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, 1999
[_] 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 April 30, 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 I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Financial Condition
March 31, 1999 and June 30, 1998....................... 3
Consolidated Statements of Operations
Three and Nine Months Ended March 31, 1999 and 1998.... 4
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1999 and 1998.............. 5
Notes to Consolidated Financial Statements............. 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............. 11
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Part I. FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
================================================================================
March 31,
1999 June 30,
ASSETS (Unaudited) 1998 *
----------- ---------
(In Thousands)
Cash on hand and in banks $ 716 $ 961
Interest-bearing balances in other banks 9,242 7,811
Investment securities available for sale, at fair value 10,272 10,295
Investment securities held to maturity, at amortized cost 7,328 5,670
Loans held for sale - 1,057
Loans receivable, net 85,871 83,623
Accrued interest receivable 636 583
Premises and equipment, net 2,370 2,076
Stock in the Federal Home Loan Bank, at cost 735 735
Foreclosed real estate 20 20
Other assets 1,326 1,080
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TOTAL ASSETS $118,516 $113,911
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $101,399 $ 93,415
Other borrowed funds - 3,200
Accrued interest payable 130 152
Advance payments by borrowers for property taxes
and insurance 272 419
Accrued expenses and other liabilities 802 1,337
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TOTAL LIABILITIES 102,603 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 (2,355) (2,531)
Retained earnings, substantially restricted 10,426 10,042
Unrealized holding gains (losses) (4) 25
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TOTAL STOCKHOLDERS' EQUITY 15,913 15,388
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $118,516 $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 Nine Months Ended
March 31, March 31,
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1999 1998 1999 1998
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(In Thousands except per share data)
INTEREST INCOME
Loans $1,768 $1,737 $5,328 $5,067
Investments and deposits in other banks 343 412 967 1,359
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TOTAL INTEREST INCOME 2,111 2,149 6,295 6,426
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INTEREST EXPENSE
Deposit accounts 1,098 1,017 3,284 3,049
Borrowings - - - 4
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TOTAL INTEREST EXPENSE 1,098 1,017 3,284 3,053
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NET INTEREST INCOME 1,013 1,132 3,011 3,373
PROVISION FOR LOAN LOSSES 24 18 82 59
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 989 1,114 2,929 3,314
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OTHER INCOME
Transaction and other service fee income 80 84 265 244
Gain on sale of loans 67 19 191 53
Other 34 31 96 145
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TOTAL OTHER INCOME 181 134 552 442
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OTHER EXPENSES
Personnel costs 474 884 1,331 1,672
Occupancy 43 36 134 105
Equipment rental and maintenance 54 44 150 146
Marketing 21 15 61 53
Data processing and outside service fees 99 78 268 231
Federal and other insurance premiums 22 23 66 67
Supplies, telephone and postage 35 35 103 100
Other 110 98 289 277
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TOTAL OTHER EXPENSES 858 1,213 2,402 2,651
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INCOME BEFORE INCOME TAXES 312 35 1,079 1,105
INCOME TAX EXPENSE 104 10 381 395
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NET INCOME $ 208 $ 25 $ 698 $ 710
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NET INCOME PER COMMON SHARE (Note B)
BASIC AND DILUTED $ .12 $ .01 $ .40 $ .40
====== ====== ====== ======
DIVIDEND PER COMMON SHARE $ .06 $ .06 $ .18 $ .18
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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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Nine Months Ended
March 31,
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1999 1998
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 698 $ 710
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 141 129
Amortization, net 12 (68)
Gain on sale of assets, net (191) -
Origination of mortgage loans held for sale (10,581) (3,331)
Proceeds from sale of loans held for sale 11,829 3,384
Release of ESOP shares 66 95
Amortization of stock awards under management
recognition plan 103 474
Provision for loan losses 82 59
Deferred income taxes - (92)
Deferred compensation 28 65
Change in assets and liabilities
Increase in accrued interest receivable (53) (77)
Increase other assets (384) (195)
Decrease in accrued interest payable (22) (10)
Increase (decrease) in accrued expenses and other liabilities (547) 67
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,181 1,210
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CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-earning balances in other banks (1,431) (4,791)
Purchases of:
Available for sale investment securities (5,029) (15,062)
Held to maturity investment securities (5,002) (503)
Proceeds from sales, maturities and calls of:
Available for sale investment securities 5,000 16,687
Held to maturity investment securities 3,339 1,198
Net increase in loans (2,330) (4,895)
Purchase of property and equipment (297) (110)
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NET CASH USED BY
INVESTING ACTIVITIES (5,750) (7,476)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand accounts 1,632 2,763
Net increase in certificates of deposit 6,352 3,782
Decrease in borrowed funds (3,200) (500)
Decrease in advance payments by borrowers for taxes and insurance (147) (168)
Cash dividends paid (313) (317)
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 4,324 5,560
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NET DECREASE IN
CASH ON HAND AND IN BANKS (245) (706)
CASH ON HAND AND IN BANKS, BEGINNING 961 1,790
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CASH ON HAND AND IN BANKS, ENDING $ 716 $ 1,084
======== ========
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, 1999 and 1998, in conformity with generally
accepted accounting principles. The financial statements include the accounts of
Carolina Fincorp, Inc. (the "Company") and its wholly-owned subsidiary, Richmond
Savings Bank, Inc., SSB ("Richmond Savings" or the "Bank"), and the Bank's
wholly-owned subsidiary, Richmond Investment Services, Inc. Operating results
for the three and nine month periods ended March 31, 1999 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. The weighted average number of shares outstanding
were 1,721,789 and 1,735,684, respectively, for the three and nine months ended
March 31, 1999, and 1,769,459 and 1,757,219, respectively, for the three and
nine months ended March 31, 1998. The dilutive effect of unearned shares in the
management recognition plan was negligible for the three and nine months ended
March 31, 1999.
NOTE C - COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, total comprehensive income,
consisting of net income and unrealized securities gains and losses, net of
taxes, was $170,000 and $16,000, respectively. For the nine months ended March
31, 1999 and 1998, total comprehensive income was $669,000 and $778,000,
respectively.
NOTE D - GRANT OF STOCK OPTIONS
On February 19, 1999, the Company granted to directors, officers and key
employees options to purchase 138,857 shares of the Company's common stock at an
exercise price of $7.75 per share. All options granted will be fully vested
within three years of the grant date, and any unexercised options expire
November 24, 2007.
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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, 1999 AND JUNE 30, 1998
Consolidated total assets increased by $4.6 million during the nine months ended
March 31, 1999, from $113.9 million at June 30, 1998 to $118.5 million at March
31, 1999. 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 year. The borrowings had been obtained during the prior
fiscal year 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 nine month period, total deposits grew by 8.5% from $93.4 million to
$101.4 million, an increase of $8.0 million. Of this increase, $4.9 million was
generated from the Bank's new full service branch that was opened on September
28, 1998 in Laurinburg, North Carolina.
During the nine months, in addition to the $8.0 million of deposit growth
described above, the Company generated additional funds of $1.2 million from
operations. After replenishment of the liquid assets used to repay borrowings
early in the year, other funds generated have been deployed to increase
interest-bearing bank balances and investment securities held to maturity by
$1.4 million and $1.7 million, respectively, and to provide for an increase in
loans receivable of $2.2 million, which grew from $83.6 million at the beginning
of the current nine month period to $85.9 million at period end.
Total stockholders' equity was $15.9 million at March 31, 1999 as compared with
$15.4 million at June 30, 1998, an increase of $525,000 which resulted
principally from net income of $698,000 for the nine months, while the regular
quarterly dividends during the period aggregated $313,000 or $.18 per share. At
March 31, 1999, 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 MARCH 31, 1999
AND 1998
Net Income. Net income for the quarter ended March 31, 1999 was $208,000, or
$.12 per share, as compared with net income of $25,000, or $.01 per share, for
the three months ended March 31, 1998, an increase of $183,000 or $.11 per
share. On January 23, 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 $440,000 was earned by
recipients, and therefore included in compensation expense immediately upon the
date of grant. The balance of the value of the shares granted is being included
ratably in compensation expense over four years. Net of applicable income taxes,
the additional $440,000 of MRP expense recognized during the quarter ended March
31, 1998 reduced net income for that quarter by approximately $275,000. Net
income for the quarter ended March 31, 1999 was affected by a lower level of net
earnings assets as a result of the one-time special cash dividend of $11.4
million ($6.00 per share) paid on June 18, 1998 and additional operating
expenses related to the full service branch office opened on September 28, 1999
in Laurinburg, North Carolina.
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Net Interest Income. Net interest income for the quarter ended March 31, 1999
was $1.0 million as compared with $1.1 million during the quarter ended March
31, 1998, a decrease of $119,000. 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 March 31, 1999 and 1998, respectively. There were net
loan charge-offs of $10,000 during the quarter ended March 31, 1999 as compared
with net charge-offs of $15,000 during the quarter ended March 31, 1998. At
March 31, 1999, nonaccrual loans aggregated $223,000, while the allowance for
loan losses stood at $501,000.
Other Income. Other income was $181,000 for the quarter ended March 31, 1999 as
compared with $134,000 for the quarter ended March 31, 1998, an increase of
$47,000 resulting principally from an increase in gains from the sale of loans.
Other Expenses. Other expenses decreased to $858,000 during the quarter ended
March 31, 1999 as compared with $1.2 million for the quarter ended March 31,
1998, a decrease of $355,000. Substantially all of this decrease relates to
personnel costs which declined by $410,000. As explained under the caption "Net
Income", this decrease in personnel costs is attributable to the significant
reduction in costs recorded during the current quarter for awards granted during
the prior year quarter under the Management Recognition Plan. Other components
of this expense category have risen during the current quarter principally as a
result of the opening of the Bank's new full service branch facility in
Laurinburg and because of costs associated with the Company's Year 2000
compliance plan.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income before income taxes, was 33.3% and 28.6% for the three months ended March
31, 1999 and 1998, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND
1998
Net Income. Net income for the nine months ended March 31, 1999 was $698,000, or
$.40 per share, as compared with net income of $710,000, also $.40 per share,
for the nine months ended March 31, 1998, a decrease of $12,000. A decrease in
net interest income of $362,000 for the current nine month period was offset by
a decrease of $249,000 in non-interest expenses and an increase of $110,000 in
non-interest income, while reducing after tax net income by approximately
$182,000. In addition, during the current nine 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 was $3.0 million for the nine months
ended March 31, 1999 as compared with $3.4 million during the first nine months
of the previous fiscal year, a decrease of $362,000. This decrease resulted
principally from a reduction of $10.1 million in average net interest earning
assets arising from the payment on June 18, 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 for the nine months ended March 31, 1999 by approximately
$375,000.
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Provision for Loan Losses. The provision for loan losses was $82,000 and $59,000
for the nine months ended March 31, 1999 and 1998, respectively. There were net
loan charge-offs of $18,000 during the nine months ended March 31, 1999 as
compared with net charge-offs of $47,000 during the nine months ended March 31,
1998. At March 31, 1999, nonaccrual loans aggregated $223,000, while the
allowance for loan losses stood at $501,000.
Other Income. Other income was $552,000 for the nine months ended March 31, 1999
as compared with $442,000 for the nine months ended March 31, 1998, an increase
of $110,000 resulting principally from an increase in gains from the sale of
loans.
Other Expenses. Other expenses declined to $2.4 million during the nine months
ended March 31, 1999 as compared with $2.7 million for the nine months ended
March 31, 1998, an decrease of $249,000. This decrease relates to personnel
costs which declined by $341,000 as a result of the significant reduction in
costs recorded during the current nine month period for awards granted during
the prior year under the Management Recognition Plan. Other components of this
expense category have risen during the current nine month period principally as
a result of the opening of the Bank's new full service branch facility in
Laurinburg and because of costs associated with the Company's Year 2000
compliance plan.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income before income taxes, was 35.3% and 35.7%, respectively, for the nine
months ended March 31, 1999 and 1998.
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, 1999, as computed under North Carolina regulations, was approximately
22.5%. On a consolidated basis, liquid assets also represent approximately 23.3%
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,
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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, 1999, 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 1998, 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
$313,000, including capital expenditures of approximately $225,000 and other
expenses of approximately $88,000 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 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, 1999.
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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 4, 1999 By: /s/ R. Larry Campbell
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R. Larry Campbell
Chief Executive Officer
Date: May 4, 1999 By: /s/ Winston G. Dwyer
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Winston G. Dwyer
Chief Financial Officer
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