompanying notes to consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
-----------------------------
Operating activities: (dollars in thousands)
Net income $ 1,532 $ 1,481 $ 737
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 86 96 85
Provision for loan losses 60 50 350
Deferred income taxes (36) (42) (66)
Contributions allowing the release of ESOP shares 579
Compensation earned under the Management
Recognition Plan 353
Decrease (increase) in accrued interest
receivable 26 (206) 28
Increase in cash surrender value of life
insurance (18) (64) (64)
Decrease (increase) in refundable income taxes (49) (56) 40
Increase (decrease) in amounts payable under
remittance service agreement 539 41 296
(Increase) decrease in other assets (48) 44 (90)
Increase (decrease) in accrued interest payable (26) 23 25
Increase (decrease) in accrued cash dividends
payable (402) 402
Increase (decrease) in other liabilities 257 281 143
-------- -------- -------
Net cash provided by
operating activities 2,853 2,050 1,484
-------- -------- -------
Investing activities:
Net increase in loans held for investment (10,035) (7,996) (9,474)
Principal collected on
mortgage-backed securities 597 108
Purchase of investment securities classified as
available-for-sale - (860)
Purchase of investment securities classified as
held-to-maturity (750) (2,760) (500)
Purchase of mortgage-backed securities
classified as held-to-maturity - (2,298)
Proceeds from maturities of investment securities
classified as available-for-sale 875 439
Proceeds from maturities of investment securities
held-to-maturity 2,000 500 3,280
Purchase of FHLB Stock (74) (91) (79)
Purchase of premises and equipment (10) (47) (92)
-------- -------- -------
Net cash used by investing activities (7,397) (13,005) (6,865)
-------- -------- -------
Financing activities:
Net increase (decrease) in deposits 409 (6,471) 3,895
Proceeds from borrowings 7,800 1,000
Repayments of borrowings - (1,000)
Proceeds from issuance of no par common stock - 26,333
Loan to ESOP for the purchase of common stock (329) (2,198)
Cash dividends paid to shareholders (8,438) (803)
-------- -------- -------
Net cash provided by financing activities (558) 15,861 4,895
-------- -------- -------
Increase (decrease) in cash and cash
equivalents (5,102) 4,906 (486)
Cash and cash equivalents at beginning of period 9,805 4,899 5,385
-------- -------- -------
Cash and cash equivalents at end of period $ 4,703 $ 9,805 $ 4,899
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,517 $ 3,587 $ 3,581
======== ======== =======
Income taxes $ 949 $ 914 $ 390
======== ======== =======
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on available-for-sale
securities, net of deferred taxes (benefit) of
$2 for 1997, $3 for 1996 and $24 for 1995 $ 3 $ 8 $ 95
======== ======== =======
Dividends declared but unpaid $ - $ 402 $ -
======== ======== =======
See accompanying notes to consolidated financial statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) Significant Accounting Policies
-------------------------------
Organization and Operations
---------------------------
On March 29, 1996, pursuant to a Plan of Conversion approved by its members
and regulators, Mocksville Savings Bank, Inc., SSB (the "Bank") amended and
restated its charter to effect its conversion from a North Carolina
chartered mutual savings bank to a North Carolina chartered stock savings
bank (the "Conversion"), and became a wholly-owned subsidiary of Stone
Street Bancorp, Inc. (the "Parent"), a holding company formed in connection
with the Conversion. The Bank is primarily engaged in the business of
obtaining savings deposits and providing loans to the general public. The
principal activity of the Parent is ownership of the Bank. In 1997, the Bank
formed a subsidiary, Stone Street Financial Services, Inc. for the purpose
of offering investment discount brokerage services to the public.
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the Parent and
the Bank and its wholly-owned subsidiary, together referred to as "the
Company". All significant intercompany transactions and balances are
eliminated in consolidation. 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 as of
the date of the balance sheets and the reported amounts of income and
expenses for the periods presented. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant changes in the near-term relate to the
determination of the allowance for loan losses.
Investment and Mortgage-Backed Securities
-----------------------------------------
Management determines the appropriate classification of investment and
mortgage-backed securities at the time of purchase and reevaluates such
designation at each reporting date. Securities are classified as held-to-
maturity when the Company has both the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at
amortized cost. Securities not classified as held-to-maturity are classified
as available-for-sale. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. The Company has no trading
securities.
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over
the estimated life of the security. Such amortization is included in
interest income from investments. Realized gains and losses, and declines in
value judged to be other-than-temporary are included in net securities gains
(losses). The cost of securities sold is based on the specific
identification method.
Loans Receivable
----------------
Loans held for investment are carried at their principal amount outstanding,
net of deferred loan origination fees.
Interest on loans is recorded as borrowers' monthly payments become due.
Accrual of interest income on loans is suspended when, in management's
judgment, doubts exist as to the collectibility of principal and interest.
Loans are returned to accrual status when management determines, based on an
evaluation of the underlying collateral together with the borrower's payment
record and financial condition, that the borrower has the capability and
intent to meet the contractual obligations of the loan agreement.
Loan fees are accounted for in accordance with Statement of Financial
Accounting Standards No. 91. Loan origination fees and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment
of the related loans' yield over the life of the related loans using a
level-yield method. Unamortized net loan fees or costs on loans sold are
recorded as gain or loss on sale in the year of disposition.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
(1) Significant Accounting Policies, Continued
------------------------------------------
Allowance for Loan Losses
-------------------------
The Company provides for loan losses on the allowance method. Accordingly,
all loan losses are charged to the allowance and all recoveries are credited
to it. Additions to the allowance for loan losses are provided by charges to
operating expense. The provision is based upon management's evaluation of
the risk characteristics of the loan portfolio under current economic
conditions and considers such factors as financial condition of the
borrower, collateral values, growth and composition of the loan portfolio,
the relationship of the allowance for loan losses to outstanding loans, and
delinquency trends.
At December 31, 1997, substantially all of the Company's loans were
collateralized by real estate in Davie and adjacent counties. The collateral
is predominately owner-occupied residential real estate in which the
borrower does not rely on underlying cash flows from the property to satisfy
debt service. The ultimate collectibility of a substantial portion of the
loan portfolio is susceptible to changes in market conditions in the
Company's market area. While management uses available information to
recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. Various regulatory
agencies, as an integral part of their examination processes, periodically
review the Company's allowance for loan losses. Such agencies may require
the Company to recognize additions to the allowance based on their judgments
about information available to them at the time of their examinations.
For all specifically reviewed loans for which it is probable that the Bank
will be unable to collect all amounts due according to the terms of the loan
agreement, the Bank determines fair value either based on discounted cash
flows using the loans' initial interest rate or the fair value of the
collateral if the loan is collateral dependent. Large groups of smaller
balance homogenous loans that are collectively evaluated for impairment
(such as residential mortgage and consumer installment loans) are excluded
from impairment evaluation, and their allowance for loan losses is
calculated in accordance with the allowance for loan losses policy described
above.
Investment in Federal Home Loan Bank Stock
------------------------------------------
As a requirement for membership, the Bank invests in stock of the Federal
Home Loan Bank of Atlanta (FHLB) in the amount of 1% of its outstanding
residential loans or 5% of its outstanding advances from the FHLB, whichever
is greater. At December 31, 1997, the Bank owned 7,410 shares of the FHLB's
$100 par value capital stock. No ready market exists for such stock, which
is carried at cost.
Premises and Equipment
----------------------
Premises and equipment are stated at cost. Provisions for depreciation are
computed principally using the straight-line method and charged to
operations over the estimated useful lives of the assets over 20 years for
office buildings and 3 to 10 years for furniture, fixtures, and equipment
and other improvements.
Retirement Plan
---------------
The Bank has an employee stock ownership plan which covers substantially all
of its employees. Contributions to the plan are determined annually by the
Board of Directors based on employee compensation. Prior to establishment of
the employee stock ownership plan, the Company had a self-administered,
defined contribution retirement plan that covered all eligible employees.
This plan was terminated as of January 1, 1996 in conjunction with the
Conversion. The Bank also has a 401(k) plan that covers all eligible
employees.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
(1) Significant Accounting Policies, Continued
------------------------------------------
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, the Company considers cash, Federal
funds sold and interest-bearing deposits in other institutions with original
maturities of three months or less to be cash equivalents.
Earnings Per Share
------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
during 1997. Presentation of both basic and diluted earnings per share have
been presented in the financial statements. Because the Company's stock
options would have an antidilutive effect on earnings per share due to the
average marked price not exceeding the exercise price during the period,
both basic and diluted earnings per share are the same. Weighted average
shares outstanding for 1997 was 1,875,541 shares and for 1996, 1,825,050
shares were assumed outstanding for the full year.
New Accounting Pronouncements
-----------------------------
The Company prepares its consolidated financial statements and related
disclosures in conformity with standards established by, among others, the
Financial Accounting Standards Board (the "FASB"). Because the information
needed by users of financial reports is dynamic, the FASB frequently has new
rules and proposed new rules for companies to apply in reporting their
activities. The following discussion addresses such changes as of December
31, 1997 that will affect the Company's future reporting.
In August 1996, the financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of financial assets and
Extinguishments of Liabilities". This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and does not recognize financial
assets it no longer controls and liabilities that have been extinguished.
The financial-components approach focuses on the assets and liabilities that
exist after the transfer. If a transfer does not meet the criteria for a
sale, the transfer is accounted for as a secured borrowing with pledge of
collateral. This statement is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and is to be applied prospectively. The Company adopted this
statement on January 1, 1997 without any impact on its consolidated
financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share". SFAS 128 establishes standards of computing and presenting earnings
per share (EPS) and applies to entities with publicly held common stock or
potential common stock. This statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share", and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted
EPS computation. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997 and requires restatement of all prior
period EPS data presented. The Company adopted this statement in fiscal year
1997 and has disclosed the required information in the financial statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 ("SFAS 129"), "Disclosure of Information about Capital
Structure". SFAS 129 establishes standards for disclosing information about
an entity's capital structure and is applicable to all entities. It
contains no change in disclosure requirements for entities that were
previously subject to the requirements of APB Opinion No. 10, "Omnibus
Opinion - 1996", APB Opinion No. 15, "Earnings Per Share", and Statement of
financial Accounting Standards No. 47, "Disclosure of Long-Term
Obligations". SFAS 129 is effective for financial statements for periods
ending after December 15, 1997. The Company adopted this statement in
fiscal year 1997 with no impact on its consolidated financial statements.
Reclassifications
-----------------
Certain reclassifications have been made for 1996 and 1995 to conform with
the 1997 presentation. The reclassifications had no effect on previously
reported net income or stockholders' equity.
(2) Investment Securities
---------------------
The following is a summary of the investment securities portfolios by major
classification:
December 31, 1997
--------------------------------------------
(in thousands)
Estimated
Amortized Unrealized Unrealized market
cost gains losses value
--------- ---------- ---------- ---------
Securities held-to-maturity:
US government and agency
securities $ 3,489 $ 6 $ 1 $ 3,494
Mortgage-backed securities (a) 2,400 46 2,446
--------- ---------- ---------- ---------
Total securities
held-to-maturity 5,889 52 1 5,940
========= ========== ========== =========
Securities available-for-sale:
States and local governments $ 1,854 $ 6 $ 1 $ 1,859
--------- ---------- ---------- ---------
Total securities
available-for-sale $ 1,854 $ 6 $ 1 $ 1,859
========= ========== ========== =========
December 31, 1996
--------------------------------------------
(in thousands)
Estimated
Amortized Unrealized Unrealized market
cost gains losses value
--------- ---------- ---------- ---------
Securities held-to-maturity:
US government and agency
securities $ 4,753 $ 21 $ 18 $ 4,756
Mortgage-backed securities (a) 2,983 41 - 3,024
--------- ---------- ---------- ---------
Total securities
held-to-maturity 7,736 62 18 7,780
========= ========== ========== =========
Securities available-for-sale:
States and local governments $ 2,019 $ 4 $ 12 $ 2,011
Mutual funds 712 - - 712
--------- ---------- ---------- ---------
Total securities
available-for-sale $ 2,731 $ 4 $ 12 $ 2,723
========= ========== ========== =========
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
(2) Investment Securities, Continued
--------------------------------
December 31, 1995
--------------------------------------------
(in thousands)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
Securities held-to-maturity:
US government and agency securities $ 2,995 $ 24 $ 3 $ 3,016
Mortgage-backed 274 - - 274
------- ------- ------ -------
Total securities held-to-maturity $ 3,269 $24 $ 3 $ 3,290
======= ======= ====== =======
Securities available-for-sale
State and local governments $ 1,629 $ 3 $ 2 $ 1,630
Mutual Funts 670 2 - 672
------- ------- ------ -------
Total securities available-for-sale $ 2,299 $ 5 $ 2 $ 2,302
======= ======= ====== =======
(a) At December 31, 1997 and 1996, the Company owned mortgage-backed securities
issued by the General National Mortgage Association (GNMA) and the Federal
Home Loan Mortgage Corporation (FHLMC) with an aggregate amortized cost of
$2,400,000 and $2,983,000 respectively, and a market value of $2,446,000
and $3,024,000.
The aggregate amortized cost and approximate market value of the available-
for-sale and held-to-maturity securities portfolios at December 31, 1997,
by remaining contractual maturity are as follows:
Securities available-for-sale Securities held-to-maturity
----------------------------- ----------------------------
(in thousands)
Estimated Estimated
Amortized market Amortized market
cost value cost value
----------------------------- ----------------------------
US government securities:
Due in 1 year or less $ - $ - $ 500 $ 499
Due in 1 year through 5 years
US government agencies securities:
Due in 1 year or less 2,249 2,250
Due in 1 year through 5 years 740 745
Obligations of states and local governments:
Due in 1 year or less 1,090 1,089
Due 1 year through 5 years - -
Due after 5 through 10 years 764 770 - -
Mortgage-backed securities - - 2,400 2,446
----------------------------- ----------------------------
Total securities $ 1,854 $1,859 $5,889 $5,940
============================= ============================
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
There was no sales activity for held-to-maturity or available-for-sale
securities for the years ended December 31, 1997, 1996 and 1995.
(3) Loans Receivable
----------------
December 31,
-----------------
Loans receivable consist of the following: 1997 1996
------- -------
(in thousands)
Loans secured by first mortgages on real estate:
Mortgage loans held for investment, primarily one-to-four family $76,894 $67,844
Construction loans 8,571 12,492
Nonresidential real estate 9,541 5,716
------- -------
95,006 86,052
Home equity lines of credit 2,438 2,191
Other second mortgage loans 237 282
Other installment loans 632 372
------- -------
98,313 88,897
Undisbursed proceeds on loans in process (3,718) (4,385)
Deferred loan fees (1,058) (1,009)
Allowance for loan losses (570) (511)
------- -------
$92,967 $82,992
======= =======
An analysis of the allowance for loan losses follows:
1997 1996 1995
------- ------- -------
(in thousands)
Balance at beginning of period $ 511 $ 462 $ 115
Provision for loan losses 60 50 350
Loans charged off (1) (1) (3)
Recoveries - - -
------- ------- -------
Balance at end of period $ 570 $ 511 $ 462
======= ======= =======
At December 31, 1997 and 1996, the Company had no loans which were in
nonaccrual status and $294,858 and $486,875 respectively, which were
contractually delinquent for 90 days or more and still accruing.
At December 31, 1997, the Company had mortgage loan commitments outstanding of
$4,102,595 and preapproved but unused lines of credit totaled $2,132,705. The
Company's exposure to credit loss for commitments to extend credit and standby
letters of credit is the contractual amount of those financial instruments.
The Company uses the same credit policies for making commitments and issuing
standby letters of credit as it does for on-balance sheet financial
instruments. Each customer's creditworthiness is evaluated on an individual
basis. The amount and type of collateral, if deemed necessary by management,
is based upon this evaluation of creditworthiness. Collateral obtained varies
but may include marketable securities, deposits, real estate, investment
assets, and property and equipment. In management's opinion, these
commitments, and undisbursed proceeds on loans in process reflected above,
represent no more than normal lending risk to the Company and will be funded
from normal sources of liquidity.
The Bank makes loans to executive officers and directors of the Company and to
their associates. It is management's opinion that such loans are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility.
Following is a reconciliation of loans outstanding to executive officers,
directors, and their associates for the year ending December 31, 1997.
Balance at December 31, 1996 $1,903,882
New loans 334,550
Repayments 209,480
----------
Balance at December 31, 1997 $2,028,952
==========
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
-------------------------------------------
(4) Premises and Equipment
----------------------
Premises and equipment consist of the following:
December 31, 1997 December 31, 1996
---------------------------------------- --------------------------------------
Accumulated Net book Accumulated Net book
Cost depreciation value Cost depreciation value
---------------------------------------- --------------------------------------
(in thousands)
Land $ 258 $ - $ 258 $ 258 $ - $ 258
Office buildings and
improvements 834 423 411 834 386 448
Furniture, fixtures and
equipment 507 371 136 500 330 170
Vehicles 26 7 19 26 2 24
---------------------------------------- --------------------------------------
$ 1625 $ 801 $ 824 $1,618 $ 718 $ 900
======================================== ======================================
(5) Deposits
--------
Time deposits of $100,000 or more totaled $5,514,098 and $5,144,587 at
December 31, 1997 and 1996, respectively.
Interest expense on deposits includes $196,905, $343,000 and $431,000 for
the years ended December 31, 1997, 1996 and 1995, respectively, on time
deposits of $100,000 or more.
Contractual maturities of time deposits are as follows:
Total
Year Ending December 31, Maturities
------------------------ ----------------------
(dollars in thousands)
1998 $ 38,474
1999 11,667
2000 2,938
---------
Total time deposits $ 53,079
=========
(6) Advances from the Federal Home Loan Bank
----------------------------------------
Advances from the Federal Home Loan Bank of Atlanta, with weighted
average interest rates, are as follows:
December 31, 1997
----------------------
(in thousands)
6.50% due on or before December 31, 1998 $ 7,800
========
There were no FHLB advances outstanding at December 31, 1996. At December
31, 1997, the Bank had additional credit availability from the Federal
Home Loan Bank of $4,200,000.
All advances are secured by all stock in the Federal Home Loan Bank and a
blanket floating lien on the Bank's one-to-four family residential
mortgage loans
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
(7) Stockholders' Equity
--------------------
Common Stock
------------
The Company is authorized to issue 20,000,000 shares of common stock. The
common stock has no par value. As of December 31, 1997 and 1996, there were
1,898,052 and 1,825,050 shares of common stock issued and outstanding,
respectively. The increase is attributable to an additional 73,002 shares
of common stock issued for the MRP as discussed in Note 9 to the
consolidated financial statements.
Preferred Stock
----------------
The Company is authorized to issue up to 5,000,000 shares of preferred
stock. No shares of preferred stock have been issued or were outstanding at
December 31, 1997 or 1996. Such preferred stock may be issued in one or
more series with such rights, preferences, and designations as the Board of
Directors of the Parent may from time to time determine subject to
applicable law and regulations. If and when such shares are issued, holders
of such shares may have certain preferences, powers, and rights (including
voting rights) senior to the rights of the holders of the common stock of
the Company. The Board of Directors of the Parent can (without stockholder
approval) issue preferred stock with voting and conversion rights which
could, among other things, adversely affect the voting power of the holders
of the common stock of the company and assist management in an unfriendly
takeover or attempted change in control of the Company that some
stockholders may consider to be in their best interest but to which
management is opposed. The Company has no current plans to issue preferred
stock.
As of December 31, 1997, the FDIC categorized the Bank as "well-
capitalized". The Bank is required to meet minimum ratios for total risk-
based, and Tier I leverage (the ratio of Tier I capital to average assets)
as set forth in the following table. There are no events or conditions
since the notification that management believes have changed the Bank's
category.
Minimum Ratios
-----------------------------
For To Be Well
Capital Amount Ratio Capital Capitalized Under
---------------- -------------- Adequacy Prompt Corrective
1997 1996 1997 1996 Purposes Action Provisions
------- ------- ------ ------ --------- ------------------
As of December 31:
Tier I Capital (ratio to risk-weighted assets): $26,027 $24,974 42.30% 51.95% 4.00% 6.00%
Tier Capital - Tier II capital (ratio to risk-
weighted assets): 26,597 25,485 43.23% 53.01% 8.00% 10.00%
Leverage - Tier I capital (ratio to average
Assets): 26,027 24,974 25.92% 25.90% 4.00% 5.00%
Liquidation Account: At the time of Conversion, the Bank established a
liquidation account in an amount equal to its net worth at December 31,
1995. The liquidation account will be maintained for the benefit of
eligible deposit account holders who continue to maintain their deposit
accounts in the Bank after Conversion. Only in the event of a complete
liquidation will each eligible deposit account holder be entitled to
receive a liquidation distribution from the liquidation account in the
amount of the then current adjusted subaccount balance for deposit accounts
then held before any liquidation distribution may be made with respect to
the Parent's common stock. Dividends cannot be paid from this liquidation
account.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
(7) Stockholders' Equity - Continued
--------------------------------
Dividends
---------
Subject to applicable law, the Boards of Directors of the Bank and the
Parent may each provide for the payment of dividends. Future declarations of
cash dividends, if any, by the Parent may depend upon dividend payments by
the Bank to the Parent. Subject to regulations of the Administrator, the
Bank may not declare or pay a cash dividend on or repurchase any of its
common stock if its stockholders' equity would thereby be reduced below
either the aggregate amount then required for the liquidation account or the
minimum regulatory capital requirements imposed by federal and state
regulations. In addition, for a period of five years after the Conversion,
the Bank will be required, under existing North Carolina regulations, to
obtain prior written approval of the Administrator before it can declare and
pay a cash dividend on its capital stock in an amount in excess of one-half
of the greater of (i) its net income for the most recent fiscal year, or
(ii) the average of its net income after dividends for the most recent
fiscal year and not more than two of the immediately preceding fiscal years,
if applicable. As a result of this limitation, the Bank cannot pay a
dividend in excess of $663,215 without the approval of the Administrator.
Capital Adequacy
----------------
The Parent is regulated by the Board of Governors of the Federal Reserve
System ("FRB") and is subject to securities registration and public
reporting regulations of the Securities and Exchange Commission. The Bank is
regulated by the Federal Deposit Insurance Corporation ("FDIC") and the
Administrator, Savings Institutions Division, North Carolina Department of
Commerce (the "Administrator").
The Bank is subject to capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier
1 capital to total risk-weighted assets and total capital to risk-weighted
assets of 4% and 8%, respectively. Tier 1 capital consists of total
shareholders' equity calculated in accordance with generally accepted
accounting principles less intangible assets, and total capital is comprised
of Tier 1 capital plus certain adjustments, the only one of which applicable
to the Bank is the allowance for possible loan losses. Risk-weighted assets
refer to the on and off-balance sheet exposures of the Bank adjusted for
their relative risk levels using formulas set forth in FDIC regulations. The
Bank is also subject to a FDIC leverage capital requirement, which calls for
a minimum ratio of Tier 1 capital (as defined above) to quarterly average
total assets of 3% to 5%, depending on the institution's composite ratings
as determined by its regulators. The Administrator requires a net worth
equal to at least 5% of total assets.
At December 31, 1997 and 1996, the Bank was in compliance with all of the
aforementioned capital requirements.
(8) Income Taxes
------------
The components of income tax expense (benefit) were as follows:
Year ended December 31,
------------------------------
(in thousands)
1997 1996 1995
------------------------------
Currently payable:
Federal $ 798 $ 757 $ 530
State 145 139 80
------------------------------
943 896 610
------------------------------
Deferred:
Federal (34) (31) (147)
State (8) (7) (33)
------------------------------
(42) (38) (180)
------------------------------
$ 901 $ 858 $ 430
==============================
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are shown
below:
December 31,
----------------
1997 1996
----------------
(in thousands)
Allowance for loan losses (net) $ 229 $ 204
Deferred loan origination fees, net of deferred costs 424 404
------- -------
Gross deferred tax assets 653 608
Valuation allowance 0 0
------- -------
Net deferred tax assets 653 608
------- -------
Accelerated depreciation 46 52
FHLB stock dividends 180 180
Other temporary differences creating deferred tax assets 15
------- -------
Gross deferred tax liabilities 241 232
------- -------
Net deferred tax asset $ 412 $ 376
======= =======
The Company has no valuation allowance at December 31, 1997 or 1996 because
it has sufficient taxable income in the carryback period to support the
realizability of the net deferred tax asset.
The reconciliation of income taxes at statutory tax rates to income tax
expense reported in the statements of income follows:
December 31,
----------------------
1997 1996 1995
------ ------ ------
(in thousands)
Income taxes at the statutory federal tax rate $ 827 $ 798 $ 397
State income taxes less federal benefit 120 120 59
Tax exempt interest (29) (38) (40)
Other (17) (22) 14
------ ------ ------
Total tax expense $ 901 $ 858 $ 430
====== ====== ======
Retained earnings at December 31, 1997 includes approximately $2,577,990 for
which no provision for federal income tax has been made. This amount
represents allocations of income to bad debt deductions for tax purposes
only. Reduction of such amount for purposes other than tax bad debt losses
will create income for tax purposes only, which will be subject to the then
current corporate income tax rate. Legislation passed in 1996 eliminates the
percentage of taxable income method as an option for computing bad debt
deductions for 1996 and in all future years. The Bank will still be
permitted to take deductions for bad debts, but will be required to compute
such deductions using an experience method.
(9) Employee and Director Benefit Plans
-----------------------------------
DEFINED CONTRIBUTION RETIREMENT PLAN: The Bank had a self-administered,
defined contribution retirement plan that covered all eligible employees.
The Bank's policy has been to fund retirement costs accrued for the year.
Under the plan, the Bank contributed an actuarially determined amount based
on a participants compensation and years of service. In conjunction with the
Conversion, the defined contribution retirement plan was terminated as of
January 1, 1996. Funds were distributed in 1996. There was no gain or loss
upon the termination of the defined contribution retirement plan. Retirement
expense of this plan totaled approximately $84,000 in 1995.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
(9) Employee and Director Benefit Plans - Continued
------------------------------------------------
401(k) PLAN
-----------
During 1994, the Bank implemented a 401(k) plan that covers all eligible
employees. During years prior to 1996, the Bank has matched 50% of employee
contributions, with the Bank's contribution limited to 3% of each employee's
salary. 401(k) matching contributions are funded when accrued. Matching
expense totaled approximately $866 in 1997, $1,900 in 1996, and $10,000 in
1995.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP"): The Bank has an ESOP whereby an
aggregate number of shares amounting to 146,004 were purchased for future
allocation to employees. Contributions to the ESOP are made by the Bank on a
discretionary basis, and are allocated among ESOP participants on the basis
of relative compensation in the year of allocation. Benefits will vest in
full upon five years of service with credit given for years of service prior
to the conversion.
The ESOP was funded in December, 1996 by a loan from the Parent in the
amount of $2,198,064. The loan is secured by shares of stock purchased by
the ESOP and is not guaranteed by the Bank. Principal and interest payments
on this loan are funded primarily from discretionary contributions by the
Bank. Dividends, if any, paid on shares held by the ESOP may also be used to
reduce the loan. Dividends on unallocated shares are used by the ESOP to
repay the debt to the Parent and are not reported as dividends in the
consolidated financial statements. Dividends on allocated shares are
credited to the amounts of the participants and reported as dividends in the
consolidated financial statements.
During 1997, the Bank made a $250,491 contribution to the ESOP, representing
the normal principal payment due for the year and the application of
dividends on unallocated shares to the principal balance of the loan. This
contribution resulted in the release of 23,617 shares to individual
participant accounts. At December 31, 1997, a total of 30,822 shares have
been released and allocated to participants and 115,182 shares remain
unallocated.
Total compensation expense associated with the ESOP for the years ended
December 31, 1997 and 1996 was $180,000 and $175,000, respectively. At
December 31, 1997, there were 115,182 unallocated ESOP shares with a total
fair value of approximately $2,555,601.
In fiscal year 1996, the $175,000 cash contribution made for the year ended
December 31, 1996 was used to release 7,205 shares to ESOP participants.
During the year ended December 31, 1997, 23,617 shares were considered
committed to be released to ESOP participants, and compensation expense of
$180,000 associated with those shares was recorded.
Management Recognition Plan ("MRP")
-----------------------------------
The Bank's MRP was approved by stockholders of the Parent and by the
Parent's and the Bank's Boards of Directors during fiscal year 1997. The MRP
serves as a means of providing existing directors and employees of the Bank
with an ownership interest in the Company. Shares of the Company's common
stock awarded under the MRP vest equally over a five year period.
Compensation expense related to those shares is recognized on a straight-
line basis corresponding with the vesting period. Prior to vesting, each
participant granted shares under the MRP may direct the voting of the shares
allocated to the participant and will be entitled to receive any dividends
or other distributions paid on such shares. On May 9, 1997, 73,002 shares
were awarded under the MRP. Total compensation expense associated with the
MRP for the year ended December 31, 1997 was $352,779.
32
NOTES TO FINANCIAL STATEMENTS - Continued
-----------------------------------------
(9) Employee and Director Benefit Plans - Continued
-----------------------------------------------
Stock Option Plan
-----------------
The Company adopted a Stock Option Plan which has also been approved by the
stockholders of the Parent and by the Parent's and the Bank's Boards of
Directors. The Stock Option Plan makes available options to purchase 182,505
shares, or 10% of the shares issued in the conversion to employees and
directors. Options granted under the Stock Option Plan to directors vest
immediately while options granted to employees have a vesting schedule which
provides that 20% of the options granted vest in the first year, and 20%
will vest on each subsequent anniversary date, so that options would be
completely vested within five years from the date of grant. Options become
100% vested upon death or disability, if earlier. Unexercised options expire
within ten years from the date of grant. The exercise price for options
granted in 1997 was the fair market value at the date of grant (May 9, 1997)
of $25.625 per share and was adjusted to $21.75 to reflect the $4.00 special
return of capital dividend paid to stockholders in 1997.
The weighted-average fair value per share of options granted in 1997
amounted to $6.26. Fair values were estimated at the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions.
Risk-free interest rate 6.75%
Dividend yield 3.90
Volatility 30.00
Expected life 7 years
A summary of the Company's stock option activity and related information for
the year ended December 31, 1997 follows:
Outstanding Exercisable
------------------ -----------------
Weighted Weighted
Average Average
Option Exercise Option Exercise
Shares Price Shares Price
-------- -------- ------- --------
At December 31, 1996 - $ - - $ -
Granted 172,244 21.75 78,241 21.75
Exercised - - - -
Forfeited - - - -
-------- -------- ------- --------
At December 31, 1997 $172,244 $ 21.75 $78,241 $ 21.75
======== ======== ======= ========
DIRECTOR'S DEFERRED COMPENSATION PLAN: The Bank has a deferred compensation
plan for its directors under which the directors would be paid specified
amounts during the ten year period following the date that the director
becomes 65 years of age. The Bank has purchased life insurance policies with
the Bank named as beneficiary to fund the benefits. Total expense related to
these plans was approximately $123,271 for 1997, $48,000 for 1996, and
$70,000 for 1995.
EMPLOYMENT AGREEMENTS: In connection with the Conversion, the Bank entered
into an employment agreement with its chief executive officer in order to
ensure a stable and competent management base. The agreement provides for a
three-year term, but upon each anniversary, the agreement automatically
extends so that the remaining term shall always be three years. The
agreement provides that the nature of the covered employee's compensation,
duties or benefits cannot be diminished following a change in control of the
Company.
SEVERANCE PLAN: In connection with the Conversion, the Bank adopted a
Severance Plan for the benefit of its employees. The Plan provides for
severance pay benefits in the event of a change in control which results in
the termination of such employees or diminished compensation, duties, or
benefits within two years of a change in control. The employees covered
would be entitled to a severance benefit of the greater of (a) the amount
equal to two weeks'
33
NOTES TO FINANCIAL STATEMENTS - Continued
-----------------------------------------
(9) Employee and Director Benefit Plans - Continued
-----------------------------------------------
salary at the existing salary rate multiplied by the employee's number of
completed years of service or (b) the amount of one month's salary at the
employee's salary rate at the time of termination, subject to a maximum
payment equal to two times the employee's annual salary.
The Company has elected to follow APB Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock options as permitted under SFAS NO. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation". In accordance with APB
25, no compensation cost is recognized by the Company when stock options
are granted because the exercise price of the Company's stock options
equals the market price of the underlying common stock on the date of
grant. As required by SFAS 123, disclosures are presented below for the
effect on the net income and net income per share that would result from
the use of the fair value based method to measure compensation cost related
to stock option grants in 1997. The effects of applying the provisions of
SFAS 123 in 1997 are not necessarily indicative of future effects.
Amount
------
(in thousands, except per share data)
Net income
As reported $ 1,532
Pro forma 1,498
Net income per share
As reported $ .82
Pro forma .80
(10) Quarterly Financial Data (Unaudited)
------------------------------------
Summarized unaudited quarterly financial data for the year ended December
31, 1997 is as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Operating Summary: (in thousands except per share amounts)
Interest income $ 2,110 $ 2,050 $ 2,099 $ 2,094
Interest expense 826 840 890 935
-------- -------- -------- --------
Net interest income 1,284 1,210 1,209 1,159
Provision for loan losses 15 15 15 15
-------- -------- -------- --------
Net interest income after provision for loan
losses 1,269 1,195 1,194 1,144
Other income 34 33 36 42
Other expenses 450 826 604 634
-------- -------- -------- --------
Income before income tax expense 853 402 626 552
Income taxes 327 144 240 190
-------- -------- -------- --------
Net income 526 258 386 362
Per Share Data:
Net Income per share--basic .29 .14 .20 .19
Net Income per share--diluted .29 .14 .20 .19
Cash dividends declared .1125 .1125 4.1125 .1125
Dividend payout 39.04 82.74 55.27 59.01
Book value per share 20.76 16.13 16.32 16.37
Selected Average Balances:
Assets $104,971 $105,946 $103,526 $105,630
Investment securities 17,149 14,494 11,471 10,529
Loans, net 84,256 86,024 87,469 91,095
Interest-bearing deposits 65,938 71,490 65,553 66,414
FHLB advances - - 3,390 6,555
Stockholders' equity 37,587 34,212 30,799 31,027
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
------------------------------------------
(10) Quarterly Financial Data (Unaudited) - Continued
------------------------------------------------
Summarized unaudited quarterly financial data for the year ended December
31, 1996 is as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------
Operating Summary: (in thousands except per share amounts)
Interest income $ 1,774 $ 2,082 $ 2,086 $ 2,066
Interest expense 1,016 884 860 850
------- -------- -------- --------
Net interest income 758 1,198 1,226 1,216
Provision for loan losses - 15 15 20
------- -------- -------- --------
Net interest income after
provision for loan losses 758 1,183 1,211 1,196
Other income 26 29 31 27
Other expenses 439 368 847 468
------- -------- -------- --------
Income before income tax expense 345 844 395 755
Income taxes 141 305 126 286
------- -------- -------- --------
Net income 204 539 269 469
Per Share Data:
Net income per share--basic N/A .30 .15 .26
Net income per share--diluted N/A .30 .15 .26
Cash dividends declared N/A .11 .11 .22
Dividend payout N/A 37.29 74.72 85.00
Book value per share N/A 21.00 20.18 20.47
Selected Average Balances:
Assets $92,835 $108,766 $108,343 $105,691
Investment securities 14,871 28,281 25,237 21,296
Loans, net 75,883 77,704 79,520 82,081
Interest-bearing deposits 72,692 67,951 67,613 66,480
Stockholders' equity 16,621 39,401 38,944 37,494
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
------------------------------------------------------
(11) Parent Company Financial Data
-----------------------------
Condensed financial information for Stone Street Bancorp, Inc. (Parent
Company) is as follows:
December 31, December 31,
1997 1996
------- -------
Condensed Balance Sheet (in thousands)
Assets:
Cash on deposit with bank subsidiary $ 3,957 $ 4,272
Interest bearing deposits 204 7,531
Investment securities available for sale at
market value:
Obligations of states and local governments,
cost $860,000 859 859
Investment in bank subsidiary 26,030 25,230
Other assets 118 164
------- -------
Total assets $31,168 $38,056
======= =======
Liabilities and stockholders' equity:
Accrued expenses and other liabilities $ 92 $ 418
Stockholders' equity, net 31,076 37,638
------- -------
Total liabilities and stockholders' equity $31,168 $38,056
======= =======
Year Ended December 31, December 31,
1997 1996
------- -------
Condensed Statement of Income (in thousands)
Dividends from bank subsidiary $ 619 $ 435
Interest income from bank subsidiary 203 30
Interest on interest bearing deposits 149 483
Interest on loan from bank subsidiary ESOP 182 93
Interest on investment securities 33 5
------- -------
Total income 1,186 1,046
Operating expenses 241 30
------- -------
Income before income taxes 945 1,016
Income tax expense 120 227
------- -------
Income before equity in undistributed net
income of subsidiary 825 789
Equity in undistributed net income of bank
subsidiary 707 692
------- -------
Net income $ 1,532 $ 1,481
======= =======
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
------------------------------------------------------
(11) Parent Company Financial Data - Continued
-----------------------------------------
Year Ended
December 31, December 31,
1997 1996
------- -------
Condensed Statement of Cash Flows (in thousands)
Cash flows from operating activities:
Net income $ 1,532 $ 1,481
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed earnings of bank subsidiary (707) (692)
Payments on ESOP loan receivable from bank
subsidiary 579 -
(Increase) (decrease) in other assets 47 (164)
Increase in other liabilities (326) 418
------- --------
Net cash provided by operating activities 1,125 1,043
------- --------
Cash flows from investing activities:
Purchase of available for sale securities - (860)
------- --------
Net cash used by investing activities - (860)
Cash flows from financing activities:
Proceeds of issuance of no par common stock - 26,333
Loan to ESOP for purchase of common stock (329) (2,198)
Capital contribution to bank subsidiary - (11,712
Cash dividends paid to stockholders (8,438) (803)
------- --------
Net cash provided by financing activities (8,767) 11,620
------- --------
Net increase in cash and cash equivalents (7,642) 11,803
Cash and cash equivalents at beginning of year 11,803 -
------- --------
Cash and cash equivalents at end of year $ 4,161 $ 11,803
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 149 $ 283
======= ========
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on securities
available for sale net of deferred tax benefit
of $1 in each year $ (1) $ (1)
======= ========
Unrealized gains (losses) on subsidiary's
securities available for sale, net of deferred
tax benefit of $2 and $3 in 1997 and 1996,
respectively $ 4 $ (7)
======= ========
Dividends declared but unpaid $ - $ 402
======= ========
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
----------------------------------------------------
(12) Fair Value of Financial Instruments
-----------------------------------
Fair value estimates are made by management at a specific point in time,
based on relevant information about the financial instrument and the
market. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of
a particular financial instrument nor are potential taxes and other
expenses that would be incurred in an actual sale considered. Fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions and/or the
methodology used could significantly affect the estimates disclosed.
Similarly, the fair values disclosed could vary significantly from amounts
realized in actual transactions.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments.
The following table presents the carrying values and estimated fair values
of the Company's financial instruments at December 31, 1997 and 1996:
1997 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value fair value
-------- ---------- -------- ----------
(dollars in thousands)
Financial assets:
Cash and interest-bearing deposits $ 4,703 $ 4,703 $ 9,805 $ 9,805
Investment securities:
Available-for-sale 1,854 1,859 2,723 2,723
Held-to-maturity 5,889 5,940 7,736 7,780
Net loans 92,967 92,549 82,992 82,617
Federal Home Loan Bank stock 741 741 667 667
Financial liabilities:
Deposits 66,973 67,106 66,564 66,667
Advance from FHLB 7,800 7,805 - -
The estimated fair values of net loans and deposits are based on cash flows
discounted at market interest rates. The carrying values of other financial
instruments, including various receivables and payables, approximate fair
value.
At December 31, 1997, the Company had outstanding commitments to extend
credit. These off-balance sheet financial instruments are generally
exercisable at the market rate prevailing at the date the underlying
transaction will be complete, and, therefore, they are deemed to have no
current fair market value. Refer to note 3.
38
CAPITAL STOCK
-----------------------
Stone Street Bancorp's common stock is traded on the American Stock Exchange
under the symbol "SSM". As of December 31, 1997, there were 1,898,052 shares
outstanding and 720 shareholders of record, not including the number of persons
or entities whose stock is held in nominee or street name through various
brokerage firms or banks. Payment of dividends by the Bank subsidiary to the
Parent is subject to various restrictions. Under applicable banking regulations,
the Bank may not declare a cash dividend if the effect thereof would be to
reduce its net worth to an amount less than the minimum required by federal and
state banking regulations. In addition, for a period of five years after the
consummation of the Bank's stock conversion, which occurred on March 29, 1996,
the Bank will be required to obtain prior written approval from the
Administrator of the Savings Institutions Division, North Carolina Department of
Commerce, before it can declare a cash dividend in an amount in excess of one-
half the greater of (i) its net income for the most recent fiscal year or (ii)
the average of its net income after dividends for the most recent fiscal year
and not more than two of the immediately preceding fiscal years, as applicable.
Quarterly Common Stock Performance and Dividends Declared
For the Year Ended December 31, 1997
Stock Price Dividends Declared, Per Share
----------------- -----------------------------
High Low
------ -----
First Quarter ended January 31 $ 27 1/2 $ 20 1/8 $ .1125
Second quarter ended June 30 27 1/2 20 15/16 .1125
Third quarter ended September 30 (1) 22 1/8 21 1/8 4.1125
Fourth quarter ended December 31 22 7/8 18 1/2 .1125
- ----------------------------------
(1) Includes regular cash dividend of $.1125 per share and a return of
capital dividend of $4.00 per share.
40