U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[ X ] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
[ ] Transition Report Under Section 13
or 15(d) of the Exchange Act
For the transition period ended
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Commission File Number 0-21083
SOUTH STREET FINANCIAL CORP.
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(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-1973261
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
155 WEST SOUTH STREET, ALBEMARLE, NC 28001
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(Address of principal executive office)
(704) 982-9184
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
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As of April 17, 2001, 3,132,767 shares of the issuer's common stock, no par
value, were outstanding.
This report contains 11 pages.
Page No.
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
March 31, 2001 and December 31, 2000.................................................. 3
Consolidated Statements of Income and Comprehensive Income
Three Months Ended March 31, 2001 and 2000............................................ 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000............................................ 5
Notes to Consolidated Financial Statements............................................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations..... 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................. 10
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
South Street Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
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March 31,
2001 December 31,
ASSETS (Unaudited) 2000*
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(In Thousands)
Cash and cash equivalents:
Noninterest-bearing deposits $ 3,296 $ 2,978
Interest-bearing deposits 10,379 2,935
Federal Funds sold 1,810 1,570
Securities held to maturity 6,545 6,762
Securities available for sale 20,047 25,288
Federal Home Loan Bank stock 1,348 1,229
Loans receivable, net 154,321 152,514
Real estate acquired in settlement of loans 18 18
Real estate held for investment 1,341 1,284
Accrued interest receivable 1,128 1,088
Office properties and equipment, net 1,468 1,504
Prepaid expenses and other assets 453 1,173
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TOTAL ASSETS $ 202,154 $ 198,343
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 159,988 $ 155,035
Borrowings 16,000 16,000
Advance payments by borrowers for taxes and insurance 359 232
Accrued expenses and other liabilities 2,218 3,267
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TOTAL LIABILITIES 178,565 174,534
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STOCKHOLDERS' EQUITY
Preferred stock, no par value: authorized 5,000,000 shares;
none issued - -
Common stock, no par value: authorized 20,000,000
shares; issued 3,137,767 shares March 31, 2001
and 3,182,767 shares at December 31, 2000 8,691 9,051
Unearned compensation (1,629) (1,665)
Unearned ESOP (2,930) (2,993)
Retained earnings, substantially restricted 19,490 19,579
Accumulated other comprehensive loss (33) (163)
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TOTAL STOCKHOLDERS' EQUITY 23,589 23,809
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 202,154 $ 198,343
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* Derived from audited financial statements
See accompanying notes.
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South Street Financial Corp. and Subsidiary
Consolidated Statements of Income and Comprehensive Income (Unaudited)
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Three Months Ended
March 31,
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2001 2000
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(In Thousands except
per share data)
INTEREST INCOME
Loans $ 3,057 $ 2,666
Investment securities 453 538
Other interest-bearing deposits 128 93
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TOTAL INTEREST INCOME 3,638 3,297
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INTEREST EXPENSE
Deposits 2,053 1,722
Borrowings 264 114
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TOTAL INTEREST EXPENSE 2,317 1,836
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NET INTEREST INCOME 1,321 1,461
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PROVISION FOR LOAN LOSSES - -
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,321 1,461
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NON-INTEREST INCOME, NET
Service charges and fees 64 27
Gain (loss) on sale of assets - (56)
Other 9 11
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TOTAL NON-INTEREST INCOME, NET 73 (18)
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NON-INTEREST EXPENSE
Compensation and benefits 766 869
Net occupancy 94 88
Federal deposit insurance premium 7 8
Data processing 68 69
Other 164 195
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TOTAL NON-INTEREST EXPENSE 1,099 1,229
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INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
IN NET INCOME OF CONSOLIDATED SUBSIDIARY 295 214
INCOME TAXES 103 74
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INCOME BEFORE MINORITY INTEREST IN NET
INCOME OF CONSOLIDATED SUBSIDIARY 192 140
Less minority interest in net income of consolidated subsidiary - 14
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NET INCOME $ 192 $ 126
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BASIC AND DILUTED NET INCOME PER COMMON SHARE $ .07 $ .04
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 2,829,038 3,117,994
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See accompanying notes.
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South Street Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
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Three Months Ended
March 31,
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2001 2000
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before minority interest $ 192 $ 140
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net accretion of premiums and discounts on securities 18 20
Provision for depreciation 41 37
Gain on sale of real estate held for investment - (28)
ESOP contribution - (60)
Vesting of deferred management recognition plan - 200
Deferred income taxes (12) (22)
ESOP expense (35) 37
(Gain) loss on sale of investments - 84
(Increase) decrease in assets:
Accrued interest receivable (40) (68)
Prepaid expenses and other assets 732 (143)
Decrease in other liabilities:
Accrued expenses and other liabilities (1,128) 257
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (232) 454
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of FHLB stock (119) (76)
Proceeds from maturities and recalls of securities available for sale 5,452 318
Proceeds from sale of securities available for sale - 1,468
Principal collected on securities held to maturity 202 266
Loan originations and principal payments on loans, net (1,807) (4,756)
Purchase of office properties and equipment (5) (42)
Purchase of real estate held for investment (57) (107)
Proceeds from sale of real estate held for investment - 80
Draw by minority interest in LLP - (46)
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NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,666 (2,895)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 4,953 681
Net increase in advance payments by borrowers for taxes and insurance 127 149
Principal payment received on ESOP note 63 -
Dividends paid (285) (284)
Repurchase of common stock (290) (1,200)
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 4,568 (654)
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NET DECREASE IN CASH
AND CASH EQUIVALENTS 8,002 (3,095)
CASH AND CASH EQUIVALENTS, BEGINNING 7,483 9,533
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CASH AND CASH EQUIVALENTS, ENDING $ 15,485 $ 6,438
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See accompanying notes.
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South Street Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
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NOTE A - BASIS OF PRESENTATION
In management's opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the three
month periods ended March 31, 2001 and 2000, in conformity with generally
accepted accounting principles. The consolidated financial statements include
the accounts of South Street Financial Corp. (the "Company") and its
wholly-owned subsidiary, Home Savings Bank of Albemarle, S.S.B., ("Home Savings"
or the "Bank"), the Bank's wholly-owned subsidiary, South Street Development
Corporation ("SSDC"), and SSDC's wholly-owned subsidiary, Park Ridge Associates,
LLC ("Park Ridge"). During 2000, SSDC became the sole owner of Park Ridge by
purchasing the 50% interest in Park Ridge that was previously held by a third
party. All significant intercompany transactions and balances have been
eliminated in consolidation. Operating results for the three month period ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2001.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the consolidated
financial statements filed as part of the Company's 2000 annual report on Form
10-K. This quarterly report should be read in conjunction with such annual
report.
NOTE B. EARNINGS PER SHARE
The Company's basic earnings per share for the three month period ended March
31, 2001 is based on net income earned divided by the weighted average number of
shares outstanding from the beginning of the period to the end of the period.
Diluted earnings per share is adjusted for all potential common stock
instruments having a dilutive effect. For purposes of this computation, the
number of shares of common stock purchased by the ESOP which have not been
allocated to participant accounts are not assumed to be outstanding.
NOTE C. DIVIDENDS DECLARED
On March 19, 2001, the Company's Board of Directors declared a dividend of $.10
per share for shareholders of record as of April 2, 2001 and payable on April
12, 2001. In addition, on March 19, 2001, the Board of Directors of the Bank
declared an upstream dividend of $314,000 to the Company.
NOTE D. BORROWINGS
Borrowings, which consisted solely of advances from the FHLB, totaled
$16,000,000 at March 31, 2001. The weighted average interest rate of the
advances was 6.56%. All of the advances mature during 2001.
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-QSB may contain certain forward-looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited to, general economic
conditions, changes in interest rates, deposit flows, loan demand, real estate
values, and conditions; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting the
Company's operations, pricing, products and services.
Comparison of Financial Condition at March 31, 2001 and December 31, 2000
Total consolidated assets increased by $3.8 million or 1.9% to $202.1 million at
March 31, 2001 from $198.3 million at December 31, 2000. Net loans receivable
increased by $1.8 million or 1.2% to $154.3 million at March 31, 2001 from
$152.5 million at December 31, 2000. Investment securities held to maturity
decreased $217,000 or 3.2% to $6.5 million at March 31, 2001 from $6.8 million
at December 31, 2000. Additionally, investment securities classified as
available for sale decreased $5.2 million or 20.7% to $20.0 million at March 31,
2001 from $25.3 million at December 31, 2000. The Bank has guaranteed the
repayment of the ESOP's note payable to the Company, which it incurred on
October 2, 1996 in order to purchase 359,720 shares of stock in the Company. The
Company's note receivable from the ESOP totals $2.9 million at March 31, 2001
and is reported as a reduction of stockholders' equity. Retained earnings
decreased by $89,000 to $19.5 million at March 31, 2001, which is attributable
to the Company's dividends accrued for the three months ended March 31, 2001 in
the amount of $281,000 and net of $192,000 of net income. Common stock and
unearned compensation decreased by $324,000 to $7.1 million at March 31, 2001
from $7.4 million at December 31, 2000. The decrease was primarily attributable
to the repurchase of 45,000 shares of outstanding common stock in the amount of
$290,000.
As a North Carolina chartered stock savings bank, the Bank is required to meet
various capital standards established by federal and state banking agencies. At
March 31, 2001, the Company's stockholders' equity amounted to $23.6 million, or
11.7% of total assets and exceeds all regulatory capital requirements.
The Bank's level of nonperforming loans, defined as loans past due 90 days or
more, was $196,000 and $439,000 at March 31, 2001 and December 31, 2000,
respectively. During the three month period ended March 31, 2000, the Bank's
level of nonperforming loans remained consistently low in relation to prior
periods and to total loans outstanding. Based on their analysis, management
determined that no loan loss provisions were necessary during the three months
ended March 31, 2001 and 2000.
Comparison of Operating Results for the Three Months Ended March 31, 2001 and
2000
General. Net income for the three month period ended March 31, 2001 was
$192,000, or $66,000 more than the $126,000 earned during the same period in
2000.
Interest income. Interest income increased by $341,000 from $3.3 million for the
three months ended March 31, 2000 to $3.6 million for the three months ended
March 31, 2001. The increase was primarily attributable to the increased volume
in loans receivable and interest-bearing deposits net of a decrease in the
volume of investment securities during the quarter.
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Interest expense. Interest expense on deposits and borrowed funds increased by
$481,000 from $1.8 million for the three months ended March 31, 2000 to $2.3
million for the three months ended March 31, 2001. The increase is primarily due
to an increase in the total amount of customer deposits for the three months
ended March 31, 2001 compared to the same period in 2000.
Net interest income. Net interest income decreased by $140,000 from $1.5 million
for the three months ended March 31, 2000 to $1.3 million for the three months
ended March 31, 2001. This decrease resulted from the factors discussed above.
Provision for loan losses. There were no provisions for loan losses charged to
income during the three months ended March 31, 2001 and 2000. Provisions, which
are charged to operations, and the resulting loan loss allowances are amounts
the Bank's management believes will be adequate to absorb losses on existing
loans that may become uncollectible.
Loans are charged off against the allowance when management believes that
collectibility is unlikely. The decision to increase or decrease the provision
and resulting allowances is based upon an evaluation of both prior loan loss
experience and other factors, such as changes in the nature and volume of the
loan portfolio, overall portfolio quality, and current economic conditions. The
Bank's level of nonperforming loans has remained consistently low in relation to
prior periods and total loans outstanding and the Bank's loan charge-offs during
the three months ended March 31, 2001 and 2000 were minimal.
At March 31, 2001, the Bank's level of general valuation allowances for loan
losses amounted to $414,000, which management believes is adequate to absorb
losses inherent in its loan portfolio.
Non-interest income. The Company earned non-interest income of $73,000 during
the three months ended March 31, 2001 compared to the net loss of $18,000 that
was incurred during the same period in 2000. This increase in non-interest
income of $91,000 was primarily attributable to a decrease in the net loss on
the sale of assets of $56,000 for the three months ended March 31, 2001 versus
2000, and an increase in service charges and fees of $37,000 from $27,000 for
the three months ended March 31, 2000 to $64,000 for the three months ended
March 31, 2001.
Non-interest expense. Non-interest expense decreased by $130,000 from $1.2
million for the three months ended March 31, 2000 to $1.1 million for the three
months ended March 31, 2001. This decrease resulted primarily from a decrease in
compensation expense of $103,000 due largely to expense associated with the
management recognition plan in the quarter ended March 31, 2000. The management
recognition plan became fully vested prior to 2001, therefore there was no
related expense included in the quarter ended March 31, 2001.
Liquidity and Capital Resources
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-bearing deposits.
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As a state chartered stock savings bank, the Bank must meet certain liquidity
requirements that are established by the NC Administrator of the Savings
Institutions Division. The Bank's liquidity ratio at March 31, 2001, as computed
under such regulations, was considerably in excess of such requirements. Given
its excess liquidity and its ability to borrow from the FHLB of Atlanta, the
Bank believes that it will have sufficient funds available to meet anticipated
future loan commitments, unexpected deposit withdrawals, or other cash
requirements.
The FDIC requires the Bank to have a minimum leverage ratio of Tier I Capital
(principally consisting of retained earnings and any common stockholders'
equity, less any intangible assets) to all assets of at least 3%, provided that
it receives the highest rating during the examination process. For institutions
that receive less than the highest rating, the Tier I capital requirement is 1%
to 2% above the stated minimum. The FDIC also requires the Bank to have a ratio
of total capital to risk-weighted assets of 8%, of which at least 4% must be in
the form of Tier I capital. The Administrator requires a net worth equal to at
least 5% of total assets. The Bank complied with all of the capital requirements
of both the FDIC and the Administrator at March 31, 2001.
Inflation and Changing Prices
The 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 market interest rates have a greater
impact on the Company's performance than do the effects of inflation.
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated February
22, 2001 announcing the termination of the firm of McGladrey &
Pullen, LLP as the Company's independent auditors and
appointing the firm of Dixon Odom PLLC as the Company's
independent auditors for the fiscal year ending December 31,
2001.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SOUTH STREET FINANCIAL CORP.
Date: May 9, 2001 By: /s/ Carl M. Hill
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Carl M. Hill
President and Chief Executive Officer
Date: May 9, 2001 By: /s/ Christopher F. Cranford
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Christopher F. Cranford
Treasurer and Controller
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