UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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.)
236 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
5,440,644 SHARES OF COMMON STOCK, PAR VALUE $2.50
PER SHARE, OUTSTANDING AS OF May 14, 1999
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1999
and 1998 4
Consolidated Statements of Changes in
Shareholder's Equity and Comprehensive Income -
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9 -15
Item 3. Quantitative and Qualitative Disclosures about 16
Market Risk
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 18
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------
MARCH 31, DECEMBER 31,
----------------- ------------------
1999 1998
----------------- ------------------
Assets:
Cash and due from banks $27,983,225 $28,611,146
Federal funds sold 12,235,107 13,220,957
----------------- ------------------
Total cash and cash equivalents 40,218,332 41,832,103
Interest bearing deposits in other banks 803,586 777,346
Investment securities held to maturity (market value of
$37,184,061 in 1999 and $33,609,910 in 1998) 37,104,988 33,306,113
Securities available for sale (cost of $156,821,010 in
1999 and $153,255,268 in 1998) 156,906,883 154,384,075
Loans, net of unearned income ( $582,693 in 1999 and
$565,714 in 1998) 483,749,202 476,109,833
Allowance for loan losses (7,090,976) (6,723,516)
----------------- ------------------
Loans, net 476,658,226 469,386,317
Premises and equipment, net 13,460,516 13,662,738
Other real estate owned 201,873 326,206
Other assets 17,567,275 17,951,346
----------------- ------------------
Total Assets $742,921,679 $731,626,244
================= ==================
Liabilities and Shareholders' Equity
Deposits:
Demand $93,337,008 $89,666,447
Interest bearing transaction accounts 166,740,796 167,131,413
Savings 67,440,077 63,833,667
Time, $100,000 and over 90,659,752 87,947,784
Other time 243,499,222 244,023,259
----------------- ------------------
Total deposits 661,676,855 652,602,570
Borrowed funds 12,144,349 10,399,634
Other liabilities 5,937,526 6,646,309
----------------- ------------------
Total Liabilities 679,758,730 669,648,513
Shareholders' Equity:
Common stock, $2.50 par value;
authorized --- 20,000,000 shares;
issued and outstanding - 5,438,567 shares in
1999, and 5,396,736 shares in 1998 13,596,418 13,491,840
Additional paid-in capital 22,919,463 22,758,001
Retained earnings 26,587,660 25,031,771
Accumulated other comprehensive income 59,408 696,119
----------------- ------------------
Total Shareholders' Equity 63,162,949 61,977,731
Commitments and Contingent Liabilities ----- -----
Total Liabilities and Shareholders' Equity $742,921,679 $731,626,244
================= ==================
3
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- ------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------
Three Months Ended
March 31,
-------------------------------
1999 1998
-------------- --------------
Interest Income:
Interest and fees on loans $10,762,096 $9,633,243
Interest and dividends on securities:
Taxable income 2,542,097 2,262,540
Non-taxable income 101,583 97,627
Other interest income 251,634 200,842
-------------- --------------
Total interest income 13,657,410 12,194,252
Interest Expense:
Interest on deposits 5,567,409 5,102,018
Interest on borrowed funds 148,157 122,235
-------------- --------------
Total interest expense 5,715,566 5,224,253
-------------- --------------
Net Interest Income 7,941,844 6,969,999
Provision for Loan Losses 383,000 209,000
-------------- --------------
Net Interest Income after Provision for Loan Losses 7,558,844 6,760,999
Other Income:
Charges on deposit accounts 950,700 900,120
Insurance commissions 100,654 155,489
Other service fees and commissions 365,066 325,908
Mortgage banking income 186,039 145,799
Other income 351,665 278,683
-------------- --------------
Total other income 1,954,124 1,805,999
Operating Expenses:
Salaries and benefits 3,226,386 3,058,449
Occupancy and equipment 891,312 757,479
Federal and other insurance premiums 47,032 53,238
Office supplies 212,232 231,433
Data processing 237,779 151,618
Other expenses 1,804,951 1,553,227
-------------- --------------
Total operating expenses 6,419,692 5,805,444
-------------- --------------
Income Before Income Taxes 3,093,276 2,761,554
Income Taxes 993,529 926,150
-------------- --------------
Net Income $2,099,747 $1,835,404
============== ==============
Net Income Per Common Share - Basic $0.39 $0.34
============== ==============
Net Income Per Common Share - Diluted $0.38 $0.34
============== ==============
Cash Dividend Per Common Share $0.10 $0.08
============== ==============
4
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
COMMON STOCK ACCUMULATED
-------------------------- ADDITIONAL OTHER NET
PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
----------- ------------- -------------- ------------ ----------------- ---------------
Balance, December 31, 1997 5,325,769 $13,314,423 $22,335,466 $19,980,565 $580,346 $56,210,800
Exercise of stock options 27,064 67,660 63,945 131,605
Cash dividend ($.08 per share) (349,161) (349,161)
Retirement of stock (1,264) (3,160) (34,732) (37,892)
Dividend Reinvestment Plan 4,431 11,077 110,022 121,099
Net income 1,835,404 1,835,404
Other comprehensive income:
Unrealized gain on securities
available for sale 37,852 37,852
---------------
Total comprehensive income 1,873,256
----------- ------------- -------------- --------------- ------------- ---------------
Balance, March 31, 1998 5,356,000 13,390,000 22,474,701 21,466,808 618,198 57,949,707
Balance, December 31, 1998 5,396,736 13,491,840 22,758,001 25,031,771 696,119 61,977,731
Exercise of stock options 40,990 102,475 139,175 241,650
Cash dividend ($.10 per share) (543,858) (543,858)
Dividend reinvestment plan 841 2,103 22,287 24,390
Net income 2,099,747 2,099,747
Other comprehensive income:
Unrealized loss on securities
available for sale (636,711) (636,711)
---------------
Total comprehensive income 1,463,036
=========== ============= ============== =============== ============= ===============
Balance, March 31, 1999 5,438,567 $13,596,418 $22,919,463 $26,587,660 $59,408 $63,162,949
=========== ============= ============== =============== ============= ===============
5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
1999 1998
---------------- --------------
Operating Activities:
Net Income 2,099,747 1,835,404
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 649,004 536,576
Accretion and amortization of securities discounts and premiums, net (174,198) (123,462)
Provision for loan losses 383,000 209,000
Losses on sales of equipment, net 6,549 -
Gains on sales of real estate, net (12,499) -
Increase in other assets 627,218 (136,796)
Increase in other liabilities (690,164) 550,297
---------------- --------------
Net cash provided by operating activities 2,888,657 2,871,019
---------------- --------------
Investing Activities:
Proceeds from maturities of securities available for sale 31,970,059 140,225
Proceeds from sales of securities available for sale 12,511,647 10,157,259
Purchases of securities available for sale (47,857,499) (18,294,640)
Proceeds from calls and maturities of securities held to maturity 4,011,213 2,557,811
Purchases of securities held to maturity (7,829,891) -
Purchases and maturities of certificates of deposit, net (26,240) (16,228)
Originations of loans, net (7,688,501) (4,011,474)
Proceeds from sale of real estate 168,018 195,100
Proceeds from sale of premises and equipment 5,298 -
Capital expenditures (288,495) (313,109)
---------------- --------------
Net cash used in investing activities (15,024,391) (9,585,056)
---------------- --------------
Financing Activities:
Increase in time deposits 2,187,931 17,704,277
Net increase in other deposits 6,886,354 11,884,117
Net increase (decrease) in borrowed funds 2,244,715 (2,300,148)
Repayment of notes payable (518,619) (5,180)
Repurchase of stock - (37,892)
Payment of cash dividends and fractional shares (543,858) (349,161)
Issuance of stock 266,040 252,704
---------------- --------------
Net cash provided by financing activities 10,522,563 27,148,717
---------------- --------------
Net Increase in Cash and Cash Equivalents (1,613,171) 20,434,680
Cash and Cash Equivalents, Beginning of Year 41,832,103 29,946,377
================ ==============
Cash and Cash Equivalents, End of Year 40,218,932 50,381,057
================ ==============
Supplemental disclosures of cash flow information:
Interest paid 5,186,273 5,179,650
Income taxes paid 1,334,000 1,180,000
================ ==============
Supplemental disclosure of noncash investing and financing activities:
Increase (decrease) in net unrealized loss (636,711) 37,852
Assets transferred to other real estate 33,592 100
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 March 31, 1999 and December 31,
1998 the results of operations for the three-month periods ended March 31, 1999
and 1998, and cash flows for the three-month periods ended March 31, 1999 and
1998.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's audited consolidated financial statements for the year ended December
31, 1998.
2. The consolidated financial statements include the accounts of the holding
company, and its wholly owned subsidiaries, Cabarrus Bank of North Carolina,
("Cabarrus Bank"), Lincoln Bank of North Carolina, ("Lincoln Bank") and
Community Bank & Trust Company, ("Community 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-month periods ended March 31, 1999
and 1998 are not necessarily indicative of the results that might be expected
for the full year ending December 31, 1999 and 1998.
4. The Company adopted the provisions of SFAS No. 128, "Earnings Per Share",
during 1997. The Statement establishes standards for computing and presenting
earnings per share (EPS). 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
March 31,
1999 1998
-----------------
Basic EPS denominator: weighted average number of common shares outstanding 5,429,925 5,334,030
Dilutive effect arising from assumed exercise of stock options 85,409 137,809
------ -------
Diluted EPS denominator 5,515,334 5,471,839
========= =========
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 months ended March 31,
1999 and 1998 consists of unrealized gains and losses on certain investments in
debt and equity securities. Comprehensive income for the three months ended
March 31, 1999 and 1998 is $1,463,036 and $1,873,256, respectively.
7
6. On December 23, 1998, a subsidiary of the Company merged with Community Bank
& Trust Co. ("Community Bank"), a community bank with approximately $110 million
in assets, headquartered in Rutherfordton, North Carolina. The merger was
effected through a tax-free exchange of stock whereby each outstanding share of
Community Bank was exchanged for .72716 of a share of the Company's common
stock. Consequently, the Company issued approximately 1,021,202 shares of common
stock and cash in-lieu of fractional shares for all of the outstanding shares of
Community Bank. The merger has been accounted for as a pooling-of-interests.
In connection with the Community Bank merger, the Company incurred restructuring
and merger related expenses of $1,861 for the three months ended March 31, 1999
and $2,070,000 for the year ended December 31, 1998. At December 31, 1998,
accruals related to such charges totaled approximately $563,000, consisting
mainly of severance payments and payments under employment contracts.
With the exception of accruals related to employment contracts totaling
approximately $173,000, substantially all of the accrued restructuring and
merger related expenses at December 31, 1998 were utilized during the three
months ended March 31, 1999. The remaining accrual of approximately $150,000 for
employment contracts relates to amounts due to former Community Bank executive
officers under existing employment contracts and will be paid out over the next
year pursuant to the terms of the contracts.
8
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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 three-month periods ended March
31, 1999 and 1998.
Year 2000 Readiness Disclosure
The Company is aware of and is addressing the implications of Year 2000 computer
problem. 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 are interpreted it as 1900 rather than 2000. This misinterpretation
could result in disruptions 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
also 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, and is 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 its 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 has assessed 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.
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.
The third and fourth required phases deal with renovation and validation. To
cover these phases, the testing of our hardware and all mission-critical
applications has been completed. All upgrades to software and test scripts have
been received from the vendors and service providers. We are continuing with our
testing to include lower priority systems. This testing will be complete by June
30, 1999. If any problems arise during testing, the Company will request a fix
from the providers.
9
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. The fifth
phase is implementation, whereby the bank introduces its successfully tested
systems into use within the bank (a.k.a. "put into production environment").
This has been an ongoing process, as we have made efforts to replace and upgrade
older systems with newer technology. 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. This Business Resumption Contingency Plan and our
methods of validating the plan will be complete by June 30, 1999.
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 is continuing to
work on Year 2000 problem and provide contingency plans to reduce the
possibility of Year 2000 problems.
General
Net income for the quarter ended March 31, 1999 was $2,099,747, or $.39 per
basic share, compared to net income of $1,835,404, or $.34 per basic share, for
the same period in 1998.
Net Interest Income/Margins
Net interest income of $7,941,844 during the first three months of 1999 resulted
from a net interest margin of 4.74% on average earning assets of $675.4 million.
This compares with a net interest margin of 4.90% on average earning assets of
$572.5 million generating net interest income of $6,969,999 for the same period
in 1998. 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 a decrease of $309,000 relative to rate and an increase of
$1,285,000 relative to volume.
Management reviews asset/liability volumes and rates on a regular 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 three-months ended March
31, 1999 and 1998 is presented on pages 14 and 15 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
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.
10
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 probable losses from any
borrower that 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 $7,090,976 or
1.47% of outstanding loans, at March 31, 1999 and $6,723,516 or 1.41% of
outstanding loans, at December 31, 1998.
The provision for loan losses charged to operations during the first three
months was $383,000 in 1999 and $209,000 in 1998. Charge-offs, net of
recoveries, were $15,540 or .01 (annualized) of average loans outstanding,
during the three months ended March 31, 1999, as compared to $63,056 or .06%
(annualized) of average loans outstanding, during the same period in 1998. The
ratio of non-accrual loans to total loans was .48% at March 31, 1999, .31% at
December 31, 1998, and .28% at March 31, 1998. The ratio of non-performing
assets to total assets was .47% at March 31, 1999, .26% at December 31, 1998,
and .26% at March 31, 1998. The increase in nonperforming assets is primarily
due to two loans for which the Company has significant collateral. 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 March 31, 1999 and 1998.
1999 1998
---- ----
Balance at beginning of year $6,723,516 $5,837,328
Charge-offs (84,312) (91,481)
Recoveries 68,772 30,351
Provision for loan losses 383,000 209,000
------- -------
Balance at March 31, $7,090,976 $5,985,198
========== ==========
11
Non-Interest Income
Non-interest income increased $148,125 or 8.20% for the three-month period ended
March 31, 1999, 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 deposits
acquired from the 1998 branch acquisitions and branch openings have positively
impacted deposit-related income.
Non-interest expense increased $614,248 or 10.58% for the three-month period
ended March 31, 1999, as compared to the same period a year earlier.
Non-interest expense increased in relation to the 1998 branch acquisitions, and
1998 branch openings and the completed acquisition of Community Bank in late
December 1998. Specifically, occupancy and data processing 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 of
$134,000.
Financial Condition
The Company's total assets at March 31, 1999 and 1998, were $742,921,679 and
$647,649,014 respectively, and $731,626,244 at December 31, 1998. Average
earning assets for the first three months of 1999 were $657,447,000 versus
$572,494,000 for the same period a year earlier, an increase of 17.98%. 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 $473,198,000 represented 70.06% of average earning assets
during the first three months of 1999. During the same period in 1998, average
loans totaled $400,531,000, or 69.96% of average earning assets. Gross loans
increased to $483,749,202 at March 31, 1999, an 18.57% increase over loans a
year ago at March 31, 1998 and a 1.60% increase over December 31, 1998. It is
anticipated that general loan growth will continue to mirror the economy,
however, competition for quality loans may adversely effect the net interest
margins.
Securities averaged $183,936,000 during the three months ended March 31, 1999
versus $157,948,000 for the same period a year ago. The securities portfolio
represented 27.23% of earning assets at March 31, 1999 and 27.59% at March 31,
1998. At March 31, 1999, the securities portfolio had an unrealized gain of
approximately $85,873 for securities available for sale. A gain of $40,162 was
realized during the first 3 months of 1999. Securities held to maturity with a
carrying value of approximately $12.7 million were scheduled to mature within
the next five years. Of this amount, $6.0 million were scheduled to mature
within one year. Securities available for sale with a carrying value of $141.0
million were scheduled to mature within the next five years. Of this amount,
$59.2 million were scheduled to mature within one year. The Company currently
has the ability and intent to hold its investment securities held to maturity to
their contractual 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 16.51%, to $575,400,000 in the first
three months of 1999, from an average of $493,874,000 in the first three months
of 1998. Total deposits increased 15.15% from March 31, 1998 to March 31, 1999,
and 1.39% from December 31, 1998 to March 31, 1999. The second quarter
acquisitions of 1998 resulted in large growth rates. As the Company capitalizes
on these acquisitions and gains market share, deposits will continue to
increase.
12
Liquidity
The liquidity position of the Company's subsidiaries, Lincoln Bank ("Lincoln"),
Cabarrus Bank of North Carolina ("Cabarrus"), and Community Bank & Trust Co.
("Community Bank") 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 March 31, 1999, the
Company had a liquidity ratio of 33.80%. 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. The Company presently anticipates it has sufficient
liquidity to meet Year 2000 cash needs of its customers.
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 current capital standard call for a minimum total capital of 8% of
risk-adjusted assets, including 4% Tier I capital, and minimum leverage ratio of
Tier I capital to total tangible assets of at least 4-5%. The Company, Lincoln
Bank, Cabarrus Bank and Community Bank all maintain capital levels exceeding the
minimum levels for well capitalized banks and bank holding companies as follows.
Well Adequately Carolina Lincoln Cabarrus Community
Capitalized Capitalized First Bank Bank Bank
Tier I capital to risk adjusted assets 6.00% 4.00% 11.86% 10.66% 10.06% 12.46%
Total capital to risk adjusted assets 10.00% 8.00% 13.11% 11.92% 11.32% 13.71%
Leverage ratio 5.00% 4.00% 7.90% 7.75% 7.23% 6.57%
13
The following table summarizes net interest income and average yields and rates
paid for the years indicated. For purposes of this analysis, the interest on
non-taxable investment securities has been adjusted to a taxable-equivalent
amount to facilitate comparison with other asset yields. The adjustment gives
effect tot the exemption form federal income taxes for earnings on obligations
of state and political subdivisions and assumes a marginal tax rate of 34%.
Non-accrual loans are excluded from the interest-earning loan balances shown.
As of March 31,
---------------------------------------------------------------------------------------------
(Thousands)
1999 1998
---------------------------------------------- --------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
---------------- ------------ ------------ ------------ ------------ -----------
Assets
Interest bearing deposits in other banks $779 $20 10.27% 672 $28 16.67%
Taxable securities 176,038 2,542 5.78% 152,223 2,262 5.94%
Non-taxable securities 7,898 155 7.85% 5,725 148 10.34%
Federal funds sold and securities
purchased with agreements to
resell 17,534 232 5.29% 13,343 173 5.19%
Loans 473,198 10,762 9.10% 400,531 9,633 9.62%
---------------- ------------ ------------ ------------ ------------ -----------
Interest earning assets 675,447 13,711 8.12% 572,494 12,244 8.55%
---------------- ------------ ------------ ------------ ------------ -----------
Cash and due from banks 26,982 23,239
Other assets 29,486 28,223
---------------- ------------
Total assets $731,915 $623,956
================ ============
Liabilities and Shareholders' Equity
Interest bearing deposits
Demand $162,639 $842 2.07% $137,614 $763 2.22%
Savings 65,420 347 2.12% 58,986 459 3.11%
Time 334,416 4,378 5.24% 287,361 3,880 5.40%
Other borrowings 12,925 148 4.58% 9,913 122 4.92%
---------------- ------------ ------------ ------------ ------------ -----------
Interest bearing liabilities 575,400 5,715 3.97% 493,874 5,224 4.23%
---------------- ------------ ------------ ------------ ------------ -----------
Other liabilities 93,117 76,964
Shareholders' equity 63,398 53,118
---------------- ------------
Total liabilities and shareholders'
equity $731,915 $623,956
================ ============
Interest rate spread 4.15% 4.32%
============ ===========
Net interest earned and net
yield on earning assets $7,996 4.74% $7,020 4.90%
============ ============ ============ ===========
14
The following table presents the dollar amount of changes in interest income and
interest expense on a taxable-equivalent basis. The table distinguishes between
the changes related to average outstanding (volume) of earning assets and
interest-bearing liabilities, as well as the changes related to average interest
rates (rate) on such assets and liabilities. Changes attributable to both volume
and rate have been allocated proportionately.
As of March 31.
--------------------------------------------------------------------
(Thousands)
1999 1998
Income/ Income/
Expense Volume Rate Expense
---------------- --------------- -------------- ---------------
Interest Income:
Loans 10,762 1,653 (524) 9,633
Securities - tax - exempt 155 43 (36) 148
Securities - taxable 2,542 344 (64) 2,262
Federal funds sold & interest bearing
balances in other banks 252 59 (8) 201
---------------- --------------- -------------- ---------------
Total Interest Income 13,711 2,099 (632) 12,244
Interest Expense:
Interest Bearing Demand 842 130 (51) 763
Savings 347 34 (146) 459
Time 4,378 616 (118) 3,880
Other Borrowings 148 34 (8) 122
---------------- --------------- -------------- ---------------
Total Interest Expense 5,715 814 (323) 5,224
---------------- --------------- -------------- ---------------
Net Interest Income 7,996 1,285 (309) 7,020
================ =============== ============== ===============
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 risks 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 risk inherent in the bank's investment
portfolio, the counterparties to interest rate contracts, and the 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 March 31, 1999, the Company had a
modified duration of less than 2.78%. At March 31, 1999 the Company had a
one-year cumulative gap of 3.53% and a one to five year cumulative gap of
5.78. 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 March 31, 1999, the price change was less than 7.3%
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.
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 for the period ended December 31,
1998. There has been no significant changes in these risks since December 31,
1998.
16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company understands that its former Chairman and Chief Executive
Officer, D. Mark Boyd, III, entered a negotiated plea of guilty upon the advice
of counsel pursuant to the principles of North Carolina v. Alford, 400 U.S. 25,
to two Misdemeanor Statements of Charges regarding his solicitation of the
Company and one of his sons to violate the antifraud provisions of the North
Carolina Securities Act, ending the pending criminal indictments against him.
The SEC informal inquiry into trading in Community Bank stock prior to the
public announcement of Community Bank's merger with a Company subsidiary
continues. See the Company's Annual Report on Form 10-K for the period ended
December 31, 1998 for additional information.
Item 2 - Changes in Securities and Use of Proceeds
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10. Carolina First BancShares, Inc. 1999 Long Term Incentive
Plan (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998.
27. Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company
during the quarter for which this report is filed:
- On January 6, 1999 the Company filed an 8-K announcing the
completion of the Company's acquisition of Community Bank &
Trust Co., Marion, North Carolina, and filing a copy of the
Company's Amended and Restated Bylaws.
- On March 22, 1999, the Company filed an 8-K announcing the
appointment of L.D. Warlick, Jr. as chairman of the Company's
Board of Directors.
17
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: May 14, 1999 By: /s/ James E. Burt, III
--------------------------------- -------------------------------------
James E. Burt, III
Chief Executive Officer
Date: May 14, 1999 By: /s/ Jan H. Hollar
---------------------------------- -------------------------------------
Jan H. Hollar
Chief Financial Officer
18