U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-QSB [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1999 [_] Transition Report Under Section 13 or 15(d) of the Exchange Act For the transition period ended -------------------------------------- Commission File Number 000-21701 --------------------- CAROLINA FINCORP, INC. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) North Carolina 56-1978449 - ------------------------------------- ------------------------------ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 115 SOUTH LAWRENCE STREET, ROCKINGHAM, NC 28380 - -------------------------------------------------------------------------------- (Address of principal executive office) (910) 997-6245 - -------------------------------------------------------------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- As of February 1, 2000, 1,871,545 shares of the issuer's common stock, no par value, were outstanding. The registrant has no other classes of securities outstanding. This report contains 12 pages. -1- Page No. -------- Part I. FINANCIAL INFORMATION Item 1 - Financial Statements (Unaudited) Consolidated Statements of Financial Condition December 31, 1999 and June 30, 1999.................................................. 3 Consolidated Statements of Operations Three and Six Months Ended December 31, 1999 and 1998................................ 4 Consolidated Statements of Cash Flows Six Months Ended December 31, 1999 and 1998.......................................... 5 Notes to Consolidated Financial Statements........................................... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 7 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders......................... 11 Item 6. Exhibits and Reports on Form 8-K............................................ 11 -2- Part I. Financial Information Item 1 - Financial Statements - ----------------------------- Carolina Fincorp, Inc. and Subsidiaries Consolidated Statements of Financial Condition - -------------------------------------------------------------------------------- December 31, 1999 June 30, ASSETS (Unaudited) 1999 * -------------- -------------- (In Thousands) Cash on hand and in banks $ 3,407 $ 565 Interest-bearing balances in other banks 3,115 7,118 Investment securities available for sale, at fair value 7,142 10,678 Investment securities held to maturity, at amortized cost 6,085 6,697 Loans held for sale - 106 Loans receivable, net 95,267 89,308 Accrued interest receivable 534 588 Premises and equipment, net 2,255 2,329 Stock in the Federal Home Loan Bank, at cost 727 727 Foreclosed real estate 308 20 Other assets 1,229 1,063 ------------- ------------- TOTAL ASSETS $ 120,069 $ 119,199 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposit accounts $ 102,917 $ 101,998 Accrued interest payable 101 133 Advance payments by borrowers for property taxes and insurance 196 407 Accrued expenses and other liabilities 717 905 ------------- ------------- TOTAL LIABILITIES 103,931 103,443 ------------- ------------- STOCKHOLDERS' EQUITY Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding - - Common stock, 20,000,000 shares authorized; 1,871,545 shares issued and outstanding 7,653 7,669 Unearned compensation (2,092) (2,236) Retained earnings, substantially restricted 10,646 10,372 Accumulated other comprehensive income (loss) (69) (49) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 16,138 15,756 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 120,069 $ 119,199 ============= ============= * Derived from audited financial statements See accompanying notes. -3- Carolina Fincorp, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) - -------------------------------------------------------------------------------- Three Months Ended Six Months Ended December 31, December 31, --------------------------------- ----------------------- 1999 1998 1999 1998 -------------- -------------- -------------- --------- (In Thousands except per share data) INTEREST INCOME Loans $ 1,924 $ 1,800 $ 3,751 $ 3,560 Investments and deposits in other banks 300 310 646 624 -------------- -------------- -------------- -------------- TOTAL INTEREST INCOME 2,224 2,110 4,397 4,184 -------------- -------------- -------------- -------------- INTEREST EXPENSE Deposit accounts 1,108 1,111 2,211 2,186 -------------- -------------- -------------- -------------- NET INTEREST INCOME 1,116 999 2,186 1,998 PROVISION FOR LOAN LOSSES 27 24 54 58 -------------- -------------- -------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,089 975 2,132 1,940 -------------- -------------- -------------- -------------- NON-INTEREST INCOME Transaction and other service fee income 105 90 218 185 Gain on sale of loans 7 56 40 124 Other 43 34 116 62 -------------- -------------- -------------- -------------- TOTAL NON-INTEREST INCOME 155 180 374 371 -------------- -------------- -------------- -------------- NON-INTEREST EXPENSES Personnel costs 466 453 906 857 Occupancy 44 48 87 91 Equipment rental and maintenance 58 55 119 96 Marketing 34 20 70 40 Data processing and outside service fees 95 92 184 169 Federal and other insurance premiums 24 22 47 44 Supplies, telephone and postage 32 39 62 68 Other 131 97 261 179 -------------- -------------- -------------- -------------- TOTAL NON-INTEREST EXPENSES 884 826 1,736 1,544 -------------- -------------- -------------- -------------- INCOME BEFORE INCOME TAXES 360 329 770 767 INCOME TAX EXPENSE 142 118 294 277 -------------- -------------- -------------- -------------- NET INCOME $ 218 $ 211 $ 476 $ 490 ============== ============== ============== ============== NET INCOME PER COMMON SHARE Basic $ .13 $ .12 $ .28 $ .28 Diluted .12 .12 .27 .28 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 1,697,394 1,736,901 1,697,394 1,751,091 Assuming dilution 1,739,649 1,736,901 1,729,702 1,751,091 DIVIDEND PER COMMON SHARE $ .06 $ .06 $ .12 $ .12 See accompanying notes -4- Carolina Fincorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) - -------------------------------------------------------------------------------- Six Months Ended December 31, ---------------------------- 1999 1998 ------------ ------------ (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 476 $ 490 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 99 89 Amortization, net (26) 7 Gain on sale of assets, net (18) - Decrease in loans held for sale 106 1,057 Release of ESOP shares 60 40 Amortization of stock awards under management recognition plan 68 69 Provision for loan losses 54 58 Deferred income taxes (21) - Deferred compensation - 25 Change in assets and liabilities Decrease in accrued interest receivable 54 42 Increase in other assets (135) (231) Decrease in accrued interest payable (32) (24) Decrease in accrued expenses and other liabilities (188) (520) ------------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 497 1,102 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of: Available for sale investment securities (1,152) (4,529) Held to maturity investment securities - (2,500) Proceeds from sales, maturities and calls of: Available for sale investment securities 4,685 4,000 Held to maturity investment securities 611 3,259 Net increase in loans (6,352) (2,947) Proceeds from sale of foreclosed real estate 69 - Purchase of property and equipment (25) (329) ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (2,164) (3,046) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand accounts 1,711 1,253 Net increase (decrease) in certificates of deposit (792) 4,972 Decrease in borrowed funds - (3,200) Decrease in advance payments by borrowers for taxes and insurance (211) (265) Cash dividends paid (202) (211) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 506 2,549 ------------ ------------ NET (INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS (1,161) 605 CASH AND CASH EQUIVALENTS, BEGINNING 7,683 8,772 ------------ ------------ CASH AND CASH EQUIVALENTS, ENDING $ 6,522 $ 9,377 ============ ============ See accompanying notes. -5- Carolina Fincorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE A - BASIS OF PRESENTATION In management's opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and six month periods ended December 31, 1999 and 1998, in conformity with generally accepted accounting principles. The financial statements include the accounts of Carolina Fincorp, Inc. (the "Company") and its wholly-owned subsidiary, Richmond Savings Bank, Inc., SSB ("Richmond Savings" or the "Bank"), and the Bank's wholly-owned subsidiary, Richmond Investment Services, Inc. Operating results for the three and six month periods ended December 31, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2000. The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company's annual report on Form 10- KSB. This quarterly report should be read in conjunction with such annual report. NOTE B - NET INCOME PER SHARE Net income per share has been computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. In accordance with generally accepted accounting principles, management recognition plan shares and employee stock ownership plan shares are only considered outstanding for the basic earnings per share calculations when they are earned or committed to be released. NOTE C - COMPREHENSIVE INCOME For the three months ended December 31, 1999 and 1998, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $214,000 and $206,000, respectively, and for the six months ended December 31, 1999 and 1998, $456,000 and $499,000, respectively. NOTE D - PENDING ACQUISITION OF THE COMPANY On October 16, 1999, the Company's Board of Directors executed a definitive agreement for the Company to be acquired by FNB Corp., the holding company for First National Bank and Trust Company of Asheboro, North Carolina ("First National"). The terms of this agreement provide that FNB Corp. will issue .79 shares of its common stock for each share of the Company's common stock. This business combination, which is expected to be accounted for as a pooling of interests, is expected to result in an institution with combined assets of approximately $500 million and a market capitalization in excess of $100 million. First National operates twelve offices in Randolph, Chatham and Montgomery counties in North Carolina. -6- Item 2 - Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- This Quarterly Report on Form 10-QSB may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services. Comparison of Financial Condition at December 31 and June 30, 1999 Consolidated total assets increased by $870,000 during the six months ended December 31, 1999, from $119.2 million at June 30, 1999 to $120.1 million at December 31, 1999. During the six months, the Company generated strong loan growth, as net loans receivable increased by $6.0 million to $95.3 million. This loan growth was partially funded by an increase of $919,000 in customer deposit accounts, with the balance of the funding provided from liquid assets. The overall increase in customer deposits during the six months resulted from an increase of $1.7 million in demand deposits. In the aggregate, liquid assets decreased from $25.1 million at June 30, 1999 to $19.7 million at December 31, 1999. Total stockholders' equity was $16.1 million at December 31, 1999 as compared with $15.8 million at June 30, 1999, an increase of $382,000 which resulted principally from net income of $476,000 for the six months, while regular quarterly dividends during the six month period aggregated $202,000 or $.12 per share. At December 31, 1999, both the Company and the Bank continued to significantly exceed all applicable regulatory capital requirements. Comparison of Results of Operations for the Three months Ended December 31, 1999 and 1998 Net Income. Net income for the quarter ended December 31, 1999 was $218,000, or $.13 per share, as compared with net income of $211,000, or $.12 per share, for the three months ended December 31, 1998, an increase of $7,000 or $.01 per share. An increase of $117,000 in net interest income for the current quarter was largely offset by a decrease of $25,000 in non-interest income and an increase of $58,000 in non-interest expenses. Net Interest Income. Net interest income for the quarter ended December 31, 1999 was $1.1 million as compared with $1.0 million during the quarter ended December 31, 1998, an increase of $117,000 that resulted principally from an increased level of interest earning assets during the current quarter and a reduction in deposit costs. Average interest earning assets were approximately $5.7 million higher during the quarter ended December 31, 1999 as compared with the quarter ended December 31, 1998, while the weighted average rate paid for deposits declined to 4.28% from 4.59%. The higher level of interest earning assets generated an increase in total interest income of $114,000. The reduction in deposit costs yielded a $3,000 reduction in total interest expense, despite an increase of $6.6 million in average deposits outstanding during the quarter. -7- Provision for Loan Losses. The provision for loan losses was $27,000 and $24,000 for the quarters ended December 31, 1999 and 1998, respectively. There were net loan charge-offs of $21,000 during the quarter ended December 31, 1999 as compared with net charge-offs of $4,000 during the quarter ended December 31, 1998. At December 31, 1999, nonaccrual loans aggregated $151,000, while the allowance for loan losses stood at $544,000. Other Income. Other income was $155,000 for the quarter ended December 31, 1999 as compared with $180,000 for the quarter ended December 31, 1998, a decrease of $25,000. This decrease resulted principally from a decrease of $49,000 in gains from the sale of loans, offset partially by increases of $15,000 and $9,000, respectively, in transaction and service fee income and other income. Other Expenses. Other expenses increased to $884,000 during the quarter ended December 31, 1999 as compared with $826,000 for the quarter ended December 31, 1998, an increase of $58,000 or 7%. Most of the cost increases represented normal inflationary and growth related increases. Marketing costs increased by $14,000 because of higher levels of advertising and other marketing activities. Other non-interest expenses increased by $34,000 principally as a result of legal, consulting and other expenses incurred in preparation for the Company's annual meeting that was held on November 17, 1999. Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 39.4% and 35.9% for the three months ended December 31, 1999 and 1998, respectively. Comparison of Results of Operations for the Six months ended December 31, 1999 and 1998 Net Income. Net income for the six months ended December 31, 1999 was $476,000, or $.28 per share, as compared with net income of $490,000, also $.28 per share, for the six months ended December 31, 1998, a decrease of $14,000. The Company's full service branch in Laurinburg, North Carolina opened on September 28, 1998, and was therefore fully operational during the current six months while open for only half of the corresponding six months of 1998. On a comparative basis, this new branch contributed to higher levels of both income and operating expenses during the six months ended December 31, 1999 as compared with the six months ended December 31, 1998. An increase in net interest income for the six months ended December 31, 1999 of $188,000 was more than offset by an increase of $192,000 in non-interest expenses. Net Interest Income. Net interest income for the six months ended December 31, 1999 was $2.2 million as compared with $2.0 million during the six months ended December 31, 1998, an increase of $188,000 that resulted principally from an increased level of interest earning assets during the current six months and a lower percentage cost for deposits. Average interest earning assets were approximately $6.6 million higher during the six months ended December 31, 1999 as compared with the six months ended December 31, 1998, while the weighted average rate paid for deposits declined to 4.29% from 4.59%. The higher level of interest earning assets generated an increase in total interest income of $213,000, and, despite an increase of $6.6 million in average deposits outstanding during the six months, the reduction in deposit costs limited the overall increase in total interest expense to $25,000. -8- Provision for Loan Losses. The provision for loan losses was $54,000 and $58,000 for the six months ended December 31, 1999 and 1998, respectively. There were net loan charge-offs of $27,000 during the six months ended December 31, 1999 as compared with net charge-offs of $8,000 during the six months ended December 31, 1998. At December 31, 1999, nonaccrual loans aggregated $151,000, while the allowance for loan losses stood at $544,000. Other Income. Other income was $374,000 for the six months ended December 31, 1999 as compared with $371,000 for the six months ended December 31, 1998, an increase of $3,000. This increase resulted principally from increases of $33,000 and $54,000, respectively, in transaction and service fee income and other income, offsetting a decrease of $84,000 in gains from the sale of loans. Included in other income during the current quarter was a gain of $18,000 from the sale of foreclosed real estate. Other Expenses. Other expenses increased to $1.7 million during the six months ended December 31, 1999 as compared with $1.5 million for the six months ended December 31, 1998, an increase of $192,000. Factors contributing to this increase include (1) operating costs during the current six months of the Laurinburg full service branch office that was open for only three days during the six months ended December 31, 1998, (2) equipment, data processing and related costs resulting both from growth and from Year 2000 systems upgrades, and (3) normal inflationary cost increases. In addition, during the six months ended December 31, 1999 other non-interest expenses increased by $82,000, largely as a result of legal, consulting and other expenses incurred in preparation for the Company's annual meeting that was held on November 17, 1999. Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 38.2% and 36.1% for the six months ended December 31, 1999 and 1998, respectively. Liquidity and Capital Resources The objective of the Company's liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses Richmond Savings' ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise. The primary sources of internally generated funds are principal and interest payments on loans receivable, cash flows generated from operations, and repayments of mortgage-backed securities. External sources of funds include increases in deposits, advances from the FHLB of Atlanta, and sales of loans. As a North Carolina-chartered savings bank, Richmond Savings must maintain liquid assets equal to at least 10% of assets. The computation of liquidity under North Carolina regulations allows the inclusion of mortgage-backed securities and investments with readily marketable value, including investments with maturities in excess of five years. Richmond Savings' liquidity ratio at December 31, 1999, as computed under North Carolina regulations, was approximately 15.9%. On a consolidated basis, liquid assets also represent approximately 16.4% of total assets. Management believes that it will have sufficient funds available to meet its anticipated future loan commitments as well as other liquidity needs. -9- As a North Carolina-chartered savings bank, Richmond Savings is subject to the capital requirements of the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Administrator of Savings Institutions ("N. C. Administrator"). The FDIC requires state-chartered savings banks to have a minimum leverage ratio of Tier I capital (principally consisting of common shareholders' equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less certain intangible assets) to total assets of at least 3%; provided, however, that all institutions, other than those (i) receiving the highest rating during the examination process and (ii) not anticipating or experiencing any significant growth, are required to maintain a ratio of 1% or 2% above the stated minimum. The FDIC also requires Richmond Savings to have a ratio of total capital to risk-weighted assets of at least 8%, of which at least 4% must be comprised of Tier I capital. The N. C. Administrator requires a net worth equal to at least 5% of total assets. At December 31, 1999, Richmond Savings exceeded the capital requirements of both the FDIC and the N. C. Administrator. Year 2000 Compliance Issues The Year 2000 issue has posed business risks to most business organizations, including the Company. In response, the Company formed a Year 2000 project team, consisting of senior officers within the Company's operations, information systems, financial and management areas, to ensure that the Company attained Year 2000 compliance. All date sensitive systems were evaluated for Year 2000 compliance, with complete upgrading and testing of systems completed well in advance of the Year 2000 date change. The Company also developed contingency plans for its computer processes, including the use of alternative systems and the manual processing of certain critical operations. In addition, the Company had undertaken extensive efforts to ensure that significant vendor and customer relationships are Year 2000 compliant. The Company's management is pleased, but not surprised, that business continued as normal without adverse impact to the Company during the critical date change. In coming months, the Bank will continue monitoring external entities to assure that they have not experienced any Year 2000 problems that could impact their relationship with the Company. The Company estimates that its total Year 2000 compliance costs have aggregated approximately $313,000, including capital expenditures of approximately $225,000 and other expenses charged to operations of approximately $88,000. In addition to the estimated costs of its Year 2000 compliance, the Company routinely makes annual investments in technology in its efforts to improve customer service and to efficiently manage its product and service delivery systems. -10- Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of the Stockholders was held on November 17, 1999. Of 1,871,545 shares entitled to vote at the meeting, 1,545,261 shares voted. The following matters were voted on at the meeting: Number of Votes For ------------------- 1. Election of directors: i) All of the nominees who were presented in the proxy for the annual meeting were elected, as follows: J. Stanley Vetter 1,476,828 or 95.6% of the shares voted John T. Page, Jr. 1,437,635 or 93.0% of the shares voted Russell E. Bennett 1,478,404 or 95.7% of the shares voted R. Larry Campbell 1,471,455 or 95.2% of the shares voted Buena Vista Coggin 1,478,204 or 95.7% of the shares voted Joe M. McLaurin 1,478,404 or 95.7% of the shares voted W. Jesse Spencer 1,419,107 or 91.8% of the shares voted E. E. Vuncannon, Jr. 1,477,604 or 95.6% of the shares voted ii) The following other individuals received votes in a number insufficient for election to the Board of Directors: Jeff Edwards 5,120 or 0.3% of the shares voted Patrick Molamphy 10,220 or 0.7% of the shares voted Thomas McInnis 10,220 or 0.7% of the shares voted 2. The appointment of Dixon Odom PLLC to serve as independent auditor for the year ending June 30, 2000 was ratified: 1,514,951 or 98.0% of the shares voted Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. (27) Financial data schedule (b) Reports on Form 8-K. Two reports on Form 8-K were filed by the Company during the quarter ended December 31, 1999. A report was filed on October 22, 1999 to announce that the Company had entered into an Agreement and Plan of Merger pursuant to which the Company will be acquired by FNB Corp. Another report was filed on December 28, 1999 to announce that the Company had terminated a stock repurchase plan that was announced on April 8, 1999. Under this stock repurchase plan, the Company purchased 34,000 shares of its common stock between May 7, 1999 and May 13, 1999. -11- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAROLINA FINCORP, INC. Date: February 2, 2000 By: /s/ R. Larry Campbell -------------------------------------------- R. Larry Campbell Chief Executive Officer Date: February 2, 2000 By: /s/ Winston G. Dwyer -------------------------------------------- Winston G. Dwyer Chief Financial Officer -12-