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 September 30, 2001
[_] Transition Report Under Section 13
or 15(d) of the Exchange Act
For the transition period ended September 30, 2001
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Commission File Number 0-21083
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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 November 13, 2001, 3,114,867 shares of the issuer's common stock, no par
value, were outstanding.
This report contains 13 pages.
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Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
September 30, 2001 and December 31, 2000 .......................... 3
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2001 and 2000 .... 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000 ..................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ......................... 12
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Part I. Financial Information
Item 1 - Financial Statements
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South Street Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
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September 30,
2001 December 31,
ASSETS (Unaudited) 2000*
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(In Thousands)
Cash and cash equivalents:
Noninterest-bearing deposits $ 2,906 $ 2,978
Interest-bearing deposits 12,105 2,935
Federal funds sold 1,931 1,570
Securities held to maturity 5,364 6,762
Securities available for sale 17,423 25,288
Federal Home Loan Bank stock 1,348 1,229
Loans receivable, net 167,799 152,514
Real estate acquired in settlement of loans 18 18
Real estate held for investment 1,296 1,284
Accrued interest receivable 1,150 1,088
Office properties and equipment, net 1,421 1,504
Prepaid expenses and other assets 1,047 1,173
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TOTAL ASSETS $ 213,808 $ 198,343
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 165,149 $ 155,035
FHLB advances 21,000 16,000
Advance payments by borrowers for taxes and insurance 54 232
Accrued expenses and other liabilities 3,925 3,267
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TOTAL LIABILITIES 190,128 174,534
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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 3,114,867 shares at September 30, 2001
and 3,182,767 shares at December 31, 2000 8,390 9,051
Unearned compensation (1,520) (1,665)
Unearned ESOP (2,719) (2,993)
Retained earnings, substantially restricted 19,397 19,579
Accumulated other comprehensive income (loss) 132 (163)
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TOTAL STOCKHOLDERS' EQUITY 23,680 23,809
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 213,808 $ 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 (Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
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2001 2000 2001 2000
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(In thousands, except per share data)
INTEREST INCOME
Loans $ 3,307 $ 2,871 $ 9,504 $ 8,327
Investment securities 322 556 1,155 1,663
Other interest-bearing deposits 89 47 361 183
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TOTAL INTEREST INCOME 3,718 3,474 11,020 10,173
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INTEREST EXPENSE
Deposits 2,015 1,884 6,104 5,373
FHLB advances 254 236 784 490
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TOTAL INTEREST EXPENSE 2,269 2,120 6,888 5,863
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NET INTEREST INCOME 1,449 1,354 4,132 4,310
PROVISION FOR LOAN LOSSES - - - -
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,449 1,354 4,132 4,310
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NON-INTEREST INCOME, NET
Service charges and fees 36 31 157 86
Loss on sale of investments - - - (84)
Gain on sale of real estate held for investment - 2 17 28
Other 8 11 26 33
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TOTAL NON-INTEREST INCOME, NET 44 44 200 63
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NON-INTEREST EXPENSE
Compensation and benefits 703 868 2,232 2,662
Net occupancy 87 79 263 244
Federal deposit insurance premium 7 8 22 23
Data processing 67 56 205 181
Other 203 176 571 518
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TOTAL NON-INTEREST EXPENSE 1,067 1,187 3,293 3,628
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INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST IN NET INCOME
OF CONSOLIDATED SUBSIDIARY 426 211 1,039 745
INCOME TAXES 161 77 384 258
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INCOME BEFORE MINORITY INTEREST IN
NET INCOME OF CONSOLIDATED SUBSIDIARY 265 134 655 487
Less minority interest in net income
of consolidated subsidiary - - - 14
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NET INCOME $ 265 $ 134 $ 655 $ 473
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BASIC AND DILUTED NET INCOME
PER COMMON SHARE $ .09 $ .04 $ .23 $ .16
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WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 2,816,465 2,997,538 2,817,980 3,050,114
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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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Nine Months Ended
September 30,
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2001 2000
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before minority interest $ 655 $ 487
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion of premiums and discounts on securities 50 -
Depreciation expense and amortization of goodwill 123 113
Gain on sale of real estate held for investment (18) (28)
ESOP contribution - (185)
Amortization of unearned compensation - 109
Vesting of deferred management recognition plan - 599
Deferred income taxes (9) -
ESOP expense (75) (68)
Loss on sale of investments - 84
(Increase) decrease in assets:
Accrued interest receivable (62) (147)
Prepaid expenses and other assets 123 (249)
Increase (decrease) in other liabilities:
Accrued expenses and other liabilities 483 556
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,270 1,271
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of FHLB stock (119) -
Proceeds from sale of securities available for sale 8,343 -
Principal collected on securities held to maturity 1,354 -
Loan originations and principal payments on loans, net (15,285) (15,049)
Net decrease in investments - 4,540
Purchase of office properties and equipment (37) (53)
Increase in real estate held for investment (70) (246)
Proceeds from sale of real estate held for investment 76 80
Draw by minority interest in LLP - (49)
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NET CASH USED BY INVESTING ACTIVITIES (5,738) (10,777)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,114 4,030
Proceeds from FHLB advances - 6,000
Net increase in advance payments by borrowers for taxes and insurance (178) (97)
Principal payments received on ESOP note 274 158
Dividends paid 4,158 (861)
Repurchase of common stock (441) (1,889)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 13,927 7,341
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,459 (2,165)
CASH AND CASH EQUIVALENTS, BEGINNING 7,483 9,533
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CASH AND CASH EQUIVALENTS, ENDING $ 16,942 $ 7,368
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SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Net change in unrealized gain (loss) on securities available for sale,
net of deferred taxes $ 295 $ 265
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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 and
nine month periods ended September 30, 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 and nine month
periods ended September 30, 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 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations entered into after June 30, 2001 be accounted for under
the purchase method. SFAS No. 142 requires that all intangible assets, including
goodwill that results from business combinations, be periodically (at least
annually) evaluated for impairment, with any resulting impairment loss being
charged against earnings. Also, under SFAS No. 142, goodwill resulting from any
business combination accounted for according to SFAS No. 141 will not be
amortized, and the amortization of goodwill related to business combinations
entered into prior to June 30, 2001 will be discontinued effective, for the
Company, January 1, 2002. The adoption of the provisions of SFAS No. 141 and
SFAS No. 142, effective January 1, 2002, is not expected to affect the Company's
financial statements.
NOTE C - EARNINGS PER SHARE
The Company's basic earnings per share for the three and nine month periods
ended September 30, 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.
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South Street Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
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NOTE D - DIVIDENDS DECLARED
On September 21, 2001, the Company's Board of Directors declared a dividend of
$.10 per share for shareholders of record as of October 2, 2001 and payable on
October 12, 2001. In addition, on June 18, 2001, the Board of Directors of the
Bank declared an upstream dividend of $312,000 to the Company.
NOTE E - BORROWINGS
Borrowings, which consist solely of advances from the FHLB, totaled $21.0
million at September 30, 2001 and $16.0 million at December 31, 2000. The
weighted average interest rate of the advances at September 30, 2001 was 5.16%.
The advances mature at varying dates from 2001 through 2003.
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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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 September 30, 2001 and December 31, 2000
Total consolidated assets increased by $15.5 million or 7.8% to $213.8 million
at September 30, 2001 from $198.3 million at December 31, 2000. This increase
resulted primarily from an increase in loans receivable of $15.3 million, from
$152.5 million at December 31, 2000 to $167.8 million at September 30, 2001.
This increase in loans was funded by increases in deposits and FHLB advances of
$10.1 million and $5.0 million, respectively, during the same period.
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 totaled $2.7
million at September 30, 2001 and is reported as a reduction of stockholders'
equity. Retained earnings decreased by $182,000 to $19.4 million at September
30, 2001. Net income for the nine-month period ended September 30, 2001 of
$655,000 was offset by the dividends to shareholders during the period of
$837,000. Common stock and unearned compensation decreased by $516,000 to $6.9
million at September 30, 2001 from $7.4 million at December 31, 2000. The
decrease was primarily attributable to the repurchase of 67,900 shares of
outstanding common stock in the amount of $441,000.
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
September 30, 2001, the Company's stockholders' equity amounted to $23.7
million, or 11.1% 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 $628,000 and $439,000 at September 30, 2001 and December 31, 2000,
respectively. During the nine month period ended September 30, 2001, 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 nine months
ended September 30, 2001 and 2000.
Comparison of Operating Results for the Three Months Ended September 30, 2001
and 2000
General. Net income for the three-month period ended September 30, 2001 was
$265,000, or $131,000 more than the $134,000 earned during the same period in
2000.
Interest income. Interest income increased by $244,000 from $3.5 million for the
three months ended September 30, 2000 to $3.7 million for the three months ended
September 30, 2001. The increase was primarily attributable to the increased
volume in interest-earning assets during the quarter.
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Interest expense. Interest expense on deposits and borrowed funds increased by
$149,000 from $2.1 million for the three months ended September 30, 2000 to $2.3
million for the three months ended September 30, 2001. This increase is due to
the increases in deposits and FHLB advances during the three months ended
September 30, 2001.
Net interest income. Net interest income increased by $95,000 from $1.4 million
for the three months ended September 30, 2000 to $1.5 million for the three
months ended September 30, 2001. This increase 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 September 30, 2001 and 2000.
Loans are charged 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 September 30, 2001 and 2000 were minimal. At
September 30, 2001, the Bank's allowance for loan losses amounted to $429,000,
which management believes is adequate to absorb losses inherent in its loan
portfolio.
Non-interest income. The Company earned non-interest income of $44,000 for both
of the three months ended September 30, 2001 and 2000.
Non-interest expense. Non-interest expense totaled $1.1 million and $1.2 million
for the three months ended September 30, 2001 and 2000, respectively. This
decrease resulted primarily from a decrease in compensation expense of $165,000
due largely to expense associated with the management recognition plan in the
three months ended September 30, 2000. The management recognition plan became
fully vested prior to 2001; therefore, there was no related expense included in
the quarter ended September 30, 2001.
Comparison of Operating Results for the Nine Months Ended September 30, 2001 and
2000
General. Net income for the nine-month period ended September 30, 2001 was
$655,000, or $182,000 more than the $473,000 earned during the same period in
2000.
Interest income. Interest income increased by $847,000 from $10.2 million for
the nine months ended September 30, 2000 to $11.0 million for the nine months
ended September 30, 2001. The increase was primarily attributable to the
increased volume in interest-earning assets during the nine-month period.
Interest expense. Interest expense on deposits and borrowed funds increased by
$1.0 million from $5.9 million for the nine months ended September 30, 2000 to
$6.9 million for the nine months ended September 30, 2001. This increase is due
to the increases in deposits and FHLB advances during the nine months ended
September 30, 2001.
Net interest income. Net interest income decreased by $178,000 from $4.3 million
for the nine months ended September 30, 2000 to $4.1 million for the nine months
ended September 30, 2001. This decrease resulted from the factors discussed
above.
Provisions for loan losses. There were no provisions for loan losses charged to
income during the nine months ended September 30, 2001 and 2000.
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Loans are charged 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 nine months ended September 30, 2001 and 2000 were minimal. At
September 30, 2001, the Bank's allowance for loan losses amounted to $429,000,
which management believes is adequate to absorb losses inherent in its loan
portfolio.
Non-interest income. The Company earned non-interest income of $200,000 during
the nine months ended September 30, 2001 compared to the $63,000 that was earned
during the same period in 2000. This increase in non-interest income of $137,000
was primarily attributable to an increase in service charges and fees of $71,000
from $86,000 for the nine months ended September 30, 2000 to $157,000 for the
nine months ended September 30, 2001. In addition, noninterest income for the
nine months ended September 30, 2000 included a loss on the sale of investment
securities of $84,000. There were no such losses during the nine months ended
September 30, 2001.
Non-interest expense. Non-interest expense decreased by $335,000 from $3.6
million for the nine months ended September 30, 2000 to $3.3 million for the
nine months ended September 30, 2001. This decrease resulted primarily from a
decrease in compensation expense of $340,000 due largely to expense associated
with the management recognition plan in the nine months ended September 30,
2000. The management recognition plan became fully vested prior to 2001;
therefore, there was no related expense included in the period ended September
30, 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.
As a state chartered stock savings bank, the Bank must meet certain liquidity
requirements that are established by the N. C. Administrator of the Savings
Institutions Division. The Bank's liquidity ratio at September 30, 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 September 30, 2001.
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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 Bank filed no reports on Form 8-K during the quarter ended
September 30, 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: November 13, 2001 By: /s/ Carl M. Hill
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Carl M. Hill
President and Chief
Executive Officer
Date: November 13, 2001 By: /s/ Christopher F. Cranford
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Christopher F. Cranford
Treasurer and Controller
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