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, 1998
[_] 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
--- ---
As of January 29, 1999, 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 12 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
DECEMBER 31, 1998 AND JUNE 30, 1998.......................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997........ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 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........................................ 7
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,
1998 June 30,
ASSETS (Unaudited) 1998 *
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(In Thousands)
Cash on hand and in banks $ 2,161 $ 961
Interest-bearing balances in other banks 7,216 7,811
Investment securities available for sale, at fair value 10,835 10,295
Investment securities held to maturity, at amortized cost 4,907 5,670
Loans held for sale - 1,057
Loans receivable, net 86,512 83,623
Accrued interest receivable 541 583
Premises and equipment, net 2,381 2,076
Stock in the Federal Home Loan Bank, at cost 735 735
Foreclosed real estate 20 20
Other assets 1,246 1,080
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TOTAL ASSETS $ 116,554 $ 113,911
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 99,640 $ 93,415
Other borrowed funds - 3,200
Accrued interest payable 128 152
Advance payments by borrowers for property taxes
and insurance 154 419
Accrued expenses and other libbilities 847 1,337
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TOTAL LIABILITIES 100,769 98,523
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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
shares issued and outstanding 7,846 7,852
ESOP loan receivable, unearned ESOP compensation and
unvested restricted stock (2,415) (2,531)
Retained earnings, substantially restricted 10,320 10,042
Unrealized holding gains 34 25
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TOTAL STOCKHOLDERS' EQUITY 15,785 15,388
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 116,554 $ 113,911
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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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1998 1997 1998 1997
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(In Thousands except per share data)
INTEREST INCOME
Loans $ 1,800 $ 1,659 $ 3,560 $ 3,330
Investments and deposits
in other banks 310 493 624 947
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TOTAL INTEREST INCOME 2,110 2,152 4,184 4,277
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INTEREST EXPENSE
Deposit accounts 1,111 1,028 2,186 2,032
Borrowings - - - 4
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TOTAL INTEREST EXPENSE 1,111 1,028 2,186 2,036
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NET INTEREST INCOME 999 1,124 1,998 2,241
PROVISION FOR LOAN LOSSES 24 18 58 41
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 975 1,106 1,940 2,200
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OTHER INCOME
Transaction and other
service fee income 90 82 185 160
Gain on sale of loans 56 22 124 34
Other income 34 50 62 114
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TOTAL OTHER INCOME 180 154 371 308
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OTHER EXPENSES
Personnel costs 453 406 857 788
Occupancy 48 33 91 69
Equipment rental and
maintenance 55 50 96 102
Marketing 20 22 40 38
Data processing and
outside service fees 92 77 169 153
Federal and other
insurance premiums 22 21 44 44
Supplies, telephone and
postage 39 35 68 65
Other 97 103 179 179
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TOTAL OTHER EXPENSES 826 747 1,544 1,438
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INCOME BEFORE
INCOME TAX EXPENSE 329 513 767 1,070
INCOME TAX EXPENSE 118 183 277 385
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NET INCOME $ 211 $ 330 $ 490 $ 685
========== ========== ========== ==========
NET INCOME PER COMMON SHARE
Basic and diluted $.12 $.19 $.28 $.39
Weighted average shares
outstanding 1,736,901 1,748,736 1,751,091 1,747,485
DIVIDEND PER COMMON SHARE $.06 $.06 $.12 $.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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1998 1997
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 490 $ 685
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 89 88
Amortization, net 7 (27)
Gain on sale of assets, net (124) -
Origination of mortgage loans held for sale (6,219) (1,992)
Proceeds from sale of loans held for sale 7,400 2,026
Release of ESOP shares 40 60
Amortization of stock awards under management
recognition plan 69 -
Provision for loan losses 58 41
Deferred compensation 25 30
Change in assets and liabilities
Decrease in accrued interest receivable 42 65
Increase in other assets (231) (369)
Decrease in accrued interest payable (24) (22)
Increase (decrease) in accrued expenses and
other liabilities (520) 27
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,102 612
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CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-earning
balances in other banks 595 (56)
Purchases of:
Available for sale investment securities (4,529) (8,990)
Held to maturity investment securities (2,500) (503)
Proceeds from sales, maturities and calls of:
Available for sale investment securities 4,000 9,486
Held to maturity investment securities 3,259 655
Net increase in loans (2,947) (3,558)
Purchase of property and equipment (329) (104)
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NET CASH USED BY
INVESTING ACTIVITIES (2,451) (3,070)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand accounts 1,253 1,425
Net increase in certificates of deposit 4,972 1,884
Decrease in borrowed funds (3,200) (500)
Decrease in advance payments by borrowers for
taxes and insurance (265) (288)
Cash dividends paid (211) (209)
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,549 2,312
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NET INCREASE (DECREASE) IN
CASH ON HAND AND IN BANKS 1,200 (146)
CASH ON HAND AND IN BANKS, BEGINNING 961 1,790
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CASH ON HAND AND IN BANKS, ENDING $ 2,161 $ 1,644
========= =========
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, 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 six month periods ended December 31, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 1999.
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 shares of common stock 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. Unearned shares in the management recognition plan
had no dilutive effect for the three and six months ended December 31, 1998. No
potentially dilutive securities were outstanding during the three and six months
ended December 31, 1997.
NOTE C - COMPREHENSIVE INCOME
On July 1, 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS No. 130). This pronouncement
establishes standards for the reporting and display of comprehensive income and
its components in a full set of financial statements. Comprehensive income is
defined as the change in equity during a period for non-owner transactions and
is divided into net income and other comprehensive income. Other comprehensive
income includes revenues, expenses, gains and losses that are excluded from
earnings under current accounting standards. This statement does not change or
modify the reporting or display in the statement of operations. SFAS No. 130 is
effective for the Company for interim and annual periods beginning on or after
July 1, 1998. Comparative financial statements for earlier periods are required
to reflect retroactive application of this statement. For the three months ended
December 31, 1998 and 1997, total comprehensive income, consisting of net income
and unrealized securities gains and losses, net of taxes, was $206,000 and
$345,000, respectively. For the six months ended December 31, 1998 and 1997,
total comprehensive income was $499,000 and $739,000, respectively.
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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, 1998 and June 30, 1998
Consolidated total assets increased by $2.7 million during the six months ended
December 31, 1998, from $113.9 million at June 30, 1998 to $116.6 million at
December 31, 1998. The Company began the current fiscal year by using liquid
assets to repay on July 3, 1998 borrowings of $3.2 million that had been
outstanding as of the beginning of the quarter. The borrowings had been obtained
during the prior quarter to provide funding for payment on June 18, 1998 of a
special $6.00 per share return of capital dividend which aggregated $11.4
million. During the current six month period, total deposits grew by 6.7% from
$93.4 million to $99.6 million, an increase of $6.2 million. Of this increase,
$3.7 million was generated from the Bank's new full service branch that was
opened on September 28, 1998 in Laurinburg, North Carolina.
During the six months, reductions of $595,000 and $763,000, respectively, in
interest-bearing balances in other banks and investment securities held to
maturity, together with the growth in deposits described above and the sale of
$1.1 million of loans which were held for sale at June 30, 1998, provided
funding to replenish the liquid assets used for the repayment of borrowings
discussed above and for an increase of $2.9 million in loans receivable, which
grew from $83.6 million at the beginning of the current six month period to
$86.5 million at period end.
Total stockholders' equity was $15.8 million at December 31, 1998 as compared
with $15.4 million at June 30, 1998, an increase of $397,000 which resulted
principally from net income of $490,000 for the six months, while the regular
quarterly dividends during the period aggregated $211,000 or $.12 per share. At
December 31, 1998, both the Holding 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, 1998
and 1997
Net Income. Net income for the quarter ended December 31, 1998 was $211,000, or
$.12 per share, as compared with net income of $330,000, or $.19 per share, for
the three months ended December 31, 1997, a decrease of $119,000 or $.07 per
share. This decrease resulted principally from a reduction of $10.3 million in
net interest earning assets arising from the payment on June 19, 1998 of a
special dividend that aggregated $11.4 million. Based upon yields currently
available on liquid assets, payment of the special dividend in June had the
effect of reducing net interest income and income before income taxes during the
three months ended December 31, 1998 by approximately $140,000, while reducing
after tax net income by approximately $90,000. In addition, during the current
quarter the Company incurred additional operating costs of approximately $46,000
and $23,000, respectively, relating to the opening of the new Laurinburg full
service branch facility and the Company's Year 2000 compliance program.
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Net Interest Income. Net interest income for the quarter ended December 31,
1998 was $1.0 million as compared with $1.1 million during the quarter ended
December 31, 1997, a decrease of $125,000. The decrease resulted primarily from
payment of the special dividend discussed under the caption "Net Income," offset
somewhat by a larger concentration of interest earning assets in higher yielding
loans during the current quarter.
Provision for Loan Losses. The provision for loan losses was $24,000 and
$18,000 for the quarters ended December 31, 1998 and 1997, respectively. There
were net loan charge-offs of $4,000 during the quarter ended December 31, 1998
as compared with net charge-offs of $17,000 during the quarter ended December
31, 1997. At December 31, 1998, nonaccrual loans aggregated $140,000, while the
allowance for loan losses stood at $487,000.
Other Income. Other income was $180,000 for the quarter ended December 31, 1998
as compared with $154,000 for the quarter ended December 31, 1997, an increase
of $26,000 resulting principally from an increase in gains from the sale of
loans.
Other Expenses. Other expenses increased to $826,000 during the quarter ended
December 31, 1998 as compared with $747,000 for the quarter ended December 31,
1997, an increase of $79,000. In addition to the cost increases described under
the caption "Net Income," personnel costs increased by $35,000 as a result of
costs attributable to awards previously granted under the Management Recognition
Plan.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income before income taxes, was 35.9% and 35.7%, respectively, for the quarters
ended December 31, 1998 and 1997.
Comparison of Results of Operations for the Six Months Ended December 31, 1998
and 1997
Net Income. Net income for the six months ended December 31, 1998 was $490,000,
or $.28 per share, as compared with net income of $685,000, or $.39 per share,
for the six months ended December 31, 1997, a decrease of $195,000 or $.11 per
share. This decrease resulted principally from a reduction of $9.8 million in
net interest earning assets arising from the payment on June 19, 1998 of a
special dividend that aggregated $11.4 million. Based upon yields currently
available on liquid assets, payment of the special dividend in June had the
effect of reducing net interest income and income before income taxes during the
six months ended December 31, 1998 by approximately $285,000, while reducing
after tax net income by approximately $182,000. In addition, during the current
six months the Company incurred additional operating costs of approximately
$48,000 and $27,000, respectively, relating to the opening of the new Laurinburg
full service branch facility and the Company's Year 2000 compliance program.
Net Interest Income. Net interest income for the six months ended December 31,
1998 was $2.0 million as compared with $2.2 million during the six months ended
December 31, 1997, a decrease of $243,000. The decrease resulted primarily from
payment of the special dividend discussed under the caption "Net Income," offset
somewhat by a larger concentration of interest earning assets in higher yielding
loans during the current quarter.
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Provision for Loan Losses. The provision for loan losses was $58,000 and
$41,000 for the six months ended December 31, 1998 and 1997, respectively. There
were net loan charge-offs of $8,000 during the six months ended December 31,
1998 as compared with net charge-offs of $32,000 during the six months ended
December 31, 1997. At December 31, 1998, nonaccrual loans aggregated $140,000,
while the allowance for loan losses stood at $487,000.
Other Income. Other income was $371,000 for the six months ended December 31,
1998 as compared with $308,000 for the six months ended December 31, 1997, an
increase of $63,000 resulting principally from an increase in gains from the
sale of loans.
Other Expenses. Other expenses increased to $1.5 million during the six months
ended December 31, 1998 as compared with $1.4 million for the six months ended
December 31, 1997, an increase of $106,000. In addition to the cost increases
described under the caption "Net Income," personnel costs increased by $69,000
as a result of costs attributable to awards previously granted under the
Management Recognition Plan.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income before income taxes, was 36.1% and 36.0%, respectively, for the six
months ended December 31, 1998 and 1997.
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, 1998, as computed under North Carolina regulations, was
approximately 22%. On a consolidated basis, liquid assets also represent
approximately 22% 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
December 31, 1998, Richmond Savings exceeded the capital requirements of both
the FDIC and the N. C. Administrator.
YEAR 2000 COMPLIANCE ISSUES
All levels of the Company's management and its Board of Directors are aware of
the issues presented by the Year 2000 century change and the serious effects it
may have on the Company and its customers. In May 1997, the Federal Financial
Institutions Examination Council ("FFIEC") issued an Interagency Statement,
"Year 2000 Project Management Awareness", to emphasize the critical issues that
need to be addressed to implement an effective Year 2000 project management
plan. The FFIEC Statement identifies five phases of the Year 2000 project
management process. The Company has 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 will be Year 2000
compliant. Although the Company relies entirely upon outside vendors and service
providers for its computer hardware and software and its security and
communications equipment, all date sensitive systems are being evaluated for
Year 2000 compliance. During 1998, the Company completed upgrading and testing
of systems that have been identified as critical to conducting its banking
business. Testing of systems with lower priorities is planned for early 1999.
The Company is also developing contingency plans for its computer processes,
including the use of alternative systems and the manual processing of certain
critical operations. In addition, the Company is undertaking efforts to ensure
that significant vendor and customer relationships are or will be Year 2000
compliant. There can be no guarantee that the systems of other entities on which
the Company either directly or indirectly rely will be timely converted, or that
a failure to convert by another entity, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company in future periods. However, the Company's management believes that all
of its systems will be verified Year 2000 compliant and that the Company will be
able to process without interruption into the next millennium. The Company
estimates that its total Year 2000 compliance costs will aggregate approximately
$308,000, including capital expenditures of approximately $225,000 and other
expenses of approximately $83,000 that have been or will be charged to
operations. 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.
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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 18, 1998. Of
1,905,545 shares entitled to vote at the meeting, 1,571,968 shares voted. The
following matters were voted on at the meeting:
Number of Votes
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For Against Withheld Abstain
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1. Election of directors:
J. Stanley Vetter 1,539,374 - 32,594 -
John T. Page, Jr. 1,536,541 - 35,427 -
Russell E. Bennett 1,542,114 - 29,854 -
R. Larry Campbell 1,547,118 - 24,850 -
Buena Vista Coggin 1,542,114 - 29,854 -
Joe M. McLaurin 1,542,114 - 29,854 -
W. Jesse Spencer 1,535,031 - 36,937 -
E.E. Vuncannon, Jr. 1,536,341 - 35,627 -
Number of Votes
-----------------------------------------
For Against Non-Vote Abstain
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2. Ratification of Dixon Odom
PLLC to serve as independent
auditor for the year ending
June 30, 1999 1,554,456 3,422 14,090 -
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, 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: February 4, 1999 By: /s/ R. Larry Campbell
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R. Larry Campbell
Chief Executive Officer
Date: February 4, 1999 By: /s/ Winston G. Dwyer
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Winston G. Dwyer
Chief Financial Officer
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