UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-17939
CAROLINA FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-165582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
402 East Main Street
Lincolnton, North Carolina 28092
(Address of principal executive office) (Zip Code)
704-732-2222
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
4,411,666 SHARES OF COMMON STOCK, PAR VALUE $2.50
PER SHARE, OUTSTANDING AS OF August 13, 1998
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations -
Six and Three Months Ended June 30, 1998
and 1997 4
Consolidated Statements of Changes in
Shareholder's Equity - Six Months Ended
June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures about 15-16
Market Risk
Item 5. Shareholder Proposals for the 1999 Annual Meeting 17
PART II. OTHER INFORMATION 18
Signatures 19
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- ----------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -----------------------------------------------------------------
JUNE 30, DECEMBER 31,
---------------- ------------------
1998 1997
---------------- ------------------
Assets:
Cash and due from banks $20,739,587 $20,160,505
Federal funds sold 9,925,000 ---
---------------- ------------------
Total cash and cash equivalents 30,664,587 20,160,505
Interest bearing deposits in other banks 722,620 673,860
Investment securities (market value $25,107,911
in 1998 and $29,555,613 in 1997) 24,907,141 29,292,273
Securities available for sale (cost of $130,137,272 in
1998 and $106,694,428 in 1997) 131,195,883 107,630,916
Loans, net of unearned income ( $424,467 in 1998 and
$434,953 in 1997) 363,338,759 347,919,688
Allowance for loan losses (5,389,682) (5,039,035)
---------------- ------------------
Loans, net 357,949,077 342,880,653
Premises and equipment, net 9,636,698 9,566,175
Other real estate owned 265,999 442,310
Other assets 12,463,898 12,570,635
---------------- ------------------
Total Assets $567,805,903 $523,217,327
================ ==================
Liabilities and Shareholders' Equity
Deposits:
Demand $68,085,434 $50,979,999
Interest bearing demand accounts 118,504,893 115,725,015
Savings 51,129,960 47,001,921
Time, $100,000 and over 63,317,278 53,896,333
Other time 204,731,551 194,994,519
---------------- ------------------
Total deposits 505,769,116 462,597,787
Repurchase agreements 7,341,401 8,993,205
Other liabilities 5,092,329 5,301,899
---------------- ------------------
Total Liabilities 518,202,846 476,892,891
Shareholders' Equity:
Common stock, $2.50 par value;
authorized --- 5,000,000 shares;
issued and outstanding - 4,405,601 shares in
1998, and 4,357,757 shares in 1997 11,014,003 10,894,393
Additional paid-in capital 16,660,289 16,492,544
Retained earnings 21,288,668 18,366,627
Accumulated other comprehensive income 640,097 570,872
---------------- ------------------
Total Shareholders' Equity 49,603,057 46,324,436
Commitments and Contingent Liabilities ----- -----
Total Liabilities and Shareholders' Equity $567,805,903 $523,217,327
================ ==================
3
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter Ended Six Months Ended
June 30, June 30,
----------------------------------------- ----------------------------------------
1998 1997 1997 1996
----------------------------------------- ----------------------------------------
Interest Income:
Interest and fees on loans $8,587,084 $7,632,399 $16,913,549 $14,918,895
Interest and dividends
on securities:
Taxable income 2,167,444 1,401,246 4,094,089 2,597,790
Non-taxable income 64,018 121,867 161,645 249,758
Interest on federal funds sold 134,911 136,401 219,140 225,415
Other interest income 33,983 17,419 62,306 26,757
--------------- -------------- --------------- -------------
Total interest income 10,987,440 9,309,332 21,450,729 18,018,615
Interest Expense:
Interest on deposits 4,601,012 4,076,045 9,019,507 7,874,328
Interest on notes payable 84,801 52,890 187,679 113,613
--------------- -------------- --------------- -------------
Total interest expense 4,685,813 4,128,935 9,207,186 7,987,941
--------------- -------------- --------------- -------------
Net Interest Income 6,301,627 5,180,397 12,243,543 10,030,674
Provision for Loan Losses 301,000 212,733 510,000 498,333
--------------- -------------- --------------- -------------
Net Credit Income 6,000,627 4,967,664 11,733,543 9,532,341
Other Income:
Charges on deposit accounts 768,799 591,266 1,459,896 1,149,417
Insurance commissions 179,384 228,739 319,780 401,316
Other service fees and
commissions 327,836 289,602 618,325 493,808
Mortgage banking income 146,036 115,498 277,333 224,083
Securities gains (losses), net 42,708 10,365 42,708 10,889
Other income 308,753 204,662 566,909 368,782
--------------- -------------- --------------- -------------
Total other income 1,773,516 1,440,132 3,284,951 2,648,295
Operating Expenses:
Salaries and benefits 2,591,713 2,195,298 5,069,657 4,172,972
Occupancy and equipment 645,754 524,204 1,215,029 950,792
Federal and other insurance
premiums 41,785 33,284 84,130 63,429
Office supplies 177,638 171,605 355,810 285,686
Data processing 135,193 115,788 261,669 218,336
Other expenses 1,300,065 1,108,627 2,540,218 2,036,742
--------------- -------------- --------------- -------------
Total operating expenses 4,892,148 4,148,806 9,526,513 7,727,957
--------------- -------------- --------------- -------------
Income Before Income Taxes 2,881,995 2,258,990 5,491,981 4,452,679
Income Taxes 993,025 759,774 1,868,175 1,516,050
--------------- -------------- --------------- -------------
Net income $1,888,970 $1,499,216 $3,623,806 $2,936,629
=============== ============== =============== =============
Net Income Per Common Share - Basic $0.43 $0.36 $0.83 $0.71
=============== ============== =============== =============
Net Income Per Common Share - Diluted $0.42 $0.36 $0.80 $0.71
=============== ============== =============== =============
Cash Dividend Per Common Share $0.08 $0.06 $0.16 $0.12
=============== ============== =============== =============
4
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
COMMON STOCK ACCUMULATED
--------------------------- ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
----------- ------------- -------------- ------------- ------------- --------------
BALANCE, DECEMBER 31, 1996 2,052,971 $5,132,428 $16,442,810 $13,378,236 $48,382 $35,001,856
EXERCISE OF STOCK OPTIONS 6,970 17,425 79,309 96,734
CASH DIVIDEND ($.12 PER SHARE) (493,610) (493,610)
RETIREMENT OF STOCK (912) (2,281) (28,774) (31,055)
DIVIDEND REINVESTMENT PLAN -
CHANGE IN UNREALIZED GAIN
ON SECURITIES AVAILABLE FOR SALE 293,011 293,011
NET INCOME 2,936,629 2,936,629
----------- ------------- -------------- ------------- ------------- --------------
BALANCE, JUNE 30, 1997 2,059,029 $5,147,572 $16,493,345 $15,821,255 $341,393 $37,803,565
=========== ============= ============== ============= ============= ==============
BALANCE, DECEMBER 31, 1997 4,357,757 10,894,393 16,492,544 18,366,627 570,872 46,324,436
EXERCISE OF STOCK OPTIONS 44,676 111,690 92,428 204,118
CASH DIVIDEND ($.16 PER SHARE) (701,765) (701,765)
RETIREMENT OF STOCK (1,264) (3,160) (34,732) (37,892)
DIVIDEND REINVESTMENT PLAN 4,432 11,080 110,049 121,129
CHANGE IN UNREALIZED GAIN
ON SECURITIES AVAILABLE FOR SALE 69,225 69,225
NET INCOME 3,623,806 3,623,806
----------- ------------- -------------- ------------- ------------- --------------
BALANCE, JUNE 30, 1998 4,405,601 $11,014,003 $16,660,289 $21,288,668 $640,097 $49,603,057
=========== ============= ============== ============= ============= ==============
5
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
- ---------------------------------------------------------------
June 30, June 30,
------------------ ------------------
1998 1997
------------------ ------------------
Operating Activities:
Net Income $3,623,806 $2,936,629
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 699,256 605,300
Accretion and amortization of securities discounts
and premiums, net (192,950) (80,519)
Provision for loan losses 510,000 498,333
Gains on sales of securities available for sale (61,298) (13,684)
Losses on sales of securities available for sale 18,590 -
Losses on calls and maturities of securities held to maturity - 98
Gains on sales of equipment, net - (4,810)
Losses (gains) on sales of real estate, net 500 (64,013)
Decrease (increase) in other assets 39,598 (2,804,748)
Increase (decrease) in other liabilities (299,267) 393,153
--------------- ---------------
Net cash provided by operating activities 4,400,804 1,465,739
--------------- ---------------
Investing Activities:
Proceeds from maturities of securities available for sale 18,336,780 12,816,008
Proceeds from sales of securities available for sale 366,539 42,215
Purchases of securities available for sale (41,954,951) (45,121,806)
Proceeds from calls and maturities of securities held to maturity 5,465,103 4,870,019
Purchases of securities held to maturity (1,088,423) (988,125)
Purchases and maturities of certificates of deposit, net (48,760) (218,257)
Originations of loans, net (15,613,524) (15,659,009)
Proceeds from sale of real estate 247,865 106,299
Proceeds from sale of premises and equipment - 41,384
Capital expenditures (739,594) (1,238,558)
--------------- ---------------
Net cash used in investing activities (35,091,534) (45,349,830)
--------------- ---------------
Financing Activities:
Net increase in time deposits 19,157,977 24,172,268
Net increase in other deposits 24,013,352 35,220,685
Net decrease in borrowed funds (1,651,804) (1,608,049)
Repayment of notes payable 89,697 (9,679)
Repurchase of stock (37,892) (31,055)
Payment of cash dividends and fractional shares (701,765) (493,610)
Issuance of stock 325,247 96,734
--------------- ---------------
Net cash provided by financing activities 41,194,812 57,347,294
--------------- ---------------
Net Increase in Cash and Cash Equivalents 10,504,082 13,463,203
Cash and Cash Equivalents, Beginning of Year 20,160,505 19,325,459
=============== ===============
Cash and Cash Equivalents, End of Year $30,664,587 $32,788,662
=============== ===============
Supplemental disclosures of cash flow information:
Interest paid $9,156,188 $7,803,269
Income taxes paid $1,549,100 $2,161,706
Supplemental disclosure on noncash investing and financing activities:
Increase in net unrealized gain on securities available for sale $69,225 $293,011
Assets transferred to other real estate 35,100 38,000
Disclosure of accounting policy:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, due from banks and federal funds sold.
See accompanying notes to consolidated financial statements.
cash on hand, due from banks and federal funds sold.
See accompanying notes to consolidated financial statements.
6
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of Management, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Carolina First
BancShares, Inc. and Subsidiary Companies as of June 30, 1998 and December 31,
1997 the results of operations for the three and six-month periods ended June
30, 1998 and 1997, and cash flows for the six-month periods ended June 30, 1998
and 1997.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's audited financial statements for the year ended December 31, 1997.
2. The consolidated financial statements include the accounts of the holding
company, and its wholly owned subsidiaries, Cabarrus Bank of North Carolina,
("Cabarrus Bank"), and Lincoln Bank of North Carolina, ("Lincoln Bank").
Jointly, Lincoln Bank and Cabarrus Bank own a mortgage company, Carolina First
Mortgage Corporation and a financial services company, Carolina First Financial
Services Corporation. All significant intercompany items and transactions have
been eliminated in consolidation.
3. The results of operations for the three and six-month periods ended June 30,
1998 and 1997, are not necessarily indicative of the results that might be
expected for the full year ending December 31, 1998 and 1997.
4. The Company adopted the provisions for SFAS No. 128, "Earnings Per Share",
during 1997. The Statement establishes standards for computing and presenting
earnings per share (EPS). SFAS No. 128 simplifies the standards for computing
EPS 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 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. In accordance with SFAS No. 128, all prior period EPS
data has been restated. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects potential dilution that could occur if the Company's dilutive stock
options were exercised. The numerator of the basic EPS computation is the same
as the numerator of the diluted EPS computation for all periods presented. A
reconciliation of the denominator of the basic EPS computation is as follows.
Three months ended Six months ended
March 31, June 30,
1998 1997 1998 1997
Basic EPS denominator: weighted average number of
common shares outstanding .......................................... 4,396,082 4,113,616 4,381,050 4,109,643
Dilutive effect arising from assumed exercise of
stock options ...................................................... 115,855 48,749 120,538 42,641
--------- --------- --------- ---------
Diluted EPS denominator ............................................ 4,511,937 4,162,365 4,501,588 4,152,284
========= ========= ========= =========
In addition, the weighted average number of shares for each year presented have
been retroactively adjusted for the two-for-one stock split in August 1997, the
five-for four stock split in 1996, and the 5% stock dividend in 1995.
5. On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components (revenues, expense, 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 form retained earnings and additional
paid-in-capital in the equity section of a statement of financial position. In
accordance with the provisions of SFAS No. 130, comparative financial statements
presented for earlier periods have been reclassified to reflect the provisions
of the statement.
7
Comprehensive income is the change in equity of a Corporation during the period
from transactions and other events and circumstances from non-owner sources.
Comprehensive income is divided into net income and other comprehensive income.
The Company's other comprehensive income for the three and six months ended June
30, 1998 and 1997 consists of unrealized gains and losses on certain investments
in debt and equity securities. Comprehensive income for the three and six months
ended June 30, 1998 is $1,939,094 and $3,693,031, respectively and for the three
and six months ended June 30, 1997 is $1,907,270 and $3,229,640, respectively.
6. On April 15, 1998, the Company and Community Bank & Trust Co. ("CBT")
announced the signing of a letter of intent whereby the Company would acquire
CBT. CBT is headquartered in Marion, North Carolina with assets of approximately
$100 million with seven branches in Western North Carolina. According to the
terms of the proposed merger, CBT would continue as a separately chartered
commercial bank and would retain its name, Board of Directors and management.
The proposed merger is expected to be finalized in the fourth quarter of 1998
and is subject to a number of conditions, including approval by regulatory
authorities and the shareholders of the Company and CBT.
8
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis sets forth the major factors which
affected the Company's results of operations and financial condition reflected
in the unaudited financial statements for the six-month periods ended June 30,
1998 and 1997.
General
Net income for the quarter ended June 30, 1998, was $1,888,970, or $.43 per
basic share, compared to net income of $1,499,413, or $.36 per basic share, for
the same period in 1997. Net income for the six-month period ended June 30, 1998
was $3,623,806 or $.83 per basic share, compared to net income of $2,936,629, or
$.71 per basic share for the same period in 1997.
The Company continues to put the necessary emphasis on Year 2000 efforts and is
currently working in the Renovation and Validation stages. A test plan and
schedule has been completed. Testing will begin in the third quarter of 1998 and
will be completed in the first quarter of 1999, with "mission-critical" testing
complete by the end of 1998. Contingency plans have been made for
"mission-critical" applications. The Company is in the process of developing a
complete Contingency and Business Resumption Plan and continue to move forward
with efforts. As part of its assessment, Company management has been evaluating
Year 2000 compliance by those with whom it does business, and to date has not
discovered any Year 2000 problem with significant counter-parties that it
believes are reasonable likely to have a material adverse effect upon the
company. However, no assurance can be given that potential Year 2000 problems at
those with whom the Company does business will not occur, and if these occur,
consequences to the Company.
On April 15, 1998, the Company and Community Bank & Trust Co. ("CBT") announced
the signing of a letter of intent whereby the Company would acquire CBT. CBT is
headquartered in Marion, North Carolina with assets of approximately $100
million with seven branches in Western North Carolina. According to the terms of
the proposed merger, CBT would continue as a separately chartered commercial
bank and would retain its name, Board of Directors and management. The proposed
merger is expected to be finalized in the third quarter of 1998 and is subject
to a number of conditions, including approval by regulatory authorities and the
shareholders of the Company and CBT.
Net Interest Income/Margins
Net interest income of $12,243,543 during the first six-months of 1998 resulted
from a net interest margin of 4.96% on average earning assets of $501.1 million.
This compares with a net interest margin of 4.95% on average earning assets of
$414.0 million generating net interest income of $10,030,674 for the same period
in 1997. The interest rate earned on taxable securities has been reduced as the
Company continues to invest in relatively short term government securities. The
Company has, however, been able to sustain the strong net interest margin as
average interest bearing liabilities have decreased slightly as a percentage of
total liabilities and capital. This is the result of both increased capital and
increases in noninterest bearing deposits. Interest rates have remained
relatively stable and thus the change in the net interest margin is more a
function of competition and investment options than changes in interest rates.
The increase in loan demand experienced by the Company positively affects the
net interest margin, as noted by the large volume related increase, and is an
indicator of the continued strong local economy. The increase in net interest
income consists of an increase of $266,000 relative to rate and an increase of
$1,902,000 relative to volume.
Management reviews asset/liability volumes and rates on a weekly basis. As
Carolina First's loans have continued to grow, the funds have been obtained
primarily through customer deposits and the maturing of investment securities.
Deposit and loan rates are adjusted as market conditions and Company needs
allow.
Analysis of average balances and interest rates for the six-months ended June
30, 1998 and 1997, is presented on pages 13 and 14 of this report. Such analysis
is presented on a fully-taxable equivalent basis at the federal statutory rate
of 34 %.
9
Loan Loss Allowance/Provision
The allowance for loan losses represents management's determination as to an
adequate amount in relation to the risk of future losses inherent in the loan
portfolio. In evaluating the allowance and its adequacy, management considers
the bank's loan loss experience, the amount of past due and non-performing
loans, current and anticipated economic conditions and other appropriate
information. While it is the Company's policy to charge-off in the current
period the loans in which a loss is considered probable, there are additional
risks for future losses which cannot be quantified precisely or attributed to
particular loans or classes of loans. Because these risks are continually
changing in response to facts beyond the control of the Company, such as the
state of the economy, management's judgment as to the adequacy of the provision
is approximate and imprecise. It is also subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as
methodology used to calculate the allowance for loan losses and the size of the
loan loss allowance in comparison to a group of peer banks identified by the
regulatory agencies.
In assessing the adequacy of the allowance, management relies predominantly on
its ongoing review of the loan portfolio, which is undertaken to both ascertain
whether there are probable losses which must be charged-off and to assess the
risk characteristics of the portfolio in the aggregate. This review considers
the judgments of management, and also those of bank regulatory agencies that
review the loan portfolio as part of their regular bank examination process.
There are no loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that the Company reasonably expects will
materially impact future operating results, liquidity, or capital resources. The
Company has no concentrations or credit risks by type of credit or industry
group within its loan or investment portfolio.
On a monthly basis, the Company reviews the adequacy of its allowance for loan
losses. The loan review staff prepares a listing of loans believed to be
deserving of a closer review by management. These loans are rated as to the
presumed collectibility, and a statistical loss factor is assigned to each
category of loans that directly relates to the associated risk. In addition to
these specific allowances, an additional component of the allowance is computed
by applying a factor based on historical loss experience to all loans by type
that are not listed on the above referenced schedule. Finally, an additional
factor is assigned to the entire portfolio to cover unexpected losses from any
borrower that may not be identified. This final component reflects the economic
conditions of the market areas served. These factors are multiplied by the
balances in each category and totaled to determine the required allowance for
loan losses. The actual allowance for loan losses (after charge-offs) is
compared with the required level to determine if an additional provision should
be made in the current period. The allowance for loan losses was $5,389,682 or
1.48% of outstanding loans, at June 30, 1998 and $5,039,035 or 1.45% of
outstanding loans, at December 31, 1997.
The provision for loan losses charged to operations during the first six months
was $510,000 in 1998 and $498,333 in 1997. Charge-offs, net of recoveries, were
$159,353 or .09% (annualized) of average loans outstanding, during the six
months ended June 30, 1998, as compared to $134,386 or .08% (annualized) of
average loans outstanding, during the same period in 1997. The ratio of
non-accrual loans to total loans was .21% at June 30, 1998, .21% at December 31,
1997, and .50% at June 30, 1997. The ratio of non-performing assets to total
assets was 19% at June 30, 1998, 25% at December 31, 1997, and 39% at June 1997.
Management believes that reserves and asset values are adequate to facilitate
the timely disposition of these assets.
1998 1997
---------- ----------
Balance at beginning of year ........................................... 5,039,035 4,488,958
Charge-offs ............................................................ (232,748) (199,951)
Recoveries ............................................................. 73,395 65,565
Provision for loan losses .............................................. 510,000 498,333
---------- ----------
Balance at March 31, ................................................... 5,389,682 4,852,905
========== ==========
10
Net Non-Interest Income
Non-interest income increased 24.04% for the first six months of 1998 as
compared to the same period a year earlier. Non-interest income from core
operations continues to increase as the Company expands fee income areas such as
trust services and credit cards. Also, the additional deposits recently acquired
have boosted deposit related income.
Non-interest expense increased $1,798,556 or 23.27%, for the six-month period
ended June 30, 1998, as compared to the same period a year earlier. Non-interest
expense increased in relation to the additional branch acquisitions and branch
openings. Specifically, occupancy and supplies were directly effected as well as
other expenses which includes the amortization of the premium paid to acquire
the deposits. Additionally, the expenses relative to our technology expenditures
are apparent in the increase in equipment expense.
Financial Condition
The Company's total assets at June 30, 1998 and 1997, were $567,805,903 and
$490,681,378 respectively, and $523,217,327 at December 31, 1997. Average
earning assets for the first six months of 1998 were $501,138,000 versus
$413,970,000 for the same period a year earlier, an increase of 21.06%. This
growth is the result of the strong local economy and the Company's continued
expansion of its customer base. During the past year, the Company has acquired
the deposits of three branches, has opened three supermarket branches and one
stand alone branch. The Company will continue to look for ways to acquire
business and grow in market share in the existing markets.
Average loans of $349,091,000 represented 69.66% of average earning assets
during the first six months of 1998. During the same period in 1997, average
loans totaled $311,003,000, or 75.13% of average earning assets. Gross loans
increased to $363,338,759 at June 30, 1998, a 11.93% increase over loans a year
ago at June 30, 1997 and a 4.43% increase over December 31, 1997. It is
anticipated that general loan growth will continue to mirror the economy
generally, however, competition for quality loans may adversely effect the net
interest margins.
Securities averaged $143,273,000 during the six months ended June 30, 1998
versus $93,697,000 for the same period a year ago. The securities portfolio
represented 28.59% of earning assets at June 30, 1998 and 22.63% at June 30,
1997. This increase in the portfolio directly relates to the acquisition of the
branch deposits during 1997. As quality loan demand absorbs these deposits the
historical percentages should return. At June 30, 1998, the securities portfolio
had an unrealized gain of approximately $1,058,611 for securities available for
sale. A gain of $42,708 was realized during the first half of 1998. Securities
held to maturity with a carrying value of approximately $16.7 million were
scheduled to mature within the next five years. Of this amount, $5.9 million
were scheduled to mature within one year. Securities available for sale with a
carrying value of $127.8 million were scheduled to mature within the next five
years. Of this amount, $57.8 million were scheduled to mature within one year.
The Company currently has the ability and intent to hold its investment
securities to maturity. Certain debt securities are designated by management as
held for sale and are carried at the lower of cost or market because management
may sell them before they mature. The Company's securities portfolio has shifted
toward the available for sale category due to the added flexibility allowed over
the securities held to maturity.
Average interest bearing liabilities rose 17.41%, to $432,323,000 in the first
six months of 1998, from an average of $368,204,000 in the first six months of
1997. Total deposits increased 13.81% from June 30, 1997 to June 30, 1998, and
9.33% from December 31, 1997 to June 30, 1998. The second quarter acquisitions
of 1997 resulted in large growth rates. As the Company capitalizes on these
acquisitions and gains market share, deposits will continue to increase.
The Company continues to maintain capital ratios in excess of regulatory minimum
requirements. The current capital standards call for a minimum total capital of
8% of risk-adjusted assets, including 4% Tier I capital, and a minimum leverage
ratio of Tier I capital to total tangible assets of at least 4-5%. At June 30,
1998, the Company's ratio of total capital to risk-adjusted assets was 13.87%
which includes 12.62% Tier I capital and the Company's ratio of total Tier I
capital to total assets, adjusted for the loans loss allowance and intangibles,
was 8.58%.
11
Liquidity
The liquidity position of the Company's subsidiaries, Lincoln Bank ("Lincoln")
and Cabarrus Bank of North Carolina ("Cabarrus"), is primarily dependent upon
their need to respond to withdrawals from deposit accounts and upon the
liquidity of their assets. Primary liquidity sources include cash and due from
banks, federal funds sold, short-term investment securities and loan repayments.
At June 30, 1998, the Company had a liquidity ratio of 37.20%. Management
believes the liquidity sources are adequate to meet operating needs. Except as
discussed above, there are no known trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations.
Capital Resources
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The primary Federal regulators for the Banks and the Company
have adopted minimum capital regulations or guidelines that categorize
components and the level of risk associated with various types of assets.
Financial institutions are expected to maintain a level of capital commensurate
with the risk profile assigned to its assets in accordance with the guidelines.
The Company, Lincoln Bank and Cabarrus all maintain capital levels exceeding the
minimum levels for well capitalized banks and bank holding companies.
Well Adequately Carolina Lincoln Cabarrus
Capitalized Capitalized First Bank Bank
Tier I capital to risk adjusted assets 6.00% 4.00% 12.62% 11.18% 10.26%
Total capital to risk adjusted assets 10.00% 8.00% 13.87% 12.44% 11.51%
Leverage ratio 5.00% 4.00% 8.58% 7.60% 6.90%
12
CAROLINA FIRST BANCSHARES, INC.
----------------------------------------------------
AVERAGE BALANCE SHEET AS OF JUNE 30,
----------------------------------------------------
(In Thousands)
1998 1997
--------------------------------------------- -------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
---------------- ------------ ------------ ------------ ------------ -----------
Assets
Interest bearing deposits in other banks $685 $62 18.25% $509 $27 10.70%
Taxable securities 138,398 4,094 5.97% 86,347 2,598 6.07%
Non-taxable securities 4,875 245 10.13% 7,350 378 10.37%
Federal funds sold and securities
purchased with agreements to
resell 8,089 219 5.46% 8,761 225 5.18%
Loans 349,091 16,914 9.77% 311,003 14,919 9.67%
--------- -------- -------- --------- -------- -------
Interest earning assets 501,138 21,534 8.67% 413,970 18,147 8.84%
--------- -------- -------- --------- -------- -------
Cash and due from banks 17,423 $15,812
Other assets 21,307 18,579
--------- ---------
Total assets $539,868 $448,361
========= =========
Liabilities and Shareholders' Equity
Interest bearing deposits
Demand $116,394 $1,396 2.42% $97,739 $1,177 2.43%
Savings 49,097 600 2.46% 42,055 528 2.53%
Time 259,019 7,024 5.47% 223,233 6,169 5.57%
Other borrowings 7,813 187 4.83% 5,177 114 4.44%
--------- -------- -------- --------- -------- -------
Interest bearing liabilities 432,323 9,207 4.29% 368,204 7,988 4.37%
--------- -------- -------- --------- -------- -------
Other liabilities 63,331 43,180
Shareholders' equity 44,214 36,977
--------- ---------
Total liabilities and shareholders'
equity $539,868 $448,361
========= =========
Interest rate spread 4.37% 4.47%
======= =======
Net interest earned and net
yield on earning assets $12,327 4.96% $10,159 4.95%
========= ======= ======== ========
13
CAROLINA FIRST BANCSHARES, INC.
- ------------------------------------------
RATE / VOLUME ANALYSIS
- ------------------------------------------
FOR THE PERIOD ENDED JUNE, 1998 AND 1997
- ------------------------------------------
(In Thousands)
Increase/(Decrease)
due to
1997 Volume Rate 1998
Inc/exp Inc/exp
-------------------------------------------------------------------------
Interest Income:
Loans 14,919 1,845 150 16,914
Securities - tax - exempt 378 (124) (9) 245
Securities - taxable 2,598 1,540 (44) 4,094
Federal funds sold & interest bearing
balances in other banks 252 (16) 45 281
----------- ---------- -------- ---------
Total Interest Income 18,147 3,245 142 21,534
Interest Expense:
Interest Bearing Demand 1,177 224 (5) 1,396
Savings 528 86 (14) 600
Time 6,169 970 (115) 7,024
Other Borrowings 114 63 10 187
----------- ---------- -------- ---------
Total Interest Expense 7,988 1,343 (124) 9,207
----------- ---------- -------- ---------
Net Interest Income 10,159 1,902 266 12,327
=========== =========== ======== =========
14
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk is inherent to all industries, but perhaps more prevalent to the banking
industry. The Company considers credit to be the most significant, however,
interest rate risk is a close second. There are eight risks that must be
considered in managing the Company. These risk are listed in order of the
perceived level of risk imposed upon the Company. Another risk associated with
some banks is foreign exchange risk. The Company does not consider this a
significant risk and thus, does not address it in this assessment. The Company
has identified certain critical risks to these subsidiary banks.
Credit Risk. Credit risk is the risk to the bank's earnings or capital from the
potential of an obligator or related group of obligators failing to fulfill its
or their contractual commitments to the bank. Credit risk is most closely
associated with a bank's lending. It encompasses the potential of loss on a
particular loan as well as the potential for loss from a group of related loans,
i.e., a credit concentration. Credit risk extends also to less traditional bank
activities. It includes the credit behind the bank's investment portfolio, the
credit of counterparties to interest rate contracts, and the credit of
stockbrokers holding the bank's investment portfolio in street name.
Interest Rate Risk. Interest rate risk is the risk to earnings or capital from
the potential of movement in interest rates. It is the sensitivity of the bank's
future earnings to interest rate changes. Interest rate risk is generally
measured on the basis of duration analysis or gap analysis. Duration analysis
measures the degree of risk in a particular instrument or portfolio and gap
analysis defines the timing when loss may occur. The Company is willing to
accept a modified duration of 5% and a one year cumulative gap or +/- 5% and a
one to five cumulative gap of +/- 8%. As of June 30, 1998, the Company had a
modified duration of less than 1.51%. At June 30, 1998 the Company had a one
year cumulative gap of 4.39% and a one to five year cumulative gap of 2.84%. The
major components of interest rate risk are described as repricing risk, basis
risk, yield curve risk, and options risk.
Price Risk. Price risk is the risk to earnings or capital from changes in the
value of portfolios of financial instruments. Frequently this is referred to as
market risk. Price risk is generally reflected as the risk of a decline in
market value of its securities portfolio and the Company is willing to accept a
7.5% change in value after experiencing a 300 basis point rate shock, either
positive or negative. At June 30, 1998, the price change was less than 4.06%
with such a rate shock.
Liquidity Risk. Liquidity risk is the risk to earnings or capital from a bank's
inability to meet its obligations when they come due without incurring
unacceptable losses or costs. Depositors withdraw their deposits and the bank
does not have the liquid assets to fund the withdrawals and to meet its loan
funding obligations. The risk is particularly great with brokered deposits of
which the Company currently has none.
Transaction Risk. Transaction risk is the risk to earnings or capital arising
from problems with service or product delivery. Transaction risk is the risk of
a failure in a bank's operating processes. It is a risk of failure in a bank's
automation, its employee integrity, or its internal controls.
Compliance Risk. Compliance risk is the risk to earnings or capital from
noncompliance with laws, rules, and regulations.
Strategic Risk. Strategic risk is the risk to earnings or capital arising from
adverse business decisions or improper implementation of those decisions.
Reputation Risk. Reputation risk is the risk to earnings or capital from
negative public opinion.
15
Most of these risks are interrelated and thus all must be considered by
management regardless of the implied risk. Management reviews the performance
against these ranges on a quarterly basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 4 through 15
of the Company's Annual Report to Shareholders.
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. The estimated fair market
value of loans outstanding is approximately $347,040,000 and $309,811,000 at
December 31, 1997 and 1996, respectively. The fair value of noninterest-bearing
demand deposits and NOW, savings and money market deposits is the amount payable
on demand at the reporting date. The fair value of the time deposits is
estimated using the rates currently offered for deposits of similar remaining
maturities. The estimated fair market value of deposits is approximately
$459,703,000 and $386,920,000 at December 31, 1997 and 1996, respectively. As
interest rates have remained relatively constant, there have been no material
changes in the above since year end.
16
Item 5.
SHAREHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING
The proxy statement solicited by the Company's Board of Directors with respect
to the Company's 1999 Annual Meeting of Shareholders will confer discretionary
authority to vote on any proposals of shareholders intended to be paresented for
consideration at such Annual Meeting that are submitted to the Company afer
January 15, 1999.
17
PART II - OTHER INFORMATION
Item
1 - Legal Proceedings None
2 - Changes in Securities None
3 - Defaults upon Senior Securities None
4 - Submission of Matters to a Vote of
Security Holders None
5 - Other Information None
6 - Exhibits and Reports on Form 8-K
(a) Exhibits: 27 - Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAROLINA FIRST BANCSHARES, INC.
(Registrant)
Date: August 14, 1998 By: /s/ D. Mark Boyd,III
D. Mark Boyd, III
Chairman and Chief Executive Officer
Date: August 14, 1998 By: /s/ Jan H.Hollar
Jan H. Hollar
Principal Accounting Officer
19