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 March 31, 1998
[ ] 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
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As of May 1, 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.
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Part 1. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
March 31, 1998 and June 30, 1997............... 3
Consolidated Statements of Operations
Three and Nine Months Ended March 31, 1998 and
1997........................................... 4
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1998 and 1997...... 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...... 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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March 31,
1998 June 30,
ASSETS (Unaudited) 1997*
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(In Thousands)
Cash on hand and in banks $ 1,084 $ 1,790
Interest-bearing balances in other banks 6,654 1,863
Investment securities available for sale, at fair value 16,268 17,714
Investment securities held to maturity, at amortized
cost 6,247 6,948
Loans receivable, net 83,457 78,674
Accrued interest receivable 780 703
Premises and equipment, net 2,099 2,118
Stock in the Federal Home Loan Bank, at cost 735 735
Other assets 1,144 958
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TOTAL ASSETS $118,468 $111,503
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit Accounts $ 90,305 $ 83,760
Advances from the Federal Home Loan Bank - 500
Accrued interest payable 169 179
Advance payments by borrowers for property taxes
and insurance 288 456
Accrued expenses and other liabilities 1,227 1,160
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TOTAL LIABILITIES 91,989 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; 1,905,545
and 1,851,500 shares issued and outstanding,
respectively 18,601 17,586
ESOP loan receivable and unvested restricted stock (1,937) (1,491)
Retained earnings, substantially restricted 9,790 9,396
Unrealized holding gains (losses) 25 (43)
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TOTAL STOCKHOLDERS' EQUITY 26,479 25,448
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $118,468 $111,503
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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 Nine Months Ended
March 31, March 31,
------------------ ------------------
1998 1997 1998 1997
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(In Thousands except per share data)
INTEREST INCOME
Loans $1,737 $1,486 $5,067 $4,326
Investments and deposits
in other banks 412 475 1,359 1,322
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TOTAL INTEREST INCOME 2,149 1,961 6,426 5,648
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INTEREST EXPENSE
Deposit accounts 1,017 929 3,049 2,955
Borrowings - - 4 -
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TOTAL INTEREST EXPENSE 1,017 929 3,053 2,955
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NET INTEREST INCOME 1,132 1,032 3,373 2,693
PROVISION FOR LOAN LOSSES 18 19 59 52
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,114 1,013 3,314 2,641
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OTHER INCOME
Transaction and other
service fee income 84 81 244 263
Gain on sale of loans 19 4 53 8
Other income 31 84 145 154
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TOTAL OTHER INCOME 134 169 442 425
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OTHER EXPENSES
Personnel costs 884 354 1,672 1,030
Occupancy 36 42 105 119
Equipment rental and
maintenance 44 46 146 128
Marketing 15 12 53 49
Data processing and
outside service fees 78 77 231 214
Federal and other
insurance premiums 23 23 67 88
FDIC special assessment - - - 519
Supplies, telephone and
postage 35 40 100 99
Other 98 84 277 186
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TOTAL OTHER EXPENSES 1,213 678 2,651 2,432
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INCOME BEFORE
INCOME TAX EXPENSE 35 504 1,105 634
INCOME TAX EXPENSE 10 169 395 222
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NET INCOME $ 25 $ 335 $ 710 $ 412
====== ====== ====== ======
NET INCOME PER COMMON SHARE (Note D)
BASIC AND DILUTED $.01 $.18 $.40 $.27
====== ====== ====== ======
DIVIDEND PER COMMON SHARE $.06 $ - $.18 $ -
====== ====== ====== ======
See accompanying notes.
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Carolina Fincorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Nine Months Ended
March 31,
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1998 1997
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 710 $ 412
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 129 108
Amortization, net (68) 49
Gain on sale of assets, net - (60)
Origination of mortgage loans held for sale (3,331) (1,049)
Proceeds from sale of loans held for sale 3,384 1,057
Release of ESOP shares 95 -
Amortization of stock awards under management
recognition plan 474 -
Provision for loan losses 59 52
Deferred income taxes (92) -
Deferred compensation 65 62
Change in assets and liabilities
Increase in accrued interest receivable (77) (213)
(Increase) decrease in other assets (195) 77
Decrease in accrued interest payable (10) (42)
Increase (decrease) in accrued expenses and other
liabilities 67 (51)
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,210 402
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CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-earning balances in
other banks (4,791) 878
Purchases of:
Available for sale investment securities (15,062) (10,523)
Held to maturity investment securities (503) (516)
Proceeds from sales, maturities and calls of:
Available for sale investment securities 16,687 515
Held to maturity investment securities 1,198 1,370
Net increase in loans (4,895) (6,200)
Purchase of property and equipment (110) (842)
Proceeds from sale of premises and equipment - 79
Proceeds from sale of real estate acquired in
settlement of loans - 29
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NET CASH USED BY
INVESTING ACTIVITIES (7,476) (15,210)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand accounts 2,763 (931)
Net increase (decrease) in certificates of deposit 3,782 (1,429)
Decrease in borrowed funds (500) -
Decrease in advance payments by borrowers for taxes and
insurance (168) (158)
Net proceeds from issuance of common stock - 17,586
Loan to ESOP for purchase of common stock - (835)
Cash dividends paid (317) -
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 5,560 14,233
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NET DECREASE IN
CASH ON HAND AND IN BANKS (706) (575)
CASH ON HAND AND IN BANKS, BEGINNING 1,790 1,207
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CASH ON HAND AND IN BANKS, ENDING $ 1,084 $ 632
======== ========
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
nine month periods ended March 31, 1998 and 1997, 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 nine month periods ended March 31, 1998 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 is presented for periods subsequent to the closing of the
Company's stock offering on November 22, 1996.
Net income per share has been computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. In
accordance with generally accepted accounting principles, management recognition
plan shares (see Note E) 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. The weighted average number of shares
outstanding were 1,769,459 and 1,757,219, respectively, for the three and nine
months ended March 31, 1998, and 1,827,500 and 1,831,622, respectively, for the
three months ended March 31, 1997, and the period from November 22, 1996 to
March 31, 1997. The dilutive effect of unearned shares in the management
recognition plan was negligible for the three and nine months ended March 31,
1998. No potentially dilutive securities were outstanding during the three and
nine months ended March 31, 1997.
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 at a value of $18.25 per share. Personnel costs for both the three and
nine months ended March 31, 1998 include $485,000 which represents the value of
MRP shares earned through that date. 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 March 31, 1998 and June 30, 1997
Total assets increased by $7.0 million during the nine months ended March 31,
1998, from $111.5 million at June 30, 1997 to $118.5 million at the period's
end. Asset growth was concentrated in loans receivable which increased by $4.8
million from $78.7 million to $83.5 million during the nine 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
nine month period with demand deposits and certificate of deposit accounts
increasing by $2.7 million and $3.8 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 $26.5 million at March 31, 1998 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 March 31, 1998
and 1997
Net Income. Net income for the quarter ended March 31, 1998 was $25,000, or $.01
per share, as compared with net income of $335,000, or $.18 per share, for the
three months ended March 31, 1997, a decrease of $310,000 or $.17 per share. In
January 1998, the Company awarded grants of 54,045 shares of common stock under
the Management Recognition Plan ("MRP") which was approved by the shareholders
at the Annual Meeting held on November 25, 1997. The total value of shares
granted was $986,000, of which $475,000 had been earned by recipients as of
March 31, 1998. The balance of the shares granted will be earned, and therefore
reflected in compensation expense, over the next four years. Including
applicable payroll taxes, the personnel costs during the three months ended
March 31, 1998 include MRP related expenses of $485,000. Net of applicable
income taxes, these expenses reduced net income during the quarter by
approximately $315,000. There were no MRP expenses during the quarter ended
March 31, 1997.
Net Interest Income. Net interest income for the quarter ended March 31, 1998
was $1.1 million as compared with $1.0 million during the quarter ended March
31, 1997, an increase of $100,000. The increase resulted primarily from loan
growth as average loans outstanding during the current quarter were
approximately $10.4 million higher than during the corresponding quarter of the
prior year.
Provision for Loan Losses. The provision for loan losses was $18,000 and $19,000
for the quarters ended March 31, 1998 and 1997, respectively. There were net
loan charge-offs of $15,000 during the quarter ended March 31, 1998 as compared
with net charge-offs of $17,000 during the quarter ended March 31, 1997. At
March 31, 1998, nonaccrual loans aggregated $182,000, while the allowance for
loan losses stood at $412,000.
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Other Income. Other income was $134,000 for the quarter ended March 31, 1998 as
compared with $169,000 for the quarter ended March 31, 1997, a decrease of
$35,000. During the quarter ended March 31, 1997, the Company realized a gain of
$52,000 from the sale of a branch location for which a replacement facility had
been constructed. There were no such gains realized during the current quarter.
During the current quarter, the Company realized gains of $19,000 from the sale
of loans, as compared with gains from loan sales of $4,000 during the quarter
ended March 31, 1997.
Other Expenses. Other expenses increased to $1.2 million during the quarter
ended March 31, 1998 as compared with $678,000 for the quarter ended March 31,
1997, an increase of $535,000. Substantially all of this increase relates to
personnel costs which increased by $530,000. As explained under the caption "Net
Income", $485,000 of this increase in personnel costs is attributable to awards
granted during the current quarter under the Management Recognition Plan. The
balance of 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.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income before income taxes, was 28.6% and 33.5% for the three months ended March
31, 1998 and 1997, respectively.
Comparison of Results of Operations for the Nine Months Ended March 31, 1998 and
1997
Net Income. Net income for the nine months ended March 31, 1998 was $710,000, or
$.40 per share, as compared with net income of $412,000 during the nine months
ended March 31, 1997, an increase of $298,000. Net income increased because of
(1) the higher level of interest-earning assets during the current nine months
as a result of asset growth and investment of proceeds from the November 1996
issuance of the Company's common stock and (2) a special insurance assessment
imposed in September 1996 on all SAIF-insured institutions by the FDIC to
recapitalize the SAIF fund. The Company's assessment was $519,000. Net of an
income tax benefit of $176,000, this special assessment reduced earnings during
the nine months ended March 31, 1997 by $343,000. In addition, as previously
discussed, during the current nine months ended March 31, 1998 the Company
incurred personnel costs in connection with awards of common stock under the
Management Recognition Plan which, net of applicable income taxes, reduced
earnings by $315,000.
Net Interest Income. Net interest income was $3.4 million for the nine months
ended March 31, 1998 as compared with $2.7 million during the first nine months
of the previous fiscal year, an increase of $680,000. The increase resulted
primarily from an increase in average interest-earning assets attributable both
to growth and to investment of proceeds from the sale in November of 1996 of the
Company's common stock. Average loan balances were $11.0 million higher during
the current nine months than during the corresponding nine months of the
previous fiscal year.
Provision for Loan Losses. The provision for loan losses was $59,000 and $52,000
for the six months ended March 31, 1998 and 1997, respectively. There were net
loan charge-offs of $47,000 during the nine months ended March 31, 1998 as
compared with net charge-offs of $40,000 during the nine months ended March 31,
1997. At March 31, 1998, nonaccrual loans aggregated $182,000, while the
allowance for loan losses stood at $412,000.
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Other Income. Other income was $442,000 for the nine months ended March 31, 1998
as compared with $425,000 for the nine months ended March 31, 1997, an increase
of $17,000. During the nine months ended March 31, 1997 the Company realized a
gain of $52,000 from the sale of a branch location for which a replacement
facility had been constructed. There were no such gains realized during the
current period. During the current period, the Company realized gains of $53,000
from the sale of loans, as compared with gains from loan sales of $8,000 during
the nine months ended March 31, 1997.
Other Expenses. Other expenses increased to $2.7 million for the nine months
ended March 31, 1998 as compared with $2.4 million for the nine months ended
March 31, 1997, an increase of $219,000. An overall decrease of $540,000 in
deposit and other insurance costs was largely offset by $485,000 of personnel
costs attributable to awards granted during the current nine months under the
Management Recognition Plan. Exclusive of the Management Recognition Plan costs,
personnel costs increased by $157,000 as a result of growth, normal compensation
adjustments, and the higher costs associated with the Company's Employee Stock
Ownership Plan. In addition, other expenses increased by $91,000 as a result of
growth and additional costs arising from operation as a publicly held company.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income or loss before income taxes, was 35.7% and 35.0% for the nine month
periods ended March 31, 1998 and 1997, 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
March 31, 1998, as computed under North Carolina regulations, was approximately
20%. On a consolidated basis, liquid assets represent approximately 26% 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.
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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
March 31, 1998, Richmond Savings exceeded the capital requirements of both the
FDIC and the N. C. Administrator.
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
developed a plan for identifying, renovating, testing and implementing its
systems for Year 2000 processing and internal control requirements. Based upon
progress to date in carrying out that plan, management believes that the Company
will be Year 2000 compliant on a timely basis. The full cost for becoming Year
2000 compliant has not been determined; however, management believes it will not
be material to the Company's financial statements.
-11-
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.
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1998.
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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: May 5, 1998 By: /s/ R. Larry Campbell
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R. Larry Campbell
Chief Executive Officer
Date: May 5, 1998 By: /s/ Winston G. Dwyer
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Winston G. Dwyer
Chief Financial Officer
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