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, 1997
[ ] Transition Report Under Section 13
or 15(d) of the Exchange Act
For the transition period ended
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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
--- ---
As of January 30, 1998, 1,905,545 shares of the issuer's common stock, no par
value, were outstanding. The registrant has no other classes of securities
outstanding.
This report contains 13 pages.
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Page No.
Part 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Financial Condition
December 31, 1997 and June 30, 1997........................... 3
Consolidated Statements of Operations
Three and Six Months Ended December 31, 1997 and 1996......... 4
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1997 and 1996................... 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 4. Submission of Matters to a Vote of Security Holders. 12
Item 6. Exhibits and Reports on Form 8-K.................... 12
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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,
1997 June 30,
ASSETS (Unaudited) 1997 *
------------ ------------
(In Thousands)
Cash on hand and in banks $ 1,644 $ 1,790
Interest-bearing balances in other banks 1,919 1,863
Investment securities available for sale, at fair value 17,332 17,714
Investment securities held to maturity, at amortized cost 6,792 6,948
Loans receivable, net 82,157 78,674
Accrued interest receivable 638 703
Premises and equipment, net 2,134 2,118
Stock in the Federal Home Loan Bank, at cost 735 735
Other assets 1,309 958
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TOTAL ASSETS $114,660 $111,503
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 87,069 $ 83,760
Advances from the Federal Home Loan Bank - 500
Accrued interest payable 157 179
Advance payments by borrowers for property taxes
and insurance 168 456
Accrued expenses and other liabilities 1,228 1,160
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TOTAL LIABILITIES 88,622 86,055
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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;
1,851,500 shares issued and outstanding 17,602 17,586
ESOP loan receivable (1,448) (1,491)
Retained earnings, substantially restricted 9,873 9,396
Unrealized holding gains (losses) 11 (43)
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TOTAL STOCKHOLDERS' EQUITY 26,038 25,448
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $114,660 $111,503
======== ========
* 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,
1997 1996 1997 1996
-------- -------- -------- --------
(In Thousands except per share data)
INTEREST INCOME
Loans $1,659 $1,446 $3,330 $2,840
Investments and deposits in other banks 493 509 947 847
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TOTAL INTEREST INCOME 2,152 1,955 4,277 3,687
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INTEREST EXPENSE
Deposit accounts 1,028 1,028 2,032 2,026
Borrowings - - 4 -
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 1,028 1,028 2,036 2,026
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NET INTEREST INCOME 1,124 927 2,241 1,661
PROVISION FOR LOAN LOSSES 18 24 41 33
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,106 903 2,200 1,628
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OTHER INCOME
Transaction and other service fee income 82 58 160 157
Gain on sale of loans 22 4 34 4
Other income 50 65 114 95
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TOTAL OTHER INCOME 154 127 308 256
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OTHER EXPENSES
Personnel costs 406 350 788 676
Occupancy 33 38 69 77
Equipment rental and maintenance 50 41 102 82
Marketing 22 25 38 37
Data processing and outside service fees 77 68 153 137
Federal and other insurance premiums 21 8 44 65
FDIC special assessment - - - 519
Supplies, telephone and postage 35 29 65 59
Other 103 52 179 102
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TOTAL OTHER EXPENSES 747 611 1,438 1,754
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INCOME BEFORE INCOME TAX EXPENSE 513 419 1,070 130
INCOME TAX EXPENSE 183 148 385 53
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NET INCOME $ 330 $ 271 $ 685 $ 77
======== ======== ======== ========
NET INCOME PER COMMON SHARE (Note D) $ .19 $ .08 $ .39 $ .08
======== ======== ======== ========
DIVIDEND PER COMMON SHARE $ .06 $ - $ .12 $ -
======== ======== ======== ========
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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1997 1996
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 685 $ 77
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 88 68
Amortization, net (27) 36
Origination of mortgage loans held for sale (1,992) (495)
Proceeds from sale of loans held for sale 2,026 491
Release of ESOP shares 60 -
Provision for loan losses 41 33
Deferred income taxes - -
Deferred compensation 30 45
Change in assets and liabilities
(Increase) decrease in accrued interest receivable 65 (83)
(Increase) decrease in other assets (369) 155
Decrease in accrued interest payable (22) (25)
Increase (decrease) in accrued expenses and other liabilities 27 (81)
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 612 221
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CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-earning balances in other banks (56) (2,020)
Purchases of:
Available for sale investment securities (8,990) (7,782)
Held to maturity investment securities (503) (516)
Proceeds from sales, maturities and calls of:
Available for sale investment securities 9,486 -
Held to maturity investment securities 655 695
Net increase in loans (3,558) (3,109)
Purchase of property and equipment (104) (590)
Proceeds from sale of real estate acquired in settlement of loans - 29
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NET CASH USED BY
INVESTING ACTIVITIES (3,070) (13,293)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand accounts 1,425 (911)
Net increase (decrease) in certificates of deposit 1,884 (3,101)
Decrease in borrowed funds (500) -
Decrease in advance payments by borrowers for taxes and insurance (288) (281)
Net proceeds from issuance of common stock - 17,586
Loan to ESOP for purchase of common stock - (314)
Cash dividends paid (209) -
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,312 12,979
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NET DECREASE IN
CASH ON HAND AND IN BANKS (146) (93)
CASH ON HAND AND IN BANKS, BEGINNING 1,790 1,207
-------- --------
CASH ON HAND AND IN BANKS, ENDING $1,644 $ 1,114
======== ========
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, 1997 and 1996, 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, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 1998.
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 - PLAN OF CONVERSION
On May 1, 1996, the Board of Directors of Richmond Savings unanimously adopted a
Plan of Holding Company Conversion 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.
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. purchased all of the Richmond Savings common stock 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 quarter.
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE D - NET INCOME PER SHARE
Net income per share for the three and six month periods ended December 31, 1997
was computed based on the weighted average number of shares outstanding of
1,748,736 and 1,747,485, respectively, during each period.
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).
NOTE E MANAGEMENT RECOGNITION AND STOCK OPTION PLANS
At the Company's annual meeting which was held on November 27, 1997, the
stockholders approved the Carolina Fincorp, Inc. Stock Option Plan ("SOP") and
the Richmond Savings Bank, Inc., SSB Management Recognition Plan ("MRP"). The
SOP provides for the issuance to directors, officers and employees of the Bank
options to purchase up to 185,150 shares of the Company's common stock. The MRP
provides for the award of up to 74,060 shares of the Company's common stock to
directors, officers and employees of the Bank. The Company may elect to fund
the plans through the issuance of authorized but unissued shares, or may elect
to purchase the shares to fund the plans in the open market.
During January of 1998, 54,045 of newly issued common shares were awarded under
the MRP. To date no options have been issued under the SOP.
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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, 1997 AND JUNE 30, 1997
Total assets increased by $3.2 million during the six months ended December 31,
1997, from $111.5 million at June 30, 1997 to $114.6 million at the period's
end. Asset growth was concentrated in loans receivable which increased by $3.5
million from $78.7 million to $82.2 million during the six months. The Company's
holding company conversion was completed in November of 1996 with the issuance
of common stock generating net proceeds of $17.6 million. Since that time, the
Company has attempted to generate growth in higher yielding loans receivable.
The Company also attracted good deposit growth during the current period with
demand deposits and certificate of deposit accounts increasing by $900,000 and
$3.1 million, respectively. This deposit growth funded the growth in loans while
also enabling the Company to repay an advance of $500,000 from the Federal Home
Loan Bank which had been outstanding at June 30, 1997.
Total stockholders' equity was $26.0 million at December 31, 1997 as compared
with $25.4 million at June 30, 1997. The Company and its bank subsidiary
substantially exceeded all regulatory capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
AND 1996
Net Income. Consolidated net income during the quarter ended December 31, 1997
was $330,000, or $.19 per share, as compared with net income of $271,000 during
the three months ended December 31, 1996, an increase of $59,000. The increase
is attributable to the higher level of interest-earning assets during the
current quarter as a result of investment of proceeds from the November 1996
issuance of the Company's common stock.
Net Interest Income. Net interest income was $1.1 million during the quarter
ended December 31, 1997 as compared with $927,000 during the corresponding
quarter of the previous fiscal year, an increase of $197,000. The increase
resulted primarily from an increase in average interest-earning assets
attributable to investment of proceeds from the sale in late November of 1996 of
the Company's common stock. Average investment and loan balances were $2.0
million lower and $11.0 million higher, respectively, during the current quarter
than during the corresponding quarter of the previous fiscal year.
Provision for Loan Losses. The provision for loan losses was $18,000 and
$24,000 for the quarters ended December 31, 1997 and 1996, respectively. There
were net loan charge-offs of $17,000 during the quarter ended December 31, 1997
as compared with no charge-offs during the quarter ended December 31, 1996. At
December 31, 1997, nonaccrual loans aggregated $65,000, while the allowance for
loan losses stood at $409,000.
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Other Income. Other income was $154,000 during the quarter ended December 31,
1997 as compared with $127,000 during the quarter ended December 31, 1996, an
increase of $27,000. During the current quarter, the Company realized gains of
$22,000 from the sale of loans, as compared with gains from loan sales of $4,000
during the quarter ended December 31, 1996.
Other Expenses. Other expenses increased to $747,000 during the quarter ended
December 31, 1997 as compared with $611,000 during the quarter ended December
31, 1996, an increase of $136,000 arising principally from increases of $56,000
and $51,000 in personnel costs and other expenses, respectively. The increase
in personnel costs relates to growth, normal compensation adjustments, and the
higher costs of benefits associated with the Company's Employee Stock Ownership
Plan. The increase in other expenses relates largely to growth and to the
additional costs arising from operation as a publicly held holding company.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income or loss before income taxes, was 35.7% and 35.3% for the three months
ended December 31, 1997 and 1996, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
AND 1996
Net Income. Consolidated net income during the six months ended December 31,
1997 was $685,000, or $.39 per share, as compared with net income of $77,000
during the six months ended December 31, 1996, an increase of $608,000. The
increase is attributable to the higher level of interest-earning assets during
the current six months as a result of investment of proceeds from the November
1996 issuance of the Company's common stock, and to a special insurance
assessment imposed in September 1996 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 six months ended December 31, 1996 by $343,000.
Net Interest Income. Net interest income was $2.2 million during the six months
ended December 31, 1997 as compared with $1.7 milliion during the first six
months of the previous fiscal year, an increase of $580,000. The increase
resulted primarily from an increase in average interest-earning assets
attributable to investment of proceeds from the sale in November of 1996 of the
Company's common stock. Average investment and loan balances were $1.0 million
and $11.0 million, respectively, higher during the current quarter than during
the corresponding quarter of the previous fiscal year.
Provision for Loan Losses. The provision for loan losses was $41,000 and
$33,000 for the six months ended December 31, 1997 and 1996, respectively.
There were net loan charge-offs of $32,000 during the six months ended December
31, 1997 as compared with net charge-offs of $23,000 during the six months ended
December 31, 1996. At December 31, 1997, nonaccrual loans aggregated $65,000,
while the allowance for loan losses stood at $409,000.
Other Income. Other income was $308,000 during the six months ended December
31, 1997 as compared with $256,000 during the six months ended December 31,
1996, an increase of $52,000. During the current six months, the Company
realized gains of $34,000 from the sale of loans, an increase of $30,000 over
the gains realized during the six months ended December 31, 1996.
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Other Expenses. Other expenses decreased to $1.4 million during the six months
ended December 31, 1997 as compared with $1.8 million during the six months
ended December 31, 1996, a decrease of $316,000. An overall decrease of $540,000
in deposit and other insurance costs was partially offset by increases of
$112,000 and $77,000 in personnel costs and other expenses, respectively. The
increase in personnel costs relates to growth, normal compensation adjustments,
and the higher costs of benefits associated with the Company's Employee Stock
Ownership Plan. The increase in other expenses relates largely to growth and to
the additional costs arising from operation as a publicly held holding company.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income or loss before income taxes, was 36.0% and 40.8% for the six month
periods ended December 31, 1997 and 1996, 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, 1997, as computed under North Carolina regulations, was
approximately 18%. On a consolidated basis, liquid assets represent
approximately 24% 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, 1997, Richmond Savings exceeded the capital requirements of both
the FDIC and the N. C. Administrator.
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THE YEAR 2000
At the turn of the century, computer-based information systems will be faced
with the problems potentially affecting hardware, software, networks, processing
platforms, as well as customer and vendor interdependencies. The Company has
established a committee and is in the process of assessing the effect of Year
2000 on the Bank's operating plans and systems. The Company is developing a plan
for identifying, renovating, testing and implementing its systems for Year 2000
processing and internal control requirements. The cost for becoming Year 2000
compliant has not been determined; however, management feels it will not be
material to the Company's financial statements.
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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 24, 1997. Of
1,851,500 shares entitled to vote at the meeting, 1,571,667 shares voted. The
following matters were voted on at the meeting:
Number of Votes
---------------------------------------------
For Against Withheld Abstain
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1. Election of directors:
J. Stanley Vetter 1,551,267 - 20,400 -
John T. Page, Jr. 1,547,722 - 23,945 -
Russell E. Bennett 1,552,267 - 19,400 -
R. Larry Campbell 1,552,267 - 19,400 -
Buena Vista Coggin 1,549,767 - 21,900 -
Joe M. McLaurin 1,552,267 - 19,400 -
W. Jesse Spencer 1,552,267 - 19,400 -
E.E. Vuncannon, Jr. 1,552,267 - 19,400 -
Number of Votes
---------------------------------------------
For Against Non-Vote Abstain
--------- ------- -------- -------
2. Ratification of Dixon Odom
PLLC to serve as independent
auditor for the year ending
June 30, 1998 1,558,645 4,909 - 8,113
3. Approval of the Carolina
Fincorp, Inc. Stock Option
Plan 966,008 229,315 366,526 9,818
4. Approval of the Richmond
Savings Bank, Inc., SSB
Management Recognition
Plan 931,283 257,411 365,496 17,477
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(27) Financial data schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1997.
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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 2, 1998 By: /s/ R. Larry Campbell
-------------------------------
R. Larry Campbell
Chief Executive Officer
Date: February 2, 1998 By: /s/ Winston G. Dwyer
-------------------------------
Winston G. Dwyer
Chief Financial Officer
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