SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2002 Commission File No. 333-76512
CAROLINA NATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
South Carolina 57-1101005
- -------------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1350 MAIN STREET
COLUMBIA, SOUTH CAROLINA 29201
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(803) 779-0411
- --------------------------------------------------------------------------------
(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 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 [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock: 1,427,303
shares outstanding at October 31, 2002.
Transitional Small Business Format (Check one): Yes [ ] No [X]
CAROLINA NATIONAL CORPORATION
FORM 10-QSB
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet........................................................3
Statements of Operations.............................................4
Statements of Cash Flows.............................................5
Notes to Unaudited Financial Statements..............................6
Item 2. Management's Discussion and Analysis or Plan of Operation............7
PART II -OTHER INFORMATION
Item 3. Controls and Procedures ............................................15
Item 6. Exhibits and Reports on Form 8-K....................................16
SIGNATURES .................................................................17
2
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
CAROLINA NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
September 30,
2002
(Unaudited)
-----------
ASSETS
Cash and cash equivalents ................................. $ 861,235
Federal funds ............................................. 20,325,000
Investment ................................................ 3,570,500
Loans, net of reserve ..................................... 3,854,921
Office equipment .......................................... 513,486
Other assets .............................................. 106,267
------------
$ 29,231,409
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing accounts ........................... $ 2,492,001
Savings and money market accounts ...................... 3,558,436
Certificates ........................................... 10,886,574
Other liabilities ......................................... 120,542
------------
Total liabilities ................................. 17,057,553
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized, none issued -
Common stock, no par value, 20,000,000 shares authorized,
1,427,303 shares issued and outstanding ................ 13,829,293
Retained deficit .......................................... (1,655,437)
------------
Total shareholders' equity ........................ 12,173,856
------------
Total liabilities and stockholders' equity ........ $ 29,231,409
============
See notes to unaudited consolidated financial statements.
3
CAROLINA NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Escrow ..................................................... $ - $ - $ 16,365 $ -
Loans ...................................................... 38,235 - 38,235 -
Investments ................................................ 64,782 - 64,782 -
--------- --------- --------- ---------
Total interest income .............................. 103,017 - 119,382 -
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits ................................................... 50,788 - 50,788 -
--------- --------- --------- ---------
Total interest expense ............................. 50,788 - 50,788 -
--------- --------- --------- ---------
NET INTEREST INCOME ............................................ 52,229 - 68,594 -
--------- --------- --------- ---------
PROVISION FOR LOAN LOSSES ...................................... 58,700 - 58,700 -
--------- --------- --------- ---------
Net interest income after provision for
loan losses ........................................ (6,471) - 9,894 -
--------- --------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts ........................ 7,008 - 7,008 -
--------- --------- --------- ---------
Total noninterest income ........................... 7,008 - 7,008 -
--------- --------- --------- ---------
NONINTEREST EXPENSES
Salaries and employee benefits ............................. 377,558 40,322 515,392 126,807
Net occupancy .............................................. 89,145 8,638 128,888 18,021
Other ...................................................... 242,821 35,038 303,556 64,668
--------- --------- --------- ---------
Total noninterest expenses ......................... 709,524 83,998 947,836 209,496
--------- --------- --------- ---------
Income before income taxes ................................. (708,987) (83,998) (930,934) (209,496)
Provision for income taxes ................................. (43,913) - (43,913) -
--------- --------- --------- ---------
Net loss ........................................... $(665,074) $ (83,998) $(887,021) $(209,496)
========= ========= ========= =========
PER SHARE
Average shares outstanding 1,119,097 37,538 446,113 28,473
========= ========= ========= =========
Net loss $ (0.69) $ (2.24) $ (1.99) $ (7.36)
========= ========= ========= =========
See notes to unaudited consolidated financial statements.
4
CAROLINA NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
-------------
2002 2001
---- ----
OPERATING ACTIVITIES
Net loss .................................................................... $ (887,021) $ (209,496)
Adjustments to reconcile net income to net cash used
for operating activities
Provision for loan losses ................................................ 58,700 -
Services rendered for common stock ....................................... - 15,000
Depreciation ............................................................. 14,282 -
(Increase) decrease in other assets ...................................... (56,870) -
Increase (decrease) in other liabilities ................................. 54,743 (42,318)
------------ ------------
Net cash used for operating activities ............................ (816,166) (236,814)
------------ ------------
INVESTING ACTIVITIES
(Increase) decrease in federal funds sold ................................... (20,325,000) -
Purchase of investment securities available for sale ........................ (3,570,500) -
Net increase in loan balances ............................................... (3,913,621) -
Purchase of equipment ....................................................... (523,209) -
------------ ------------
Net cash used for investing activities ............................ (28,332,330) -
------------ ------------
FINANCING ACTIVITIES
Proceeds from sale of stock ................................................. 12,969,293 320,000
Net increase (decrease) in deposits ......................................... 16,937,011 -
------------ ------------
Net cash provided by financing activities ......................... 29,906,304 320,000
------------ ------------
Increase in cash and cash equivalents ............................. 757,808 83,186
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 103,427 20,568
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................ $ 861,235 $ 103,754
============ ============
CASH PAID FOR
Interest .................................................................... $ 50,788 $ -
============ ============
Income taxes ................................................................ $ - $ -
============ ============
See notes to unaudited consolidated financial statements.
5
CAROLINA NATIONAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies and Activities
A summary of these policies is included in the registration statement
filed under the Securities Act of 1933 and declared effective by the Securities
and Exchange Commission on March 11, 2002 and is incorporated herein by
reference.
Basis of Presentation
The accompanying unaudited financial statements at September 30, 2002 and
for the three-month and nine-month periods ending September 30, 2002 have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information with the instructions to Form 10-QSB and Item
310(b) of Regulation S-B of the Securities and Exchange Commission. Accordingly,
they do not include all information and footnotes required by GAAP for complete
financial statements. However, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included.
Operating results for the three-month period ended September 30, 2002 or
for the period from inception through September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002 or for any other period.
NOTE 1
The Company completed its public stock offering on July 12, 2002 and sold
1,159,021 shares at $10 per share in the stock offering. The Company received
the proceeds of $11,333,948 net of offering costs of $256,262. Additionally, the
organizers and directors of the Company have purchased 135,000 shares of common
stock at $10 per share, with a capital of investment of $1,350,000 (1,500 shares
were issued for services valued at $15,000). The Company capitalized the Bank
with $9,300,000.
Upon receiving approval from the Office of the Comptroller of Currency
and the federal Deposit Insurance Corporation, the Bank opened for business on
July 15, 2002.
The Company sold an additional 133,282 shares at $10 per share in a
public offering and received proceeds of $1,332,820 in September, 2002. The
Company plans to use the proceeds for general corporate purposes.
NOTE 2
Net loss per share. Prior to completion of its public Stock Offering, the
directors purchased stock to fund organizational expenses. The weighted average
shares outstanding includes only these shares through July 12, 2002, when the
stock offering was completed. Diluted loss per share is not presented because
under the treasury stock method, cash equivalents would be antidilutive to the
calculation.
6
Item 2. - Management's Discussion and Analysis or Plan of Operations
This discussion is intended to assist in understanding the financial
condition and results of operations of Carolina National Corporation. The
information should be reviewed in conjunction with the financial statements and
the related notes contained elsewhere in this report.
Carolina National Corporation has recently completed the initial public
offering of its common stock in which it sold a total of 1,159,021 shares at
$10.00 per share, and a second offering of its common stock in which it sold an
additional 133,282 shares at $10.00 per share. Prior to the initial public
offering, Carolina National Corporation sold a total of 135,000 shares at $10.00
per share to its directors and an organizer of Carolina National Bank & Trust
Company. Proceeds of the three offerings were used to pay organizational costs
and provide the initial capital for Carolina National Bank & Trust Company.
Carolina National Bank & Trust Company opened for business and was acquired by
Carolina National Corporation on July 15, 2002.
FORWARD LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
the securities laws. All statements that are not historical facts are
"forward-looking statements." You can identify these forward-looking statements
through our use of words such as "may," "will," "expect," "anticipate,"
"believe," "intend, " "estimate," "project, " "continue," or other similar
words. Forward-looking statements include, but are not limited to, statements
regarding our future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, income, business operations and proposed
services.
These forward-looking statements are based on current expectations,
estimates and projections about our industry, management's beliefs, and
assumptions made by management. Such information includes, without limitation,
discussions as to estimates, expectations, beliefs, plans, strategies, and
objectives concerning our future financial and operating performance. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict, particularly in
light of the fact that we are a new company with no operating history.
Therefore, actual results may differ materially from those expressed or
forecasted in such forward-looking statements. The risks and uncertainties
include, but are not limited to:
o our growth and our ability to maintain growth;
o governmental monetary and fiscal policies, as well as legislative and
regulatory changes;
o the effect of interest rate changes on our level and composition of
deposits, loan demand and the value of our loan collateral and
securities;
o the effects of competition from other financial institutions operating
in our market area and elsewhere, including institutions operating
locally, regionally, nationally and internationally, together with
competitors that offer banking products and services by mail,
telephone and computer and/or the Internet;
o failure of assumptions underlying the establishment of our allowance
for loan losses, including the value of collateral securing loans; and
o loss of consumer confidence and economic disruptions resulting from
terrorist activities.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this report might not occur.
7
PLAN OF OPERATION OF CAROLINA NATIONAL CORPORATION AND ORGANIZATION OF
CAROLINA NATIONAL BANK & TRUST COMPANY
Organization and Plan of Operation of Carolina National Corporation
Carolina National Corporation was incorporated under the laws of South
Carolina in May, 2000. Carolina National Corporation was organized for the
purpose of becoming the holding company for Carolina National Bank & Trust
Company. Carolina National Corporation acquired Carolina National Bank & Trust
Company on July 12, 2002.
At the time of its incorporation, Carolina National Corporation had only
a few organizers whose immediate goal was to assemble a group of organizers and
directors that would be recognized as a strong board of successful people with
strong ties to the community and to find the right locations for the Bank's
offices in order to file an application for a national bank charter. A chief
executive officer was employed at the outset and given primary responsibility
for finding appropriate locations for the Bank's main office and branch as well
as helping assemble the board of directors. Locating and negotiating leases of
the right locations for the Bank's offices proved to be a lengthy process.
Similarly, it took a considerable amount of time to assemble the desired board
of directors because several of the desired directors had prior commitments that
had to be reconciled before they could commit to join Carolina National
Corporation.
As a result of the time expended in choosing its locations and directors,
Carolina National Corporation took a somewhat longer period of time in the phase
between its inception and filing of its national bank charter application and
incurred higher organizational expenses than is typical to new bank and holding
company organization in South Carolina. Higher organizational expenses resulted
primarily from having a highly compensated chief executive officer employed from
the outset of the extended organizational process. The chief executive officer
subsequently terminated his relationship with Carolina National Corporation and
was paid a severance package which also increased the expenses.
Because of the desirability of the locations obtained and the strength of
its director team, management of Carolina National Corporation believes that the
resulting delay in filing the charter application and increase in organizational
expenses was in the long term best interest of Carolina National Corporation.
For the foreseeable future, Carolina National Corporation expects that
its primary business activity will be ownership and operation of Carolina
National Bank & Trust Company. At some point in the future, if the directors of
Carolina National Corporation determine that it is appropriate to do so and any
necessary regulatory approvals can be obtained, Carolina National Corporation
may engage in other activities permitted for bank holding companies and may
organize or acquire additional banks, though there can be no assurances that it
will do so.
Organization of Carolina National Bank & Trust Company
On December 3, 2001, the organizers of Carolina National Bank & Trust
Company filed an application to obtain a national bank charter with the
Comptroller of the Currency. The Comptroller of the Currency approved the
application and the Bank opened on July 15, 2002. The organizers also submitted
an application to the FDIC for the insurance of Carolina National Bank & Trust
Company's deposit accounts which was also approved. Accordingly the Bank's
deposits are insured by FDIC up to the limits provided by law.
Management Philosophy and Policy
The directors of Carolina National Corporation and Carolina National Bank
& Trust Company believe that, with the increased demand for banking services
arising from steady growth in population, personal income, and employment, the
banking market will continue to grow in the Greater Columbia area. It is their
opinion that there is a need for an additional locally owned and managed bank to
serve the needs of the community, including individuals and small and
medium-sized business enterprises. The directors intend for Carolina National
Bank & Trust Company to concentrate on this hometown market with a professional
staff that is sensitive to local needs.
The directors of Carolina National Bank & Trust Company are dedicated to
providing personalized banking to the citizens of the Greater Columbia area.
Based on their knowledge of the area as long-time residents and business people,
8
the directors believe that a bank owned and managed by people living and working
in the local area can best serve the community for the following reasons:
o Decisions regarding credit and services of a bank can best be made at
a local level.
o Funds made available from local deposits should be re-invested in the
depositors' community.
o Stability and continuity of management within a banking institution
without frequent changes are important to its customers.
The wave of bank mergers and consolidations has resulted in most banks in
the Greater Columbia market area being controlled by large out-of-state
institutions. A primary objective of the directors of Carolina National Bank &
Trust Company is to provide citizens of Greater Columbia with more opportunity
to have their banking needs met locally. The directors are involved extensively
in business in the Greater Columbia service area and intend to make meeting the
credit needs of this area a first priority. The directors believe that a large
number of bank customers prefer a local bank, and that this preference should
result in the successful and profitable operation of Carolina National Bank &
Trust Company, though no assurances can be given that this will be the case.
Carolina National Bank & Trust Company offers and intends to offer a wide
range of banking services including checking and savings accounts; commercial,
installment, and personal loans; and other associated services. While trust
services will not be offered immediately, the directors would expect Carolina
National Bank & Trust Company to consider offering such services when a need for
offering them is indicated and when the appropriate staff can be developed and
regulatory approvals obtained. The goals of the new Bank are to provide banking
services to satisfy the needs of its customers, while investing its funds in
accordance with sound banking practices and earning the maximum profit for
shareholders.
Carolina National Bank & Trust Company provides personalized banking
services, with emphasis on knowledge of the individual financial needs and
objectives of its customers and an appropriate array of services to meet those
needs and objectives, coupled with timely response. The Bank seeks to promote
continuous long-term relationships between officers and customers by minimizing
transfers of account officers to different customers, departments or locations.
The Bank also seeks to limit the number of accounts served by each of its
officers to a level that will permit personal attention to each customer and
full development of each customer's business relationship with Carolina National
Bank & Trust Company. Because the management of the Bank is located in Columbia,
all credit and related decisions are made locally, which facilitates prompt
response.
The directors anticipate that Carolina National Bank & Trust Company's
initial capitalization will enable it to commence operations as a significant
competitor. With capitalization of approximately $9.3 million, the Bank has a
legal lending limit of approximately $1.2 million for loans to a single
customer. The Bank has established a correspondent relationship with The Bankers
Bank, and may establish correspondent relationships with other banks to
participate loans when loan amounts exceed the Bank's legal lending limits or
internal lending policies. The directors believe that Carolina National Bank &
Trust Company's initial capitalization should support substantial growth in
deposits and loans, and will be sufficient to meet its capital requirements for
at least its first three years of operations.
Market Area
The information about market area provided below has been compiled from
information obtained from various federal, state, county, city and local
agencies that the directors believe to be reliable sources, but the directors
have not independently confirmed all of such information and make no
representations as to its accuracy.
9
Size and Location
Columbia is South Carolina's capital city and is the largest city in the
state. Columbia, together with the adjacent towns of Forest Acres and Arcadia
Lakes, comprise the Bank's primary service area. These smaller towns are
attractive traditional "bedroom" communities with relatively upscale retail and
service businesses. They are fully integrated physically with Columbia. The
secondary service area is Richland County, with a potential extended market into
the outlying area considered as "Greater Columbia," which is comprised of
Richland County (includes Columbia) and the four surrounding counties.
Ranked among the top twenty metropolitan growth areas in the country,
Columbia stands at the geographic center of the South Atlantic region of the
United States, which is one of the fastest growing areas in the country. The
city is located in the center of the 1,465 square mile Columbia Metropolitan
Statistical Area and anchors the Greater Columbia area. The Greater Columbia
area's overall population grew 17.3% to 664,000 in the decade of the nineties
and a continuation of this trend is expected for the foreseeable future.
Columbia is situated 205 miles northeast of Atlanta, Georgia and 95 miles
south of Charlotte, North Carolina. It shares many of those cities' favorable
natural attributes typical of the sunbelt and conducive to healthy economic
growth. The city is geographically positioned in the center of South Carolina
and serves as its economic hub. It is a service center located approximately
midway between the healthy, industrialized Upstate and the bustling coastal city
of Charleston, which is the fourth largest containerized shipping port in the
United States and a thriving tourist area.
Transportation
Columbia's strategic location and interstate highway networks have
stimulated its overall commercial and industrial growth, particularly
warehousing and distribution. Three major interstate highways serve Columbia
(I-20, I-77 and I-26), directly connecting it to the commerce centers referred
to above and providing important access to every economic region in the nation.
The recently completed Southeastern Beltway linking I-77 to I-26 has
significantly enhanced the accessibility and development potential of Forest
Acres, Arcadia Lakes and the rest of Columbia's east side.
The Columbia Metropolitan airport is located 6.5 miles southwest of
Columbia and provides service by Delta, US Airways, United and Continental. A
$48,000,000 redevelopment project was recently completed and includes a new
concourse, a new connector with moving sidewalk and complete interior
remodeling. The project doubled the space of the existing terminal. United
Parcel Service recently built a regional air hub at the Columbia Metropolitan
Airport. The air hub allows local firms to ship more quickly and is drawing new
distribution firms to the area. The UPS hub is a magnet for new industries and
jobs, particularly for catalog operations, light manufacturing and businesses
with time-sensitive shipments.
Rail transportation in the region is provided by Norfolk-Southern and CSX
Systems, and inter-city bus service in the Columbia area is provided by
Greyhound-Continental Bus Lines. Intra-city bus and taxicab service is also
available in the city. Amtrak Silver Star serves the Columbia area with
passenger rail service from its downtown station. Port services are available
from Charleston (one and one-half hour drive) or Savannah, Georgia (three-hour
drive). The Columbia area's sixty motor freight carriers round out the
transportation network. The city is therefore well located to expedite its
shipping, transportation, and distribution processes to most locations in the
state and the Southeast region.
Government and Related Influence
Columbia, as the capital city of the state, is the center of government
on city, county, state and federal levels. Columbia has a council-manager form
of government, while Forest Acres and Arcadia Lakes have mayor-council forms of
government. Richland County is governed by a county council. Many services are
performed as joint ventures between city and county government such as water and
sanitary sewer service, fire protection and emergency medical treatment. The
city's public water and sewer systems are quite good and are believed to provide
for adequate capacity for expansion.
10
Government exercises a substantial stabilizing influence on the area
economy as a purchaser, service provider and employer. State government is the
area's largest employer. Local and federal governments are the third and fourth
ranking employers, respectively. Established in World War I, Fort Jackson is the
second largest employer in the area. In the spring of 1989, the U. S. Army named
Fort Jackson as its number one military training facility in the world. More
recruits are trained there than at any other military base in the United States.
Annually, Fort Jackson disburses over $350,000,000 in remuneration to its
employees, a significant portion of which is spent in the Columbia area. Each
year, approximately 35,000 soldiers attend initial entry training at the fort
and each graduate has an average of two visitors traveling to attend the
graduation ceremony, which generates significant tourism expenditures.
Approximately 9,000 students attend schools at Fort Jackson each year and a new
$7.6 million construction project for the U. S. Chaplain Center and school at
Fort Jackson is planned.
The highly regarded University of South Carolina is located in Columbia
and has the state's largest number of enrollees in higher education at
approximately 27,000. It is the city's sixth largest employer with approximately
4,500 faculty and workers on its payroll. Midlands Technical College in Columbia
has enrollment of approximately 9,100 students, while the combined enrollment of
the eight other institutions of higher learning in the area numbers
approximately 4,900 students.
Competition
South Carolina law permits statewide branching by banks and savings and
loan associations. Consequently, many financial institutions have branches
located in several communities. The City of Columbia is currently served by 14
commercial banking organizations with approximately 100 branches, one savings
bank and approximately 17 credit unions. One additional commercial bank serves
the Richland County area outside of Columbia. Since interstate banking was first
permitted, an overwhelming number of Columbia's locally based commercial banks
have been acquired, mostly by large regional out-of-state banks. Of the 14
commercial banks left in Columbia, seven are owned and controlled out of state,
and only two of the remaining seven (one of which is Carolina National Bank &
Trust Company) are headquartered in Columbia.
Carolina National Bank & Trust Company encounters strong competition from
most of these financial institutions. In the conduct of certain areas of its
business, Carolina National Bank & Trust Company also competes with credit
unions, insurance companies, money market mutual funds and other financial
institutions, some of which are not subject to the same degree of regulation and
restrictions as the Bank. Most of these competitors have substantially greater
resources and lending abilities than Carolina National Bank & Trust Company has
and offer certain services, such as international banking, investment banking,
and trust services, that the Bank does not currently provide.
The principal areas and methods of competition in the banking industry
are the services offered, pricing of those services, the convenience and
availability of the services, and the degree of expertise and personal manner
with which those services are offered. As discussed above under "Management
Philosophy and Policy", the directors believe that Carolina National Bank &
Trust Company will be able to exploit opportunities available for a
locally-owned community bank so that the Bank can compete effectively in those
areas, but no assurance can be given that it will be able to do so.
SERVICES OF CAROLINA NATIONAL BANK & TRUST COMPANY
The services of Carolina National Bank & Trust Company are described
below. Although this information is derived from the Bank's business plan and
represents the directors' current plans for operation of the Bank, these plans
are subject to change based on various factors, including, among others, changes
in local and national economic conditions, changes in competitive conditions,
changes in market demands, and actual operating experience of the Bank. The Bank
has begun offering many of the services described and plans to offer the others.
Deposits
Carolina National Bank & Trust Company offers the full range of deposit
services typically available in most banks and savings and loan associations,
including checking accounts, NOW accounts, and savings and other time deposits
of various types, ranging from daily money market accounts to longer-term
11
certificates of deposit. The transaction accounts and time certificates are
tailored to the principal market area at rates competitive with those offered in
the area. In addition, retirement accounts such as IRA's (Individual Retirement
Accounts) are available. All deposit accounts are insured by the FDIC up to the
maximum amount permitted by law. Carolina National Bank & Trust Company solicits
these accounts from individuals, businesses, associations and organizations, and
government authorities. Although the Bank intends to be competitive in its
efforts to attract deposit accounts, it does not aggressively seek jumbo
certificates of deposit (certificates in amounts greater than $100,000) and does
not accept brokered deposit accounts.
Lending Activities
Carolina National Bank & Trust Company offers a range of lending
services, including real estate, commercial and consumer loans.
To address the risks inherent in making loans, management maintains an
allowance for loan losses based on, among other things, an evaluation of
Carolina National Bank & Trust Company's loan loss experience, management's
experience at other financial institutions in the market area, the amount of
past due and nonperforming loans, current and anticipated economic changes and
the values of certain loan collateral. Based upon such factors, management makes
various assumptions and judgments about the ultimate collectibility of the loan
portfolio and provides an allowance for loan losses equal to the estimated
losses inherent in the loan portfolio. However, because there are certain risks
that cannot be precisely quantified, management's judgment of the allowance is
necessarily approximate and imprecise. The adequacy and methodology of the
allowance for loan losses are subject to regulatory examination and compared to
a peer group of financial institutions identified by the regulatory agencies.
Real Estate Loans
The directors intend for one of the primary components of Carolina
National Bank & Trust Company's loan portfolio to be loans secured by first or
second mortgages on residential and commercial real estate. These loans
generally consist of commercial real estate loans, construction and development
loans and residential real estate loans (including home equity and second
mortgage loans). Interest rates may be fixed or adjustable and Carolina National
Bank & Trust Company generally charges an origination fee. Fixed rate
residential loans are usually sold into the secondary market and not held in the
portfolio. The Bank seeks to manage credit risk in the commercial real estate
portfolio by emphasizing loans on owner-occupied office and retail buildings
where the loan-to-value ratio, established by independent appraisals, does not
exceed 80%. The loan-to-value ratio for first and second mortgage loans and for
construction loans generally will not exceed 80%. In addition, the Bank may
require personal guarantees of the principal owners of the property. The Bank
also originates mortgage loans for sale into the secondary market, earning a
fee, but avoiding the interest rate risk of holding long-term, fixed-rate loans.
The principal economic risk associated with all loans, including real
estate loans, is the creditworthiness of Carolina National Bank & Trust
Company's borrowers. The ability of a borrower to repay a real estate loan
depends upon a number of economic factors, including employment levels and
fluctuations in the value of real estate. In the case of a real estate
construction loan, there is generally no income from the underlying property
during the construction period, and the developer's personal obligations under
the loan are typically limited. Each of these factors increases the risk of
nonpayment by the borrower. In the case of a real estate purchase loan, the
borrower may be unable to repay the loan at the end of the loan term and may
thus be forced to refinance the loan at a higher interest rate, or, in certain
cases, the borrower may default as a result of its inability to refinance the
loan. In either case, the risk of nonpayment by the borrower is increased.
Carolina National Bank & Trust Company also faces additional credit risks
to the extent that it engages in making adjustable rate mortgage loans ("ARMs").
In the case of an ARM, as interest rates increase, the borrower's required
payments increase, thus increasing the potential for default. The marketability
of all real estate loans, including ARMs, is also generally affected by the
prevailing level of interest rates.
12
Commercial Loans
Carolina National Bank & Trust Company makes loans for commercial
purposes in various lines of business. The commercial loans include both secured
and unsecured loans for working capital (including inventory and receivables),
loans for business expansion (including acquisition of real estate and
improvements), Small Business Administration ("SBA") loans for new businesses
(as well as other governmentally guaranteed business loans), and loans for
purchases of equipment and machinery. The directors intend for equipment loans
typically to be made for a term of five years or less at either fixed or
variable rates, with the loan fully amortized over the term and secured by the
financed equipment. Working capital loans typically are expected to have terms
not exceeding one year and will usually be secured by accounts receivable,
inventory or personal guarantees of the principals of the business. Commercial
loans vary greatly depending upon the circumstances and loan terms will be
structured on a case-by-case basis to better serve customer needs.
The risks associated with commercial loans vary with many economic
factors, including the economy in the Bank's market area. The well-established
banks in the Bank's market area make proportionately more loans to medium- to
large-sized businesses than Carolina National Bank & Trust Company. Many of
Carolina National Bank & Trust Company's anticipated commercial loans are made
to small- to medium-sized businesses, which typically have shorter operating
histories, and less sophisticated record keeping systems than larger entities.
As a result, these smaller entities may be less able to withstand adverse
competitive, economic and financial conditions than larger borrowers. In
addition, because payments on loans secured by commercial property generally
depend to a large degree on the results of operations and management of the
properties, repayment of such loans may be subject, to a greater extent than
other loans, to adverse conditions in the real estate market or the economy.
Consumer Loans
Carolina National Bank & Trust Company makes a variety of loans to
individuals for personal and household purposes, including secured and unsecured
installment and term loans, home equity loans and lines of credit and unsecured
revolving lines of credit such as credit cards. The secured installment and term
loans to consumers generally consist of loans to purchase automobiles, boats,
recreational vehicles, mobile homes and household furnishings, with the
collateral for each loan being the purchased property. The underwriting criteria
for home equity loans and lines of credit is generally the same as applied by
Carolina National Bank & Trust Company when making a first mortgage loan, as
described above, and home equity lines of credit will typically expire 15 years
or less after origination, unless renewed or extended.
Consumer loans generally involve more credit risks than other loans
because of the type and nature of the underlying collateral or because of the
absence of any collateral. Consumer loan repayments are dependent on the
borrower's continuing financial stability and are likely to be adversely
affected by job loss, divorce and illness. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the case of default. In most cases, any repossessed collateral will not provide
an adequate source of repayment of the outstanding loan balance. Although the
underwriting process for consumer loans includes a comparison of the value of
the security, if any, to the proposed loan amount, Carolina National Bank &
Trust Company cannot predict the extent to which the borrower's ability to pay,
and the value of the security, will be affected by prevailing economic and other
conditions.
Loan Approval and Review
Carolina National Bank & Trust Company's loan approval policies provide
for various levels of officer lending authority. When the amount of aggregate
loans to a single borrower exceeds an individual officer's lending authority,
the loan request will be considered and approved by an officer with a higher
lending limit or by the Loan Committee of the Board of Directors. The Loan
Committee sets the lending limits for the Bank's loan officers, and any loan in
excess of such lending limits must be approved by the Loan Committee. Carolina
National Bank & Trust Company will not make any loans to any director, officer
or employee of the Bank unless the loan is approved by the Bank's Board of
Directors, or a committee thereof, and is made on terms not more favorable to
such person than would be available to a person not affiliated with the Bank.
13
Other Services
Carolina National Bank & Trust Company participates in a regional network
of automated teller machines that may be used by Bank customers in major cities
throughout the Southeast. The Bank offers both VISA and MasterCard brands of
bank cards together with related lines of credit. The lines of credit may be
used for overdraft protection as well as pre-authorized credit for personal
purchases and expenses.
Carolina National Bank & Trust Company provides safe deposit boxes,
travelers checks, direct deposit of payroll and social security checks, banking
by mail, and automatic drafts for various accounts, but will not provide
international or trust banking services in the near future.
Asset and Liability Management
The primary earning assets of Carolina National Bank & Trust Company
consist of the loan portfolio and investment account. Efforts are made generally
to match maturities and rates of loans and the investment portfolio with those
of deposits, although exact matching is not be possible. The majority of
Carolina National Bank & Trust Company's securities investments are in
marketable obligations of the United States government, federal agencies and
state and municipal governments, generally with varied maturities.
Long-term loans are priced primarily to be interest-rate sensitive.
Long-term fixed rate loans are not expected to be held in the portfolio, but,
rather, are expected to be sold in the secondary market.
Deposit accounts represent the majority of the liabilities of Carolina
National Bank & Trust Company. These include transaction accounts, time deposits
and certificates of deposit. The maturities of the majority of
interest-sensitive accounts are expected to be 12 months or less.
Premises
The main offices of Carolina National Bank & Trust Company and Carolina
National Corporation are located at 1350 Main Street, on the corner of Main and
Washington Streets, in downtown Columbia. The space, which comprises
approximately 9,718 square feet on three floors, was previously used as a bank,
and the directors, therefore, believe it is well-suited for its purpose. The
Bank has also opened a branch office at 4840 Forest Drive in a building which
comprises approximately 2,600 square feet, and which was previously used as a
bank branch. This branch facility has ample parking and four drive-through
teller stations. Both properties have been leased pursuant to long term leases.
Employees
The president and chief executive officer of Carolina National Bank &
Trust Company is Roger B. Whaley. Mr. Whaley, age 56, has over 29 years of
experience in the banking industry. Mr. Whaley began his banking career in
Columbia, South Carolina with Bankers Trust Company of South Carolina. He
remained with Bankers Trust in various positions, which included Columbia
Regional Executive with responsibility for loans and deposits in half of the
state of South Carolina, until Bankers Trust was acquired by NCNB in 1986. He
then became the NCNB Consumer and Community Banking Division Executive for South
Carolina. In 1992 NCNB, which had been renamed NationsBank, promoted him to
Executive Vice President. In 1997 he was promoted to President of NationsBank
Oklahoma and, following the merger of NationsBank with Bank of America, he also
became the Small Business Banking Executive for the Midwest (Arkansas, Illinois,
Iowa, Kansas, Missouri and Oklahoma). Upon his retirement in 2000 he returned to
his home state of South Carolina.
Carolina National Bank & Trust Company currently has 21 employees. The
Bank expects to hire additional employees as it grows. The Bank seeks to provide
its employees with competitive benefits, which should enable the Bank to attract
and retain quality employees.
14
Lack of Profitability in the Early Period of Operation
It has been the experience in the banking industry for new banks to
operate at a loss in the first several years of operation. Every reasonable
effort will be made to reach a level of profitability as quickly as possible,
but there can be no assurances that Carolina National Bank & Trust Company will
be profitable during its first 3 years of operation or at any time thereafter.
The directors of Carolina National Bank & Trust Company, who are local
residents of the Bank's market area, believe that the existing and future bank
market in the Greater Columbia area presents an excellent opportunity for a new
locally owned bank. Their belief is based upon their review of the economic
outlook for the area and the size, nature, and growth potential of the existing
market for banking services and the experience of Mr. Whaley in the banking
industry.
Item 3. Controls and Procedures.
(a) Based on their evaluation of the issuer's disclosure controls and procedures
(as defined in 17 C.F.R. Sections 240.13a-14(c) and 240.15d-14(c)) as of a date
within 90 days prior to the filing of this quarterly report, the issuer's chief
executive officer and chief financial officer concluded that the effectiveness
of such controls and procedures was adequate.
(b) There were no significant changes in the issuer's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K.
(a) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K. None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CAROLINA NATIONAL CORPORATION
November 13, 2002 /s/ Roger B. Whaley
--------------------------------------------
Roger B. Whaley, President and
Chief Executive Officer
November 13, 2002 /s/ John W. Hobbs
--------------------------------------------
John W. Hobbs, Chief Operating Officer
and Chief Financial Officer
15
CERTIFICATIONS*
I, Roger B. Whaley, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Carolina
National Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 s/Roger B. Whaley
------------------------------- -----------------------------------
Roger B. Whaley
Chief Executive Officer
*Provide a separate certification for each principal executive officer
and principal financial officer of the registrant. See Rules 13a-14 and 15d-14.
The required certification must be in the exact form set forth above.
16
CERTIFICATIONS*
I, John W. Hobbs, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Carolina
National Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 s/John W. Hobbs
------------------ --------------------------------
John W. Hobbs
Chief Financial Officer
*Provide a separate certification for each principal executive officer
and principal financial officer of the registrant. See Rules 13a-14 and 15d-14.
The required certification must be in the exact form set forth above.
17
EXHIBIT INDEX
Exhibit No. in
Item 601 of
Regulation S-B) Description
--------------- -----------
*3.1 Articles of Incorporation of Carolina
National Corporation
*3.2 Bylaws of Carolina National Corporation
*4 Form of stock certificate
**10.1 Form of Stock Warrant Agreement (revised)
*10.2 Employment Agreement between Carolina
National Corporation and Roger B. Whaley
*10.3 Memorandum of Understanding between Carolina
National Corporation and Joe Pinner
*10.4 Severance Agreement between Carolina National
Corporation and James A. Gunter
*10.5 Lease between Carolina National Bank & Trust
Company and HHB Associates, LLC.
*10.6 Lease between Carolina National Bank & Trust
Company and Carolina First Bank
*Incorporated by reference to Exhibits to Registrant's Registration Statement on
Form SB-2 (File No. 333-76512)
**Incorporated by reference to Exhibit 10.1 to Registrant's Registration
Statement on Form SB-2 (File No. 333-97397).
18