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, 1996
[ ] Transition Report Under Section 13
or 15(d) of the Exchange Act
For the transition period ended ________________________
Commission File Number 000-21701
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CAROLINA FINCORP, INC.
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(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-1978449
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
115 SOUTH LAWRENCE STREET, ROCKINGHAM, NC 28380
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(910) 997-6245
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(ISSUER'S TELEPHONE NUMBER)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(D) OF THE EXCHANGE ACT OF 1934 DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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AS OF FEBRUARY 10, 1997, 1,851,500 SHARES OF THE ISSUER'S COMMON STOCK, NO PAR
VALUE, WERE OUTSTANDING. THE REGISTRANT HAS NO OTHER CLASSES OF SECURITIES
OUTSTANDING.
THIS REPORT CONTAINS 12 PAGES.
1
Page No.
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Part 1. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
December 31, 1996 and June 30, 1996............ 3
Consolidated Statements of Operations
Three and Six Months Ended December 31, 1996
and 1995....................................... 4
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1996 and 1995.... 5
Notes to Consolidated Financial Statements..... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...... 11
2
Part 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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Carolina Fincorp, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
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December 31,
1996 June 30,
ASSETS (Unaudited) 1996 *
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(In Thousands)
Cash on hand and in banks $ 1,114 $ 1,207
Interest-bearing balances in other banks 6,705 4,685
Investment securities available for sale, at fair value 16,227 8,387
Investment securities held to maturity, at amortized cost 7,767 7,975
Loans receivable, net 71,438 68,358
Accrued interest receivable 660 577
Premises and equipment, net 1,878 1,356
Real estate acquired in settlement of loans - 29
Stock in the Federal Home Loan Bank, at cost 735 735
Other assets 646 801
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TOTAL ASSETS $107,170 $94,110
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 79,703 $83,715
Accrued interest payable 186 211
Advance payments by borrowers for property taxes
and insurance 188 469
Accrued expenses and other liabilities 1,062 1,074
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TOTAL LIABILITIES 81,139 85,469
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STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, 20,000,000 shares authorized; 1,851,000
shares issued and outstanding at December 31, 1996 17,586 -
Retained earning, substantially restricted 8,759 8,641
ESOP loan receivable (314) -
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TOTAL STOCKHOLDERS' EQUITY 26,031 8,641
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $107,170 $94,110
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* DERIVED FROM AUDITED FINANCIAL STATEMENTS
See accompanying notes.
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Carolina Fincorp, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
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Three Months Ended Six Months Ended
December 31, December 31,
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1996 1995 1996 1995
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(In Thousands)
INTEREST INCOME
Loans $ 1,446 $1,397 $ 2,840 $2,791
Investments and deposits in
other banks 509 303 847 590
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TOTAL INTEREST INCOME 1,955 1,700 3,687 3,381
INTEREST EXPENSE ON
DEPOSIT ACCOUNTS 1,028 999 2,026 1,986
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NET INTEREST INCOME 927 701 1,661 1,395
PROVISION FOR LOAN LOSSES 24 9 33 18
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 903 692 1,628 1,377
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OTHER INCOME
Transaction and other service
fee income 58 50 157 141
Gain on sale of loans 4 4 4 8
Other income 65 102 95 129
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TOTAL OTHER INCOME 127 156 256 278
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OTHER EXPENSES
Personnel costs 350 310 676 609
Occupancy 38 34 77 68
Equipment rental and
maintenance 41 40 82 78
Marketing 25 10 37 20
Data processing and outside
service fees 68 60 137 128
Federal and other insurance
premiums 8 62 65 115
FDIC special assessment - - 519 -
Supplies, telephone and
postage 29 29 59 53
Other 52 68 102 132
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TOTAL OTHER EXPENSES 611 613 1,754 1,203
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INCOME BEFORE
INCOME TAX EXPENSE 419 235 130 452
INCOME TAX EXPENSE 148 81 53 145
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NET INCOME $ 271 $ 154 $ 77 $ 307
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See accompanying notes.
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Carolina Fincorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended
December 31,
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1996 1995
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 77 $ 307
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 68 69
Amortization, net 36 8
Provision for loan losses 33 18
Deferred compensation 45 24
Gain on sale of loans (4) (8)
Change in assets and liabilities
Increase in accrued interest receivable (83) (50)
(Increase) decrease in other assets 93 (95)
Increase (decrease) in accrued interest payable (25) 16
Increase (decrease) in accrued expenses and other
liabilities (81) 18
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 159 307
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of:
Available for sale investment securities (7,782) (3,065)
Held to maturity investment securities (516) (1,130)
Proceeds from maturities and calls of:
Held to maturity investment securities 695 3,058
Net increase in loans (3,600) (437)
Proceeds from sale of loans 491 958
Purchase of property and equipment (590) (159)
Proceeds from sale of real estate acquired in settlement
of loans 29 -
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NET CASH USED BY
INVESTING ACTIVITIES (11,273) (775)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand accounts (911) (548)
Net increase (decrease) in certificates of deposit (3,101) 959
Decrease in advance payments by borrowers for taxes and
insurance (281) (355)
Net proceeds from issuance of common stock 17,586 -
Decrease in stock conversion costs 62 -
Increase in ESOP loan receivable (314) -
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 13,041 56
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NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,927 (412)
CASH AND CASH EQUIVALENTS, BEGINNING 5,892 4,867
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CASH AND CASH
EQUIVALENTS, ENDING $ 7,819 $ 4,455
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See accompanying notes.
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Carolina Fincorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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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, 1996 and 1995, in conformity with generally
accepted accounting principles. The financial statements include the accounts
of Carolina Fincorp, Inc. (the "Company") and its wholly owned subsidiary,
Richmond Savings Bank, SSB ("Richmond Savings" or the "Bank"), and the Bank's
wholly-owned subsidiary, CERKO, Inc. Operating results for the three and six
month periods ended December 31, 1996 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 1997.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the consolidated
financial statements filed as part of the Company's registration statement on
Form S-1. This quarterly report should be read in conjunction with such
registration statement.
NOTE B - PLAN OF CONVERSION
On May 1, 1996, the Board of Directors of Richmond Savings Bank, SSB unanimously
adopted a Plan of Holding Company Conversion, which was subsequently amended and
restated on September 4, 1996 (the "Plan"), whereby Richmond Savings converted
from a North Carolina-chartered mutual savings bank to a North Carolina-
chartered stock savings bank and became a wholly-owned subsidiary of Carolina
Fincorp, Inc., which was formed in connection with the conversion. Carolina
Fincorp, Inc. issued common stock in the conversion and used a portion of the
net proceeds thereof to purchase the capital stock of Richmond Savings. The
Plan was approved by regulatory authorities and by the members of Richmond
Savings at a special meeting.
At the time of conversion, Richmond Savings established a liquidation account in
an amount equal to its net worth as reflected in its latest balance sheet used
in its final conversion prospectus. The liquidation account will be maintained
for the benefit of eligible deposit account holders who continue to maintain
their deposit accounts in Richmond Savings after conversion. Only in the event
of a complete liquidation will each eligible deposit account holder be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted subaccount balance for deposit accounts then held
before any liquidation distribution may be made with respect to common stock.
Dividends paid subsequent to the conversion cannot be paid from this liquidation
account.
Richmond Savings may not declare or pay a cash dividend on or repurchase any of
its common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations.
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Carolina Fincorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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NOTE B - PLAN OF CONVERSION (Continued)
On November 22, 1996, Richmond Savings completed its conversion from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank. The conversion occurred through the sale of 1,851,500 shares of
common stock (no par value) of Carolina Fincorp, Inc. Total proceeds of
$18,515,000 were reduced by conversion expenses of $929,389. Carolina Fincorp,
Inc. paid $7,750,000 to Richmond Savings in exchange for the common stock of
Richmond Savings issued in the conversion, and retained the balance of the net
conversion proceeds. The transaction was recorded as an "as-if" pooling with
assets and liabilities recorded at historical cost.
NOTE C - FDIC SPECIAL ASSESSMENT
On September 30, 1996, a comprehensive continuing appropriations bill which
provided for a one-time assessment to recapitalize the SAIF was signed into law
by the President. This special assessment, which was imposed on all SAIF-
insured institutions, amounted to $519,000 for Richmond Savings and was charged
against earnings during the quarter ended September 30, 1996. Net of an income
tax benefit of $176,000, this special assessment decreased earnings by $343,000
during the six months ended December 31, 1996.
NOTE D - DEFINED CONTRIBUTION RETIREMENT PLAN
In conjunction with the mutual to stock conversion, Richmond Savings' defined
contribution target benefit retirement plan was terminated as of September 19,
1996. Funds were distributed in October 1996. There was no gain or loss upon
the termination of the defined contribution retirement plan.
NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the holding company conversion, the Bank adopted an Employee
Stock Ownership Plan (the "Plan"). As of December 31, the Plan had borrowed
$314,000 from the Company, and had used those proceeds to purchase 24,000 shares
of the Company's common stock in the open market.
NOTE F - NET INCOME PER SHARE
Net income per share for the period from the closing of the Company's stock
offering (November 22, 1996) through December 31, 1996 was $.08 and was computed
based on consolidated net income during that period divided by the weighted
average number of shares outstanding during that period (1,840,671 shares).
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Comparison of Financial Condition at December 31, 1996 and June 30, 1996
Principally as a result of net proceeds of $17.6 million received on November
22, 1996 from the sale of the Company's common stock, consolidated total assets
increased by $13.1 million, from $94.1 million at June 30, 1996 to $107.2
million at December 31, 1996. Funds generated from the stock sale were used
principally to acquire liquid investments, with interest-bearing balances in
other banks and investment securities available for sale increasing by $2
million and $7.8 million, respectively, since the beginning of the current year.
Loan demand has also been relatively strong, however, with net loans receivable
increasing by $3 million from $68.4 million to $71.4 million during the six
months. Customer deposit accounts declined by $4 million during the six months,
with substantially all of the decrease resulting from deposit withdrawals by
customers who used the funds thus provided to purchase shares of the Company's
common stock.
Total stockholders' equity was $26 million at December 31 as compared with $8.6
million at June 30. The Company and its bank subsidiary substantially exceeded
all regulatory capital requirements.
Comparison of Results of Operations for the Three Months Ended December 31, 1996
and 1995
Net Income. Consolidated net income during the quarter ended December 31, 1996
was $271,000 as compared with net income of $154,000 for the quarter ended
December 31, 1995. The increase is primarily attributable to the significantly
higher level of interest-earning assets during the current quarter as a result
of investment of proceeds from issuance of the Company's common stock.
Net Interest Income. Net interest income increased to $927,000 during the
quarter ended December 31, 1996 as compared with $701,000 during the second
quarter of the previous year. This increase resulted from a combination of an
increase in average interest-earning assets of $11.4 million, which increase
consisted principally of investment securities, and a reduction in the rate of
interest paid on customer deposits, which declined from a weighted average rate
of 5.03% during the quarter ended December 31, 1995 to a weighted average rate
of 4.87% during the quarter ended December 31, 1996, tracking the general levels
of interest rates during the respective quarters.
Provision for Loan Losses. The provision for loan losses was $24,000 and $9,000
for the quarters ended December 31, 1996 and 1995, respectively. Management
believes that the provision for loan losses and the resulting loan loss
allowance at December 31, 1996 will be adequate to absorb losses on existing
loans. There were no loan charge-offs during the three months ended December
31, 1996 as compared with net charge-offs of $4,000 during the three months
ended December 31, 1995. Nonaccrual loans aggregated $158,000 at December 31,
1996.
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Other Income. Other income decreased from $156,000 to $127,000, as an increase
of $8,000 in transaction and other service fee income was offset by a decrease
of $37,000 in other income. This decrease is principally attributable to a
reduced level of fee income on loans originated and sold during the current
period.
General and Administrative Expenses. General and administrative expenses
remained relatively stable, decreasing to $611,000 during the quarter ended
December 31, 1996 as compared with $613,000 during the quarter ended December
31, 1995. Increased costs incurred for personnel and marketing were offset by a
significant reduction in deposit insurance premiums as reduced rates became
effective at the beginning of the quarter.
Comparison of Results of Operations for the Six Months Ended December 31, 1996
and 1995
Net Income. The Company earned consolidated net income of $77,000 during the
six months ended December 31, 1996 as compared with net income of $307,000
during the corresponding period of the prior year, a decrease of $230,000. The
decrease resulted from a special insurance assessment imposed on all SAIF-
insured institutions by the FDIC to recapitalize the SAIF fund. Richmond
Savings' assessment was $519,000. Net of an income tax benefit of $176,000,
this special assessment decreased earnings during the period by $343,000. If
this special assessment had not been incurred, net income during the six months
ended December 31, 1996 would have been $420,000.
Net Interest Income. Net interest income increased to $1,661,000 during the six
months ended December 31, 1996 as compared with $1,377,000 during the first six
months of the previous year. This increase resulted from a combination of an
increase in average interest-earning assets of $7.9 million, which increase
consisted principally of investment securities, and a reduction in the rate of
interest paid on customer deposits, which declined from a weighted average rate
of 5.02% during the six months ended December 31, 1995 to a weighted average
rate of 4.81% during the six months ended December 31, 1996, tracking the
general levels of interest rates during the respective periods.
Provision for Loan Losses. The provision for loan losses was $33,000 and
$18,000 for the six months ended December 31, 1996 and 1995, respectively.
Management believes that the provision for loan losses and the resulting loan
loss allowance at December 31, 1996 will be adequate to absorb losses on
existing loans. There were $23,000 in loan charge-offs during the six months
ended December 31, 1996 as compared with net charge-offs of $4,000 during the
six months ended December 31, 1995. Nonaccrual loans aggregated $158,000 at
December 31, 1996.
Other Income. Other income decreased from $278,000 to $256,000, as an increase
of $16,000 in transaction and other service fee income was offset by a decrease
of $34,000 in other income.
General and Administrative Expenses. Exclusive of the FDIC special insurance
assessment explained under the caption "Net Income," general and administrative
expenses remained relatively stable, increasing to $1,235,000 during the six
months ended December 31, 1996 as compared with $1,203,000 during the six months
ended December 31, 1995.
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Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses
Richmond Savings' ability to meet deposit withdrawals on demand or at
contractual maturity, to repay borrowings as they mature, and to fund new loans
and investments as opportunities arise.
The primary sources of internally generated funds are principal and interest
payments on loans receivable, cash flows generated from operations, and
repayments of mortgage-backed securities. External sources of funds include
increases in deposits, advances from the FHLB of Atlanta, and sales of loans.
As a North Carolina-chartered savings bank, Richmond Savings must maintain
liquid assets equal to at least 10% of assets. The computation of liquidity
under North Carolina regulations allows the inclusion of mortgage-backed
securities and investments with readily marketable value, including investments
with maturities in excess of five years. Richmond Savings' liquidity ratio at
December 31, 1996, as computed under North Carolina regulations, was
approximately 22%. On a consolidated basis, liquid assets represent
approximately 28% of total assets. Management believes that it will have
sufficient funds available to meet its anticipated future loan commitments as
well as other liquidity needs.
As a North Carolina-chartered savings bank, Richmond Savings is subject to the
capital requirements of the Federal Deposit Insurance Corporation ("FDIC") and
the North Carolina Administrator of Savings Institutions ("N. C.
Administrator"). The FDIC requires state-chartered savings banks to have a
minimum leverage ratio of Tier I capital (principally consisting of common
shareholders' equity, noncumulative perpetual preferred stock, and a limited
amount of cumulative perpetual preferred stock, less certain intangible assets)
to total assets of at least 3%; provided, however, that all institutions, other
than those (i) receiving the highest rating during the examination process and
(ii) not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the state minimum. The FDIC also requires
Richmond Savings to have a ratio of total capital to risk-weighted assets of at
least 8%, of which at least 4% must be comprised of Tier I capital. The N. C.
Administrator requires a net worth equal to at least 5% of total assets. At
December 31, 1996, Richmond Savings exceeded the capital requirements of both
the FDIC and the N. C. Administrator.
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(27) Financial data schedule
(b) Reports on Form 8-K.
One report on Form 8-K was filed on December 9, 1996 to report
the impact on earnings of the FDIC special assessment described
in Note C to the consolidated financial statements presented
herein.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAROLINA FINCORP, INC.
Date: February 10, 1997 By: /s/ R. Larry Campbell
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R. Larry Campbell
Chief Executive Officer
Date: February 10, 1997 By: /s/ Winston G. Dwyer
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Winston G. Dwyer
Chief Financial Officer
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