SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[ ] Transition Report Under Section 13
or 15(d) of the Exchange Act
For the transition period ended ______________________________________
COMMISSION FILE NUMBER 000-21701
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CAROLINA FINCORP, INC.
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(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-1978449
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
115 SOUTH LAWRENCE STREET, ROCKINGHAM, NC 28380
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(910) 997-6245
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(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of April 29, 1997, 1,851,500 shares of the issuer's common stock, no par
value, were outstanding. The registrant has no other classes of securities
outstanding.
This report contains 12 pages.
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Page No.
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PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Financial Condition
March 31, 1997 and June 30, 1996............................. 3
Consolidated Statements of Operations
Three and Nine Months Ended March 31, 1997 and 1996.......... 4
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1997 and 1996.................... 5
Notes to Consolidated Financial Statements................... 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................... 11
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PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31,
1997 June 30,
ASSETS (UNAUDITED) 1996 *
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(In Thousands)
Cash on hand and in banks $ 632 $ 1,207
Interest-bearing balances in other banks 3,807 4,685
Investment securities available for sale, at fair value 18,315 8,387
Investment securities held to maturity, at amortized cost 7,085 7,975
Loans receivable, net 74,506 68,358
Accrued interest receivable 790 577
Premises and equipment, net 2,063 1,356
Real estate acquired in settlement of loans - 29
Stock in the Federal Home Loan Bank, at cost 735 735
Other assets 747 801
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TOTAL ASSETS $108,680 $94,110
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 81,355 $83,715
Accrued interest payable 169 211
Advance payments by borrowers for property taxes
and insurance 311 469
Accrued expenses and other liabilities 1,085 1,074
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TOTAL LIABILITIES 82,920 85,469
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STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, 20,000,000 shares authorized; 1,851,500 shares
issued and outstanding at March 31, 1997 17,586 -
Retained earnings, substantially restricted 9,009 8,641
ESOP loan receivable (835) -
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TOTAL STOCKHOLDERS' EQUITY 25,760 8,641
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $108,680 $94,110
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* DERIVED FROM AUDITED FINANCIAL STATEMENTS
See accompanying notes.
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
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1997 1996 1997 1996
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(In Thousands)
INTEREST INCOME
Loans $1,486 $1,440 $4,326 $4,231
Investments and deposits in other banks 475 316 1,322 906
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TOTAL INTEREST INCOME 1,961 1,756 5,648 5,137
INTEREST EXPENSE ON
DEPOSIT ACCOUNTS 929 989 2,955 2,975
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NET INTEREST INCOME 1,032 767 2,693 2,162
PROVISION FOR LOAN LOSSES 19 9 52 27
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,013 758 2,641 2,135
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OTHER INCOME
Transaction and other service fee
income 81 84 263 269
Gain on sale of loans 4 2 8 10
Loss on sale of investment securities - (4) - (4)
Gain on sale of premises and equipment 52 - 52 -
Other income 32 30 102 115
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TOTAL OTHER INCOME 169 112 425 390
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OTHER EXPENSES
Personnel costs 354 275 1,030 944
Occupancy 42 41 119 109
Equipment rental and maintenance 46 45 128 123
Marketing 12 15 49 35
Data processing and outside service fees 77 65 214 193
Federal and other insurance premiums 23 47 88 162
FDIC special assessment - - 519 -
Supplies, telephone and postage 40 34 99 87
Other 84 126 186 198
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TOTAL OTHER EXPENSES 678 648 2,432 1,851
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INCOME BEFORE
INCOME TAX EXPENSE 504 222 634 674
INCOME TAX EXPENSE 169 65 222 210
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NET INCOME $ 335 $ 157 $ 412 $ 464
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See accompanying notes.
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
March 31,
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1997 1996
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 412 $ 464
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 108 101
Amortization, net 49 (8)
Gain on sale of assets, net (60) (6)
Origination of mortgage loans held for sale (1,049) (1,202)
Proceeds from sale of loans 1,057 1,212
Provision for loan losses 52 27
Deferred compensation 62 79
Deferred income taxes - (20)
Change in assets and liabilities
Increase in accrued interest receivable (213) (117)
Decrease in other assets 15 100
Decrease in accrued interest payable (42) (1)
Increase (decrease) in accrued expenses and other liabilities (51) 31
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 340 660
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of:
Available for sale investment securities (10,523) (4,060)
Held to maturity investment securities (516) (1,985)
Proceeds from maturities and calls of:
Available for sale investment securities 515 1,816
Held to maturity investment securities 1,370 1,500
Proceeds from sale of available for sale investment securities - 1,511
Net (increase) decrease in loans (6,200) 453
Purchase of premises and equipment (842) (12)
Proceeds from sale of premises and equipment 79 -
Proceeds from sale of real estate acquired in settlement of loans 29 -
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NET CASH USED BY
INVESTING ACTIVITIES (16,088) (777)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand accounts (931) 2,383
Net increase (decrease) in certificates of deposit (1,429) 1,305
Decrease in advance payments by borrowers for taxes and insurance (158) (307)
Net proceeds from issuance of common stock 17,586 -
Decrease in stock conversion costs 62 -
Increase in ESOP loan receivable (835) -
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 14,295 3,381
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NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (1,453) 3,264
CASH AND CASH EQUIVALENTS, BEGINNING 5,892 4,867
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CASH AND CASH
EQUIVALENTS, ENDING $ 4,439 $ 8,131
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See accompanying notes.
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
In management's opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the three and
nine month periods ended March 31, 1997 and 1996, in conformity with generally
accepted accounting principles. The financial statements include the accounts
of Carolina Fincorp, Inc. (the "Company") and its wholly owned subsidiary,
Richmond Savings Bank, SSB ("Richmond Savings" or the "Bank"), and the Bank's
wholly-owned subsidiary, CERKO, Inc. Operating results for the three and nine
month periods ended March 31, 1997 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 1997.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the consolidated
financial statements filed as part of the Company's registration statement on
Form S-1. This quarterly report should be read in conjunction with such
registration statement.
NOTE B - PLAN OF CONVERSION
On May 1, 1996, the Board of Directors of Richmond Savings Bank, SSB unanimously
adopted a Plan of Holding Company Conversion, which was subsequently amended and
restated on September 4, 1996 (the "Plan"), whereby Richmond Savings converted
from a North Carolina-chartered mutual savings bank to a North Carolina-
chartered stock savings bank and became a wholly-owned subsidiary of Carolina
Fincorp, Inc., which was formed in connection with the conversion. Carolina
Fincorp, Inc. issued common stock in the conversion and used a portion of the
net proceeds thereof to purchase the capital stock of Richmond Savings. The
Plan was approved by regulatory authorities and by the members of Richmond
Savings at a special meeting.
At the time of conversion, Richmond Savings established a liquidation account in
an amount equal to its net worth as reflected in its latest balance sheet used
in its final conversion prospectus. The liquidation account will be maintained
for the benefit of eligible deposit account holders who continue to maintain
their deposit accounts in Richmond Savings after conversion. Only in the event
of a complete liquidation will each eligible deposit account holder be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted subaccount balance for deposit accounts then held
before any liquidation distribution may be made with respect to common stock.
Dividends paid subsequent to the conversion cannot be paid from this liquidation
account.
Richmond Savings may not declare or pay a cash dividend on or repurchase any of
its common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations.
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - PLAN OF CONVERSION (CONTINUED)
On November 22, 1996, Richmond Savings completed its conversion from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank. The conversion occurred through the sale of 1,851,500 shares of
common stock (no par value) of Carolina Fincorp, Inc. Total proceeds of
$18,515,000 were reduced by conversion expenses of $929,389. Carolina Fincorp,
Inc. paid $7,750,000 to Richmond Savings in exchange for the common stock of
Richmond Savings issued in the conversion, and retained the balance of the net
conversion proceeds. The transaction was recorded as an "as-if" pooling with
assets and liabilities recorded at historical cost.
NOTE C - FDIC SPECIAL ASSESSMENT
On September 30, 1996, a comprehensive continuing appropriations bill which
provided for a one-time assessment to recapitalize the SAIF was signed into law
by the President. This special assessment, which was imposed on all SAIF-
insured institutions, amounted to $519,000 for Richmond Savings and was charged
against earnings during the quarter ended September 30, 1996. Net of an income
tax benefit of $176,000, this special assessment decreased earnings by $343,000
during the nine months ended March 31, 1997.
NOTE D - DEFINED CONTRIBUTION RETIREMENT PLAN
In conjunction with the mutual to stock conversion, Richmond Savings' defined
contribution target benefit retirement plan was terminated as of September 19,
1996. Funds were distributed in October 1996. There was no gain or loss upon
the termination of the defined contribution retirement plan.
NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the holding company conversion, the Bank adopted an Employee
Stock Ownership Plan (the "Plan"). As of March 31, 1997, the Plan had
borrowings of $835,000 from the Company, and had purchased 64,500 shares of the
Company's common stock in the open market.
NOTE F - NET INCOME PER SHARE
Net income per share for the period from the closing of the Company's stock
offering (November 22, 1996) through March 31, 1997 was $.27 and was computed
based on consolidated net income during that period divided by the weighted
average number of shares outstanding during that period (1,831,622 shares). Net
income per share for the quarter ended March 31, 1997 was $.18 and was computed
based upon 1,827,500 weighted shares outstanding during the quarter.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND JUNE 30, 1996
Principally as a result of net proceeds of $17.6 million received on November
22, 1996 from the sale of the Company's common stock, consolidated total assets
increased by $14.6 million, from $94.1 million at June 30, 1996 to $108.7
million at March 31, 1997. Proceeds generated by the stock sale were used
principally to fund growth in loans receivable and an increase of $9.9 million
in investment securities available for sale since the beginning of the current
year. Loan demand has been strong, with net loans receivable increasing by $6.1
million from $68.4 million to $74.5 million during the nine months. Customer
deposit accounts declined by $2.4 million during the nine months, principally as
a result of deposit withdrawals by customers who used the funds thus provided to
purchase shares of the Company's common stock.
Total stockholders' equity was $25.8 million at March 31 as compared with $8.6
million at June 30. The Company and its bank subsidiary substantially exceeded
all regulatory capital requirements.
During the quarter ended March 31, 1997, the Company's bank subsidiary occupied
two new branch facilities in Rockingham and Ellerbe, replacing existing
locations. Total costs incurred in constructing and furnishing the new
facilities approximated $855,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1996
Net Income. Consolidated net income during the quarter ended March 31, 1997 was
$335,000 as compared with net income of $157,000 for the quarter ended March 31,
1996. The increase is primarily attributable to the significantly higher level
of interest-earning assets during the current quarter as a result of investment
of proceeds from issuance of the Company's common stock.
Net Interest Income. Net interest income increased to $1,032,000 during the
quarter ended March 31, 1997 as compared with $767,000 during the third quarter
of the previous year. This increase resulted from increases of $9.1 million and
$4.9 million, respectively, in the average balances of investments and loans
receivable, and to a lesser extent from a reduction in the rate of interest paid
on customer deposits, which declined from a weighted average rate of 4.78%
during the quarter ended March 31, 1996 to a weighted average rate of 4.61%
during the quarter ended March 31, 1997, tracking the general levels of interest
rates during the respective quarters.
Provision for Loan Losses. The provision for loan losses was $19,000 and $9,000
for the quarters ended March 31, 1997 and 1996, respectively. Management
believes that the provision for loan losses and the resulting loan loss
allowance at March 31, 1997 will be adequate to absorb losses on existing loans.
There were no loan charge-offs during the three months ended March 31, 1996 as
compared with net charge-offs of $17,000 during the three months ended March 31,
1997. Nonaccrual loans aggregated $300,000 at March 31, 1997.
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Other Income. Other income increased from $112,000 to $169,000, principally as
a result of a gain of $52,000 from the sale of the Ellerbe branch facility which
was sold during the quarter.
General and Administrative Expenses. General and administrative expenses
remained relatively stable, increasing to $678,000 during the quarter ended
March 31, 1997 as compared with $648,000 during the quarter ended March 31,
1996. Increased costs incurred for personnel and marketing were offset by a
significant reduction in deposit insurance premiums as reduced rates became
effective at the beginning of the quarter and by other cost reductions.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND
1996
Net Income. The Company earned consolidated net income of $412,000 during the
nine months ended March 31, 1997 as compared with net income of $464,000 during
the corresponding period of the prior year, a decrease of $52,000. The decrease
resulted because earnings generated from the investment of proceeds from sale of
the Company's common stock were offset by a special insurance assessment imposed
on all SAIF-insured institutions by the FDIC to recapitalize the SAIF fund.
Richmond Savings' assessment was $519,000. Net of an income tax benefit of
$176,000, this special assessment decreased earnings during the period by
$343,000. If this special assessment had not been incurred, net income during
the nine months ended March 31, 1997 would have been $755,000.
Net Interest Income. Net interest income increased to $2,693,000 during the
nine months ended March 31, 1997 as compared with $2,162,000 during the first
nine months of the previous year. This increase resulted from a combination of
an increase in average interest-earning assets of $10.1 million, which increase
consisted principally of investment securities, and a reduction in the rate of
interest paid on customer deposits, which declined from a weighted average rate
of 4.85% during the nine months ended March 31, 1996 to a weighted average rate
of 4.69% during the nine months ended March 31, 1997, tracking the general
levels of interest rates during the respective periods.
Provision for Loan Losses. The provision for loan losses was $52,000 and
$27,000 for the nine months ended March 31, 1997 and 1996, respectively.
Management believes that the provision for loan losses and the resulting loan
loss allowance at March 31, 1997 will be adequate to absorb losses on existing
loans. There were $40,000 in loan charge-offs during the nine months ended
March 31, 1997 as compared with net charge-offs of $4,000 during the nine months
ended March 31, 1996. Nonaccrual loans aggregated $300,000 at March 31, 1997.
Other Income. Other income increased from $390,000 to $425,000, principally as
a result of a gain of $52,000 from the sale of the Ellerbe branch facility.
General and Administrative Expenses. Exclusive of the FDIC special insurance
assessment explained under the caption "Net Income," general and administrative
expenses remained relatively stable, increasing to $1,913,000 during the nine
months ended March 31, 1997 as compared with $1,851,000 during the nine months
ended March 31, 1996.
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LIQUIDITY AND CAPITAL RESOURCES
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses
Richmond Savings' ability to meet deposit withdrawals on demand or at
contractual maturity, to repay borrowings as they mature, and to fund new loans
and investments as opportunities arise.
The primary sources of internally generated funds are principal and interest
payments on loans receivable, cash flows generated from operations, and
repayments of mortgage-backed securities. External sources of funds include
increases in deposits, advances from the FHLB of Atlanta, and sales of loans.
As a North Carolina-chartered savings bank, Richmond Savings must maintain
liquid assets equal to at least 10% of assets. The computation of liquidity
under North Carolina regulations allows the inclusion of mortgage-backed
securities and investments with readily marketable value, including investments
with maturities in excess of five years. Richmond Savings' liquidity ratio at
March 31, 1997, as computed under North Carolina regulations, was approximately
20.2%. On a consolidated basis, liquid assets represent approximately 27.5% of
total assets. Management believes that it will have sufficient funds available
to meet its anticipated future loan commitments as well as other liquidity
needs.
As a North Carolina-chartered savings bank, Richmond Savings is subject to the
capital requirements of the Federal Deposit Insurance Corporation ("FDIC") and
the North Carolina Administrator of Savings Institutions ("N. C.
Administrator"). The FDIC requires state-chartered savings banks to have a
minimum leverage ratio of Tier I capital (principally consisting of common
shareholders' equity, noncumulative perpetual preferred stock, and a limited
amount of cumulative perpetual preferred stock, less certain intangible assets)
to total assets of at least 3%; provided, however, that all institutions, other
than those (i) receiving the highest rating during the examination process and
(ii) not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the state minimum. The FDIC also requires
Richmond Savings to have a ratio of total capital to risk-weighted assets of at
least 8%, of which at least 4% must be comprised of Tier I capital. The N. C.
Administrator requires a net worth equal to at least 5% of total assets. At
March 31, 1997, Richmond Savings exceeded the capital requirements of both the
FDIC and the N. C. Administrator.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(27) Financial data schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1997.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAROLINA FINCORP, INC.
Date: May 5, 1997 By: /s/ R. Larry Campbell
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R. Larry Campbell
Chief Executive Officer
Date: May 5, 1997 By: /s/ Winston G. Dwyer
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Winston G. Dwyer
Chief Financial Officer
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