U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________to_________
Commission File No. 000-50257
CAROLINA NATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
South Carolina 57-1101005
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1350 Main Street
Columbia, South Carolina 29201
(Address of principal executive offices, including zip code)
(803) 779-0411
(Issuer's telephone number, including area code)
------------------------------------------------
Indicate by check mark whether the issuer (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 issuer was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
1,427,303 shares of common stock, no par value on July 31, 2003
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
CAROLINA NATIONAL CORPORATION
Index
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2003 and December 31, 2002....................................3
Condensed Consolidated Statements of Operations -
Six months ended June 30, 2003 and 2002 and Three months ended June 30, 2003 and 2002........................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income-
Six months ended June 30, 2003 and 2002......................................................................5
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002......................6
Notes to Condensed Consolidated Financial Statements...........................................................7
Item 2. Management's Discussion and Analysis or Plan of Operation..................................................8-14
Item 3. Controls and Procedures......................................................................................14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..........................................................15
Item 6. Exhibits and Reports on Form 8-K.............................................................................15
(a) Exhibits..................................................................................................15
(b) Reports on Form 8-K.......................................................................................15
CAROLINA NATIONAL CORPORATION
Condensed Consolidated Balance Sheets
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
June 30, December 31,
2003 2002
---- ----
Assets (Unaudited)
Cash and cash equivalents
Cash and due from banks ................................................................ $ 671,844 $ 970,326
Federal funds sold ..................................................................... 3,524,000 14,798,000
------------ ------------
Total cash and cash equivalents ...................................................... 4,195,844 15,768,326
------------ ------------
Investment securities
Securities held to maturity ............................................................ 3,329,533 5,373,101
Nonmarketable equity securities ........................................................ 315,500 270,500
------------ ------------
Total investment securities .......................................................... 3,645,033 5,643,601
------------ ------------
Loans receivable ......................................................................... 31,218,276 10,144,579
Less allowance for loan losses ......................................................... 468,356 152,000
------------ ------------
Loans, net ........................................................................... 30,749,920 9,992,579
------------ ------------
Premises, furniture and equipment, net ................................................... 542,096 514,384
Accrued interest receivable .............................................................. 160,416 103,023
Deferred tax asset ....................................................................... 1,063,793 719,501
Other assets ............................................................................. 59,557 68,892
------------ ------------
Total assets ......................................................................... $ 40,416,659 $ 32,810,306
============ ============
Liabilities
Deposits
Noninterest-bearing transaction accounts ............................................... $ 5,535,218 $ 2,245,732
Interest-bearing transaction accounts .................................................. 4,820,810 1,947,377
Savings and money market ............................................................... 8,175,063 4,824,965
Time deposits $100,000 and over ........................................................ 3,552,976 3,929,980
Other time deposits .................................................................... 6,280,837 7,203,573
------------ ------------
Total deposits ....................................................................... 28,364,904 20,151,627
------------ ------------
Accrued interest payable ................................................................. 22,226 19,892
Other liabilities ........................................................................ 92,389 44,910
------------ ------------
Total liabilities .................................................................... 28,479,519 20,216,429
------------ ------------
Shareholders' equity
Preferred stock, 10,000,000 shares authorized, none issued Common stock, no
par value, 20,000,000 shares authorized;
and 1,427,303 shares issued and outstanding ............................................ 13,994,796 13,994,796
Retained deficit ....................................................................... (2,057,656) (1,400,919)
------------ ------------
Total shareholders' equity ........................................................... 11,937,140 12,593,877
------------ ------------
Total liabilities and shareholders' equity ........................................... $ 40,416,659 $ 32,810,306
============ ============
See notes to condensed consolidated financial statements.
3
CAROLINA NATIONAL CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Interest income
Loans, including fees .................................... $ 524,891 $ - $ 345,724 $ -
Investment securities:
Taxable ................................................ 47,395 - 18,271 -
Nonmarketable equity securities ........................ 8,100 - 4,050 -
Federal funds sold ......................................... 51,651 - 11,934
Other ...................................................... - 16,365 - 16,365
----------- ----------- ----------- -----------
Total ................................................ 632,037 16,365 379,979 16,365
----------- ----------- ----------- -----------
Interest expense
Time deposits $100,000 and over .......................... 56,996 - 27,435
Other deposits ........................................... 156,422 - 77,752 -
----------- ----------- ----------- -----------
Total ................................................ 213,418 - 105,187 -
----------- ----------- ----------- -----------
Net interest income ........................................ 418,619 16,365 274,792 -
Provision for loan losses .................................. 317,424 - 156,424 -
----------- ----------- ----------- -----------
Net interest income after provision for loan losses ........ 101,195 16,365 118,368 -
----------- ----------- ----------- -----------
Noninterest income
Service charges on deposit accounts ...................... 3,018 1,730 -
Residential mortgage origination fees .................... 163,098 81,498 -
Other .................................................... 21,709 - 13,145 -
----------- ----------- ----------- -----------
Total noninterest income ............................. 187,825 - 96,373 -
----------- ----------- ----------- -----------
Noninterest expenses
Salaries and employee benefits ........................... 698,390 209,006 360,314 137,834
Net occupancy ............................................ 109,065 63,645 51,812 39,743
Furniture and equipment .................................. 58,271 - 29,654 -
Other operating .......................................... 418,345 102,123 271,053 60,735
----------- ----------- ----------- -----------
Total noninterest expense ............................ 1,284,071 374,774 712,833 238,312
----------- ----------- ----------- -----------
Loss before income taxes ................................... (995,051) (358,409) (498,092) (221,947)
Income tax benefit ......................................... (338,314) - (169,349) -
----------- ----------- ----------- -----------
Net loss ................................................... (656,737) (358,409) $ (328,743) $ (221,947)
----------- ----------- =========== ===========
Earnings per share
Basic loss per share ....................................... $ (.46) - $ (.23) -
=========== =========== =========== ===========
Average shares outstanding ................................. 1,427,303 - 1,427,303 -
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
CAROLINA NATIONAL CORPORATION
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 2003 and 2002
(Unaudited)
Common Stock Unearned
------------ Stock Retained
Shares Amount Compensation Deficit Total
------ ------ ------------ ------- -----
Balance, December 31, 2001 ................. 85,330 $ 860,000 $ (6,700) $ (768,415) $ 84,885
Proceeds from the sale of stock ............ 49,000 490,000 - - 490,000
Unearned stock compensation ................ 670 - 6,700 6,700
Net loss ................................... - - - (358,409) (358,409)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2002 ..................... 135,000 1,350,000 - (1,126,824) 223,176
Balance, December 31, 2002 ................. 1,427,303 $ 13,994,796 $ - $ (1,400,919) $ 12,593,877
Net loss ................................... - - - (656,737) (656,737)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2003 ..................... 1,427,303 $ 13,994,796 $ - $ (2,057,656) $ 11,937,140
============ ============ ============ ============ ============
See notes to condensed consolidated financial statements.
5
CAROLINA NATIONAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
2003 2002
---- ----
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used by
operating activities
Net loss ................................................................... $ (656,737) $ (358,409)
Provision for loan losses .................................................. 317,424 -
Depreciation and amortization expense ...................................... 53,355 -
Loss on security call ...................................................... 12,150 -
Discount accretion and premium amortization ................................ 31,418 -
Deferred income tax benefit ................................................ (344,292) -
Increase in accrued interest receivable .................................... (57,393) 566
Increase in accrued interest payable ....................................... 2,334 -
Decrease (increase) in other assets ........................................ 9,335 (259,768)
Increase in other liabilities .............................................. 47,479 92,005
------------ ------------
Net cash used by operating activities .................................... (584,927) (525,606)
------------ ------------
Cash flows from investing activities
Purchases of nonmarketable equity securities ................................... (45,000) -
Securities called .............................................................. 2,000,000 -
Net increase in loans .......................................................... (21,074,765) -
Purchase of premises, furniture and equipment .................................. (81,067) (44,088)
------------ ------------
Net cash used by investing activities ........................................ (19,200,832) (44,088)
------------ ------------
Cash flows from financing activities
Proceeds from line of credit ................................................... - 50,000
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts .................................... 9,513,017 -
Net decrease in certificates of deposit and
other time deposits .......................................................... (1,299,740) -
Issuance of common stock, net of direct costs .................................. - 490,000
------------ ------------
Net cash provided by financing activities .................................... 8,213,277 540,000
------------ ------------
Net decrease in cash and cash equivalents ........................................ (11,572,482) (29,694)
Cash and cash equivalents, beginning of period ................................... 15,768,326 103,427
------------ ------------
Cash and cash equivalents, end of period ......................................... $ 4,195,844 $ 73,733
============ ============
Cash paid during the period for:
Income taxes ................................................................... $ 5,978 $ -
============ ============
Interest ....................................................................... $ 211,084 $ -
============ ============
See notes to condensed consolidated financial statements.
6
CAROLINA NATIONAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared in accordance with the
requirements for interim financial statements and, accordingly, they are
condensed and omit disclosures, which would substantially duplicate those
contained in the most recent annual report on Form 10-KSB. The financial
statements, as of June 30, 2003 and for the interim periods ended June 30, 2003
and 2002, are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The financial information as of December 31, 2002 has
been derived from the audited financial statements as of that date. For further
information, refer to the financial statements and the notes included in
Carolina National Corporation's 2002 Annual Report on Form 10-KSB.
Note 2 - Stock-Based Compensation
The Company has stock-based employee compensation plans which are further
described in our Annual Report on Form 10-KSB. The Company accounts for the
plans under the recognition and measurement principles of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all stock options granted under these plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. In addition, the Company has stock warrants which were issued to
organizers of the Bank in connection with the initial offering. The following
table illustrates the effect on net income (loss) and earnings (losses) per
share if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation for the stock options.
Six Months
Ended
June 30,
2003
----
Net loss, as reported ...................................... $ (656,737)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects .............. (6,755)
-----------
Pro forma net loss ......................................... $ (663,492)
===========
Loss per share:
Basic - as reported ..................................... $ (.46)
===========
Basic - pro forma ....................................... $ (.46)
===========
Note 3 - Loss Per Share
Basic loss per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed by dividing net income (loss) by the weighted-average number of common
shares outstanding and dilutive common share equivalents using the treasury
stock method. Dilutive common share equivalents include common shares issuable
upon exercise of outstanding stock warrants and stock options. There were no
dilutive common share equivalents outstanding during the first six months of
2003 due to the net loss; therefore, basic loss per share and diluted earnings
per share were the same.
2003
----
Net loss per share - basic computation:
Net loss to common shareholders ........................... $ 656,737
===========
Average common shares outstanding - basic ................. 1,427,303
===========
Basic loss per share ...................................... $ (.46)
===========
7
CAROLINA NATIONAL CORPORATION
Item 2 - Management's Discussion and Analysis or Plan of Operation
The following is our discussion and analysis of certain significant factors that
have affected our financial position and operating results and those of our
subsidiary, Carolina National Bank, during the periods included in the
accompanying financial statements. This commentary should be read in conjunction
with the financial statements and the related notes and the other statistical
information included in this report and in our 2002 Annual Report on Form
10-KSB.
This report contains "forward-looking statements" relating to, without
limitation, future economic performance; plans and objectives of management for
future operations; and projections of revenues and other financial items that
are based on the beliefs of management, as well as assumptions made by and
information currently available to management. 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. The words "may," "will,"
"anticipate," "should," "would," "believe," "contemplate," "expect," "estimate,"
"continue," "may," and "intend," as well as other similar words and expressions
of the future, are intended to identify forward-looking statements. Our actual
results may differ materially from the results discussed in the forward-looking
statements, and our operating performance each quarter is subject to various
risks and uncertainties that are discussed in detail in our filings with the
Securities and Exchange Commission, including, without limitation:
o our growth and our ability to maintain growth;
o the effects of future economic conditions;
o governmental monetary and fiscal policies, as well as legislative and
regulatory changes;
o changes in interest rates and their effect on the level and
composition of deposits, loan demand, and the values of loan
collateral, securities, and other interest-sensitive assets and
liabilities;
o our ability to control costs, expenses, and loan delinquency rates;
o the effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and
other mutual funds, and other financial institutions operating in our
market area and elsewhere, including institutions operating
regionally, nationally, and internationally, together with such
competitors offering banking products and services by mail, telephone,
computer, and the Internet; and
o failure of assumptions underlying the establishment of our allowance
for loan losses, including the value of collateral securing loans.
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 the risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
It should be understood in reading this discussion that the Bank opened for
business on July 15, 2002. All activities of the Company prior to that date
relate to the organization of the Bank. Accordingly, there were no results of
operations in the first six months of 2002 which could be compared to the
results for the same periods in 2003.
Results of Operations
Net Interest Income
For the three and six month periods ended June 30, 2003, net interest income was
$274,792 and $418,619, respectively. Interest income from loans during those
periods, including fees, was $345,724 and $524,891, respectively. Interest
expense for the three and six month periods ended June 30, 2003 was $105,187 and
$213,418, respectively. The net interest margin realized on average earning
assets was 2.63% and 2.44% for the three and six month periods ended June 30,
2003.
8
CAROLINA NATIONAL CORPORATION
Item 2 - Management's Discussion and Analysis or Plan of Operation - (continued)
Provision and Allowance for Loan Losses
The provision for loan losses is the charge to operating earnings that
management believes is necessary to maintain the allowance for loan losses at an
adequate level to reflect the losses inherent in the loan portfolio. For the
three and six month periods ended June 30, 2003, the provision charged to
expense was $156,424 and $317,424, respectively. The allowance for loan losses
represents 1.50% of gross loans at June 30, 2003. The objective of management is
to maintain the allowance at this level until a history is established. There
are risks inherent in making all loans, including risks with respect to the
period of time over which loans may be repaid, risks resulting from changes in
economic and industry conditions, risks inherent in dealing with individual
borrowers, and, in the case of a collateralized loan, risks resulting from
uncertainties about the future value of the collateral. As we establish a
history with respect to loan losses, we will fund the allowance for loan losses
based on, among other things, an evaluation of economic conditions, and regular
reviews of delinquencies and loan portfolio quality. Our judgment about the
adequacy of the allowance is based upon a number of estimates and assumptions
about present conditions and future events, which we believe to be reasonable,
but which may not prove to be accurate. Thus, there is a risk that chargeoffs in
future periods could exceed the allowance for loan losses or that substantial
additional increases in the allowance for loan losses could be required.
Additions to the allowance for loan losses would result in a decrease of our net
income and, possibly, our capital.
Noninterest Income
Noninterest income during the three and six month periods ended June 30, 2003
was $96,373 and $187,825, respectively. Of this total, $81,498 and $163,098 was
generated from residential mortgage origination fees.
Noninterest Expense
Total noninterest expense for the three and six month periods ended June 30,
2003 was $712,833 and $1,284,071, respectively. The largest increase, salaries
and employee benefits, increased from $209,006 for the six months ended June 30,
2002 to $698,390 for the six months ended June 30, 2003. The increase is
primarily attributable to the hiring of additional staff to meet the needs
associated with the opening of the Bank. Net occupancy expense for the period
ended June 30, 2003 was $109,065, as compared to $63,645 for the same period a
year earlier. The increase was due to the additional leases associated with the
branch, main office, and main office parking lot. During the three months ended
June 30, 2003, salaries and benefits and other operating expenses were the
largest noninterest expenses totaling $360,314 and $271,053, respectively.
Expenses during the same period in 2002 were associated with opening the bank.
Income Taxes
An income tax benefit of $338,314 and $169,349 was recorded for the six and
three month periods ending June 30, 2003, respectively. This represents an
effective tax rate of 34% to record the income tax benefit resulting from the
net operating loss for both periods. No income tax benefit was recorded for the
same periods in 2002, because the Company was a development stage enterprise.
Net Income (Loss)
The combination of the above factors resulted in a net loss for the six months
ended June 30, 2003. The net loss is primarily a result of noninterest expenses
associated with operating two full service branches and our provision for loan
losses. The net loss before taxes of $995,051 was partially offset by the income
tax benefit of $338,314. The net loss of $358,409 for the same period in 2002
was the result of expenses to organize and open the Bank. The net loss for the
three months ended June 30, 2003 was $328,743, as compared to $221,947 for the
same period in 2002. The net loss in 2002 related primarily to noninterest
expenses associated with opening the Bank.
9
CAROLINA NATIONAL CORPORATION
Item 2 - Management's Discussion and Analysis or Plan of Operation - (continued)
Financial Condition
Assets and Liabilities
During the first six months of 2003, as we continued to build our business,
total assets increased $7,606,353, or 23%, when compared to December 31, 2002.
Federal funds sold decreased from $14,798,000 at December 31, 2002 to $3,524,000
at June 30, 2003 as these funds were invested in higher yielding loans. Total
loans increased $21,073,697, or 208%, during the first six months of 2003. Total
deposits also increased $8,213,277, or 41%, from the December 31, 2002 amount of
$20,151,627. Within the deposit area, time deposits decreased $1,299,740, or
12%, during the first six months of 2003. Savings deposits increased $3,350,098,
or 69%, during the first six months of 2003. Transaction accounts increased
$6,162,919, or 147%, during the first six months of 2003.
Investment Securities
Investment securities decreased from $5,643,601 at December 31, 2002 to
$3,645,033 at June 30, 2003 due to a call on a security. All of the Bank's
marketable investment securities were designated as held-to-maturity at June 30,
2003.
Loans
We experienced significant loan growth during the first six months of 2003 as we
worked to establish our presence in the marketplace. Gross loans increased
$21,073,697, or 208%, during the period. As shown below, the main component of
growth in the loan portfolio was real estate - mortgage loans which increased
214%, or $16,074,294, from December 31, 2002 to June 30, 2003. Balances within
the major loans receivable categories as of June 30, 2003 and December 31, 2002
are as follows:
June 30, December 31,
2003 2002
---- ----
Residential 1-4 family ................. $ 6,399,846 $ 1,716,982
Commercial ............................. 8,843,170 2,980,269
Second mortgages ....................... 702,279 371,194
Equity lines of credit ................. 7,654,652 2,457,208
----------- -----------
Total mortgage loans ................ 23,599,947 7,525,653
Commercial and industrial .............. 6,442,441 2,417,829
Consumer and other ..................... 1,175,888 201,097
----------- -----------
Total gross loans ................... $31,218,276 $10,144,579
=========== ===========
Risk Elements in the Loan Portfolio
Criticized loans are loans that have potential weaknesses that deserve close
attention and which could, if uncorrected, result in deterioration of the
prospects for repayment or the Bank's credit position at a future date.
Classified loans are loans that are inadequately protected by the sound worth
and paying capacity of the borrower or any collateral and as to which there is a
distinct possibility or probability that we will sustain a loss if the
deficiencies are not corrected. At June 30, 2003, and December 31, 2002, the
Bank did not have any criticized or classified loans. Additionally, we did not
have any loans in nonaccrual status or loans past due for more than 90 days.
10
CAROLINA NATIONAL CORPORATION
Item 2 - Management's Discussion and Analysis or Plan of Operation - (continued)
Allowance for Loan Losses
Activity in the Allowance for Loan Losses is as follows:
Six Months
Ended
June 30, 2003
-------------
Balance, January 1 ............................................ $ 152,000
Provision for loan losses for the period ...................... 317,424
Net loans (charged-off) recovered for the period .............. (1,068)
------------
Balance, end of period ........................................ $ 468,356
============
Gross loans outstanding, end of period ........................ $ 31,218,276
Allowance for loan losses to loans outstanding, end of period . 1.50%
Deposits
At June 30, 2003, total deposits had increased by $8,213,277, or 41%, from
December 31, 2002. The largest increase was in transaction accounts, which
increased $6,162,919, or 147%, from December 31, 2002 to June 30, 2003. The
increase was attributable to the opening of new accounts during the first six
months of 2003. Expressed in percentages, noninterest-bearing deposits increased
146% and interest-bearing deposits increased 27%.
Balances within the major deposit categories as of June 30, 2003 and December
31, 2002 are as follows:
June 30, December 31,
2003 2002
---- ----
Noninterest-bearing demand deposits ..... $ 5,535,218 $ 2,245,732
Interest-bearing demand deposits ........ 4,820,810 1,947,377
Savings and money market ................ 8,175,063 4,824,965
Time deposits $100,000 and over ......... 3,552,976 3,929,980
Other time deposits ..................... 6,280,837 7,203,573
----------- -----------
$28,364,904 $20,151,627
=========== ===========
Off-Balance Sheet Risk
Through its operations, the Bank has made contractual commitments to extend
credit in the ordinary course of its business activities. These commitments are
legally binding agreements to lend money to the Bank's customers at
predetermined interest rates for a specified period of time. At June 30, 2003,
the Bank had issued commitments to extend credit of $11 million and standby
letters of credit of $10,000 through various types of commercial lending
arrangements. Approximately $10.9 million of these commitments to extend credit
had variable rates.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at June 30, 2003.
After One After Three
Within Through Through Within Greater
One Three Twelve One Than
Month Months Months Year One Year Total
------------- ----------- ------------- ----------- ------------- -------------
Unused commitments
to extend credit ............ $ 277,093 $ - $ 2,099,945 $ 2,377,038 $ 8,653,952 $ 11,030,990
Standby letters ...............
of credit ................... 10,000 - - 10,000 - 10,000
------------- ----------- ------------- ----------- ------------- -------------
Totals .................... $ 287,093 $ - $ 2,099,945 $ 2,387,038 $ 8,653,952 $ 11,040,990
============= =========== ============= =========== ============= =============
11
CAROLINA NATIONAL CORPORATION
Item 2 - Management's Discussion and Analysis or Plan of Operation - (continued)
Off-Balance Sheet Risk - (continued)
Based on historical experience in the banking industry, many of the commitments
and letters of credit will expire unfunded. Accordingly, the amounts in the
table above do not necessarily reflect the Bank's need for funds in the periods
shown.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on its credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate.
Liquidity
We meet our liquidity needs through scheduled maturities of loans and
investments and through pricing policies to attract interest-bearing deposits.
The level of liquidity is measured by the loan-to-total borrowed funds (which
includes deposits) ratio, which was at 110.1% at June 30, 2003 and 50.3% at
December 31, 2002. During the month of July, the Bank was able to generate more
deposit growth through a certificate of deposit campaign. As of August 7, 2003,
our loan-to-total borrowed funds ratio was 88.0%.
We also have lines of credit available with correspondent banks to purchase
federal funds for periods from one to seven days. At June 30, 2003, unused lines
of credit totaled $2,000,000. We also have a line of credit to borrow funds from
the Federal Home Loan Bank up to 10% of the Bank's total assets, which gave us
the ability to borrow up to $3.9 million as of June 30, 2003. As of June 30,
2003, we had not borrowed on this line. As of August 7, 2003, no borrowings had
been drawn from Federal Home Loan Bank or through the purchase of federal funds.
Capital Resources
Total shareholders' equity decreased from $12,593,877 at December 31, 2002 to
$11,937,140, at June 30, 2003. The decrease is due to the net loss for the
period of $656,737.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios of Tier 1 and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Tier 1 capital of the Bank consists of common
shareholders' equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Bank's Tier 2 capital
consists of the allowance for loan losses subject to certain limitations. Total
capital for purposes of computing the capital ratios consists of the sum of Tier
1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1
capital and 8% for total risk-based capital.
The Bank is also required to maintain capital at a minimum level based on
quarterly average assets, which is known as the leverage ratio. Only the
strongest banks are allowed to maintain capital at the minimum requirement of
3%. All others are subject to maintaining ratios 1% to 2% above the minimum. As
shown in the table below, the Bank exceeded its minimum regulatory capital
ratios as of June 30, 2003, as well as the ratios to be considered "well
capitalized."
12
CAROLINA NATIONAL CORPORATION
Item 2 - Management's Discussion and Analysis or Plan of Operation - (continued)
Capital Resources - (continued)
The following table summarizes the Bank's risk-based capital at June 30, 2003:
(In Thousands)
Shareholders' equity ...................................... $ 7,230
Less - disallowed deferred tax assets ..................... 1,055
-------
Tier 1 capital ............................................ 6,175
Plus - allowance for loan losses(1) ....................... 389
-------
Total capital ............................................. $ 6,564
=======
Risk-weighted assets ...................................... $31,085
=======
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ................ 19.86%
Total capital (to risk-weighted assets) ................. 21.12%
Tier 1 capital (to total average assets) ................ 17.66%
(1) Limited to 1.25% of risk-weighted assets
Critical Accounting Policies
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States of America in the
preparation of our financial statements. Our significant accounting policies are
described in the notes to the consolidated financial statements at December 31,
2002 as filed on our annual report on Form 10-KSB. Certain accounting policies
involve significant judgments and assumptions by us which have a material impact
on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgments and
assumptions we use are based on the historical experience and other factors,
which we believe to be reasonable under the circumstances. Because of the nature
of the judgments and assumptions we make, actual results could differ from these
judgments and estimates which could have a major impact on our carrying values
of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in preparation of our
consolidated financial statements. Refer to the portions of our 2002 Annual
Report on Form 10-KSB and this Form 10-QSB that address our allowance for loan
losses for description of our processes and methodology for determining our
allowance for loan losses.
Accounting and Reporting Changes
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation--Transition and Disclosure", an amendment of FASB Statement No.
123, "Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and Accounting Pronouncement Board ("APB")
Opinion No. 28, "Interim Financial Reporting", to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of APB
Opinion No. 25. The provisions of SFAS No. 148 are effective for annual
financial statements for fiscal years ending after December 15, 2002, and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The Company has adopted the disclosure
provisions of SFAS No. 148 which had no impact on the financial condition or
operating results of the Company.
13
CAROLINA NATIONAL CORPORATION
Item 2 - Management's Discussion and Analysis or Plan of Operation - (continued)
Accounting and Reporting Changes - (continued)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and loan commitments that relate to the
origination of mortgage loans held for sale, and for hedging activities under
SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS No. 149 will not have a
material impact on the financial condition or operating results of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances.) Many of those instruments
were previously classified as equity. SFAS No. 150 is generally effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on the
financial condition or operating results of the Company.
In June 2003, the American Institute of Certified Public Accountants (AICPA)
issued an exposure draft of a proposed Statement of Position (SOP), Allowance
for Credit Losses. The proposed SOP addresses the recognition and measurement by
creditors of the allowance for credit losses related to all loans, as that term
is defined in SFAS No. 114, Accounting by Creditors for Impairment of a Loan.
The proposed SOP provides that the allowance for credit losses reported on a
creditor's balance sheet should consist only of (1) a component for individual
loan impairment recognized and measured pursuant to FASB Statement No. 114 and
(2) one or more components of collective loan impairment recognized pursuant to
FASB Statement No. 5, Accounting for Contingencies, and measured in accordance
with the guidance in the proposed SOP. The provisions of the proposed SOP would
be effective for financial statements for fiscal years beginning after December
15, 2003, with earlier application permitted. The effect of initially applying
the provisions of the proposed SOP would be reported as a change in accounting
estimate. Comments on the exposure draft are due by September 19, 2003. The
effect on the financial condition or operating results of the Company related to
the adoption of this proposed SOP have not been determined, but would most
likely be material.
Item 3. Controls and Procedures
(a) Based on their evaluation of the Company'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, our 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 Company'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.
14
CAROLINA NATIONAL CORPORATION
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On April 23, 2003, we held our Annual Meeting of Shareholders for the purpose of
electing five directors to serve until the 2004 Annual Shareholders' meeting,
four directors to serve until the 2005 Annual Shareholders Meeting and four
directors to serve until the 2006 Annual Shareholders' Meeting, and to approve
the Carolina National Corporation 2003 Stock Option Plan.
Of the 1,427,303 outstanding shares of the Company's common stock, all of the
nominees for directors each received the number of affirmative votes of
shareholders required for such nominee's election in accordance with the Bylaws
of the Company as follows:
Director Term Ends Votes For Votes Withheld
-------- --------- --------- --------------
Charlotte L. Berry 2006 974,437 13,050
I.S. Leevy Johnson 2006 982,487 5,000
C. Whitaker Moore 2006 982,487 5,000
William H. Stern 2006 982,487 5,000
Kirkman Finlay, III. 2005 983,487 4,000
R.C. McEntire, Jr. 2005 983,487 4,000
Joel A Smith, III 2005 974,987 12,500
Robert E. Staton 2005 983,487 4,000
William P. Cate 2004 983,487 4,000
Angus B. Lafaye 2004 983,487 4,000
Leon Joseph Pinner 2004 982,937 4,550
Joe E. Taylor. Jr. 2004 983,487 4,000
Roger B. Whaley 2004 974,987 12,500
The 2003 Stock Option Plan was approved by the following vote:
Votes For Votes Against Votes Abstained
----------- ------------- ---------------
2003 Stock Option Plan .............. 762,071 27,950 14,100
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2003.
15
CAROLINA NATIONAL CORPORATION
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
s/Roger B. Whaley
By:----------------------------------------
Roger B. Whaley
President & Chief Executive Officer
s/John W. Hobbs
Date: August 11, 2003 By:----------------------------------------
John W. Hobbs
Chief Financial Officer
16
CAROLINA NATIONAL CORPORATION
CERTIFICATION
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.
s/Roger B. Whaley
Date: August 11, 2003 ------------------------------------
Roger B. Whaley
President & Chief Executive Officer
17
CAROLINA NATIONAL CORPORATION
CERTIFICATION
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 we 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.
s/John W. Hobbs
Date: August 11, 2003 ------------------------------------
John W. Hobbs
Chief Financial Officer
18