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 September 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 as of October 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 - September 30, 2003 and December 31, 2002...............................3
Condensed Consolidated Statements of Operations - Nine months ended September 30, 2003 and 2002
and Three months ended September 30, 2003 and 2002.........................................................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income-
Nine months ended September 30, 2003 and 2002................................................................5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 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 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
September 30, December 31,
2003 2002
---- ----
Assets (Unaudited) (Audited)
Cash and cash equivalents
Cash and due from banks ........................................................ $ 1,846,538 $ 970,326
Federal funds sold ............................................................. 3,706,000 14,798,000
------------ ------------
Total cash and cash equivalents .............................................. 5,552,538 15,768,326
------------ ------------
Investment securities
Securities held to maturity .................................................... 3,315,832 5,373,101
Nonmarketable equity securities ................................................ 315,500 270,500
------------ ------------
Total investment securities .................................................. 3,631,332 5,643,601
------------ ------------
Loans receivable ................................................................. 39,553,865 10,144,579
Less allowance for loan losses ................................................. 593,223 152,000
------------ ------------
Loans, net ................................................................... 38,960,642 9,992,579
------------ ------------
Premises, furniture and equipment, net ........................................... 513,996 514,384
Accrued interest receivable ...................................................... 146,977 103,023
Deferred tax asset ............................................................... 1,177,525 719,501
Other assets ..................................................................... 93,632 68,892
------------ ------------
Total assets ................................................................. $ 50,076,642 $ 32,810,306
============ ============
Liabilities
Deposits
Noninterest-bearing transaction accounts ....................................... $ 5,168,317 $ 2,245,732
Interest-bearing transaction accounts .......................................... 5,455,913 1,947,377
Savings and money market ....................................................... 11,721,938 4,824,965
Time deposits $100,000 and over ................................................ 5,921,952 3,929,980
Other time deposits ............................................................ 9,931,294 7,203,573
------------ ------------
Total deposits ............................................................... 38,199,414 20,151,627
------------ ------------
Accrued interest payable ......................................................... 42,947 19,892
Other liabilities ................................................................ 117,510 44,910
------------ ------------
Total liabilities ............................................................ 38,359,871 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 ................................................................. (2,278,025) (1,400,919)
------------ ------------
Total shareholders' equity ................................................... 11,716,771 12,593,877
------------ ------------
Total liabilities and shareholders' equity ................................... $ 50,076,642 $ 32,810,306
============ ============
See notes to condensed consolidated financial statements.
3
CAROLINA NATIONAL CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income
Loans, including fees .................................... $ 963,098 20,079 438,207 20,079
Investment securities:
Taxable ................................................ 60,508 - 13,113 -
Nonmarketable equity securities ........................ 12,654 3,375 4,554 3,375
Federal funds sold ......................................... 64,182 61,407 12,531 61,407
Other ...................................................... - 16,635 - -
----------- ----------- ----------- -----------
Total ................................................ 1,100,442 101,496 468,405 84,861
----------- ----------- ----------- -----------
Interest expense
Time deposits $100,000 and over .......................... 91,895 15,652 34,899 15,652
Other deposits ........................................... 250,956 35,136 94,534 35,136
----------- ----------- ----------- -----------
Total ................................................ 342,851 50,788 129,433 50,788
----------- ----------- ----------- -----------
Net interest income ........................................ 757,591 50,708 338,972 34,073
Provision for loan losses .................................. 442,290 58,700 124,866 58,700
----------- ----------- ----------- -----------
Net interest income after provision for loan losses ........ 315,301 (7,992) 214,106 (24,627)
----------- ----------- ----------- -----------
Noninterest income
Service charges on deposit accounts ...................... 5,441 270 2,423 270
Residential mortgage origination fees .................... 209,238 21,980 46,140 21,980
Other .................................................... 38,468 2,644 16,759 2,914
----------- ----------- ----------- -----------
Total noninterest income ............................. 253,147 24,894 65,322 25,164
----------- ----------- ----------- -----------
Noninterest expenses
Salaries and employee benefits ........................... 1,065,417 515,392 367,027 306,386
Net occupancy ............................................ 162,627 109,952 53,562 46,306
Furniture and equipment .................................. 89,493 18,936 31,222 18,936
Other operating .......................................... 579,852 303,556 161,508 201,434
----------- ----------- ----------- -----------
Total noninterest expense ............................ 1,897,389 947,836 613,319 573,062
----------- ----------- ----------- -----------
Loss before income taxes ................................... (1,328,941) (930,934) (333,891) (528,612)
Income tax benefit ......................................... (451,835) (43,913) (113,521) (43,913)
----------- ----------- ----------- -----------
Net loss ................................................... $ (877,106) $ (887,021) $ (220,370) $ (528,612)
=========== =========== =========== ===========
Earnings per share
Basic loss per share ....................................... $ (.61) (1.99) $ (.15) (.47)
=========== =========== =========== ===========
Average shares outstanding ................................. 1,427,303 446,113 1,427,303 1,119,097
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
CAROLINA NATIONAL CORPORATION
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the Nine months ended September 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) $ (768,416) $ 84,884
Proceeds from the sale of stock .......... 1,324,753 13,247,530 - - 13,247,527
Earned stock compensation ................ 670 - 6,700 6,700
Stock Issuance Costs ..................... (278,237) (278,234)
Net loss ................................. - - - (887,021) (887,021)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2002 .............. 1,410,753 13,829,293 - (1,655,437) 12,173,856
============ ============ ============ ============ ============
Balance, December 31, 2002 ............... 1,427,303 $ 13,994,796 $ - $ (1,400,919) $ 12,593,877
Net loss ................................. - - - (877,106) (877,106)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2003 .............. 1,427,303 $ 13,994,796 $ - $ (2,278,025) $ 11,716,771
============ ============ ============ ============ ============
See notes to condensed consolidated financial statements.
5
CAROLINA NATIONAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used by
operating activities
Net loss ................................................................... $ (877,106) $ (887,021)
Provision for loan losses .................................................. 442,290 58,700
Depreciation expense ....................................................... 81,455 14,282
Loss on security call ...................................................... 12,150 -
Discount accretion and premium amortization ................................ 45,119 -
Deferred income tax benefit ................................................ (458,024) (43,913)
Increase in accrued interest receivable .................................... (43,954) (13,647)
Increase in accrued interest payable ....................................... 23,055 18,644
Decrease (increase) in other assets ........................................ (24,740) 690
Increase in other liabilities .............................................. 72,600 36,099
------------ ------------
Net cash used by operating activities .................................... (727,155) (816,166)
------------ ------------
Cash flows from investing activities
Purchase of securities held to maturity ........................................ - (3,570,500)
Purchases of nonmarketable equity securities ................................... (45,000) -
Proceeds from calls on securities .............................................. 2,000,000 -
Net increase in loans .......................................................... (29,410,353) (3,913,621)
Purchase of premises, furniture and equipment .................................. (81,067) (523,209)
------------ ------------
Net cash used by investing activities ........................................ (27,536,420) (8,007,330)
------------ ------------
Cash flows from financing activities
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts .................................... 13,328,094 6,050,437
Net increase in certificates of deposit and
other time deposits .......................................................... 4,719,693 10,886,574
Issuance of common stock, net of direct costs .................................. - 12,969,293
------------ ------------
Net cash provided by financing activities .................................... 18,047,787 29,906,304
------------ ------------
Net increase (decrease) in cash and cash equivalents ............................. (10,215,788) 21,082,808
Cash and cash equivalents, beginning of period ................................... 15,768,326 103,427
------------ ------------
Cash and cash equivalents, end of period ......................................... $ 5,552,538 $ 21,186,235
============ ============
Cash paid during the period for:
Income taxes ................................................................... $ 6,188 $ -
============ ============
Interest ....................................................................... $ 319,796 $ 32,144
============ ============
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 September 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 2002 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 Carolina National Bank and Trust Company in connection with
the Company's initial stock 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.
Nine Months Three Months
Ended Ended
September 30, September 30,
2003 2003
---- ----
Net loss, as reported .......................................................... $(877,106) $(220,370)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects .................................. (20,266) (6,755)
--------- ---------
Pro forma net loss ............................................................. $(897,372) $(227,125)
========= =========
Loss per share:
Basic - as reported ......................................................... $ (.61) $ (.15)
========= =========
Basic - pro forma ........................................................... $ (.63) $ (.16)
========= =========
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 nine months of
2003 due to the net loss; therefore, basic loss per share and diluted earnings
per share were the same.
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 and Trust Company (the "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, the results of operations
in the first nine months of 2002 only contain 2.5 months of operations..
Results of Operations
Net Interest Income
For the nine months ended September 30, 2003, net interest income, the major
component of the Bank's net income was $757,591 as compared to $50,708 for the
same period in 2002. For the three months ended September 30, 2003, net interest
income was $338,972 compared to $34,073 for the comparable period of 2002. The
improvements in the 2003 periods were primarily attributable to increased volume
as the Bank continued to build its loan portfolio, and to the increase in net
interest margin. The average rate realized on interest-earning assets was 3.94%,
while the average rate paid on interest-bearing liabilities was 1.98% for the
nine months ended September 30, 2003.
The net interest spread and net interest margin were 1.96% and 2.71%,
respectively, for the nine month period ended September 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 in
management's judgment is necessary to maintain the allowance for possible loan
losses at an adequate level. For the nine months ended September 30, 2003 and
2002, the provision was $442,290 and $58,700, respectively. For the three months
ended September 30, 2003 and 2002, the provision for loans losses was $124,866
and $58,700, respectively. The increases primarily resulted from the growth of
the loan portfolio. There were no nonperforming loans at September 30, 2003 or
at September 30, 2002. No loans have been criticized or classified as of
September 30, 2003. Based on present information, management believes the
allowance for loan losses is adequate at September 30, 2003 to meet presently
known and inherent losses in the loan portfolio. The allowance for loan losses
is 1.50% of total loans at September 30, 2003. 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. The Bank maintains an allowance for loan losses
based on, among other things, historical experience, including management's
experience at other institutions, an evaluation of economic conditions, and
regular reviews of delinquencies and loan portfolio quality. Management's
judgment about the adequacy of the allowance is based upon a number of
assumptions about future events, which it believes to be reasonable, but which
may not prove to be accurate. Thus, there is a risk that charge-offs 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 the
Bank's net income and, possibly, its capital.
Noninterest Income
Total noninterest income for the nine months ended September 30, 2003 was
$253,147 as compared to $24,894 for the same period in 2002. Residential
mortgage origination fees totaling $209,238 comprised the largest portion of
noninterest income. Total noninterest income for the quarter ended September 30,
2003 was $65,322 compared to $25,164 for the comparable period of 2002. This
included a $24,160 increase in residential mortgage origination fees from
$21,980 for the quarter ended September 30, 2002 to $46,140 for the quarter
ended September 30, 2003, which was a result of increased mortgage loan demand
and originations. This also included a $13,845 increase in other deposit
charges, which includes NSF fees, from $2,914 for the quarter ended September
30, 2002 to $16,759 for the quarter ended September 30, 2003, which was a result
of increased deposit account volume.
Noninterest Expense
Total noninterest expense for the first nine months of 2003 was $1,897,389, an
increase of $949,553 over the comparable period in 2002. The primary component
of noninterest expense is salaries and benefits, which were $1,065,417 for the
nine months ended September 30, 2003. Other operating expense increased $276,296
from $303,556 for the nine months ended September 30, 2002 to $579,852 for the
nine months ended September 30, 2003. These increases are the result of various
increases in expenses necessary to support the growth of the Bank, which was
operational as a bank for only 2.5 months in the 2002 nine month period.
For the quarter ended September 30, 2003, noninterest expense was $613,319, an
increase of $40,257 or 7%, over the comparable period of 2002. Salaries and
benefits expense increased $60,641 from $306,386 to $367,027 for the three
months ended September 30, 2002 and 2003, respectively. Other operating expense
decreased $39,926 from $201,434 for the three months ended September 30, 2002,
to $161,508 for the three months ended September 30, 2003. This was a result of
an increase of $42,179 in various expenses necessary to support growth of the
Bank, coupled with a decrease in advertising of $82,105 from $96,916 to $14,811
for the three months ended September 30, 2002 and 2003, respectively. The
decline in advertising expense was due primarily to the Bank expending more for
advertising during 2002 related to the promotion of the Bank's opening.
Net Loss
The Company's net loss for the nine months ended September 30, 2003 was $877,106
after the recognition of an income tax benefit of $451,835 for the period. The
Company's net loss for the quarter ended September 30, 2003 was $220,370,
compared to a net loss of $528,612 for the quarter ended September 30, 2002. The
net losses are after the recognition of income tax benefits in the amount of
$113,521 and $43,913 for the three months ended September 30, 2003 and 2002,
respectively.
9
CAROLINA NATIONAL CORPORATION
Item 2 - Management's Discussion and Analysis or Plan of Operation - (continued)
Assets and Liabilities
During the first nine months of 2003, total assets increased $17.3 million, or
53%, when compared to December 31, 2002. The primary growth in assets was the
increase of $29.4 million, or 290%, in loans receivable. As a result of calls
prior to maturity, investment securities decreased by $2 million to $3.6 million
at September 30, 2003 when compared to December 31, 2002. Deposits increased by
$18 million, or 90%, to $38.2 million as of September 30, 2003. The largest
increase in deposits was in savings and money market accounts, which increased
$6.9 million, or 143%, to $11.7 million as of September 30, 2003. The increase
in deposits was from local deposits and is considered part of the normal growth
of the Bank; market rates were paid for these deposits.
Investment Securities
Investment securities totaled $3.6 million at September 30, 2003, compared to
$5.6 million at December 31, 2002. Proceeds from the calls of investments
totaling $2.0 million were used to fund loan growth. All investments in the
portfolio were designated as held-to-maturity. Nonmarketable equity securities,
consisting of stock in the Federal Home Loan Bank of Atlanta and the Federal
Reserve, totaled $315,500 as of September 30, 2003.
Loans
We experienced significant loan growth during the first nine months of 2003 as
we worked to establish our presence in the marketplace. Gross loans increased
$29.4 million, or 290%, during the period. As shown below, the main component of
growth in the loan portfolio was real estate loans, which increased 337%, or
$25.4 million, from December 31, 2002 to September 30, 2003. Balances within the
major loans receivable categories as of September 30, 2003 and December 31, 2002
are as follows:
September 30, December 31,
2003 2002
---- ----
Real estate
Construction and land loans ............. $ 1,598,902 $ -
Residential 1-4 family .................. 7,288,498 1,716,982
Commercial .............................. 14,067,760 2,980,269
Second mortgages ........................ 553,806 371,194
Equity lines of credit .................. 9,373,255 2,457,208
----------- -----------
Total real estate loans .............. 32,882,221 7,525,653
Commercial and industrial ............... 5,414,660 2,417,829
Consumer and other ...................... 1,256,984 201,097
----------- -----------
Total gross loans .................... $39,553,865 $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 September 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 for the nine months ended September
30, 2003 and 2002 is as follows:
September 30,
-------------
2003 2002
---- ----
Balance, January 1, ......................................................... $ 152,000 $ -
Provision for loan losses for the period .................................... 442,290 58,700
Net loans (charged-off) recovered for the period ............................ (1,067) -
------------ ------------
Balance, end of period ...................................................... $ 593,223 $ 58,700
============ ============
Gross loans outstanding, end of period ...................................... $ 39,553,865 $ 3,913,621
Allowance for loan losses to loans outstanding .............................. 1.50% 1.50%
Deposits
At September 30, 2003, total deposits had increased by $18 million, or 90%, from
December 31, 2002. The largest increase was in savings/money-market accounts,
which increased $6.9 million, or 143%, from December 31, 2002 to September 30,
2003. The increase was attributable to the opening of new accounts during the
first nine months of 2003. Expressed in percentages, noninterest-bearing
deposits increased 130% and interest-bearing deposits increased 84%.
Balances within the major deposit categories as of September 30, 2003 and
December 31, 2002 are as follows:
September 30, December 31,
2003 2002
---- ----
Noninterest-bearing demand deposits ..... $ 5,168,317 $ 2,245,732
Interest-bearing demand deposits ........ 5,455,913 1,947,377
Savings and money market ................ 11,721,938 4,824,965
Time deposits $100,000 and over ......... 5,921,952 3,929,980
Other time deposits ..................... 9,931,294 7,203,573
----------- -----------
$38,199,414 $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 September 30,
2003, the Bank had issued commitments to extend credit of $13.2 million and
standby letters of credit of $10,000 through various types of commercial lending
arrangements. Approximately $12.3 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 September 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 ........... $ 740,215 $ 139,297 $ 1,724,679 $ 2,604,191 $10,599,679 $13,203,870
Standby letters
of credit .................. 10,000 - - 10,000 - 10,000
----------- ----------- ----------- ----------- ----------- -----------
Totals ................... $ 750,215 $ 139,297 $ 1,724,679 $ 2,614,191 $10,599,679 $13,213,870
=========== =========== =========== =========== =========== ===========
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 creditworthiness 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 designed 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 103.5% at September 30, 2003 and
50.3% at December 31, 2002.
We also have lines of credit available with correspondent banks to purchase
federal funds for periods from one to fourteen days. At September 30, 2003,
unused lines of credit totaled $2 million. 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 $4.8 million as of September
30, 2003. As of September 30, 2003, we had not borrowed on this line.
Capital Resources
Total shareholders' equity decreased from $12,593,877 at December 31, 2002 to
$11,716,771, at September 30, 2003. The decrease is due to the net loss for the
period of $877,106.
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 September 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 September 30,
2003:
(In Thousands)
Shareholders' equity .......................................... $ 9,000
Less - disallowed deferred tax assets ......................... 1,174
-------
Tier 1 capital ................................................ 7,826
Plus - allowance for loan losses(1) ........................... 501
-------
Total capital ................................................. $ 8,327
=======
Risk-weighted assets .......................................... $40,012
=======
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) .................... 19.56%
Total capital (to risk-weighted assets) ..................... 20.81%
Tier 1 capital (to total average assets) .................... 18.01%
(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 September 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
September 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 were 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
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as
defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the
Company's chief executive officer and chief financial officer concluded
that the effectiveness of such controls and procedures, as of the end of
the period covered by this quarterly report, was adequate.
No disclosure is required under 17 C.F.R. Section 228.308(c).
14
CAROLINA NATIONAL CORPORATION
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31.1 - Certification of Principal Executive Officer required by
Rule 13a-14(a) or Rule 15d - 14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Exhibit 31.2 - Certification of Principal Financial Officer required by
Rule 13a-14(a) or Rule 15d - 14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Exhibit 32 - Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 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: November 12, 2003 By:--------------------------------------
John W. Hobbs
Chief Financial Officer