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 September 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
4,417,147 SHARES OF COMMON STOCK, PAR VALUE $2.50
PER SHARE, OUTSTANDING AS OF October 23, 1998
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1998
and 1997 4
Consolidated Statements of Changes in
Shareholder's Equity - Nine Months Ended
September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 - 15
Item 3. Quantitative and Qualitative Disclosures about 16 - 17
Market Risk
Item 5. Shareholder Proposals for the 1999 Annual Meeting 18
PART II. OTHER INFORMATION 19
Signatures 20
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- - -------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- - -------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
--------------------- ---------------------
1998 1997
--------------------- ---------------------
Assets:
Cash and due from banks $17,944,628 $20,160,505
Federal funds sold 13,550,000 ---
--------------------- ---------------------
Total cash and cash equivalents 31,494,628 20,160,505
Interest bearing deposits in other banks 752,566 673,860
Investment securities (market value $26,143,593
in 1998 and $29,555,613 in 1997) 25,755,888 29,292,273
Securities available for sale (cost of $121,180,423 in
1998 and $106,694,428 in 1997) 122,912,631 107,630,916
Loans, net of unearned income ( $482,699 in 1998 and
$434,953 in 1997) 384,559,115 347,919,688
Allowance for loan losses (5,602,778) (5,039,035)
--------------------- ---------------------
Loans, net 378,956,337 342,880,653
Premises and equipment, net 9,545,388 9,566,175
Other real estate owned 391,659 442,310
Other assets 13,135,938 12,570,635
--------------------- ---------------------
Total Assets $582,945,035 $523,217,327
===================== =====================
Liabilities and Shareholders' Equity
Deposits:
Demand $69,318,502 $50,979,999
Interest bearing demand accounts 118,344,709 115,725,015
Savings 51,097,972 47,001,921
Time, $100,000 and over 69,466,174 53,896,333
Other time 207,844,504 194,994,519
--------------------- ---------------------
Total deposits 516,071,861 462,597,787
Repurchase agreements 9,705,410 8,993,205
Other liabilities 5,618,814 5,301,899
--------------------- ---------------------
Total Liabilities 531,396,085 476,892,891
Shareholders' Equity:
Common stock, $2.50 par value;
authorized --- 20,000,000 shares;
issued and outstanding - 4,410,693 shares in
1998, and 4,357,757 shares in 1997 11,026,733 10,894,393
Additional paid-in capital 16,604,714 16,492,544
Retained earnings 22,860,844 18,366,627
Accumulated other comprehensive income 1,056,659 570,872
--------------------- ---------------------
Total Shareholders' Equity 51,548,950 46,324,436
Commitments and Contingent Liabilities ----- -----
Total Liabilities and Shareholders' Equity $582,945,035 $523,217,327
===================== =====================
3
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- - ---------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- - ---------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
Interest Income:
Interest and fees on loans $9,089,322 $8,109,543 $26,034,256 $23,028,438
Interest and dividends on securities:
Taxable income 2,184,746 1,681,564 6,278,835 4,279,354
Non-taxable income 78,105 113,452 239,750 363,210
Interest on federal funds sold 133,741 111,135 349,275 336,550
Other interest income 18,124 12,195 52,651 42,406
----------------- ----------------- ----------------- -----------------
Total interest income 11,504,038 10,027,889 32,954,767 28,049,958
Interest Expense:
Interest on deposits 4,651,850 4,353,245 13,671,357 12,227,573
Interest on notes payable 106,514 78,146 294,193 191,759
----------------- ----------------- ----------------- -----------------
Total interest expense 4,758,364 4,431,391 13,965,550 12,419,332
----------------- ----------------- ----------------- -----------------
Net Interest Income 6,745,674 5,596,498 18,989,217 15,630,626
Provision for Loan Losses 370,000 242,000 880,000 740,333
----------------- ----------------- ----------------- -----------------
Net Credit Income 6,375,674 5,354,498 18,109,217 14,890,293
Other Income:
Charges on deposit accounts 741,890 613,861 2,201,786 1,763,278
Insurance commissions 123,956 64,074 443,736 465,390
Other service fees and commissions 354,181 293,223 972,506 787,031
Mortgage banking income 145,493 99,643 422,826 323,726
Securities gains , net 11,342 55,740 54,050 66,629
Other income 326,638 218,295 893,547 583,623
----------------- ----------------- ----------------- -----------------
Total other income 1,703,500 1,344,836 4,988,451 3,989,677
Operating Expenses:
Salaries and benefits 2,376,589 2,325,593 7,446,246 6,498,565
Occupancy and equipment 628,415 543,589 1,843,444 1,494,381
Federal and other insurance premiums 40,106 35,296 124,236 98,725
Office supplies 177,907 189,984 533,717 475,670
Data processing 156,327 117,287 417,996 335,623
Merger related contingencies 375,000 --- 375,000 ---
Other expenses 1,408,749 1,110,875 3,948,967 3,147,617
----------------- ----------------- ----------------- -----------------
Total operating expenses 5,163,093 4,322,624 14,689,606 12,050,581
----------------- ----------------- ----------------- -----------------
Income Before Income Taxes 2,916,081 2,376,710 8,408,062 6,829,389
Income Taxes 990,855 813,491 2,859,030 2,329,541
----------------- ----------------- ----------------- -----------------
Net income $1,925,226 $1,563,219 $5,549,032 $4,499,848
================= ================= ================= =================
Net Income Per Common Share - Basic $0.44 $0.38 $1.27 $1.09
================= ================= ================= =================
Net Income Per Common Share - Diluted $0.43 $0.37 $1.24 $1.08
================= ================= ================= =================
4
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
ACCUMULATED
COMMON STOCK 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 $35,001,856
EXERCISE OF STOCK OPTIONS 8,006 20,015 91,289 111,304
CASH DIVIDEND ($.20 PER SHARE) (823,279) (823,279)
2-FOR-1 STOCK SPLIT 2,060,298 5,150,745 (5,150,745) -
RETIREMENT OF STOCK (1,694) (4,235) (43,605) (47,840)
DIVIDEND REINVESTMENT PLAN 890 2,225 31,598 33,823
CHANGE IN UNREALIZED GAIN
ON SECURITIES AVAILABLE FOR SALE 494,853 494,853
NET INCOME 4,499,848 4,499,848
----------- ------------- ------------- ------------- --------------- --------------
BALANCE, SEPTEMBER 30, 1997 4,120,471 $10,301,178 $11,371,347 $17,054,805 $543,235 $39,270,565
=========== ============= ============= ============= =============== =============
BALANCE, DECEMBER 31, 1997 4,357,757 10,894,393 16,492,544 18,366,627 570,872 46,324,436
EXERCISE OF STOCK OPTIONS 52,198 130,495 114,828 245,323
CASH DIVIDEND ($.24 PER SHARE) (1,054,815) (1,054,815)
RETIREMENT OF STOCK (3,694) (9,235) (112,707) (121,942)
DIVIDEND REINVESTMENT PLAN 4,432 11,080 110,049 121,129
CHANGE IN UNREALIZED GAIN
ON SECURITIES AVAILABLE FOR SALE 485,787 485,787
NET INCOME 5,549,032 5,549,032
----------- ------------- ------------- ------------- --------------- -------------
BALANCE, SEPTEMBER 30, 1998 4,410,693 $11,026,733 $16,604,714 $22,860,844 $1,056,659 $51,548,950
=========== ============= ============= ============= =============== =============
5
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
- - --------------------------------------------------------------------------------
September 30, September 30,
------------- -------------
1998 1997
------------- -------------
Operating Activities:
Net Income 5,549,032 4,499,848
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,115,314 1,023,974
Accretion and amortization of securities discounts
and premiums, net (210,526) (50,108)
Provision for loan losses 880,000 740,333
Gains on sales of securities available for sale (17,637) (27,324)
Losses on sales of securities available for sale 18,590 -
Gains on calls and maturities of securities held to maturity - (1,812)
Losses on calls and maturities of securities held to maturity - 98
Losses (gains) on sales of equipment, net 309 (4,810)
Losses (gains) on sales of real estate, net 500 (66,179)
Increase in other assets (1,003,476) (599,414)
Increase in other liabilities 232,413 155,220
------------- -------------
Net cash provided by operating activities 6,564,519 5,669,826
------------- -------------
Investing Activities:
Proceeds from maturities of securities available for sale 40,243,758 21,180,881
Proceeds from sales of securities available for sale 385,635 1,776,467
Purchases of securities available for sale (54,905,648) (63,191,157)
Proceeds from calls and maturities of securities held to maturity 6,884,246 8,336,740
Purchases of securities held to maturity (3,361,966) (988,125)
Purchases and maturities of certificates of deposit, net (78,706) (218,529)
Originations of loans, net (37,067,438) (24,613,827)
Proceeds from sale of real estate 247,865 120,299
Proceeds from sales of premises and equipment 20 583,469
Cash acquired, net of cash paid, in purchase of branches - (2,541,876)
Capital expenditures (1,038,638) (1,637,411)
------------- -------------
Net cash used in investing activities (48,690,872) (61,193,069)
------------- -------------
Financing Activities:
Increase in time deposits, net 28,419,826 29,361,739
Increase in other deposits, net 25,054,248 34,036,265
Increase (decrease) in borrowed funds, net 712,205 (930,728)
Increase in notes payable 100,000 -
Repayment of notes payable (15,498) (14,596)
Repurchase of stock (121,942) (47,840)
Payment of cash dividends and fractional shares (1,054,815) (823,279)
Issuance of stock 366,452 145,127
------------- -------------
Net cash provided by financing activities 53,460,476 61,726,688
------------- -------------
Net Increase in Cash and Cash Equivalents 11,334,123 6,203,445
Cash and Cash Equivalents, Beginning of Year 20,160,505 19,325,459
============= =============
Cash and Cash Equivalents, End of Year 31,494,628 25,528,904
============= =============
Supplemental disclosures of cash flow information:
Interest paid 13,828,038 12,197,107
Income taxes paid 3,084,521 2,895,456
Supplemental disclosure on noncash investing and financing activities:
Decrease in net unrealized loss 485,787 494,853
Assets transferred to other real estate 111,754 330,287
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.
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 September 30, 1998 and December
31, 1997 the results of operations for the three and nine-month periods ended
September 30, 1998 and 1997, and cash flows for the nine-month periods ended
September 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 nine-month periods ended
September 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 Nine months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic EPS denominator: weighted average number of
common shares outstanding ....................... 4,410,064 4,120,128 4,390,721 4,113,138
Dilutive effect arising from assumed exercise of
stock options ................................... 111,730 64,024 117,602 49,769
--------- --------- --------- ---------
Diluted EPS denominator ......................... 4,521,794 4,184,152 4,508,323 4,162,907
========= ========= ========= =========
7
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.
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 nine months ended
September 30, 1998 and 1997 consists of unrealized gains and losses on certain
investments in debt and equity securities. Comprehensive income for the three
and nine months ended September 30, 1998 is $2,341,788 and $6,034,819,
respectively and for the three and nine months ended September 30, 1997 is
$1,765,061 and $4,994,701, respectively.
6. On June 4, 1998, the Company and Community Bank & Trust Co. ("CBT") entered
into a Merger Agreement and Plan of Reorganization 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 conditions, including final approval by
certain regulatory authorities. On November 12, 1998, the proposed merger was
approved by the North Carolina State Banking Commission. Final approval by the
Federal Reserve is still pending.
The pending acquisition of CBT has been delayed due to certain charges brought
against the Company and one of the Company's officers. The Company's third
quarter earnings include $375,000 of pre-tax expenses for merger-related
contingencies and possible settlement of litigation.
In connection with the possible litigation discussed above, the Company has
formed a settlement trust. On November 10, 1998, the Company irrevocably
transferred all of the shares of CBT which it owns to the trustee to be
available for settlement of any claims of the former shareholders of such
shares.
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 nine-month periods ended September
30, 1998 and 1997.
General
Net income for the quarter ended September 30, 1998, was $1,925,226, or $.44 per
basic share, compared to net income of $1,563,219, or $.38 per basic share, for
the same period in 1997. Net income for the nine-month period ended September
30, 1998 was $5,549,032 or $1.27 per basic share, compared to net income of
$4,499,848, or $1.09 per basic share for the same period in 1997.
The Company is aware of and is making every effort to address the potentially
severe implications of the Year 2000. The "Year 2000 Issue" is a general term
used to describe problems that may arise as a result of improper processing of
dates and date-sensitive calculations as the Year 2000 approaches. The issue is
due to the fact that many of the world's existing computer programs use only two
digits to identify the year in a date field. When these programs were developed
there was a lack of consideration on the impact of the upcoming century date
change. These programs could experience malfunctions when the last two digits of
the year change to "00" and interpreting it as 1900 rather than 2000. This
misinterpretation could result in disruption to normal business operations. Due
to these possible ramifications, the Company is taking the Year 2000 Issue very
serious.
The Company's Year 2000 Preparedness Team is comprised of a representative from
all major areas of the company. The Company's Board of Directors has approved a
plan submitted by the Year 2000 team. The plan was developed in accordance with
the guidelines set by the Federal Financial Institutions Examination Council.
The first phase of the plan required the Company to assess or inventory all
known processes that could be impacted by the Year 2000 Issue and their vendors,
if applicable. The inventory included not only typical computer processes, but
all systems and equipment that could be impacted by embedded micro-chip
malfunctions. These include but are not limited to the Company's alarm systems,
telephone systems, elevators, and ATM machines. This assessment phase is
complete, yet updated as needed.
The second phase of the plan required the Company to contact all third party
vendors and service providers. We must obtain documentation regarding their Year
2000 efforts. This is significant for the Company due to it's extreme dependence
on external sources. This is an ongoing phase to track the vendors and service
providers continuous efforts.
Additionally, the Company's plan deals with the assessment of its significant
borrowers and depositors and their Year 2000 readiness. Through letters,
questionnaires, and personal contacts, the Company is in the process of
assessing the Year 2000 risk associated with these customers. The Year 2000
Issue is being addressed as an addendum to the Company's loan policy. New loans
will be subject to Year 2000 assessment as part of the approval process.
9
The Company's Board of Directors approved a Year 2000 three year budget of
$58,100 in 1998, $58,100 in 1999, and $25,000 in 2000. This budget was set to
cover all costs associated with the Year 2000. Some areas include but are not
limited to software and hardware upgrades, customer awareness materials,
necessary testing, and employee training and education.
Another important phase of the plan is the comprehensive testing of all known
processes. The testing of hardware has been completed. Testing of all
mission-critical applications will be complete by December 31, 1998 and all
other processes will be complete by March 31, 1999. All upgrades to software and
test scripts have been received from the vendors and service providers. If any
problems arise during testing, the Company will request a fix from the
providers.
The Company believes that the potential effects on internal operations of the
Year 2000 issue can and will be addressed prior to the Year 2000. In the event
that required modifications or conversions are not completed on a timely basis
prior to the Year 2000, normal business operations could be disrupted. Even
after tests have been completed and results are satisfactory, the Company must
consider the fact that systems could still fail when the actual date arrives.
Therefore, the Company is in the process of preparing a Business Resumption
Contingency Plan that addresses all areas of operations, such as power,
telecommunications, etc. and how we will resume business if any or all areas
experiences difficulties, until the Year 2000 problems are fixed.
The costs associated with the Year 2000 project and the date the Company plans
to complete Year 2000 compliance are based on management's best estimates.
However, there can be no guarantee that these estimates will be achieved at the
cost disclosed or within the time frame indicated. The Company will make every
effort to do whatever is necessary to correct all relevant problems in an
attempt to eliminate any possibility of business disruptions.
On June 4, 1998, the Company and Community Bank & Trust Co. ("CBT") entered into
a Merger Agreement and Plan of Reorganization 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 conditions, including final approval by certain regulatory
authorities. On November 12, 1998, the proposed merger was approved by the North
Carolina State Banking Commission. Final approval by the Federal Reserve is
still pending.
The pending acquisition of CBT has been delayed due to certain charges brought
against the Company and one of the Company's officers. The Company's third
quarter earnings include $375,000 of pre-tax expenses for merger-related
contingencies and possible settlement of litigation.
In connection with the possible litigation discussed above, the Company has
formed a settlement trust. On November 10, 1998, the Company irrevocably
transferred all of the shares of CBT which it owns to the trustee to be
available for settlement of any claims of the former shareholders of such
shares.
10
Net Interest Income/Margins
Net interest income of $18,989,217 during the first nine-months of 1998 resulted
from a net interest margin of 4.96% on average earning assets of $513.7 million.
This compares with a net interest margin of 4.94% on average earning assets of
$426.7 million generating net interest income of $15,630,626 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 $219,000 relative to rate and an increase of
$3,075,000 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 nine-months ended
September 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 %.
Loan Loss Allowance/Provision
The allowance for loan losses represents management's determination as to an
adequate amount in relation to the risk of likely losses 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. 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 likely losses from any
borrower that has occurred but may not be identified yet. 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 $5,602,778 or 1.46% of outstanding loans, at September 30, 1998 and
$5,039,035 or 1.45% of outstanding loans, at December 31, 1997.
11
The provision for loan losses charged to operations during the first nine months
was $880,000 in 1998 and $740,333 in 1997. Charge-offs, net of recoveries, were
$316,257 or .12% (annualized) of average loans outstanding, during the nine
months ended September 30, 1998, as compared to $356,602 or .15% (annualized) of
average loans outstanding, during the same period in 1997. The ratio of
non-accrual loans to total loans was .20% at September 30, 1998, .21% at
December 31, 1997, and .25% at September 30, 1997. The ratio of non-performing
assets to total assets was .26% at September 30, 1998, .25% at December 31,
1997, and .31% at September 30, 1997. Management believes that reserves and
asset values are adequate to facilitate the timely disposition of these assets.
The following table depicts the change in the allowance for loan losses for the
periods ended September 30, 1998 and 1997.
1998 1997
---- ----
Balance at beginning of year 5,039,035 4,488,958
Charge-offs ................ (420,429) (436,551)
Recoveries ................. 104,172 79,949
Provision for loan losses .. 880,000 740,333
---------- ----------
Balance at September 30, ... 5,602,778 4,872,689
========== ==========
Net Non-Interest Income
Non-interest income increased $358,664 or 26.67% for the three-month period
ended September 30, 1998, and $998,774 or 25.03% for the nine-month period ended
September 30, 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 $ 840,469 or 19.44% for the three-month period
ended September 30, 1998, and $2,639,025 or 21.90%, for the nine-month period
ended September 30, 1998, as compared to the same period a year earlier.
Non-interest expense increased in relation to the additional branch
acquisitions, branch openings and the pending acquisition of Community Bank and
Trust Co. Specifically, occupancy and supplies were directly effected as well as
other expenses which includes the amortization of the premium paid to acquire
the deposits and $375,000 for merger related contingencies and possible
settlement of litigation. Additionally, the expenses relative to our technology
expenditures are apparent in the increase in equipment expense.
Financial Condition
The Company's total assets at September 30, 1998 and 1997, were $582,945,035 and
$496,587,900 respectively, and $523,217,327 at December 31, 1997. Average
earning assets for the first nine months of 1998 were $513,770,000 versus
$426,733,000 for the same period a year earlier, an increase of 20.40%. 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 opened
three supermarket branches and two stand alone branches. The Company will
continue to look for ways to acquire business and grow in market share in the
existing markets.
Average loans of $356,917,000 represented 69.47% of average earning assets
during the first nine months of 1998. During the same period in 1997, average
loans totaled $315,972,000, or 74.04% of average earning assets. Gross loans
increased to $384,559,115 at September 30, 1998, a 15.47% increase over loans a
year ago at September 30, 1997 and a 10.53% 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.
12
Securities averaged $147,457,000 during the nine months ended September 30, 1998
versus $101,914,000 for the same period a year ago. The securities portfolio
represented 28.70% of earning assets at September 30, 1998 and 23.88% at
September 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 September 30, 1998,
the securities portfolio had an unrealized gain of approximately $1,732,208 for
securities available for sale. A gain of $54,050 was realized during the first 9
months of 1998. Securities held to maturity with a carrying value of
approximately $16.8 million were scheduled to mature within the next five years.
Of this amount, $7.8 million were scheduled to mature within one year.
Securities available for sale with a carrying value of $113.4 million were
scheduled to mature within the next five years. Of this amount, $48.1 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 15.82%, to $439,275,000 in the first
nine months of 1998, from an average of $379,273,000 in the first nine months of
1997. Total deposits increased 15.09% from September 30, 1997 to September 30,
1998, and 11.56% from December 31, 1997 to September 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 September
30, 1998, the Company's ratio of total capital to risk-adjusted assets was
13.60% which includes 12.35% 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 8.68%.
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 September 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% 12.35% 11.24% 10.01%
Total capital to risk adjusted assets 10.00% 8.00% 13.60% 12.50% 11.26%
Leverage ratio ....................... 5.00% 4.00% 8.68% 7.78% 6.99%
13
CAROLINA FIRST BANCSHARES, INC.
- - ----------------------------------------------------
AVERAGE BALANCE SHEET AS OF SEPTEMBER 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 $699 $36 6.87% 553 $25 6.03%
Taxable securities 142,293 6,296 5.90% 94,816 4,297 6.04%
Non-taxable securities 5,164 363 9.37% 7,098 550 10.33%
Federal funds sold and securities
purchased with agreements to
resell 8,697 349 5.35% 8,294 337 5.42%
Loans 356,917 26,034 9.73% 315,972 23,028 9.72%
--------------- ----------- ----------- ------------ ----------- ----------
Interest earning assets 513,770 33,078 8.58% 426,733 28,237 8.82%
--------------- ----------- ----------- ------------ ----------- ----------
Cash and due from banks 17,483 $16,547
Other assets 21,115 19,221
--------------- ------------
Total assets $552,368 $462,501
=============== ============
Liabilities and Shareholders' Equity
Interest bearing deposits
Demand $117,916 $2,039 2.31% $101,367 $1,845 2.43%
Savings 49,782 860 2.30% 43,422 831 2.55%
Time 263,422 10,773 5.45% 229,319 9,551 5.55%
Other borrowings 8,155 294 4.81% 5,165 192 4.96%
--------------- ----------- ----------- ------------ ----------- ----------
Interest bearing liabilities 439,275 13,966 4.24% 379,273 12,419 4.37%
--------------- ----------- ----------- ------------ ----------- ----------
Other liabilities 66,367 45,338
Shareholders' equity 46,726 37,890
--------------- ------------
Total liabilities and shareholders'
equity $552,368 $462,501
=============== ============
Interest rate spread 4.34% 4.45%
=========== ==========
Net interest earned and net
yield on earning assets $19,112 4.96% $15,818 4.94%
=========== =========== =========== ==========
14
CAROLINA FIRST BANCSHARES, INC.
- - ------------------------------------------
RATE / VOLUME ANALYSIS
- - ----------------------------------------
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
- - ----------------------------------------------------
(In Thousands)
Increase/(Decrease)
due to
1997 Volume Rate 1998
Inc/exp Inc/exp
------------------------------------------------------------------------
Interest Income:
Loans 23,028 2,987 19 26,034
Securities - tax - exempt 550 (136) (51) 363
Securities - taxable 4,297 2,101 (102) 6,296
Federal funds sold & interest bearing
balances in other banks 362 22 1 385
---------------- ---------------- ---------------- ----------------
Total Interest Income 28,237 4,974 (133) 33,078
Interest Expense:
Interest Bearing Demand 1,845 286 (92) 2,039
Savings 831 110 (81) 860
Time 9,551 1,395 (173) 10,773
Other Borrowings 192 108 (6) 294
---------------- ---------------- ---------------- ----------------
Total Interest Expense 12,419 1,899 (352) 13,966
---------------- ---------------- ---------------- ----------------
Net Interest Income 15,818 3,075 219 19,112
================ ================ ================ ================
15
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 September 30, 1998, the Company had
a modified duration of less than 1.51%. At September 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 September 30, 1998, the price change was less than
4.06% with such a rate shock.
16
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.
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.
17
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 presented for
consideration at such Annual Meeting that are submitted to the Company after
January 15, 1999.
18
PART II - OTHER INFORMATION
Item
1 - Legal Proceedings
The pending acquisition of Community Bank & Trust Co., Marion, NC has
been delayed due to certain charges brought against one of the Company's
officials who is on voluntary suspension. The Company's third quarter earnings
include $375,000 of pre-tax expenses for merger-related contingencies and
possible settlement of litigation.
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: 27.1 - Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
19
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: November 14, 1998 By: /s/ James E. Burt, III
-------------------------- ----------------------------------
James E. Burt, III
Acting Chairman and President
Date: November 14, 1998 By: /s/ Jan H. Hollar
-------------------------- ---------------------------------
Jan H. Hollar
Principal Accounting Officer
20