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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
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Commission file number 000-21701
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CAROLINA FINCORP, INC.
(Name of small business issuer in its charter)
North Carolina 56-1978449
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
115 South Lawrence Street
Rockingham, North Carolina 27380-1597
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(Address of principal executive offices) (Zip Code)
(910) 997-6245
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(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, no par value Nasdaq SmallCap Market
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(Title of class) (Name of each exchange on which registered)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year $9,156,438
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
Common Stock, no par value -- $13,844,678 (based on the price at which the stock
was sold on September 7, 1999).
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, no par value 1,871,545
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(Class) (Outstanding at September 7, 1999)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended June 30, 1999
(the "1999 Annual Report"), are incorporated by reference into Part I and Part
II.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on November 17, 1999 (the "Proxy Statement"), are incorporated by reference
into Part III.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Prior to November 22, 1996, Richmond Savings, Inc., SSB (the "Bank")
operated as a mutual North Carolina-chartered savings bank. On November 22,
1996, the Bank converted from a North Carolina-chartered mutual savings bank to
a North Carolina-chartered stock savings bank (the "Conversion"). In connection
with the Conversion, all of the issued and outstanding capital stock of the Bank
was acquired by Carolina Fincorp, Inc., a North Carolina corporation (the
"Company"), which was organized to become the Bank's holding company and
incorporated on June 5, 1996. At that time, the Company had an initial public
offering of its common stock, no par value (the "Common Stock").
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina. The Company's and the Bank's principal
office is located at 115 South Lawrence Street, Rockingham, North Carolina. The
Company's activities consist of holding the indebtedness outstanding from the
Richmond Savings Bank, Inc., SSB Employee Stock Ownership Plan (the "ESOP"),
investing any remaining proceeds of the Conversion which were retained at the
holding company level, and owning the Bank. The Company's principal sources of
income are interest payments received from the ESOP with respect to the ESOP
loan and dividends paid by the Bank to the Company, if any.
The Bank was organized in 1906, and has been a member of the Federal Home
Loan Bank (the "FHLB") system and its deposits have been federally insured since
1957. The deposits of the Bank are insured by the Savings Association Insurance
Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC") to
the maximum amount permitted by law.
The Bank conducts business through two full service offices in Rockingham
and three full services offices in Southern Pines, Ellerbe, and Laurinburg,
North Carolina. Under FDIC regulations, stock repurchases may be made by the
savings bank only upon receipt of FDIC approval. The Bank's primary market area
consists of Richmond, Moore and Scotland counties in North Carolina. At June
30, 1999, the Company had total assets of $119.2 million, net loans of $89.3
million, deposits of $10.2 million, investment securities of $17.4 million and
stockholders' equity of $15.8 million.
At June 30, 1999, the Company and the Bank had a total of 46 full-time
employees and 2 part-time employees.
The Company has no operations and conducts no business of its own other
than owning the Bank, lending funds to the ESOP, and investing its portion of
the net proceeds received in the Conversion. Accordingly, the discussion of the
business which follows in this Form 10-KSB concerns the business conducted by
the Bank, unless otherwise indicated.
Lending Activities
The Bank is engaged primarily in the business of attracting deposits from
the general public and using such deposits to make mortgage loans secured by
real estate. The Bank's primary source of revenue is interest income from its
lending activities, consisting primarily of mortgage loans for the purchase or
refinancing of one-to-four family residential real property located in its
primary market area. The Bank also makes home equity loans and loans secured by
multi-family and commercial properties, construction loans, home improvement
loans, savings accounts loans and various types of consumer loans. Over 88.6%
of the Bank's loan portfolio, before net items, is secured by real estate.
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On June 30, 1999, the Bank's largest single outstanding loan had a balance of
approximately $1.5 million. This loan was performing in accordance with its
original terms. In addition to interest earned on loans, the Bank receives fees
in connection with loan originations, loan servicing, loan modifications, late
payments, loan assumptions and other miscellaneous services. Adjustable rate
loans are generally originated with the intention that they be held in the
Bank's portfolio. Fixed rate one-to-four family residential loans are generally
originated in conformity with secondary market purchase requirements and sold in
the secondary market. During fiscal 1999, 1998, and 1997, the Bank sold $13.1
million, $6.4 million, and $1.0 million, respectively, of fixed rate loans in
order to better manage its interest rate risk.
The Bank's net loan portfolio totaled approximately $89.3 million at June
30, 1999 representing 74.9% of the Bank's total assets at such date. At June 30,
1999, 63.0% of the Bank's loan portfolio, before net items, was composed of one-
to-four family residential mortgage loans. Home equity and home improvement
loans represented 11.7% of the Bank's loan portfolio, before net items, and
multi-family residential and commercial and construction loans represented 14.1%
of the Bank's loan portfolio, before net items, on such date. As of June 30,
1999, 70.4% of the loans in the Bank's loan portfolio had adjustable interest
rates. Loans maturing or repricing on or after June 30, 2000, consist of fixed
rate real estate loans of $16.4 million, adjustable rate real estate loans of
$35.7 million, other fixed rate loans of $9.0 million and other adjustable rate
loans of $234,000. See Note C - Loans Receivable to the Financial Statements
Contained in the 1999 Annual Report.
Investment Securities
Interest and dividend income from other investment securities provide the
second largest source of income to the Bank after distribution from the Bank.
Interest and dividend income from investment securities also generally provide
the second largest source of income to the Company after interest on loans. In
addition, the Company and the Bank receive interest income from deposits in
other financial institutions. At June 30, 1999, the Company and Bank's
investment securities portfolio totaled approximately $25.2 million and
consisted of U.S. government and agency securities, mortgage-backed securities,
municipal bonds, interest-earning deposits in other financial institutions,
stock of the FHLB of Atlanta, and investments in corporate debt securities of
large financial institutions.
Investments in mortgage-backed securities involve a risk that, because of
changes in the interest rate environment, actual prepayments will be greater
than estimated prepayments over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments, thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities. In addition, the market value of such securities may be adversely
affected by changes in interest rates. See Note B - Investment Securities to
the Financial Statements Contained in the 1999 Annual Report.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As
of June 30, 1999, the Bank's investment in stock of the FHLB of Atlanta was
$727,000.
North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets which may be invested in specified short-term securities. See "--
Regulation of the Bank - Liquidity." The Bank is also permitted to make certain
other securities investments.
Deposits and Borrowings
Deposits. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. The Bank attracts both short-term and long-term
deposits from the general public by offering a variety of accounts and rates.
The Bank offers passbook savings accounts, statement savings accounts, demand
deposit accounts, negotiable order of withdrawal accounts, individual retirement
accounts, and fixed rate certificates with varying maturities. At June 30,
1999, 11.1% of the Bank's deposits consisted of passbook and statement savings
accounts, 12.8% consisted of interest-
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bearing transaction accounts and 3.0% consisted of noninterest-bearing
transaction accounts. Although the vast majority of the Bank's deposits are
authentic deposit accounts, management of the Bank believes that it has been
successful in maintaining a high percentage of demand deposit and transaction
accounts which are generally considered to be less interest rate sensitive than
certificated accounts. This is consistent with the Bank's asset/liability
management strategies. Deposit flows are greatly influenced by economic
conditions, the general level of interest rates, competition, and other factors,
including the restructuring of the thrift industry. The Bank's savings deposits
traditionally have been obtained primarily from its primary market area. The
Bank utilizes traditional marketing methods to attract new customers and savings
deposits, including print media advertising and direct mailings. The Bank does
not advertise for deposits outside of its local market area or utilize the
services of deposit brokers. See Note G - Deposit Accounts to the Financial
Statements contained in the 1999 Annual Report.
In addition to deposits, the Bank derives funds from loan principal
repayments, interest payments, investment income and principal repayments,
interest from its own interest-earning deposits, interest income and repayments
from mortgage-backed securities and otherwise from its operations. Loan
repayments are a relatively stable source of funds while deposit inflows and
outflows may be significantly influenced by general interest rates and money
market conditions.
Borrowings. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes. Although it has not
done so in several years, the Bank may obtain advances from the FHLB of Atlanta
to supplement its liquidity needs. The FHLB system functions in a reserve credit
capacity for savings institutions. As a member, the Bank is required to own
capital stock in the FHLB of Atlanta and is authorized to apply for advances
from the FHLB of Atlanta on the security of that stock and a floating lien on
certain of its real estate secured loans and other assets. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's creditworthiness. As of June 30, 1999, the Bank had no outstanding
advances from the FHLB of Atlanta. See Note F B Advances from Federal Home Loan
Bank and Other Borrowed Funds contained in the 1999 Annual Report.
Results of Operations
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its interest-
earning assets, such as loans and investments, and the cost of its interest-
bearing liabilities, consisting of deposits. The Bank's operations are affected
to a much lesser degree by non-interest income, such as transaction and other
service fee income, and other sources of income. The Bank's net income is also
affected by, among other things, provisions for loan losses and operating
expenses. The Bank's principal operating expenses, aside from interest expense,
consist of compensation and employee benefits, office occupancy costs, data
processing expenses and federal deposit insurance premiums. The Bank's results
of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and policies concerning monetary and fiscal affairs,
housing and financial institutions and the attendant actions of regulatory
authorities.
Market Area
The Bank's primary market area consists of Richmond, Moore and Scotland
Counties in North Carolina. Richmond County, which contains Rockingham, is
located in south central North Carolina near the North Carolina-South Carolina
boundary, and is the home of the North Carolina Motor Speedway, location of two
Winston-Cup stock car races annually. Moore County, which is immediately north
of Richmond County, is the home of several retirement communities and golf
resorts, including Pinehurst and Southern Pines. Scotland County, which includes
Laurinburg, is located east of Richmond County. Richmond and Scotland Counties
have experienced relatively slow growth during the last five (5) years. Moore
County, which includes the resort and retirement communities of Pinehurst and
Southern
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Pines, has experienced greater growth. The economy of the Bank's primary market
area is largely rural, with employment diversified among manufacturing,
agricultural, retail and wholesale trade, government, services and utilities.
Major area employers include UCO Fabrics, Burlington Industries, Sara Lee
Hosiery, Perdue Farms, Inc., Richmond Memorial Hospital, FirstHealth Moore
Regional Hospital, Gullistan Carpets, Resorts of Pinehurst, Campbell Soup
Company, WestPoint Stevens, Abbott Laboratories and LOF Glass.
Subsidiaries
The Bank is the only subsidiary of the Company. As a North Carolina
chartered savings bank, the Bank is able to invest up to 10% of its total assets
in subsidiary service corporations. However, any investment in a service
corporation which would cause the Bank to exceed an investment of 100% of its
Tier One Capital must receive prior approval of the FDIC.
The Bank has one wholly-owned subsidiary, Richmond Investment Services,
Inc., a North Carolina corporation ("R.I.S."). R.I.S. acts as an agent in the
sale of annuities, Medicare and Medicaid supplements, and major medical and life
insurance policies, and it provides certain investment brokerage services
through UVEST Investment Services. In addition, R.I.S. owns certain real
property. Regulations of the North Carolina Administrator, Savings Institutions
Division, North Carolina Department of Commerce (the "Administrator") and the
FDIC place limitations upon the activities of subsidiaries of North Carolina-
chartered savings banks. The total assets of R.I.S. at June 30, 1999 were
$227,000, and the net income for that subsidiary for the year ended June 30,
1999 was $24,000.
Competition
The Bank faces strong competition both in attracting deposits and making
real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them. The
Bank has also faced additional significant competition for investors' funds from
short-term money market securities and other corporate and governmental
securities. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. The
Bank competes for loans primarily through the interest rates and loan fees its
charges, the efficiency and quality of service it provides borrowers, and its
more flexible underwriting standards. Competition may increase as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions.
Supervision and Regulation
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
Regulation of the Company
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the
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BHCA, the Company's activities and those of its subsidiaries are limited to
banking, managing or controlling banks, furnishing services to or performing
services for its subsidiaries or engaging in any other activity which the
Federal Reserve determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The BHCA prohibits the
Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or
savings bank or merging or consolidating with another bank holding company or
savings bank holding company without prior approval of the Federal Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA does not place territorial restrictions on the
activities of such non-banking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all acceptable capital standards as of the
time the institution fails to comply with such capital restoration plan. Under a
policy of the Federal Reserve with respect to bank holding company operations, a
bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
Federal Reserve under the BHCA also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the SAIF or the
Bank Insurance Fund (the "BIF") as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the SAIF or the BIF or both.
The FDIC's claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period unless the Company
(i) both before and after the redemption satisfies capital requirements for
"well capitalized" state member banks, (ii) received a one or two rating in its
last examination, and (iii) is not the subject of any unresolved supervisory
issues. As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding
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company laws of North Carolina. Accordingly, the Company is also subject to
regulation and supervision by the Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
guidelines. Under these regulations, the minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby
letters of credit) is 8%. At least half of the total capital is required to be
"Tier I capital," principally consisting of common stockholders' equity,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a minimum Tier I capital
(leverage) ratio, under which a bank holding company must maintain a minimum
level of Tier I capital to average total consolidated assets of at least 3% in
the case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank
holding companies are expected to maintain a Tier I capital (leverage) ratio of
at least 1% to 2% above the stated minimum.
Federal Securities Law
The Company has registered its Common Stock with the SEC pursuant to
Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") and
will not deregister the Common Stock for a period of three years following the
completion of the Conversion. As a result of such registration, the proxy and
tender offer rules, insider trading reporting requirements, annual and periodic
reporting and other requirements of the Exchange Act are applicable to the
Company.
Regulation of the Bank
General. Federal and state legislation and regulation significantly affect
the operations of federally insured savings institutions and other federally
regulated financial institutions. The operations of regulated depository
institutions, including the Bank, is subject to changes in applicable statutes
and regulations from time to time. Such changes may or may not be favorable to
the Bank.
The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability
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under various statutes and regulations applicable to property owners generally,
including statutes and regulations relating to the environmental condition of
real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) establish certain collateral requirements for losses to
affiliates; (ii) limit the extent to which the Bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such the Bank's capital stock and surplus, and contain an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, and certain affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the savings bank's
loans-to-one borrower limit as established by federal law and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus. Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the Bank. Any "interested"
director may not participate in the voting. The Federal Reserve has prescribed
the loan amount (which includes all other outstanding loans to such person), as
to which such prior board of director approval is required, as being the greater
of $25,000 or 5% of unimpaired capital and unimpaired surplus (up to $500,000).
Further, pursuant to Section 22(h), the Federal Reserve requires that loans to
directors, executive officers, and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and not involve more than the normal risk of repayment or present other
unfavorable features. Section 22(h) also generally prohibits a depository
institution from paying the overdrafts of any of its executive officers or
directors.
Insurance of Deposit Accounts. The FDIC administers two separate deposit
insurance funds. The SAIF maintains a fund to insure the deposits for most
savings institutions and the BIF maintains a fund to insure the deposits of most
commercial banks. The Bank is a member of the SAIF of the FDIC.
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The Bank is required to pay assessments to the FDIC based on a percentage
of its insured deposits. Under the FDIC's risk-based deposit insurance
assessment system, the assessment rate for an insured depository institution
depends on the assessment risk classification assigned to the institution by the
FDIC, which is determined by the institution's capital level and supervisory
evaluations. Based on the data reported to regulators for the date closest of
the last day of the seventh month preceding the semi-annual assessment period,
institutions are assigned to one of three capital groups B well capitalized,
adequately capitalized or undercapitalized B using the same percentage criteria
as in the prompt corrective action regulations. See "-- Prompt Corrective
Regulatory Action."
Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.
The assessment rate for SAIF members had ranged from 0.23% of deposits for
well capitalized institutions in Subgroup A to 0.31% of deposits for
undercapitalized institutions in Subgroup C while assessments for over 90% of
the BIF members had been the statutory minimum of $2,000. However, recently
enacted legislation provided for a one-time assessment equal to 65.7 basis
points times insured deposits as of March 31, 1995. This assessment fully
capitalized the SAIF. Accordingly, although the special assessment resulted in a
$519,000 one-time charge of the Bank, the recapitalization of the SAIF had the
effect of reducing the Bank's future deposit insurance premiums to the SAIF.
Under the recently enacted legislation, most BIF members will be assessed
approximately 1.3 basis points while the rate for most SAIF members will be
approximately 6.4 basis points until January 1, 2000. At that time, BIF and SAIF
members will begin pro rata sharing of the payment at an expected rate of 2.43
basis points.
Community Reinvestment Act. The Bank, like other financial institutions, is
subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of the
CRA is to encourage financial institutions to help meet the credit needs of its
entire community, including the needs of low- and moderate-income neighborhoods.
Financial institutions' compliance with the CRA is regularly evaluated by their
regulatory agencies. Under recently adopted regulations, institutions are first
evaluated and rated under three categories: a lending test, an investment test
and a service test. For each of these three tests, the institution is given a
rating of either "outstanding," "high satisfactory," "low satisfactory," "needs
to improve" or" substantial non-compliance." A set of criteria for each rating
has been developed and is included in the regulation. If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantitative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to its service area should
be considered. The ratings received under the three tests are used to determine
the overall composite CRA rating. The composite ratings are "outstanding,"
"satisfactory," "needs to improve" or "substantial non-compliance."
During the Bank's last compliance examination the Bank received a
"satisfactory" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by the Bank to acquire
branches or to acquire or combine with other financial institutions and take
other actions and could result in the denial of such applications.
Capital Requirements Applicable To The Bank. The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) 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 stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted
8
<PAGE>
assets, including certain off-balance sheet activities, such as standby letters
of credit, of at least 8%. At least half of the total capital is required to be
Tier I capital. The remainder ("Tier II capital") may consist of a limited
amount of subordinated debt, certain hybrid capital instruments, other debt
securities, certain types of preferred stock and a limited amount of loan loss
allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
Bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At June 30, 1999, the
Bank had a leverage ratio of 12.7%.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At June 30, 1999, the Bank complied with each of the capital requirements
of the FDIC and the Administrator.
Each federal banking agency is required to establish risk-based capital
standards that take adequate account of interest rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as reflect the
actual performance and expected risk of loss on multifamily mortgages.
On August 2, 1995, the federal banking agencies issued a joint notice of
adoption of final risk based capital rules to take account of interest rate
risk. The final regulation required an assessment of the need for additional
capital on a case-by-case basis, considering both the level of measured exposure
and qualitative risk factors. The final rule also stated an intent to, in the
future, establish an explicit minimum capital charge for interest rate risk
based on the level of a bank's measured interest rate risk exposure.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy.
Loans-To-One-Borrower. The Bank is subject to the Administrator's loans-to-
one-borrower limits. Under these limits, no loans and extensions of credit to
any borrower outstanding at one time and not fully secured by readily marketable
collateral shall exceed 15% of the net worth of the savings bank. Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of net worth. Notwithstanding the limits just described,
savings institutions may make loans-to-one-borrower, for any purpose, in an
amount up to $500,000. A savings institution is also authorized to make loans-
to-one-borrower to develop domestic residential housing units, not to exceed the
lesser of $30 million or 30% of the savings institution's net worth, provided
that (i) the purchase price of each single-family dwelling in the development
does not exceed $500,000; (ii) the savings institution is in compliance with its
fully phased-in capital requirements; (iii) the laws comply with applicable
loan-to-value requirements; (iv) the aggregate amount of loans made under this
authority does not exceed 150% of net worth; and (v) the institution's regulator
issues an order permitting the savings institution to use this higher limit.
These limits also authorize a savings bank to make loans-to-one-borrower to
finance the sale of real property acquired in satisfaction of debts in an amount
up to 50% of net worth.
As of June 30, 1999, the largest aggregate amount of loans which the Bank
had to any one borrower was $1.5 million. These loans were performing in
accordance with their original terms as of June 30, 1999. The Bank had no loans
outstanding which management believes violate the applicable loans-to-one-
borrower limits. The Bank does not believe that the loans-to-one-borrower
limits will have a significant impact on its business, operations and earnings.
9
<PAGE>
Limitations on Rates Paid for Deposits. Regulations promulgated by the FDIC
place limitations on the ability of insured depository institutions to accept,
renew or roll over deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in such
depository institution's normal market area. Under these regulations, "well
capitalized" depository institutions may accept, renew or roll such deposits
over without restriction, "adequately capitalized" depository institutions may
accept, renew or roll such deposits over with a waiver from the FDIC (subject to
certain restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The definitions
of "well capitalized," "adequately capitalized" and "undercapitalized" are the
same as the definitions adopted by the FDIC to implement the corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991.
See "--Prompt Corrective Regulatory Action." As of June 30, 1999, the Bank was
considered "well capitalized" and, thus, was not subject to the limitations on
rates payable on its deposits.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On June 30, 1999, the Bank was in compliance with this
requirement with an investment in FHLB of Atlanta stock of $727,000.
Each FHLB is required to contribute a portion of its reserves and undivided
profits to fund the principal and a portion of the interest on certain bonds and
certain other obligations which are used to fund the resolution of troubled
savings association cases, and to transfer a percentage of its annual net
earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Regulation D, promulgated by the Federal Reserve,
imposes reserve requirements on all depository institutions, including savings
banks and savings institutions, which maintain transaction accounts or non-
personal time deposits. Checking accounts, NOW accounts and certain other types
of accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits (including certain money
market deposit accounts) at a savings institution. For 1999, a depository
institution must maintain average daily reserves equal to 3% of the first $47.8
million of net transaction accounts, plus 10% of that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances are exempt from the reserve requirements. These
percentages and threshold limits are subject to adjustment by the Federal
Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of an insured institution without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of control,
control of an insured institution is conclusively deemed to have been acquired,
among other things, upon the acquisition of more than 25% of any class of voting
stock. In addition, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings bank or prejudice the interests of its depositors; or
(iii) the competency, experience or integrity of the acquiring person or the
proposed management personnel indicates that it would not be in the interest of
the depositors or the public to permit the acquisitions of control by such
person.
Liquidity. The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%. The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable
10
<PAGE>
value, including investments with maturities in excess of five years. At June
30, 1999, the Bank's liquidity ratio, calculated in accordance with North
Carolina regulations, was approximately 21.0%.
Prompt Corrective Regulatory Action. The Federal Deposit Insurance
Corporation Improvement Act of 1991 provided the federal banking agencies with
broad powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Under the FDIC regulations applicable to the Bank, an
institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" institution is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-
based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater
(or 3% or greater in the case of an institution with the highest examination
rating and which is not experiencing or anticipating significant growth). An
institution is considered (A) "undercapitalized" if it has (i) a total risk-
based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of
less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of an
institution with the highest examination rating and which is not experiencing or
anticipating significant growth); (B) "significantly undercapitalized" if the
institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a
Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of
less than 3% and (C) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets equal to or less than 2%. The Bank is
considered to be "well capitalized" under the rules set forth above.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state could
deny interstate branching if it specifically elected to do so by June 1, 1997.
States could choose to allow interstate branching prior to June 1, 1997 by
opting-in to a group of states that permitted these transactions. These states
generally allow interstate branching via a merger of an out-of-state bank with
an in-state bank, or on a de novo basis. North Carolina enacted legislation
permitting branching transactions prior to June 1, 1997, and did not adopt
legislation electing to deny interstate branching.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely
11
<PAGE>
affect the safety and soundness of the institution. Under FDIC regulations,
stock repurchases may be made by the savings bank only upon receipt of FDIC
approval.
In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock ownership.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity. Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires that the Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on an alternating basis with the FDIC. In addition, the Administrator
is required to conduct an examination of any institution when he has good reason
to believe that the standing and responsibility of the institution is of
doubtful character or when he otherwise deems it prudent. The Administrator is
empowered to order the revocation of the license of an institution if he finds
that it has violated or is in violation of any North Carolina law or regulation
and that revocation is necessary in order to preserve the assets of the
institution and protect the interests of its depositors. The Administrator has
the power to issue cease and desist orders if any person or institution is
engaging in, or has engaged in, any unsafe or unsound practice or unfair and
discriminatory practice in the conduct of its business or in violation of any
other law, rule or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
12
<PAGE>
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans without the prior
approval of the Administrator. In addition to such to such lending authority,
North Carolina-chartered savings banks are authorized to invest funds, in excess
of loan demand, in certain statutorily permitted investments, including but not
limited to (i) obligations of the United States, or those guaranteed by it; (ii)
obligations of the State of North Carolina; (iii) bank demand or time deposits;
(iv) stock or obligations of the federal deposit insurance fund or a FHLB; (v)
savings accounts of any savings institution as approved by the board of
directors; and (vi) stock or obligations of any agency of the State of North
Carolina or of the United States or of any corporation doing business in North
Carolina whose principal business is to make education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth the location of the Bank=s headquarters in
Rockingham, North Carolina, its four full-service branch offices and two vacant
lots owned by the Bank as well as certain other information relating to these
offices and vacant lots as of June 30, 1999:
<TABLE>
<CAPTION>
Net Book Value
of Property and
Improvements Own or Lease Lease Expiration Date
------------ ------------ ---------------------
<S> <C> <C> <C>
Headquarters Office:
115 South Lawrence Street
Rockingham, NC $203,028 Owned N/A
Full-Service Branch Offices:
Rockingham Road Office
1222 Rockingham Road
Rockingham, NC $484,594 Owned N/A
Southern Pines Office
495 Pinehurst Avenue
Southern Pines, NC $685,128 Owned N/A
Ellerbe Office
115 West Sunset Avenue
Ellerbe, NC $328,209 Owned N/A
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
Laurinburg Office
103 McRae Street
Laurinburg, NC - Leased* Month to Month basis
Vacant Lots:
**Corner of Highway 5 and
Trotter Drive
Pinehurst, NC $207,000 Owned N/A
***410 South Main Street
Laurinburg, NC $ 89,500 Owned N/A
</TABLE>
*The Bank has leased the Laurinburg office property for a two year term with an
option for renewal for two additional terms of three years each. The rent due
during the initial term is $1,050 per month, which shall increase if the Bank
exercises its renewal option.
**The Pinehurst lot is owned by the Bank. The Bank is pursuing a proposal to
construct a branch facility on the property. The Bank currently estimates the
cost of development to be $approximately $397,000.
***The Laurinburg lot is owned by Richmond Investment Services, Inc., a wholly
owned subsidiary of the Bank, and it may be purchased by the Bank in the future.
This lot is being held by the Bank as a possible future branch location.
In addition to the foregoing, the Bank is leasing a small tract of real
property (approximately 5,000 square feet) located on South Main Street in
Laurinburg, N.C. for a remote ATM location pursuant to a sublease which expires
on March, 2001.
The Bank's management considers each of these properties to be in good
condition and is of the opinion that it is adequately covered by insurance. The
total net book value of the Bank's furniture, fixtures and equipment at June 30,
1999 was $620,000. Any property acquired as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold or otherwise disposed of by the Bank in an effort to recover its
investment. As of June 30, 1999, the Bank owned real estate acquired in
settlement of loans with a carrying value of approximately $20,000.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is involved
in any pending legal proceedings other than routine litigation that is
incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
quarter ended June 30, 1998.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the section captioned "Common Stock Information"
on page 41 of the Company's 1999 Annual Report, which section is incorporated
herein by reference. See "ITEM 1. DESCRIPTION OF BUSINESS -- Regulation of the
Bank -- Restrictions on Dividends and Other Capital Distributions" above for
regulatory restrictions which limit the ability of the Bank to pay dividends to
the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
See the information set forth under ITEM 1 above and the information set
forth under the section captioned "Management's Discussion and Analysis" on
pages 4 through 12 in the Company's 1999 Annual Report, which section is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company set forth on pages 14
through 40 in the Company's 1999 Annual Report are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
N/A.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors" beginning on page 7 of the Proxy Statement and "Executive
Officers" beginning on page 10 of the Proxy Statement, which sections are
incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 7 of the Proxy Statement, which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors Compensation" on pages
10 and "- Executive Compensation" on pages 11 through 18 of the Proxy Statement,
which sections are incorporated herein by reference.
15
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned Security Ownership of Certain Beneficial Owners on pages 4
through 7 of the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See also the section captioned "Certain Indebtedness and Transactions of
Management" on page 18 of the Proxy Statement, which section is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(3)(i) Articles of Incorporation, incorporated herein by reference to Exhibit
3.1 to the Registration Statement on Form S-1, Registration No. 333-
6855, dated July 26, 1996 and amended on September 10, 1996.
(3)(ii) Amended and Restated Bylaws.
(4) Specimen Stock Certificate incorporated herein by reference to Exhibit
4.1 to the Registration Statement on Form S-1, Registration No. 333-
6855, dated July 26, 1996 and amended on September 10, 1996.
10(a) Employment Agreement with R. Larry Campbell incorporated herein by
reference to Exhibit 10(a) to the Annual Report on Form 10-KSB for the
1997 fiscal year end.
10(b) Employment Agreement with John W. Bullard incorporated herein by
reference to Exhibit 10(b) to the Annual Report on Form 10-KSB for the
1997 fiscal year end.
10(c) Nonqualified Supplemental Retirement Plan with R. Larry Campbell
incorporated herein by reference to Exhibit 10(c) to the Annual Report
on Form 10-KSB for the 1997 fiscal year end.
10(d) Nonqualified Supplemental Retirement Plan with John W. Bullard
incorporated herein by reference to Exhibit 10(d) to the Annual Report
on Form 10-KSB for the 1997 fiscal year end.
10(e) Management Recognition Plan of Richmond Savings Bank, Inc., SSB.
10(f) Stock Option Plan of Carolina Fincorp, Inc.
(11) Statement Regarding Computation of Per Share Earnings
(13) Select Portions of 1999 Annual Report to Stockholders
(21) See ITEM 1. - "DESCRIPTION OF BUSINESS --Subsidiaries." for discussion
of subsidiaries
(23) Consent of Independent Certified Public Accountant
(27) Financial Data Schedule
16
<PAGE>
Reports on Form 8-K
On April 9, 1999, the Company filed a report on Form 8-K announcing the
Board of Directors' adoption of the Company's stock repurchase plan and
describing the terms thereof. Under the plan, management will be able to
repurchase up to five percent of the outstanding shares of Common Stock as of
the report date in accordance with certain limitations. The Company filed no
other reports on Form 8-K during the last quarter of the fiscal year ended June
30, 1999. However, the Company filed a report on Form 8-K on July 9, 1999
setting forth the recently adopted amendment of the Company's Bylaws regarding
the procedure for allowing shareholders to submit nominations for members of the
Board of Directors.
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CAROLINA FINCORP, INC.
Date: September 23, 1999 By: /s/ R. Larry Campbell
--------------------------------------
R. Larry Campbell
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ R. Larry Campbell President, Chief Executive September 23, 1999
- ----------------------------
R. Larry Campbell Officer and Director
/s/ John W. Bullard Executive Vice-President September 23 1999
- ----------------------------
John W. Bullard and Chief Operations Officer
/s/ Winston G. Dwyer Treasurer and Chief Financial September 23 1999
- ----------------------------
Winston G. Dwyer Officer
/s/ J. Stanley Vetter Chairman of the Board of September 23, 1999
- ----------------------------
J. Stanley Vetter Directors
/s/ John T. Page, Jr. Vice Chairman of the September 23, 1999
- ----------------------------
John T. Page, Jr. Board of Directors
/s/ Russell E. Bennett, Jr. Director September 23, 1999
- ----------------------------
Russell E. Bennett, Jr.
/s/ Buena Vista Coggin Director September 23, 1999
- ----------------------------
Buena Vista Coggin
/s/ Joe M. McLaurin Director September 23, 1999
- ----------------------------
Joe M. McLaurin
/s/ W. Jessee Spencer Director September 23, 1999
- ----------------------------
W. Jesse Spencer
/s/ E.E. Vuncannon, Jr. Director September 23, 1999
- ----------------------------
E.E. Vuncannon, Jr.
</TABLE>
18
<PAGE>
EXHIBIT 3(ii)
AMENDED AND RESTATED
BYLAWS
OF
CAROLINA FINCORP, INC.
ARTICLE I
OFFICES
-------
Section 1. Principal Office. The principal office of the corporation
----------------
shall be located at such place as the Board of Directors may fix from time to
time.
Section 2. Registered Office. The registered office of the corporation
-----------------
required by law to be maintained in the State of North Carolina may be, but need
not be, identical with the principal office.
Section 3. Other Offices. The corporation may have offices at such other
-------------
places, either within or without the State of North Carolina, as the Board of
Directors may designate or as the affairs of the corporation may require from
time to time.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
Section 1. Place of Meetings. All meetings of shareholders shall be held
-----------------
at the principal office of the corporation, or at such other place, either
within or without the State of North Carolina, as shall in each case be (i)
fixed by the Chief Executive Officer, the President, the Chairman of the Board,
or the Board of Directors and designated in the notice of the meeting or (ii)
agreed upon by a majority of the shareholders entitled to vote at the meeting.
Section 2. Annual Meetings. The annual meeting of shareholders shall be
---------------
held during the first five (5) calendar months following the end of the
corporation's fiscal year, on any day (except Saturday, Sunday, or a legal
holiday) during that period as shall be determined by the Board of Directors,
for the purpose of electing directors of the corporation and for the transaction
of such other business as may be properly brought before the meeting.
<PAGE>
Section 3. Substitute Annual Meeting. If the annual meeting shall not be
-------------------------
held within the time designated by these Bylaws, a substitute annual meeting may
be called in accordance with the provisions of Section 4 of this Article II. A
meeting so called shall be designated and treated for all purposes as the annual
meeting.
Section 4. Special Meetings. Special meetings of the shareholders may be
----------------
called at any time by the Chief Executive Officer, the President, the Chairman
of the Board of Directors or the Board of Directors.
Section 5. Notice of Meetings. Written notice stating the date, time, and
------------------
place of the meeting shall be given not less than ten (10) nor more than sixty
(60) days before the date of any shareholders' meeting, either by personal
delivery, or by mail by or at the direction of the Chief Executive Officer, the
President, the Chairman of the Board of Directors or the Board of Directors, to
each shareholder entitled to vote at such meeting, provided that such notice
must be given to all shareholders with respect to any meeting at which a merger
or share exchange is to be considered and in such other instances as required by
law. If mailed, such notice shall be deemed to be effective when deposited in
the United States mail, correctly addressed to the shareholder at the
shareholder's address as it appears on the current record of shareholders of the
corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall include a
description of the purpose or purposes for which the meeting is called; but, in
the case of an annual or substitute annual meeting, the notice of meeting need
not include a description of the purpose or purposes for which the meeting is
called unless such a description is required by the provisions of Chapter 55 of
the North Carolina General Statutes.
When a meeting is adjourned to a different date, time or place, notice need
not be given of the new date, time or place if the new date, time or place is
announced at the meeting before adjournment and if a new record date is not
fixed for the adjourned meeting. If a new record date is fixed for the adjourned
meeting (which must be done if the new date is more than 120 days after the date
of the original meeting), notice of the adjourned meeting must be given as
provided in this Section 5 to persons who are shareholders as of the new record
date.
Section 6. Waiver of Notice. Any shareholder may waive notice of any
----------------
meeting before or after the meeting. The waiver must be in writing, signed by
the shareholder, and delivered to the corporation for inclusion in the minutes
or filing with the corporate records. A shareholder's attendance, in person or
by proxy, at a meeting (i) waives objection to lack of notice or defective
notice of the meeting, unless the shareholder or his proxy at the beginning of
the meeting objects to holding the meeting or transacting business at the
meeting, and (ii) waives objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder or his proxy objects to considering the matter
before it is voted upon.
2
<PAGE>
Section 7. Shareholders' List. Before each meeting of shareholders, the
------------------
Secretary of the corporation shall prepare an alphabetical list of the
shareholders entitled to notice of such meeting. The list shall be arranged by
voting group (and within each voting group by class or series of shares) and
show the address of and number of shares held by each shareholder. The list
shall be kept on file at the principal office of the corporation, or at a place
identified in the meeting notice in the city where the meeting will be held, for
the period beginning two (2) business days after notice of the meeting is given
and continuing through the meeting, and shall be available for inspection by any
shareholder, his agent or attorney, at any time during regular business hours.
The list shall also be available at the meeting and shall be subject to
inspection by any shareholder, his agent or attorney, at any time during the
meeting or any adjournment thereof.
Section 8. Fixing Record Date. The Board of Directors may fix a date
------------------
selected by them as the record date for one (1) or more voting groups in order
to determine the shareholders entitled to notice of a shareholders' meeting, to
vote, or to take any other action. Such record date may not be more than seventy
(70) days before the meeting or action requiring a determination of
shareholders. A determination of shareholders entitled to notice of or to vote
at a shareholders' meeting is effective for any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
which it must do if the meeting is adjourned to a date more than 120 days after
the date fixed for the original meeting.
If no record date is fixed by the Board of Directors for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders,
the close of business on the day before the first notice of the meeting is
delivered to shareholders shall be the record date for such determination of
shareholders.
Section 9. Voting Groups. All shares of one (1) or more classes or series
-------------
that, under the Articles of Incorporation or the North Carolina Business
Corporation Act, are entitled to vote and be counted together collectively on a
matter at a meeting of shareholders constitute a voting group. All shares
entitled by the Articles of Incorporation or the North Carolina Business
Corporation Act to vote generally on a matter are for that purpose a single
voting group. Classes or series of shares shall not be entitled to vote
separately by voting group unless expressly authorized by the Articles of
Incorporation or specifically required by law.
Section 10. Quorum. Shares entitled to vote as a separate voting group
------
may take action on a matter at the meeting only if a quorum of those shares
exists. A majority of the votes entitled to be cast on the matter by the voting
group constitutes a quorum of that voting group for action on that matter.
Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
3
<PAGE>
In the absence of a quorum at the opening of any meeting of shareholders,
such meeting may be adjourned from time to time by the vote of a majority of the
votes cast on the motion to adjourn; and, subject to the provisions of Section 5
of this Article II, at any adjourned meeting any business may be transacted that
might have been transacted at the original meeting if a quorum exists with
respect to the matter proposed.
Section 11. Proxies. Shares may be voted either in person or by one (1)
-------
or more proxies authorized by a written appointment of proxy signed by the
shareholder or by his duly authorized attorney in fact. An appointment of proxy
is valid for eleven months from the date of its execution, unless a different
period is expressly provided in the appointment form.
Section 12. Voting of Shares. Subject to the provisions of the Articles
----------------
of Incorporation, each outstanding share shall be entitled to one (1) vote on
each matter voted on at a meeting of shareholders.
Except in the election of directors as governed by the provisions of
Section 4 of Article III, if a quorum exists, action on a matter by a voting
group is approved if the votes cast within the voting group favoring the action
exceed the votes cast opposing the action, unless a greater vote is required by
law or the Articles of Incorporation or these Bylaws.
Absent special circumstances, shares of the corporation are not entitled to
vote if they are owned, directly or indirectly, by a second corporation in which
the corporation owns, directly or indirectly, a majority of the shares entitled
to vote for directors of the second corporation; provided that this provision
does not limit the power of the corporation or such second corporation to vote
shares held by it in a fiduciary capacity.
ARTICLE III
BOARD OF DIRECTORS
------------------
Section 1. General Powers. All corporate powers shall be exercised by or
--------------
under the authority of, and the business and affairs of the corporation shall be
managed under the direction of, the Board of Directors.
Section 2. Number and Qualification. The number of directors of the
------------------------
corporation shall not be less than five (5) nor more than fifteen (15), with the
exact number to be fixed from time to time by the Board of Directors.
Section 3. Nominations. At any meeting of shareholders at which directors
-----------
are to be elected, nominations for election to the Board of Directors may be
made by the Board of Directors or, subject to the conditions described below, by
any holder of shares entitled to be voted at that meeting in the election of the
directors. To be eligible for consideration at the meeting of shareholders, all
4
<PAGE>
nominations, other than those made by the Board of Directors, shall be in
writing and must be delivered to the Secretary of the Corporation not less than
fifty (50) days nor more than ninety (90) days prior to the meeting at which
such nominations will be made; provided, however, that if less than sixty (60)
days notice of such meeting is given to the shareholders, such nominations must
be delivered to the Secretary of the Corporation not later than the close of the
business on the tenth (10th) day following the day on which notice of such
meeting was mailed.
Section 4. Election. Except as provided in Section 7 of this Article III,
--------
the directors shall be elected at the annual meeting of shareholders. Those
persons who receive the highest number of votes at a meeting at which a quorum
is present shall be deemed to have been elected.
Section 5. Terms of Directors. Each initial director shall hold office
------------------
until the earliest of the first shareholders' meeting at which directors are
elected, or until such director's death, resignation, or removal.
At all times that the number of directors is less than nine (9), each
director shall be elected to a term ending as of the next succeeding annual
meeting of shareholders or until his or her earlier death, resignation,
retirement, removal or disqualification or until his or her successor shall be
elected and shall qualify.
In the first election of directors that the total number of directors is
nine (9) or more, the directors shall be divided into three (3) classes, as
nearly equal as possible in number as may be, to serve in the first instance for
terms of one (1), two (2) and three (3) years, respectively, from the date such
class of directors takes office or until their earlier death, resignation,
retirement, removal or disqualification or until their successors shall be
elected and shall qualify, and thereafter the successors in each class of
directors shall be elected for terms of three (3) years or until their earlier
death, resignation, retirement, removal, or disqualification or until their
successors shall be elected and shall qualify. In the event of any increase or
decrease in the number of directors at a time that the directors are so
classified, the additional or eliminated directorships shall be classified or
chosen so that all classes of directors shall remain or become as nearly equal
as possible in number.
Notwithstanding the provisions of this Section 5, a decrease in the number
of directors does not shorten an incumbent director's term. Despite the
expiration of a director's term, such director shall continue to serve until a
successor shall be elected and qualified or until there is a decrease in the
number of directors.
Section 6. Removal. Any director may be removed from office at any time,
-------
only for cause, by a vote of the shareholders if the number of votes cast to
remove such director exceeds the number of votes cast not to remove him. If a
director is elected by a voting group of shareholders, only the shareholders of
that voting group may participate in the vote to remove him. A director may not
be removed by the shareholders at a meeting unless the notice of that meeting
states that the purpose, or one (1) of the purposes, of the meeting is removal
of the director. If any directors are so removed, new directors may be elected
at the same meeting.
5
<PAGE>
Section 7. Vacancies. Any vacancy occurring in the Board of Directors,
---------
including without limitation a vacancy resulting from an increase in the number
of directors or from the failure by the shareholders to elect the full
authorized number of directors, may be filled by the Board of Directors. If the
directors remaining in office do not constitute a quorum, the directors may fill
the vacancy by the affirmative vote of a majority of the remaining directors or
by the sole remaining director. If the vacant office was held by a director
elected by voting group, only the remaining director or directors elected by
that voting group or the holders of shares of that voting group are entitled to
fill the vacancy. A director elected to fill a vacancy shall be elected to serve
the remaining term of the director replaced, or if a director is not elected to
replace a previously elected director, the new director shall be elected to
serve until the next shareholders' meeting at which directors are elected.
Section 8. Chairman of the Board of Directors. There may be a Chairman of
----------------------------------
the Board of Directors elected by the directors from their number at any meeting
of the Board of Directors. The Chairman shall serve in such position at the
pleasure of the Board of Directors. The Chairman shall preside at all meetings
of the Board of Directors and shareholders, serve as a member of any executive
committee of the Board of Directors, and perform such other duties as may be
directed by the Board of Directors.
Section 9. Compensation. The Board of Directors may provide for the
------------
compensation of directors for their services as such and for the payment or
reimbursement of any or all expenses incurred by them in connection with such
services.
Section 10. Age Limitation for Non-Employee Directors. A person who is 70
-----------------------------------------
years of age or older and who is not an employee of the corporation or an
employee of a subsidiary of the corporation shall not be eligible for election,
re-election, appointment or re-appointment to the Board of Directors; provided,
however, that this age limitation shall not apply to any person serving on the
initial board of directors of the corporation as set forth in the Articles of
Incorporation of the corporation.
ARTICLE IV
MEETINGS AND COMMITTEES OF DIRECTORS
------------------------------------
Section 1. Regular Meetings. A regular meeting of the Board of Directors
----------------
shall be held immediately after, and at the same place as, the annual meeting of
shareholders. In addition, the Board of Directors may provide, by resolution,
the time and place, either within or without the State of North Carolina, for
the holding of additional regular meetings.
Section 2. Special Meetings. Special meetings of the Board of Directors
----------------
may be called by or at the request of the Chairman of the Board or the President
if such officer is also a director, or by any three (3) or more directors. Such
a meeting may be held either within or without the State of North Carolina, as
fixed by the person or persons calling the meeting.
6
<PAGE>
Section 3. Notice of Meetings. Regular meetings of the Board of Directors
------------------
may be held without notice. The person or persons calling a special meeting of
the Board of Directors shall, at least two (2) days before the meeting, give or
cause to be given notice thereof by any usual means of communication. Such
notice need not specify the purpose for which the meeting is called. Any duly
convened regular or special meeting may be adjourned by the directors to a later
time without further notice.
Section 4. Waiver of Notice. Any director may waive notice of any meeting
----------------
before or after the meeting. The waiver must be in writing, signed by the
director entitled to the notice, and be delivered to the corporation for
inclusion in the minutes or for filing with the corporate records. A director's
attendance at or participation in a meeting waives any required notice of such
meeting unless the director at the beginning of the meeting, or promptly upon
arrival, objects to holding the meeting or to transacting business at the
meeting and does not thereafter vote for or assent to action taken at the
meeting.
Section 5. Quorum. Unless the Articles of Incorporation or these Bylaws
------
provide otherwise, a majority of the number of directors fixed by or pursuant to
these Bylaws shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, or if no number is so fixed, a majority of
the number of directors in office immediately before the meeting begins shall
constitute a quorum.
Section 6. Manner of Acting. Except as otherwise provided in the Articles
----------------
of Incorporation or these Bylaws, including Section 9 of this Article IV, the
affirmative vote of a majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors.
Section 7. Presumption of Assent. A director who is present at a meeting
---------------------
of the Board of Directors or a committee of the Board of Directors when
corporate action is taken is deemed to have assented to the action taken unless
(i) he objects at the beginning of the meeting, or promptly upon his arrival, to
holding it or to transacting business at the meeting, or (ii) his dissent or
abstention from the action taken is entered in the minutes of the meeting, or
(iii) he files written notice of his dissent or abstention with the presiding
officer of the meeting before its adjournment or with the corporation
immediately after the adjournment of the meeting. Such right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
Section 8. Action Without Meeting. Action required or permitted to be
----------------------
taken at a meeting of the Board of Directors may be taken without a meeting if
the action is taken by all members of the Board of Directors. The action must be
evidenced by one (1) or more written consents signed by each director before or
after such action, describing the action taken, and included in the minutes or
filed with the corporate records.
Section 9. Committees of the Board of Directors. The Board of Directors
------------------------------------
may create such committees of the Board of Directors as it shall consider
appropriate, including without limitation those committees specifically provided
for in these Bylaws. The creation of a committee of the
7
<PAGE>
Board of Directors and appointment of members to it must by approved by the
greater of (i) a majority of the number of directors in office when the action
is taken or (ii) the number of directors required to take action pursuant to
Section 6 of this Article IV. Each committee of the Board of Directors must have
two (2) or more members and, to the extent authorized by law, shall have such
duties and authority as may be described in these Bylaws or otherwise specified
by the Board of Directors. Each committee member shall serve at the pleasure of
the Board of Directors. The provisions in these Bylaws governing meetings,
actions without meeting and other requirements of the Board of Directors shall
also apply to any committees of the Board of Directors established pursuant to
these Bylaws.
Section 10. Executive Committee. There may be a standing committee of the
-------------------
Board of Directors to be known as the Executive Committee and consisting of not
fewer than three (3) directors, one (1) of whom shall be the Chairman of the
Board of Directors and one (1) of whom shall be the President of the
corporation, if such officer is also a director.
Section 11. Audit Committee. There may be a standing committee of the
---------------
Board of Directors to be known as the Audit Committee and consisting of not
fewer than three (3) directors. The Audit Committee shall supervise examination
of the assets and the liabilities and the internal audit program of the
corporation and its subsidiaries, cause outside audits to be performed on the
financial statements of the corporation, and shall make periodic reports to the
Board of Directors.
ARTICLE V
OFFICERS
--------
Section 1. Officers of the Corporation. The officers of the corporation
---------------------------
shall consist of a President, a Secretary, a Treasurer, and such Vice Presidents
or other officers (including assistant officers) as may from time to time be
appointed by or under the authority of the Board of Directors. Any two (2) or
more offices may be held by the same person, but no officer may act in more than
one (1) capacity where action of two (2) or more officers is required.
Section 2. Appointment and Term. The officers of the corporation shall be
--------------------
appointed by the Board of Directors or by a duly appointed officer authorized by
the Board of Directors to appoint one (1) or more officers. Each officer shall
hold office until his death, resignation, retirement, removal, disqualification,
or his successor shall have been appointed.
Section 3. Compensation of Officers. The compensation of all officers of
------------------------
the corporation shall be fixed by or under the authority of the Board of
Directors, and no officer shall serve the corporation in any other capacity and
receive compensation therefor unless such additional compensation shall be duly
authorized. The appointment of an officer does not itself create contract
rights.
8
<PAGE>
Section 4. Removal. Any officer may be removed by the Board of Directors
-------
at any time with or without cause; but such removal shall not itself affect the
officer's contract rights, if any, with the corporation except to the extent, if
any, specified in any such contract.
Section 5. Resignation. An officer may resign at any time by
-----------
communicating his resignation to the corporation, orally or in writing. A
resignation is effective when communicated unless it specifies in writing a
later effective date. If a resignation is made effective at a later date that is
accepted by the corporation, the Board of Directors may fill the pending vacancy
before the effective date if the Board of Directors provides that the successor
does not take office until the effective date. An officer's resignation does not
affect the corporation's contract rights, if any, with the officer except to the
extent, if any, specified in any such contract.
Section 6. Bonds. The Board of Directors may by resolution require any
-----
officer, agent, or employee of the corporation to give bond to the corporation,
with sufficient sureties, conditioned on the faithful performance of the duties
of his respective office or position, and to comply with such other conditions
as may from time to time be required by the Board of Directors.
Section 7. President. The President shall be the principal executive
---------
officer of the corporation and, subject to the control of the Board of
Directors, shall in general supervise and control all of the business and
affairs of the corporation. He shall sign, with the Secretary, an Assistant
Secretary, or any other proper officer of the corporation thereunto authorized
by the Board of Directors, certificates for shares of the corporation, any
deeds, mortgages, bonds, contracts, or other instruments which the Board of
Directors has authorized to be executed, except in cases where the signing and
execution thereof shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the corporation, or shall be
required by law to be otherwise signed or executed, and in general he shall
perform all duties incident to the office of the President and such other duties
as may be prescribed by the Board of Directors from time to time. The President
shall be entitled to attend all regular and special meetings and meetings of
committees of the Board of Directors. If the President of the corporation is
also a director of the corporation, he shall serve as a member of the Executive
Committee.
Section 8. Vice Presidents. In the absence of the President or in the
---------------
event of his death, inability or refusal to act, the Vice Presidents, unless
otherwise determined by the Board of Directors, shall perform the duties of the
President, and when so acting shall have all the powers of and be subject to all
the restrictions upon the President. Any Vice President (or Assistant Vice
President) may sign, with the Secretary, an Assistant Secretary, or any other
proper officer of the corporation thereunto authorized by the Board of
Directors, certificates for shares of the corporation and any other instruments
which may be signed by the President, and shall perform such other duties as
from time to time may be prescribed by the President or Board of Directors.
Section 9. Secretary. The Secretary shall: (i) keep the minutes of the
---------
meetings of shareholders, of the Board of Directors, and of all committees of
the Board of Directors, in one or more books provided for that purpose; (ii) see
that all notices are duly given in accordance with the
9
<PAGE>
provisions of these Bylaws or as required by law; (iii) maintain and
authenticate the records of the corporation and be custodian of the seal of the
corporation and see that the seal of the corporation is affixed to all documents
the execution of which on behalf of the corporation under its seal is duly
authorized; (iv) sign with the President or a Vice President, certificates for
shares of the corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors; (v) maintain or cause to be maintained,
and have general charge of, the stock transfer books of the corporation; (vi)
prepare or cause to be prepared shareholder lists prior to each meeting of
shareholders as required by law; (vii) attest the signature or certify the
incumbency or signature of any officer of the corporation; and (viii) in general
perform all duties incident to the office of secretary and such other duties as
from time to time may be prescribed by the President or by the Board of
Directors.
Section 10. Treasurer. The Treasurer shall be, and may be designated as
---------
such as, the corporation's Chief Financial Officer, and shall: (i) have charge
and custody of and be responsible for all funds and securities of the
corporation; receive and give receipts for moneys due and payable to the
corporation from any source whatsoever, and deposit all such moneys in the name
of the corporation in such depositories as shall be selected in accordance with
the provisions of Section 4 of Article VI of these Bylaws; (ii) maintain, or
cause to be maintained, appropriate accounting records as required by law; (iii)
prepare, or cause to be prepared, annual financial statements of the corporation
that include a balance sheet as of the end of the fiscal year and income and
cash flow statement for that year, which statements, or a written notice of
their availability, shall be mailed to each shareholder within 120 days after
the end of such fiscal year; and (iv) in general perform all of the duties
incident to the office of treasurer and such other duties as from time to time
may be prescribed by the President or by the Board of Directors.
Section 11. Assistant Officers. In the absence of a duly appointed
------------------
officer of the corporation, or in the event of his death, inability or refusal
to act, any person appointed by the Board of Directors and designated by title
as an assistant to that officer, unless otherwise determined by the Board of
Directors, may perform the duties of, and when so acting shall have all the
powers of and be subject to all the restrictions upon, that officer. Such
assistant officers shall perform such other duties as from time to time may be
prescribed by the President or by the Board of Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
--------------------------------------
Section 1. Contracts. The Board of Directors may authorize any officer or
---------
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation, and such
authorization may be general or confined to specific instances. Also, the Board
of Directors may limit, condition, restrict or deny such authority to any
officer or officers, or any agent or agents.
10
<PAGE>
Section 2. Loans. No loans shall be contracted on behalf of the
-----
corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
Section 3. Checks and Drafts. All checks, drafts, or other orders for the
-----------------
payment of money, issued in the name of the corporation, shall be signed by such
officer or officers, agent or agents of the corporation and in such manner as
shall from time to time be determined by the Board of Directors.
Section 4. Deposits. All funds of the corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the corporation in such
depositories as may be selected by or under the authority of the Board of
Directors.
ARTICLE VII
SHARES AND THEIR TRANSFER
-------------------------
Section 1. Certificate For Shares. The Board of Directors may authorize
----------------------
the issuance of some or all of the shares of the corporation's classes or series
without issuing certificates to represent such shares. If shares are represented
by certificates, the certificates shall be in such form as required by law and
as determined by the Board of Directors. Certificates shall be signed, either
manually or in facsimile, by the President or a Vice President, and by the
Secretary or Treasurer or an Assistant Secretary or an Assistant Treasurer. All
certificates for shares shall be consecutively numbered or otherwise identified
and entered into the stock transfer books of the corporation. When shares are
represented by certificates, the corporation shall issue and deliver, to each
shareholder to whom such shares have been issued or transferred, certificates
representing the shares owned by him. When shares are not represented by
certificates, then within a reasonable time after the issuance or transfer of
such shares, the corporation shall send the shareholder to whom such shares have
been issued or transferred a written statement of the information required by
law to be on certificates.
Section 2. Stock Transfer Books. The corporation shall keep or cause to
--------------------
be kept a book or set of books, to be known as the stock transfer books of the
corporation, containing the name of each shareholder of record, together with
such shareholder's address and the number and class or series of shares held by
him. Transfers of shares of the corporation shall be made only on the stock
transfer books of the corporation (i) by the holder of record thereof or by his
legal representative, who shall provide proper evidence of authority to
transfer; (ii) by his attorney authorized to effect such transfer by power of
attorney duly executed and filed with the Secretary; and (iii) on surrender for
cancellation of the certificate for such shares (if the shares are represented
by certificates).
Section 3. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate to be issued in place of any certificate theretofore issued by the
corporation claimed to have been lost or destroyed, upon receipt of an affidavit
of such fact from the person claiming the certificate to have
11
<PAGE>
been lost or destroyed. When authorizing such issue of a new certificate, the
Board of Directors shall require that the owner of such lost or destroyed
certificate, or his legal representative, give the corporation a bond in such
sum and with such surety or other security as the Board of Directors may direct
as indemnity against any claims that may be made against the corporation with
respect to the certificate claimed to have been lost or destroyed, except where
the Board of Directors by resolution finds that in the judgment of the Board of
Directors the circumstances justify omission of a bond.
Section 4. Distribution or Share Dividend Record Date. The Board of
------------------------------------------
Directors may fix a date as the record date for determining shareholders
entitled to a distribution or share dividend. If no record date is fixed by the
Board of Directors for such determination, it is the date the Board of Directors
authorizes the distribution or share dividend.
Section 5. Holder of Record. Except as otherwise required by law, the
----------------
corporation may treat the person in whose name the shares stand of record on its
books as the absolute owner of the shares and the person exclusively entitled to
receive notification and distributions, to vote, and to otherwise exercise the
rights, powers, and privileges of ownership of such shares.
Section 6. Shares Held by Nominees. The corporation shall recognize the
-----------------------
beneficial owner of shares registered in the name of the nominee as the owner
and shareholder of such shares for certain purposes if the nominee in whose name
such shares are registered files with the Secretary a written certificate in a
form prescribed by the corporation, signed by the nominee, indicating the
following: (i) the name, address, and taxpayer identification number of the
nominee; (ii) the name, address, and taxpayer identification number of the
beneficial owner; (iii) the number and class or series of shares registered in
the name of the nominee as to which the beneficial owner shall be recognized as
the shareholder; and (iv) the purposes for which the beneficial owner shall be
recognized as the shareholder.
The purposes for which the corporation shall recognize the beneficial owner
as the shareholder may include the following: (i) receiving notice of, voting
at, and otherwise participating in shareholders' meetings; (ii) executing
consents with respect to the shares; (iii) exercising dissenters' rights under
the North Carolina Business Corporation Act; (iv) receiving distributions and
share dividends with respect to the shares; (v) exercising inspection rights;
(vi) receiving reports, financial statements, proxy statements, and other
communications from the corporation; (vii) making any demand upon the
corporation required or permitted by law; and (viii) exercising any other rights
or receiving any other benefits of a shareholder with respect to the shares.
The certificate shall be effective ten (10) business days after its receipt
by the corporation and until it is changed by the nominee, unless the
certificate specifies a later effective time or an earlier termination date.
If the certificate affects less than all of the shares registered in the
name of the nominee, the corporation may require the shares affected by the
certificate to be registered separately on the books of the corporation and be
represented by a share certificate that bears a conspicuous legend stating
12
<PAGE>
that there is a nominee certificate in effect with respect to the shares
represented by that share certificate.
13
<PAGE>
ARTICLE VIII
GENERAL PROVISIONS
------------------
Section 1. Distributions. The Board of Directors may from time to time
-------------
authorize, and the corporation may grant, distributions and share dividends to
its shareholders pursuant to law and subject to any provisions with respect
thereto in its Articles of Incorporation.
Section 2. Seal. The corporate seal of the corporation shall consist of
----
two concentric circles between which is the name of the corporation and in the
center of which is inscribed SEAL; and such seal, as impressed or affixed on the
margin hereof, is hereby adopted as the corporate seal of the corporation.
Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed
-----------
by the Board of Directors.
Section 4. Amendments. Except as otherwise provided in the Articles of
----------
Incorporation or by law, these Bylaws may be amended or repealed and new Bylaws
may be adopted by the Board of Directors.
No Bylaw adopted, amended, or repealed by the shareholders shall be
readopted, amended, or repealed by the Board of Directors, unless the Articles
of Incorporation or a Bylaw adopted by the shareholders authorizes the Board of
Directors to adopt, amend, or repeal that particular Bylaw or the Bylaws
generally.
Section 5. Definitions. Unless the context otherwise requires, terms used
-----------
in these Bylaws shall have the meanings assigned to them in the North Carolina
Business Corporation Act to the extent defined therein.
ARTICLE IX
INDEMNIFICATION
---------------
In addition to any indemnification required or permitted by law, and except
as otherwise provided in these Bylaws, any person who at any time serves or has
served as a director, officer, employee or agent of the corporation and any such
person who serves or has served at the request of the corporation as a director,
officer, employee, partner, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or as a trustee or
administrator under an employee benefit plan, shall have a right to be
indemnified by the corporation to the full extent allowed by applicable law
against liability and litigation expense arising out of such status or
activities in such capacity. "Liability and litigation expense" shall include
costs and expenses of litigation (including reasonable attorneys' fees),
judgments, fines and amounts paid in settlement which are actually and
14
<PAGE>
reasonably incurred in connection with or as a consequence of any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, including appeals.
Promptly after the final disposition or termination of any matter which
involves liability or litigation expense as described above or at such earlier
time as it sees fit, the corporation shall determine whether any person
described in this Article IX is entitled to indemnification thereunder. Such
determination shall be limited to the following issues: (i) whether the persons
to be indemnified are persons described in this Article IX, (ii) whether the
liability or litigation expense incurred arose out of the status or activities
of such persons as described in this Article IX, (iii) whether liability was
actually incurred and/or litigation expense was actually and reasonably
incurred, and (iv) whether the indemnification requested is permitted by
applicable law. Such determination shall be made by a majority vote of directors
who were not parties to the action, suit or proceeding (or, in connection with
"threatened" actions, suits or proceedings, who were not "threatened parties").
If at least two such disinterested directors are not obtainable, or, even if
obtainable, if at least half of the number of disinterested directors so direct,
such determination shall be made by independent legal counsel in written
opinion.
Litigation expense incurred by a person described in this Article IX in
connection with a matter described in this Article IX may be paid by the
corporation in advance of the final disposition or termination of such matter,
if the corporation receives an undertaking, dated, in writing and signed by the
person to be indemnified, to repay all such sums unless such person is
ultimately determined to be entitled to be indemnified by the corporation as
provided in this Article IX. Requests for payments in advance of final
disposition or termination shall be submitted in writing unless this requirement
is waived by the corporation.
Notwithstanding the foregoing, no advance payment shall be made as to any
payment or portion of a payment for which the determination is made that the
person requesting payment will not be entitled to indemnification. Such
determination may be made only by a majority vote of disinterested directors or
by independent legal counsel as next provided. If there are not at least two
disinterested directors, the notice of all requests for advance payment shall be
delivered for review to independent legal counsel for the corporation. Such
counsel shall have the authority to disapprove any advance payment or portion of
a payment for which it appears that the person requesting payment will not be
entitled to indemnification.
The corporation shall not be obligated to indemnify persons described in
this Article IX for any amounts paid in settlement unless the corporation
consents in writing to the settlement. The corporation shall not unreasonably
withhold its consent to proposed settlements. The corporation's consent to a
proposed settlement shall not constitute an agreement by the corporation that
any person is entitled to indemnification thereunder. The corporation may waive
the requirement of this section for its written consent as fairness and equity
may require.
A person described in this Article IX may apply to the corporation in
writing for indemnification or advance expenses. Such applications shall be
addressed to the Secretary or, in
15
<PAGE>
the absence of the Secretary, to any officer of the corporation. The corporation
shall respond in writing to such applications as follows: to a request for
indemnity under this Article IX, within ninety days after receipt of the
application; to a request for advance expenses under this Article IX, within
fifteen days after receipt of the application.
If any action is necessary or appropriate to authorize the corporation to
pay the indemnification required by these Bylaws, the Board of Directors shall
take such action, including (i) making a good faith evaluation of the
indemnification request, (ii) giving notice to, and obtaining approval by, the
shareholders of the corporation, and (iii) taking any other action.
The right to indemnification or advance expenses provided herein shall be
enforceable in any court of competent jurisdiction. A legal action may be
commenced if a claim for indemnity or advance expenses is denied in whole or in
part, or upon the expiration of the time periods provided above. In any such
action, if the claimant establishes the right to indemnification, he or she
shall also have the right to be indemnified against the litigation expense
(including, without limitation, reasonable attorneys' fees) of such action.
As provided by N.C. Gen. Stat.(S)55-8-57, the corporation shall have the
power to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or who is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or as a trustee or administrator under an employee benefit plan,
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not the corporation
has the power to indemnify him against such liability.
The right to indemnification provided herein shall not be deemed exclusive
of any other rights to which any persons seeking indemnity may be entitled apart
from the provisions of this bylaw, except there shall be no right to
indemnification as to any liability or litigation expense for which such person
is entitled to receive payment under any insurance policy other than a
directors' and officers' liability insurance policy maintained by the
corporation. Such right inures to the benefit of the heirs and legal
representatives of any persons entitled to such right. Any person who at any
time after the adoption of this bylaw serves or has served in any status or
capacity described in this Article IX shall be deemed to be doing or to have
done so in reliance upon, and as consideration for, the right of indemnification
provided herein. Any repeal or modification hereof shall not affect any rights
or obligations then existing. The right provided herein shall not apply as to
persons serving institutions which are hereafter merged into or combined with
the corporation, except after the effective date of such merger or combination
and only as to status and activities after such date.
If this Article or any portion hereof shall be invalidated on any ground by
any court or agency of competent jurisdiction, then the corporation shall
nevertheless indemnify each person described in this Article IX to the full
extent permitted by the portion of this Article that is not invalidated and also
to the full extent (not exceeding the benefits described herein) permitted or
required by other applicable law.
26
<PAGE>
Adopted this the 30th day of June, 1999.
__________________________________
Secretary
17
<PAGE>
EXHIBIT 10(e)
RICHMOND SAVINGS BANK, INC., SSB
MANAGEMENT RECOGNITION PLAN
Richmond Savings Bank, Inc., SSB, a North Carolina chartered savings bank
(the "Bank"), does herein set forth the terms of its Management Recognition Plan
(the "Plan").
1. Purpose of this Plan. The purpose of this Plan is to provide to the
--------------------
directors, officers, employees and other servants (the "Participants") of the
Bank and of any corporation or other entity of which the Bank owns, directly or
indirectly, not less than fifty percent (50%) of any class of the equity
securities thereof (a "Subsidiary"), an ownership interest in the Bank's parent
holding company, Carolina Fincorp, Inc. (the "Corporation") by making awards
(hereinafter referred to as "Awards" or singularly, "Award") of shares of common
stock of the Corporation (the "Common Stock"). The Board of Directors of the
Bank (the "Board") and the Board of Directors of the Corporation believe that
participation in the ownership of the Corporation will induce Participants to
continue to serve the Bank or any Subsidiary as directors, officers and/or
employees and encourage them to contribute to the future growth and profits of
the Bank and the Corporation. In addition, the existence of this Plan will make
it possible for the Bank and its Subsidiaries to attract capable individuals to
serve as directors, officers and servants of the Bank and its Subsidiaries. The
Board believes that the existence of this Plan will provide incentives to the
directors, officers and employees of the Bank and any Subsidiaries which will
contribute materially to the success of such companies.
2. Administration of this Plan.
---------------------------
(a) This Plan shall be administered by a committee of the Board (the
"Committee") which shall consist of not less than two non-employee members of
the Board who are "Non-Employee Directors" as defined in Rule 16 b-3(b)(3) of
the Rules and Regulations under the Securities Exchange Act of 1934 (the
"Exchange Act"). In the absence of a duly appointed Committee, the Plan shall be
administered by the Board. The Committee shall have full power and authority to
construe, interpret and administer this Plan. All actions, decisions,
determinations, or interpretations of the Committee shall be final, conclusive,
and binding upon all parties. Members of the Committee shall serve at the
pleasure of the Board.
(b) The Committee shall decide (i) to whom Awards shall be made under
this Plan, (ii) the number of shares of Common Stock subject to each award,
(iii) the number of additional shares, if any, to be purchased or allocated for
the purposes of this Plan, (iv) the determination of leaves of absence which may
be granted to Participants without constituting a termination of their
employment for purposes of the Plan and (v) such additional terms and conditions
for Awards as the Committee shall deem appropriate, including, without
limitation, any determinations as to the restrictions or conditions on transfer
of shares of Common Stock that are necessary or appropriate to satisfy all
applicable securities laws, rules, regulations, and listing requirements.
(c) The Committee may designate any officers or employees of the Bank
or of any Subsidiary to assist in the administration of this Plan. The
Committee may authorize such individuals
<PAGE>
to execute documents on its behalf and may delegate to them such other
ministerial and limited discretionary duties as the Committee may see fit.
(d) Any unallocated, undistributed or forfeited shares of Common
Stock held under this Plan shall be held by E.E. Vuncannon, Jr., Buena Vista
Coggin and John T. Page, Jr. (the "Trustees") and any successor or successors
who from time to time may be appointed by the Board.
3. Shares of Common Stock Available Under the Plan. The Plan shall
-----------------------------------------------
acquire 74,060 shares of Common Stock of the Corporation, which is equal to four
percent (4%) of the shares of Common Stock issued in connection with the
conversion of the Bank from a North Carolina chartered mutual savings bank to a
North Carolina chartered stock savings bank on November 22, 1996 (the
"Conversion"). Such shares of Common Stock may be purchased by the Plan in the
open market, or, subject to approval of the Board of Directors of the
Corporation, may be acquired through the issuance by the Corporation to the Plan
of authorized but unissued shares of Common Stock on such terms as may be
approved by the Committee and the Board of Directors of the Corporation. Such
shares (the "Plan Shares") shall be held by the Trustees until they have been
awarded and distributed pursuant to the terms of this Plan.
4. Eligibility. The Participants in this Plan to whom Awards may be made
-----------
shall be the following: (i) members of the Board and members of the Board of
Directors of any Subsidiary, and (ii) such officers and employees of the Bank
and/or of any Subsidiary, as may be designated by the Board.
5. Stock Grant Agreement. Subject to the provisions of Section 7 hereof,
---------------------
effective after this Plan is approved by the shareholders of the Corporation,
the Plan Shares shall be awarded and distributed to Participants. Awards of
Plan Shares under this Plan shall be effective upon execution and delivery of
the Stock Grant Agreement described in Section 7 (the "Stock Grant Agreement").
6. Vesting of Shares.
-----------------
(a) Shares granted under this Plan shall vest and the right of a
Participant to the Plan Shares shall be nonforfeitable as determined by the
Committee and as set forth in the Stock Grant Agreement.
(b) In determining the number of shares vested under any applicable
vesting schedule, a Participant shall not receive fractional shares. If the
product resulting from multiplying the vested percentage times the allocated
shares results in a fractional share, then a Participant's vested right shall be
rounded down to the nearest whole number of shares.
(c) In the event any Participant shall no longer be either a director
or an employee of the Bank or any Subsidiary for any reason, other than as
provided in Sections 6(d) and 6(e) below, and such Participant does not have a
100% vested interest in his or her shares under the Plan, then any shares which
are not vested, based upon the applicable schedule set forth in the Stock Grant
Agreement, shall be forfeited and, provided this Plan has not terminated
pursuant to Section 18 below, shall be available again for Awards to
Participants as may be determined by the Committee. Any dividends
2
<PAGE>
previously received and held by the Trustees (or other escrow agent) on such
forfeited shares pursuant to Section 8(c) below shall also be forfeited and
expended in the discretion of the Committee.
(d) In the event that a Participant shall no longer be an employee or
a director of the Bank or any Subsidiary because of such Participant's death,
disability or retirement, prior to the date when all shares allocated to him or
her would be 100% vested in accordance with the schedule set forth in the Stock
Grant Agreement, then, notwithstanding such vesting schedule, all shares
allocated to such Participant shall immediately become fully vested and
nonforfeitable. For purposes of this Plan, the term "disability" shall be
defined in the same manner as such term is defined in Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended (the "Code"). For purposes of this
plan, the term "retirement, as it relates to any employee of the Bank or any
Subsidiary, shall mean (i) the termination of the Participant's employment under
conditions which would constitute retirement under any tax qualified retirement
plan maintained by the Corporation, the Bank or any subsidiary, or (ii)
termination of employment after attaining age 65. The term "retirement," as it
relates to any person who is a Participant as a result of his or her
participation as a director, shall mean the cessation of membership on such
Board of Directors (i) with the approval of such Board of Directors, at any time
after such Participant reaches age 70, or (ii) at the election of the
Participant at any time after not less than 25 years of service as a member of
such Board of Directors, as applicable.
(e) In the event that a Participant ceases to be an employee or a
director of the Bank or a Subsidiary for any reason after the occurrence of a
"change in control" and prior to the time that all shares allocated to him or
her would be 100% vested in accordance with the schedule set forth in the Stock
Grant Agreement, then, notwithstanding such vesting schedule, all shares
allocated to such Participant shall immediately become fully vested and
nonforfeitable. For purposes of this Plan, a "change in control" shall mean (i)
a change in control of a nature that would be required to be reported by the
Corporation in response to Item 1 of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act;
(ii) such time as any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Corporation or Bank representing 25 percent or more of the combined voting power
of the outstanding Common Stock of the Corporation or outstanding common stock
of the Bank, as applicable; or (iii) individuals who constitute the board of
directors of the Corporation or the Board on the date hereof (the "Incumbent
Board" and "Incumbent Bank Board," respectively) cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board or
Incumbent Bank Board, as applicable, or whose nomination for election by the
Corporation's or Bank's shareholders was approved by the Corporation's or Bank's
Board of Directors or Nominating Committee, shall be considered as though he or
she were a member of the Incumbent Board or Incumbent Bank Board, as applicable;
or (iv) either the Corporation or the Bank consolidates or merges with or into
another corporation, association or entity or is otherwise reorganized, where
neither the Corporation nor the Bank, respectively, is the surviving corporation
in such transaction; or (v) all or substantially all of the assets of either the
Corporation or the Bank are sold or otherwise transferred to or are acquired by
any other entity or group.
7. Action Required of Participants.
-------------------------------
3
<PAGE>
(a) If required by the Committee, each Participant receiving an Award
of shares under this Plan shall represent to and agree with the Corporation, the
Bank, the Committee and the Trustees (i) that he is acquiring such shares on his
own behalf as an investment and not with a present intention of distribution or
re-sale and (ii) that there shall be placed upon the certificates representing
such shares a legend setting forth these representations and agreements or a
reference thereto. Such shares shall be transferable thereafter only if the
proposed transfer shall be permissible under this Plan and if, in the opinion of
counsel for the Corporation, such transfer shall at such time be in compliance
with all applicable federal and state securities laws and regulations.
(b) Each Participant receiving an Award of Plan Shares under this
Plan shall deliver to the Bank a Stock Grant Agreement, substantially in the
form attached hereto as Exhibit A, modified as the Committee deems necessary or
desirable, which shall be signed by such Participant.
8. Restrictions.
------------
(a) Plan Shares subject to an award made under this Plan shall
forthwith, after the Participant makes any representations required by Section 7
hereof, be issued in a certificate or certificates for such shares which shall
be prepared in the name of such Participant or any transferee permitted by
Section 12(a) (a "Permitted Transferee"). Such Participant or transferee shall
thereupon be a shareholder with respect to all of the shares, represented by
such certificate or certificates and shall have all of the rights of a
shareholder with respect to all of such shares including the right to vote such
shares and, except as provided in Section 8(c) below, to receive all dividends
and other distributions with respect thereto subject to possible forfeiture as
set forth in Section 6 and subject to the provisions of Section 10 hereof.
(b) Certificates of stock representing shares subject to an Award
made under this Plan shall be imprinted with a legend to the effect that the
shares represented are subject to restrictions on transfer and potential
forfeiture in accordance with the terms of the Stock Grant Agreement and this
Plan, and the transfer agent for Common Stock shall be instructed to that effect
with respect to such shares. In aid of such restrictions, the Participant or
Permitted Transferee shall, immediately upon receipt of the certificate or
certificates, deposit such certificate or certificates together with a stock
power or other instrument of transfer, appropriately endorsed in blank, with the
Trustees or with such other escrow agent as may be designated by the Trustees,
with the expenses of any such escrow arrangement to be borne by the Bank.
(c) Any dividend, all or any part of which is intended by the
Corporation's Board of Directors to be a return of capital to the Corporation's
stockholders, which is paid in respect to shares subject to an Award prior to
the expiration of the restricted period, as such term is defined in Section
12(b) herein, shall be held in its entirety (regardless of whether the entire
dividend or a portion thereof qualifies or is intended to qualify as a return of
capital) by the Trustees for the benefit of the Participant or Permitted
Transferee on whose behalf such unvested Plan Share is to be awarded pursuant to
the Plan, and such dividend, including any interest thereon, will be paid out
proportionately by the Trustees to the Participant or Permitted Transferee as
soon as practical after the expiration of such restricted period.
4
<PAGE>
(d) In addition, all Plan Shares which are awarded with respect to
Participants who are directors or executive officers of the Bank, without the
written consent of the Administrator of the Savings Institutions Division of the
North Carolina Department of Commerce, may not be sold during a period of one
year following the effective date of the Conversion, except upon death of the
director or executive officer. Certificates of stock representing Plan Shares
awarded during such one year period with respect to Participants who are
directors and executive officers of the Bank (including those transferred to
Permitted Transferees) shall be imprinted with a legend to that effect, and the
transfer agent for such Plan Shares shall be instructed to that effect with
respect to such shares.
(e) In the event that, as the result of a stock split or stock
dividend or combination of shares or any other change or exchange for other
securities by reclassification, reorganization, merger, consolidation,
recapitalization, or otherwise, a Participant or Permitted Transferee shall, as
the owner of the shares subject to an Award made under this Plan and subject to
the restrictions hereunder, be entitled to new or additional or different shares
of Common Stock or other securities, the certificate or certificates for, or
other evidence of, such new or additional or different shares or other
securities, together with a stock power or other instrument of transfer
appropriately endorsed, shall also be imprinted with one or more legends as
provided in Sections 8(b) and 8(d) above and deposited by such Participant or
Permitted Transferee with the Trustees, and all provisions of this Plan relating
to vesting, restrictions and lapse of restrictions herein set forth shall
thereupon be applicable to such new or additional or different shares or other
securities to the extent applicable to the shares with respect to which they
were distributed; provided, however, that if a Participant or Permitted
Transferee should receive rights, warrants or fractional interests in respect of
any of such shares then being held under the terms of this Plan, such rights or
warrants may be held, exercised, sold or otherwise disposed of, and such
fractional interests may be settled, by such Participant or Permitted Transferee
free and clear of the restrictions herein set forth.
(f) The restriction to which shares subject to an Award made under
this Plan shall be subject is that if the directorship or employment of the
Participant with respect to whom an Award is made (whichever position resulted
in the Award, as set forth in the Stock Grant Agreement) should be terminated
for any reason during the "restricted period" (as defined in Section 12(b)
hereof), except as otherwise specifically provided in Section 6 hereof, the
Participant's or Permitted Transferee's interest in the shares issued under this
Plan shall be forfeited.
9. Effect of Award on Status of Participant. The fact that an Award is
----------------------------------------
made to a Participant under this Plan shall not confer on such Participant any
right to continued service on the Board or on the Board of Directors of any
Subsidiary, nor any right to continued employment with the Bank or any
Subsidiary; nor shall it limit the right of the Bank, the Corporation, or any
Subsidiary to remove such Participant from any such boards, or to terminate his
or her employment at any time.
10. Voting Rights; Dividends; Other Distributions. After an Award of Plan
---------------------------------------------
Shares to a Participant or Permitted Transferee, the Participant or Permitted
Transferee shall have the full power to vote all of the Plan Shares held by the
Trustees in his name from time to time and shall be entitled to receive all cash
dividends or other distributions, except as otherwise provided in Section 8(c)
herein, declared upon or paid with respect to any such Plan Shares held by the
Trustees in his name from time to time. All shares of Common Stock or other
securities, including but not limited to stock dividends,
5
<PAGE>
issued in respect of such Plan Shares or in substitution thereof, whether by the
Corporation or by another issuer, shall be held by the Trustees and shall be
subject to all terms and conditions of this Plan and shall be redelivered to a
Participant or Permitted Transferee or delivered as instructed by the Committee
under the same circumstances as the shares with respect to, or in substitution
for, which they were issued; provided, however, that if a Participant or
Permitted Transferee should receive rights, warrants or fractional interests in
respect of any of the shares held by the Trustees in his name, such rights or
warrants may be held, exercised, sold or otherwise disposed of, and such
fractional interests may be settled, by such Participants or Permitted
Transferees free and clear of the restrictions herein set forth.
Notwithstanding the foregoing, if a Participant or Permitted
Transferee hereunder forfeits any Plan Shares pursuant to the terms of this
Plan, the Participant or Permitted Transferee, as applicable, shall, within 30
days after the effective date of such forfeiture, pay the Corporation an amount
equal to the dividends or other distributions received by such Participant or
Permitted Transferee with respect to such forfeited Plan Shares. In the
alternative, at the option of the Bank or a Subsidiary, the amount to be repaid
may be withheld by the Bank or Subsidiary from the final compensation or fees
payable to the Participant.
11. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation.
---------------------------------------------------------------------
In the event of a change in the number or type of shares of Common Stock
outstanding, or in the event shares of Common Stock are decreased, changed into
or exchanged for securities of a different entity, by reason of a
reclassification, recapitalization, reorganization, other similar capital
adjustment; by reason of a merger or consolidation of the Corporation; by reason
of the sale by the Corporation of all or a substantial portion of its assets; or
by reason of the occurrence of any other event which could affect the
implementation of this Plan and the realization of its objectives, the number or
kind of shares subject to Awards which have occurred, or could occur, under this
Plan shall be proportionately and equitably adjusted by the Committee.
12. Non-Transferability.
-------------------
(a) Any shares subject to an Award made under this Plan shall not be
sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of
during the "restricted period." Nothing herein shall preclude a Participant from
making a gift of any such shares to a spouse, child, stepchild, grandchild,
parent or sibling, or legal dependent of such Participant, to a trust of which
the beneficiary or beneficiaries of the trust shall be either a person
designated herein or such Participant, or to a civic or charitable organization
designated by the Participant; provided, however, that any such shares so given
by a Participant shall remain subject to the restrictions, obligations and
conditions set forth in this Plan, including, but not limited to, the escrow
provisions set forth in Section 8(b). In addition, such shares may be tendered
in response to a tender offer for or a request or invitation to tenders of
greater than fifty percent (50%) of the outstanding Common Stock and may be
surrendered in a merger, consolidation or share exchange involving the
Corporation; provided, however, in each case, that except as otherwise provided
herein, the securities or other consideration received in exchange therefor
shall thereafter be subject to the restrictions and conditions set forth in this
Plan, including, but not limited to, the escrow provisions set forth in Section
8(b)
6
<PAGE>
(b) The term "restricted period" with respect to shares subject to an
Award made under this Plan shall be the period commencing on the date of making
such Award of such shares to a Participant and ending on the date on which such
shares are no longer subject to forfeiture as provided in Section 6 hereof. The
date of making an Award shall be the date of execution by a Participant of a
Stock Grant Agreement in the form referred to in Section 7(b) hereof.
13. Impact of Award on Other Benefits of Participant. The value of any
------------------------------------------------
Award, either on the date of the Award or at the time such shares become vested,
shall not be includable as compensation or earnings for purposes of any other
benefit plan offered by the Bank, the Corporation or any Subsidiary other than
any qualified employee benefit plan which provides that such value shall be
included as compensation or earnings for purposes of such plan.
14. Corporate Action. The making of an Award under this Plan shall not
----------------
affect in any way the right or power of the Corporation or its shareholders or
the Bank or its shareholders or any Subsidiary or its shareholders to make or
authorize any adjustment, recapitalization, reorganization, or other change in
the Corporation's, the Bank's or any Subsidiary's capital structure or its
business, or any merger or consolidation of the Corporation, the Bank or any
Subsidiary, or the issuance of any bonds, debentures, preferred or other capital
stock or rights with respect thereto, or the dissolution or liquidation of the
Corporation, the Bank or any Subsidiary, or any sale or transfer of all or any
part of the Corporation's, the Bank's or any Subsidiary's assets or business.
15. Tax Withholding. The Trustees, the Corporation, the Bank and any
---------------
Subsidiary shall have the right to require any Participant or Permitted
Transferee to remit to the Corporation, the Bank or any Subsidiary an amount
sufficient to satisfy any Federal, state and/or local withholding tax
requirements prior to the delivery or release of any certificate or certificates
for Plan Shares or delivery of any cash or other assets with respect to Plan
Shares or otherwise pursuant to this Plan. Alternatively, the Trustee,
Corporation, Bank and any Subsidiary may deliver or release Shares or make other
distributions of cash or other assets net of the number of shares or cash
sufficient to satisfy the withholding tax requirements. For withholding tax
purposes, the shares of stock, cash and other assets to be distributed shall be
valued on the date the withholding obligation is incurred.
16. Exculpation and Indemnification. In connection with this Plan, no
-------------------------------
member of the Board, no member of the Board of Directors of the Corporation, no
member of the Committee and no Trustee shall be personally liable for any act or
omission to act in his capacity as a member of the Board, the Board of Directors
of the Corporation or the Committee or as a Trustee, nor for any mistake in
judgment made in good faith, unless arising out of, or resulting from, such
person's own bad faith, willful misconduct, or criminal acts. To the extent
permitted by applicable law and regulation, the Bank shall indemnify, defend and
hold harmless the members of the Board, the members of the Board of Directors of
the Corporation, the members of the Board of Directors of any Subsidiary, the
Committee and each Trustee and each other officer or employee of the Bank, the
Corporation or of any Subsidiary to whom any duty or power relating to the
administration or interpretation of this Plan may be assigned or delegated, from
and against any and all liabilities (including any amount paid in settlement of
a claim with the approval of the Board) and any costs or expenses (including
counsel fees) incurred by such persons arising out of, or as a result of, any
act or omission to act in connection with the performance of such person's
duties, responsibilities, and obligations under this Plan, other than such
liabilities, costs,
7
<PAGE>
and expenses as may arise out of, or result from, the bad faith, willful
misconduct, or criminal acts of such persons.
17. Amendment and Modification of this Plan. The Board may at any time,
---------------------------------------
and from time to time, amend or modify this Plan (including the form of Stock
Grant Agreement) in any respect, subject to any applicable regulatory
requirements and any required stockholder approval or any stockholder approval
which the Board may deem advisable for any reason, such as for the purpose of
obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying applicable stock exchange or quotation
system listing requirements. However, any amendment or modification of this Plan
shall not in any manner affect any Award of shares theretofore made to a
Participant under this Plan without the consent of such Participant or any
Permitted Transferee of such Participant.
18. Termination and Expiration of this Plan. This Plan may be abandoned,
---------------------------------------
suspended, or terminated, in whole or in part, at any time by the Board;
provided, however, that abandonment, suspension, or termination of this Plan
shall not affect any Award theretofore made under this Plan. Unless sooner
terminated, this Plan shall terminate at the close of business on the day that
is the tenth (10th) anniversary of the date of approval of the Plan by the
shareholders of the Corporation; and no Award of shares may be made under this
Plan thereafter. Such termination shall not effect any Award of shares
theretofore made. In the event that the Board terminates this Plan in whole, any
shares held by the Trustees pursuant to Section 2(d) which have not been
allocated to eligible Participants, together with any other assets held by the
Trustees in their capacities as such, shall revert to the Bank.
19. Effective Date. This Plan has been adopted by the Board to be
--------------
effective as of the date of approval of the Plan by the shareholders of the
Corporation.
20. Captions and Headings; Gender and Number. Captions and Section
----------------------------------------
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or construction of this Plan. As used herein, the
masculine gender shall include the feminine and neuter, and the singular number
shall include the plural, and vice versa, whenever such meanings are
appropriate.
21. Expenses of Administration of Plan. All costs and expenses incurred
----------------------------------
in the operation and administration of this Plan shall be borne by the Bank or
by a Subsidiary.
22. Governing Law. Without regard to the principles of conflicts of laws,
-------------
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.
23. Inspection of Plan. A copy of this Plan, and any amendments thereto,
------------------
shall be maintained by the Secretary of the Bank and shall be shown to any
proper person making inquiry about it.
8
<PAGE>
EXHIBIT A
STATE OF NORTH CAROLINA
COUNTY OF RICHMOND
STOCK GRANT AGREEMENT
THIS STOCK GRANT AGREEMENT (the "Agreement") is made and entered into as of
the ____ of ___________________, _______ (the "Effective Date"), by and among
Richmond Savings Bank, Inc., SSB (the "Bank"), a North Carolina corporation,
_______________________ (the "Participant") and E.E. Vuncannon, Jr., Buena Vista
Coggin and John T. Page, Jr. (the "Trustees").
WHEREAS, a Management Recognition Plan (the "Plan") was adopted by the
Board of Directors of the Bank (the "Bank") and approved by the Board of
Directors and by the shareholders of Carolina Fincorp, Inc., the holding
company of the Bank (the "Corporation").
WHEREAS, it has been determined that it is desirable and in the best
interest of the Bank to make an award (the "Award") of certain shares of the
Common Stock of the Corporation, under the Plan, to the Participant, subject to
certain restrictions as specified below; and
WHEREAS, capitalized terms not otherwise defined herein shall have the same
meaning given to such terms in the Plan.
NOW, THEREFORE, the Parties agree as follows:
1. Date of Award. The date of making the Award under this Agreement is
-------------
the _____ day of _________________, ______. This Award has been made in
recognition of the Participant's status and service as a ____________________ of
_____________________________________________. The Participant is ____ or is
not ____ a director or executive officer of the Bank.
2. Receipt by Participant. The Participant acknowledges receipt of
----------------------
________________________________ (__________) shares of Common Stock (the
"Restricted Stock"), and agrees to the execution of stock powers or such other
transfer authorizations as the Committee shall request, in blank, covering the
Restricted Stock to be held by the Trustees until the Restricted Stock becomes
vested and nonforfeitable pursuant to the Plan and this Agreement.
3. Investment Representation and Transfer Restrictions.
---------------------------------------------------
(a) Investment Representation. Participant makes and agrees to the
-------------------------
investment representation, if any, attached hereto as Annex A, and the Committee
may cause a legend to be placed on any certificate representing any of the
shares of Restricted Stock to make appropriate reference to such representation.
(b) Securities Law and Regulations. The Participant agrees that the
-------------------------------
Restricted Stock shall be subject to such stop-transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Securities and Exchange Commission, any
<PAGE>
stock exchange or interdealer quotation system upon which the Common Stock is
then listed and any other applicable federal or state securities laws, rules or
regulations, and the Committee may cause a legend or legends to be placed on any
certificate representing any of the shares of Restricted Stock to make
appropriate reference to such restrictions.
(c) Other Transfer Restrictions. (Intentionally omitted.)
---------------------------
4. Receipt by the Trustees. The Trustees acknowledge receipt from the
-----------------------
Participant of the Restricted Stock, registered in the name of the Participant,
and acknowledge receipt of stock powers executed in blank by the Participant
covering all of the Restricted Stock. The Restricted Stock shall be held by the
Trustees and distributed or transferred in accordance with the Plan and as set
forth herein.
5. Vesting and Delivery of Restricted Stock by the Trustees.
--------------------------------------------------------
(a) Periodic Vesting. Restricted Stock shall vest and become
----------------
nonforfeitable as follows (applicable provision is marked):
(i) [_] (Marked if applicable) Annual Installments:
-------------------
Shares of Restricted Stock shall become vested and
nonforfeitable in annual installments as follows:
__________________ shares on ______________, 19__
__________________ shares on ______________, 19__
__________________ shares on ______________, 19__
__________________ shares on ______________, 19__
In addition, shares of Restricted Stock shall become vested
and nonforfeitable upon disability, death, retirement and a
change in control as set forth in the Plan.
(ii) [_] (Marked if applicable) Immediate Vesting:
-----------------
Subject to the terms and conditions of the Plan, all of the
shares of Restricted Stock are vested, nonforfeitable and
exercisable.
(b) Delivery of Restricted Stock to the Participant. After the date
-----------------------------------------------
on which shares of Restricted Stock have become vested as provided in this
Agreement and in the Plan, the Committee shall instruct the Trustees to deliver
to the Participant, the Participant's designee, such other person as shall have
been designated as Participant's beneficiary in accordance with this Agreement,
or any other permitted recipient pursuant to the Plan, as applicable,
certificates representing the shares of Restricted Stock which have become
vested and nonforfeitable, as the Committee shall determine, free from any
restrictions imposed by this Agreement other than such restrictions and
conditions as may be deemed necessary by the Committee pursuant to Section 3
above. In addition, the Trustees shall deliver to such Participant, the
Participant's designee, such other person as shall have been designated as
Participant's
2
<PAGE>
beneficiary in accordance with the Agreement, or any other permitted recipient
to the Plan, as applicable, any and all dividends, which have been withheld by
the Trustees pursuant to Section 8(c) the Plan, and any interest accrued
thereon, paid in respect to the shares of Restricted Stock which have become
vested and nonforfeitable.
(c) Delivery of Forfeited Restricted Stock. If the shares of
--------------------------------------
Restricted Stock, or any of them, are forfeited pursuant to the Plan, the
Committee shall instruct the Trustees concerning the disposition of such
forfeited shares and any dividends paid in respect thereof but not received by
Participant. Thereafter such forfeited shares shall cease to be subject to this
Agreement.
(d) Dividend Withholding. Any dividend, all or any part of which is
--------------------
intended by the Corporation's Board of Directors to be a return of capital to
the Corporation's Stockholders, which is paid in respect to shares of Restricted
Stock not yet vested, shall be held by the Trustees until such shares of
Restricted Stock become vested and nonforfeitable and the certificates
representing such shares are delivered pursuant to Section 5(b) herein.
6. Repayment of Dividends. If the Participant hereunder forfeits any
----------------------
shares of Restricted Stock pursuant to the Plan, the Participant shall, within
30 days after the effective date of such forfeiture, pay the Corporation an
amount equal to the dividends and other distributions received by the
Participant with respect to forfeited shares of Restricted Stock as set forth in
the Plan. In the alternative, at the option of the Bank or a Subsidiary, the
amount to be repaid may be withheld by the Bank or Subsidiary from the final
compensation or fees payable to the Participant. Each acceptance by a
Participant of dividends with respect to Restricted Stock still subject to
forfeiture shall constitute a reaffirmation of the agreements set forth in this
Section 6.
7. Designation of Beneficiary. The Participant hereby designates the
--------------------------
person(s) described on Annex B as the beneficiary or beneficiaries who shall be
entitled to receive the Restricted Stock and the assets held by the trustees, if
any, distributable to the Participant upon his death. The Participant may, from
time to time, revoke or change his beneficiary designation without the consent
of any prior beneficiary, if any, by filing a new designation with the
Committee. The last such designation received by the Committee shall be
controlling; provided, however, that no designation, or change or revocation
thereof, shall be effective unless received by the Committee prior to the
Participant's death, and in no event shall it be effective as of a date prior to
such receipt.
If no such beneficiary designation is in effect at the time of the
Participant's death, or if no designated beneficiary survives the Participant,
or if such designation conflicts with law, the Participant's estate shall be
deemed to have been designated his beneficiary and shall receive the Restricted
Stock and the assets held by the trustees, if any, distributable to the
Participant upon his death. If the Committee is in doubt as to the right of any
person to receive such distribution, the Committee may direct the Trustees to
retain the Restricted Stock, without liability for any interest in respect
thereof, until the rights thereto are determined, or the Committee may direct
the transfer of such Restricted Stock into any court of appropriate jurisdiction
and such transfer shall be deemed a complete discharge of the obligations of the
Bank, the Corporation, the Committee and Trustees hereunder.
3
<PAGE>
8. Effect of Award on Status of Participant. The fact that an Award has
----------------------------------------
been made to the Participant under this Plan shall not confer on the Participant
any right to continued service on the Board, on the board of directors of the
Corporation or on the board of directors of any Subsidiary, nor to continued
employment with the Bank, the Corporation or any Subsidiary; nor shall it limit
the right of the Bank, the Corporation or of any Subsidiary to remove the
Participant from any such boards, or to terminate his employment at any time
without prior notice.
9. Impact of Award on Other Benefits of Participant. The value of the
------------------------------------------------
Restricted Stock on the date of the Award or at the time the Restricted Stock
becomes vested, shall not be includable as compensation or earnings for purposes
of any other benefit plan offered by the Bank, the Corporation or any Subsidiary
other than any qualified employee benefit plan which provides that such value
shall be included as compensation or earnings for purposes of such plan.
10. Tax Withholding. All Restricted Stock distributed pursuant to this
---------------
Agreement shall be subject to applicable federal, state and local withholding
for taxes. The Participant expressly acknowledges and agrees to such withholding
without regard to whether the Restricted Stock may then be sold or otherwise
transferred by the Participant. The Participant acknowledges and agrees to the
tax withholding provisions which are set forth in the Plan.
11. Notices. Any notices or other communications required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed to have
been sufficiently given if delivered personally or three business days after
deposit in the United States mail by Certified Mail, return receipt requested,
properly addressed and postage prepaid, if to the Bank, the Committee or the
Trustees at the Bank's principal office address at 115 South Lawrence Street,
Rockingham, North Carolina 28380-1591; and, if to the Participant, at his last
address appearing on the books of the Bank. The Bank and the Participant may
change their address or addresses by giving written notice of such change as
provided herein. Any notice or other communication hereunder shall be deemed to
have been given on the date actually delivered or as of the third (3rd) business
day following the date mailed as set forth above, as the case may be.
12. Construction Controlled by Plan. The Plan, a copy of which is
-------------------------------
attached hereto as Annex C, is incorporated herein by reference. The Award of
Restricted Shares shall be subject to the terms and conditions of the Plan, and
the Participant hereby assumes and agrees to comply with all of the obligations
imposed upon the Participant in the Plan. This Agreement shall be construed so
as to be consistent with the Plan; and the provisions of the Plan shall be
deemed to be controlling in the event that any provision hereof should appear to
be inconsistent therewith.
13. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such a manner as to be valid and enforceable under
applicable law, but if any provision of this Agreement is determined to be
unenforceable, invalid or illegal, the validity of any other provision or part
thereof shall not be affected thereby and this Agreement shall continue to be
binding on the parties hereto as if such unenforceable, invalid or illegal
provision or part thereof had not been included herein.
4
<PAGE>
14. Governing Law. Without regard to the principles of conflicts of laws,
-------------
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Agreement.
15. Modification of Agreement; Waiver. This Agreement may be modified,
---------------------------------
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto or their successors in interest. No waiver hereunder shall constitute a
waiver with respect to any subsequent occurrence or other transaction hereunder
or of any other provision hereof.
16. Binding Effect. This Agreement shall be binding upon and shall inure
--------------
to the benefit of the parties hereto, and their respective heirs, legatees,
personal representatives, executors, and administrators, successors and assigns.
17. Entire Agreement. This Agreement and the Plan constitute and embody
----------------
the entire understanding and agreement of the parties hereto and, except as
otherwise provided hereunder, there are no other agreements or understandings,
written or oral, in effect between the parties hereto relating to the matters
addressed herein.
18. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
19. Substitution of Trustee. In the event any new trustee is substituted
-----------------------
for any Trustee pursuant to the Plan, such substitute trustee shall also be
substituted as a Trustee hereunder.
IN WITNESS WHEREOF, the Bank has caused this instrument to be executed in
its corporate name by its President, or one of its Vice Presidents, and attested
by its Secretary or one of its Assistant Secretaries, and its corporate seal to
be hereto affixed, all by, authority of its Board of Directors first duly given;
and each individual party hereto has hereunto set his hand and adopted as his
seal the typewritten word "SEAL" appearing beside his name, all done this the
day and year first above written.
RICHMOND SAVINGS BANK, INC., SSB
By:_______________________________________________
R. Larry Campbell, President
ATTEST:
_________________________________
Karen M. Rickett, Secretary
5
<PAGE>
[Corporate Seal]
PARTICIPANT
_______________________________________(SEAL)
_______________________________________(SEAL)
E.E. Vuncannon, Jr., Trustee
_______________________________________(SEAL)
Buena Vista Coggin, Trustee
_______________________________________(SEAL)
John T. Page, Jr., Trustee
6
<PAGE>
ANNEX A
Investment Representation
-------------------------
<PAGE>
ANNEX B
Management Recognition Plan
---------------------------
Beneficiary Designation Form
----------------------------
As Beneficiary to receive any shares of stock distributable on my behalf
pursuant to the Richmond Savings Bank, Inc., SSB Management Recognition Plan, I
hereby designate the following:
Name Address Relationship
Primary Beneficiary: _______________________________________________________
_______________________________________________________
_______________________________________________________
Contingent Beneficiary:
(if any) _______________________________________________________
_______________________________________________________
_______________________________________________________
If more than one primary beneficiary is named, shares will be paid in equal
shares to surviving primary beneficiaries. Should the contingent beneficiaries
be eligible to receive the benefits (i.e., all primary beneficiaries are
deceased), such benefits will be paid in equal shares to such surviving
contingent beneficiaries.
Name of Spouse if not given above: __________________________________________
______________________________________ ___________________________________
Witness Participant
___________________________________
Date
<PAGE>
ANNEX C
Management Recognition Plan
---------------------------
<PAGE>
EXHIBIT 10(f)
CAROLINA FINCORP, INC.
STOCK OPTION PLAN
THIS IS THE STOCK OPTION PLAN ("Plan") of Carolina Fincorp, Inc. (the
"Corporation"), a North Carolina corporation, with its principal office in
Rockingham, Richmond County, North Carolina, adopted by the Board of Directors
of the Corporation and effective upon the approval of the Plan by the
shareholders of the Corporation, under which options may be granted from time to
time to eligible directors and employees of the Corporation, Richmond Savings
Bank, Inc., SSB (the "Bank") and of any corporation or other entity of which
either the Corporation or the Bank owns, directly or indirectly, not less than
50% of any class of equity securities (a "Subsidiary"), to purchase shares of
common stock of the Corporation ("Common Stock"), subject to the provisions set
forth below:
1. PURPOSE OF THE PLAN. The purpose of the Plan is to aid the
-------------------
Corporation, the Bank and any Subsidiary in attracting and retaining capable
directors and employees and to provide a long range incentive for directors and
employees to remain in the management of the Corporation, the Bank or any
Subsidiary, to perform at increasing levels of effectiveness and to acquire a
permanent stake in the Corporation with the interest and outlook of an owner.
These objectives will be promoted through the granting of options to acquire
shares of Common Stock pursuant to the terms of this Plan.
2. ADMINISTRATION. The Plan shall be administered by a committee (the
--------------
"Committee"), which shall consist of not less than two members of the Board of
Directors of the Corporation (the "Board") who are "Non-Employee Directors" as
defined in Rule 16b-3(b)(3) of the Rules and Regulations under the Securities
Act of 1934 (the "Exchange Act"). Members of the Committee shall serve at the
pleasure of the Board. In the absence at any time of a duly appointed
Committee, this Plan shall be administered by the Board. The Committee may
designate any officers or employees of the Corporation, the Bank or any
Subsidiary to assist in the administration of the Plan and to execute documents
on behalf of the Committee and perform such other ministerial duties as may be
delegated to them by the Committee.
Subject to the provisions of the Plan, the determinations or the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive upon all persons affected thereby. By way of
illustration and not of limitation, the Committee shall have the discretion (a)
to construe and interpret the Plan and all options granted hereunder and to
determine the terms and provisions (and amendments thereof) of the options
granted under the Plan (which need not be identical); (b) to define the terms
used in the Plan and in the options granted hereunder; (c) to prescribe, amend
and rescind the rules and regulations relating to the Plan; (d) to determine the
individuals to whom and the time or times at which such options shall be
granted, the number of shares to be subject to each option, the option price,
and the determination of leaves of absence which may be granted to participants
without constituting a termination of their employment for the purposes of the
Plan; and (e) to make all other determinations necessary or advisable for the
administration of the Plan.
<PAGE>
It shall be in the discretion of the Committee to grant options which
qualify as "incentive stock options," as that term is defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") ("Incentive Stock
Options") or which do not qualify as Incentive Stock Options ("Nonqualified
Stock Options") (herein referred to collectively as "Options;" however, whenever
reference is specifically made only to "Incentive Stock Options" or
"Nonqualified Stock Options," such reference shall be deemed to be made to the
exclusion of the other). Any options granted which fail to satisfy the
requirements for Incentive Stock Options shall become Nonqualified Stock
Options.
3. STOCK AVAILABLE FOR OPTIONS. In the discretion of the
---------------------------
Committee, the stock to be subject to Options under the Plan shall be authorized
but unissued shares of Common Stock which are issued directly to optionees upon
exercise of options and/or shares of Common Stock which are acquired by the Plan
or the Corporation in the open market. The total number of shares of Common
Stock for which Options may be granted under the Plan is 185,150 shares, which
is 10% of the total number of shares of Common Stock issued by the Corporation
in connection with the conversion of the Bank from a North Carolina mutual
savings bank to a North Carolina chartered savings bank on November 22, 1996
(the "Conversion"). Such number of shares is subject to any capital adjustments
as provided in Section 16. In the event that an Option granted under the Plan is
forfeited, released, expires or is terminated unexercised as to any shares
covered thereby, such shares thereafter shall be available for the granting of
Options under the Plan; however, if the forfeiture, expiration, release or
termination date of an Option is beyond the term of existence of the Plan as
described in Section 21, then any shares covered by forfeited, unexercised,
released or terminated options shall not reactivate the existence of the Plan
and therefore may not be available for additional grants under the Plan. The
Corporation, during the term of the Plan, will reserve and keep available a
number of shares of Common Stock sufficient to satisfy the requirements of the
Plan. In the discretion of the Committee, the shares of Common Stock necessary
to be delivered to satisfy exercised options may be from authorized and unissued
shares of Common Stock or may be purchased in the open market.
4. ELIGIBILITY. Options shall be granted only to individuals who
-----------
meet all of the following eligibility requirements:
(a) Such individual must be an employee or a member of the Board of
Directors of the Corporation, the Bank or a Subsidiary. For this purpose,
an individual shall be considered to be an "employee" only if there exists
between the Corporation, the Bank or a Subsidiary and the individual the
legal and bona fide relationship of employer and employee. In determining
whether such relationship exists, the regulations of the United States
Treasury Department relating to the determination of such relationship for
the purpose of collection of income tax at the source on wages shall be
applied.
(b) Such individual must have such knowledge and experience in
financial and business matters that he or she is capable of evaluating the
merits and risks of the investment involved in the exercise of the Options.
2
<PAGE>
(c) Such individual, being otherwise eligible under this Section 4,
shall have been selected by the Committee as a person to whom an Option
shall be granted under the Plan.
In determining the directors and employees to whom Options shall be granted
and the number of shares to be covered by each Option, the Committee shall take
into account the nature of the services rendered by respective directors and
employees, their present and potential contributions to the success of the
Corporation, the Bank and any Subsidiary and such other factors as the Committee
shall deem relevant. A director or employee who has been granted an Option under
the Plan may be granted an additional Option or Options under the Plan if the
Committee shall so determine.
If, pursuant to the terms of the Plan, it is necessary that the percentage
of stock ownership of any individual be determined, stock ownership in the
Corporation or of a related corporation which is owned (directly or indirectly)
by or for such individual's brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants or by or for any corporation,
partnership, estate or trust of which such employee is a shareholder, partner or
beneficiary shall be considered as owned by such director or employee.
5. OPTION GRANTS. Subject to the provisions of this Plan, Options
-------------
shall be awarded to the directors and employees in such amounts as are
determined by the Committee. The proper officers on behalf of the Corporation
and each Optionee shall execute a Stock Option Grant and Agreement attached
hereto as Exhibit A (the "Option Agreement") which shall set forth the total
number of shares of Common Stock to which it pertains, the exercise price,
whether it is a Nonqualified Stock Option or an Incentive Stock Option, and such
other terms, conditions, restrictions and privileges as the Committee in each
instance shall deem appropriate, provided they are not inconsistent with the
terms, conditions and provisions of this Plan. Each Optionee shall receive a
copy of his executed Option Agreement. Any Option granted with the intention
that it will be an Incentive Stock Option but which fails to satisfy a
requirement for Incentive Stock Options shall continue to be valid and shall be
treated as a Nonqualified Stock Option.
6. OPTION PRICE.
------------
(a) The option price of each Option granted under the Plan shall be
not less than 100% of the market value of the stock on the date of grant of
the Option. In the case of Incentive Stock Options granted to a
shareholder who owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Corporation, the Bank or a
Subsidiary (a "ten percent shareholder"), the option price of each Option
granted under the Plan shall not be less than 110% of the market value of
the stock on the date of grant of the Option. If the Common Stock is
listed on a national securities exchange (including for this purpose the
Nasdaq Stock Market, Inc. National Market) on the date in question, then
the market value per share shall be not less than the average of the
highest and lowest selling price on such exchange on such date, or if there
were no sales on such date, then the market price per share shall be equal
to the average between the bid and asked price on such date. If the Common
Stock is traded otherwise than on a national securities exchange (including
for this purpose the Nasdaq Stock Market, Inc. National Market) on the date
in question, then the market price per share shall be equal to the average
between the bid and asked price on
3
<PAGE>
such date, or, if there is no bid and asked price on such date, then on the
next prior business day on which there was a bid and asked price. If no
such bid and asked price is available, then the market value per share
shall be its fair market value as determined by the Committee, in its sole
and absolute discretion. The Committee shall maintain a written record of
its method of determining such value.
(b) The option price shall be payable to the Corporation either (i)
in cash or by check, bank draft or money order payable to the order of the
Corporation, or (ii) at the discretion of the Committee, through the
delivery of shares of the Common Stock owned by the optionee with a market
value (determined in a manner consistent with (i) above) equal to the
option price, or (iii) at the discretion of the Committee, by a combination
of (i) and (ii) above. No shares shall be delivered until full payment has
been made.
7. EXPIRATION OF OPTIONS. The Committee shall determine the
---------------------
expiration date or dates of each Option, but such expiration date shall not be
later than 10 years after the date such Option is granted. In the event an
Incentive Stock Option is granted to a ten percent shareholder, the expiration
date or dates of each Option shall not be later than 5 years after the date such
Option is granted. The Committee, in its discretion, may extend the expiration
date or dates of an Option after such date was originally set; however, such
expiration date may not exceed the maximum expiration date described in this
Section 7.
8. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
(a) All Options must be granted within 10 years of the Effective
Date of this Plan as defined in Section 20.
(b) The Committee may grant Options which are intended to be either
Incentive Stock Options or Nonqualified Stock Options to an eligible
employee.
(c) The grant of Options shall be evidenced by a written instrument
(an Option Agreement) containing terms and conditions established by the
Committee consistent with the provisions of this Plan.
(d) Not less than 100 shares of Common Stock may be purchased at any
one time unless the number purchased is the total number at that time
purchasable under the Plan.
(e) The recipient of an Option shall have no rights as a shareholder
with respect to any shares covered by his Option until payment in full by
him for the shares being purchased. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is
prior to the date such stock is fully paid for, except as provided in
Section 17.
4
<PAGE>
(f) The aggregate fair market value of the stock (determined as of
the time the Option is granted) with respect to which Incentive Stock
Options are exercisable for the first time by any participant during any
calendar year (under all benefit plans of the Corporation, the Bank or any
Subsidiary, if applicable) shall not exceed $100,000; provided, however,
that such $100,000 limit of this subsection (f) shall not apply to the
grant of Nonqualified Stock Options. The Committee may, in its discretion,
grant Options which are exercisable in excess of the foregoing limitations,
in which case Options granted which are exercisable in excess of such
limitation shall be Nonqualified Stock Options.
(g) All stock obtained pursuant to an option which qualifies as an
Incentive Stock Option shall be held in escrow for a period which ends on
the later of (i) two (2) years from the date of the granting of the Option
or (ii) one (1) year after the transfer of the stock pursuant to the
exercise of the Option. The stock shall be held by the Corporation or its
designee. Except as otherwise specifically provided herein, the employee
who has exercised the Option shall during such holding period have all
rights of a shareholder, including but not limited to the rights to vote,
receive dividends and sell the stock. The sole purpose of the escrow is to
inform the Corporation of a disqualifying disposition of the stock within
the meaning of Section 422 of the Code, as amended, and it shall be
administered solely for that purpose.
9. EXERCISE OF OPTIONS.
-------------------
(a) Options granted to an optionee by virtue of his position as a
nonemployee director of the Corporation or the Bank (as stated in the
Option Agreement) or to an employee by virtue of his position as an
employee (as stated in the Option Agreement) shall become vested and
exercisable at the times, at the rate and subject to such limitations as
may be set forth in the Option Agreement executed in connection therewith;
provided, however, that all outstanding and nonforfeited options shall be
exercisable, if not sooner, on the day prior to the expiration date
thereof.
(b) Unless the Committee shall specifically state otherwise at the
time an Option is granted, all Options granted hereunder shall become
vested and exercisable upon the optionee's disability, within the meaning
of Section 22(e)(3) of the Code, as set forth in Section 11 of this Plan,
in the event of the optionee's death as set forth in Section 12 of this
Plan, in the event of the optionee's retirement as set forth in Section 13
of this Plan, and in the event of a change in control as set forth in
Section 14 of this Plan.
(c) The exercise of any Option must be evidenced by written notice to
the Corporation that the optionee intends to exercise his Option. In no
event shall an Option be deemed granted by the Corporation or exercisable
by a recipient prior to the mutual execution by the Corporation and the
recipient of an Option Agreement which comports with the requirements of
Section 5 and Section 8(c) of this Plan.
(d) Any right to exercise Options in annual installments shall be
cumulative and any vested installments may be exercised, in whole or in
part, at the election of the optionee.
5
<PAGE>
(e) The inability of the Corporation or Bank to obtain approval from
any regulatory body or authority deemed by counsel to be necessary to the
lawful issuance and sale of any shares of Common Stock hereunder shall
relieve the Corporation and the Bank of any liability in respect of the
non-issuance or sale of such shares. As a condition to the exercise of an
option, the Corporation may require the person exercising the Option to
make such representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements of federal
or state securities laws.
(f) The Committee shall have the discretionary authority to impose in
the Option Agreements such restrictions on shares of Common Stock as it may
deem appropriate or desirable, including but not limited to the authority
to impose a right of first refusal or to establish repurchase rights or
both of these restrictions.
(g) Notwithstanding anything to the contrary herein, an optionee
receiving the grant of an Option by virtue of his or her position as a
director or as an employee of the Corporation, the Bank or a Subsidiary (as
stated in the Option Agreement), shall be required to exercise his or her
Options within the periods set forth in Sections 10, 11, 12, 13 and 14
below.
10. TERMINATION OF EMPLOYMENT - EXCEPT BY DISABILITY, RETIREMENT OR
---------------------------------------------------------------
DEATH. If any optionee receiving the grant of an Option by virtue of his
- -----
position as a director (as stated in the Option Agreement) ceases to be a
director of the Corporation, the Bank or any Subsidiary for any reason other
than death, disability (as defined in Section 11), or retirement (as defined in
Section 13) or if any optionee receiving the grant of an Option by virtue of his
position as an employee (as stated in the Option Agreement) ceases to be an
employee of the Corporation, the Bank or any Subsidiary for any reason other
than death, disability (as defined in Section 11), or retirement (as defined in
Section 13), he may, (i) at any time within three (3) months after his date of
termination, but not later than the date of expiration of the Option, exercise
any Option designated in the Option Agreement as an Incentive Stock Option and
(ii) at any time prior to the date of expiration of the Option, exercise any
option designated in the Option Agreement as a Nonqualified Stock Option.
However, in either such event the optionee may exercise any Option only to the
extent it was vested and he or she was entitled to exercise the Option on the
date of termination. Any Options or portions of Options of terminated optionees
not so exercised shall terminate and be forfeited.
11. TERMINATION OF EMPLOYMENT - DISABILITY. If any optionee
---------------------------------------
receiving the grant of an Option by virtue of his position as a director (as
stated in the Option Agreement) ceases to be a director of the Corporation, the
Bank or any Subsidiary due to his becoming disabled within the meaning of
Section 22(e)(3) of the Code, or if any employee receiving the grant of an
Option by virtue of his position as an employee (as stated in the Option
Agreement) ceases to be employed by the Corporation, the Bank or any Subsidiary
due to his becoming disabled within the meaning of Section 22(e)(3) of the Code,
all unvested and forfeitable Options of such optionee shall immediately become
vested and nonforfeitable, and he may, (i) at any time within 12 months after
his date of termination, but not later than the date of expiration of the
Option, exercise any option designated in the Option Agreement as an Incentive
Stock Option with respect to all
6
<PAGE>
shares subject thereto and (ii) at any time prior to the date of expiration of
the Option, exercise any Option designated in the Option Agreement as a
Nonqualified Stock Option with respect to all shares subject thereto. Any
portions of Options of optionees who are terminated because they become disabled
which are not so exercised shall terminate.
12. TERMINATION OF EMPLOYMENT - DEATH. If an optionee receiving the
----------------------------------
grant of an option by virtue of his position as a director (as stated in the
Option Agreement) dies while a director of the Corporation, the Bank or any
Subsidiary or if any employee receiving the grant of an option by virtue of his
position as an employee (as stated in the Option Agreement) dies while in the
employment of the Corporation, the Bank or a Subsidiary, all unvested and
forfeitable Options of such optionee shall immediately become vested and
nonforfeitable and the person or persons to whom the Option is transferred by
will or by the laws of descent and distribution may exercise the Option at any
time until the term of the Option has expired, with respect to all shares
subject thereto, to the same extent and upon the same terms and conditions the
optionee would have been entitled to do so had he lived. Any Options or
portions of options of deceased directors or employees not so exercised shall
terminate.
13. TERMINATION OF EMPLOYMENT - RETIREMENT. If any optionee
--------------------------------------
receiving the grant of an Option by virtue of his position as a director (as
stated in the Option Agreement) ceases to be a director of the Corporation, the
Bank or any Subsidiary due to his retirement, or if any employee receiving the
grant of an Option by virtue of his position as an employee (as stated in the
Option Agreement) ceases to be employed by the Corporation, the Bank or any
Subsidiary due to his retirement, all unvested and forfeitable Options of such
optionee shall immediately become vested and nonforfeitable, and he may at any
time prior to the date of expiration of the Option, exercise such Option,
provided, however, that if the Option is exercised more than three (3) months
after such retirement, the Option may be treated as a Nonqualified Stock Option.
Any portions of Options of retired directors or employees not so exercised shall
terminate. For purposes of this Plan, the term "retirement," as it relates to
any optionee receiving a grant of an Option as a result of his or her position
as an employee of the Corporation, the Bank or any Subsidiary, shall mean (i)
the termination of the optionee's employment under conditions which would
constitute retirement under any tax qualified retirement plan maintained by the
Corporation, the Bank or a Subsidiary, or (ii) termination of employment after
attaining age 65. The term "retirement," as it relates to any optionee
receiving a grant of an Option as a result of his or her position as a director,
shall mean the cessation of membership on such board of directors (i) with the
approval of such board of directors, at any time after such optionee reaches age
70, or (ii) at the election of the optionee at any time after not less than 25
years of service as a member of the such board of directors, as applicable.
14. CHANGE IN CONTROL. In the event that an optionee ceases to
-----------------
be an employee or a director of the Corporation, the Bank or a Subsidiary (which
position resulted in his or her receipt of an option pursuant to this Plan) for
any reason after the occurrence of a "change in control" and prior to the time
that all shares allocated to him or her would be 100% vested, nonforfeitable and
exercisable in accordance with Sections 9 and 10 above, then, notwithstanding
Sections 9 and 10 above, all Options granted to such optionee shall immediately
become fully vested and nonforfeitable. For purposes of this Plan, a "change in
control" shall mean (i) a change in control
7
<PAGE>
of a nature that would be required to be reported by the Corporation in response
to Item 1 of the Current Report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Exchange Act; (ii) such time as any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation or Bank
representing 25% or more of the combined voting power of the outstanding Common
Stock of the Corporation or outstanding common stock of the Bank, as applicable;
or (iii) individuals who constitute the Board or the board of directors of the
Bank on the date hereof (the "Incumbent Board" and "Incumbent Bank Board,"
respectively) cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Bank Board, as applicable, or whose
nomination for election by the Corporation's or Bank's shareholders was approved
by the Corporation's or Bank's Board of Directors or Nominating Committee, shall
be considered as though he or she were a member of the Incumbent Board or
Incumbent Bank Board, as applicable; or (iv) either the Corporation or the Bank
consolidates or merges with or into another corporation, association or entity
or is otherwise reorganized, where neither the Corporation nor the Bank,
respectively, is the surviving corporation in such transaction; or (v) all or
substantially all of the assets of either the Corporation or the Bank are sold
or otherwise transferred to or are acquired by any other entity or group.
As set forth in Section 10, in the event of such a termination after a
change in control, the Optionee must exercise any Incentive Stock Options within
three (3) months after his date of termination, but in no event later than the
date of expiration of the Option and may exercise any Nonqualified Stock Options
at any time prior to the date of expiration of the Option.
15. OPTIONAL CASH PAYMENT. Upon the exercise of an Option, at the
---------------------
written request of the optionee, the Committee, in its sole and absolute
discretion, may make a cash payment to the optionee, in whole or in part, in
lieu of the delivery of shares of Common Stock. Such cash payment to be paid in
lieu of delivery of Common Stock shall be equal to the difference between the
market value per share (determined as set forth in Section 6 above) of Common
Stock on the date of the Option exercise and the exercise price per share of the
Option. Such cash payment shall be in exchange for the cancellation of such
Option. Notwithstanding the above, such cash payment shall not be made in the
event that such transaction would result in liability to the optionee and the
Company under Section 16(b) of the Exchange Act, and the regulations promulgated
thereunder.
16. RESTRICTIONS ON TRANSFER. An Option granted under this Plan may
------------------------
not be transferred except by will or the laws of descent and distribution and,
during the lifetime of the optionee to whom it was granted, may be exercised
only by such optionee.
17. ADJUSTMENTS AFFECTING COMMON STOCK.
----------------------------------
(a) If the outstanding shares of Common Stock of the Corporation are
increased, decreased, changed into or exchanged for a different number or
kind of shares or other securities of the Corporation or another entity as
a result of a recapitalization, reclassification, stock dividend, stock
split, amendment to the Corporation's Certificate of
8
<PAGE>
Incorporation, reverse stock split, merger or consolidation, an appropriate
adjustment shall be made in the number and/or kind of securities allocated
to the Options previously and subsequently granted under the Plan, without
change in the aggregate purchase price applicable to the unexercised
portion of the outstanding Options but with a corresponding adjustment in
the price for each share or other unit of any security covered by the
Options.
(b) In the event that the Corporation shall declare and pay any
dividend with respect to the Common Stock (other than a dividend payable in
shares of the Corporation's Common Stock or a regular quarterly cash
dividend), including a dividend which results in a nontaxable return of
capital to the holders of shares of Common Stock for federal income tax
purposes, or otherwise than by dividend makes distribution of property to
the holders of its shares of Common Stock, the Committee, in its discretion
applied uniformly to all outstanding Options, may adjust the exercise price
per share of outstanding Options in such a manner as the Committee may
determine to be necessary to reflect the effect of the dividend or other
distribution on the fair market value of a share of Common Stock. In
adjusting the exercise price per share of outstanding Options, the
Committee may, in its discretion, (i) require all holders of outstanding
Options to return such Options and reissue new Options with a new exercise
price or (ii) adjust the Option Price without any such return and
reissuance.
(c) To the extent that the foregoing adjustments described in
Sections 16(a) and (b) above relate to particular Options or to particular
stock or securities of the Corporation subject to Option under this Plan,
such adjustments shall be made by the Committee, whose determination in
that respect shall be final and conclusive.
(d) The grant of an Option pursuant to this Plan shall not affect in
any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell,
or transfer all or any part of its business or assets.
(e) No fractional shares of stock shall be issued under the Plan for
any such adjustment.
(f) Any adjustment made pursuant to this Section 16, shall be made,
to the extent practicable, in such manner as not to constitute a
modification of any outstanding Incentive Stock Options within the meaning
of Section 424(h) of the Code.
18. INVESTMENT PURPOSE. At the discretion of the Committee, any
------------------
Option Agreement may provide that the optionee shall, by accepting the
Option, represent and agree, for himself and his transferees by will or the laws
of descent and distribution, that all shares of stock purchased upon the
exercise of the Option will be acquired for investment and not for resale or
distribution, and that upon each exercise of any portion of an Option, the
person entitled to exercise the same shall furnish evidence of such facts which
is satisfactory to the Corporation. Certificates for shares of stock acquired
under the Plan may be issued bearing such restrictive legends as the
9
<PAGE>
Corporation and its counsel may deem necessary to ensure that the optionee is
not an "underwriter" within the meaning of the regulations of the Securities
Exchange Commission.
19. APPLICATION OF FUNDS. The proceeds received by the Corporation
--------------------
from the sale of Common Stock pursuant to Options will be used for general
corporate purposes.
20. NO OBLIGATION TO EXERCISE. The granting of an Option shall
-------------------------
impose no obligation upon the optionee to exercise such Option.
21. EFFECTIVE DATE OF PLAN. The Plan will become effective upon the
----------------------
approval of the Plan by the shareholders of the Corporation and receipt
of any necessary regulatory approvals.
22. TERM OF PLAN. Options and may be granted pursuant to this Plan
------------
upon the from time to time within ten (10) years from the effective date of the
Plan.
23. TIME OF GRANTING OF OPTIONS. Nothing contained in the Plan
---------------------------
or in any resolution adopted or to be adopted by the Committee or the
shareholders of the Corporation and no action taken by the Committee shall
constitute the granting of any Option hereunder. The granting of an Option
pursuant to the Plan shall take place only when an Option Agreement shall have
been duly executed and delivered by and on behalf of the Corporation at the
direction of the Committee.
24. WITHHOLDING TAXES. Whenever the Corporation proposes or is
-----------------
required to cause to be issued or transferred shares of stock, cash or other
assets pursuant to this Plan, the Corporation shall have the right to require
the optionee to remit to the Corporation an amount sufficient to satisfy any
federal, state and/or local withholding tax requirements prior to the issuance
of any certificate or certificates for such shares or delivery of such cash or
other assets. Alternatively, the Corporation may issue or transfer such shares
of stock or make other distributions of cash or other assets net of the number
of shares or other amounts sufficient to satisfy the withholding tax
requirements. For withholding tax purposes, the shares of stock, cash and other
assets to be distributed shall be valued on the date the withholding obligation
is incurred.
25. TERMINATION AND AMENDMENT. The Board may at any time alter,
-------------------------
suspend, terminate or discontinue the Plan, subject to any applicable regulatory
requirements and any required stockholder approval or any stockholder approval
which the Board may deem advisable for any reason, such as for the purpose of
obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying applicable stock exchange or quotation
system listing requirements. The Board may not, without the consent of the
holder of an Option previously granted, make any alteration which would deprive
the optionee of his rights with respect thereto.
26. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph
----------------------------------------
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction of, this
10
<PAGE>
Plan. As used herein, the masculine gender shall include the feminine and
neuter, and the singular number shall include the plural, and vice versa,
whenever such meanings are appropriate.
27. COST OF PLAN; EXCULPATION AND INDEMNIFICATION. All costs and
---------------------------------------------
expenses incurred in the operation and administration of the Plan shall be borne
by the Corporation, the Bank and the Subsidiaries. In connection with this Plan,
no member of the Board, no member of the Board of Directors of the Bank, and no
member of the Board of Directors of any Subsidiary, and no member of the
Committee shall be personally liable for any act or omission to act, nor for any
mistake in judgment made in good faith, unless arising out of, or resulting
from, such person's own bad faith, willful misconduct or criminal acts. To the
extent permitted by applicable law and regulation, the Corporation shall
indemnify, defend and hold harmless the members of the Board, the members of the
Board of Directors of the Bank and the members of the Board of Directors of any
Subsidiary, and members of the Committee, and each other officer or employee of
the Bank, the Corporation or of any Subsidiary to whom any power or duty
relating to the administration or interpretation of this Plan may be assigned or
delegated, from and against any and all liabilities (including any amount paid
in settlement of a claim with the approval of the Board), and any costs or
expenses (including counsel fees) incurred by such persons arising out of or as
a result of, any act or omission to act, in connection with the performance of
such person's duties, responsibilities and obligations under this Plan, other
than such liabilities, costs, and expenses as may arise out of, or result from
the bad faith, willful misconduct or criminal acts of such persons.
28. GOVERNING LAW. Without regard to the principles of conflicts of
-------------
laws, the laws of the State of North Carolina shall govern and control the
validity, interpretation, performance, and enforcement of this Plan.
29. INSPECTION OF PLAN. A copy of this Plan, and any amendments
------------------
thereto, shall be maintained by the Secretary of the Corporation and shall be
shown to any proper person making inquiry about it.
30. OTHER PROVISIONS. The Option Agreements authorized under this
----------------
Plan shall contain such other provisions not inconsistent with the foregoing,
including, without limitation, increased restrictions upon the exercise of
options, as the Committee may deem advisable.
11
<PAGE>
EXHIBIT A
STOCK OPTION GRANT AND AGREEMENT
THIS STOCK OPTION GRANT AND AGREEMENT ("Agreement"), being made according
to and subject to the terms and conditions of the STOCK OPTION PLAN of Carolina
Fincorp, Inc. ("Plan"), a copy of which is attached hereto as Annex A and is
hereby incorporated by reference and made a part of this Agreement, is herein
executed and effective the ____ day of _______________, _____, between Carolina
Fincorp, Inc. (the "Corporation") and ____________________ ("Optionee"):
1 Grant. As of the above date, the Corporation
-----
hereby grants to the Optionee (applicable
provisions are marked):
[_] an Incentive Stock Option [as that term is defined
in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code")] to purchase ________ shares of
Common Stock of the Corporation at the price stated in
this Agreement;
[_] a Nonqualified Stock Option to purchase __________
shares of Common Stock of the Corporation at the price
stated in this Agreement.
The Option(s) granted under this section and as
described in this Agreement is (are) in all respects
subject to and conditioned by the terms, definitions,
and provisions of this Agreement and of the Plan.
Capitalized terms in this Agreement which are not
otherwise defined but which are defined in the Plan
shall have the same meaning given to those terms in the
Plan.
The Optionee has been granted Options under the Plan as a
result of the Optionee's position as a [-] director [-]
employee of the Corporation, the Bank or a Subsidiary.
2. Price. The Option price is $_____________
-----
for each share.
3. Exercise of Option. The Option(s) granted
------------------
under this Agreement shall be exercisable
pursuant to the terms and conditions of the
Plan and as set forth below:
1
<PAGE>
(a) Right to Exercise: In addition to the terms and
-----------------
conditions imposed on the Optionee's right to exercise his
Options imposed in the Plan, the following terms and
conditions are applicable:
(b) [_] (Marked if applicable) Annual Installments: Subject
-------------------
to the terms and conditions of the Plan, the Incentive Stock
Options can be exercised in annual installments as follows:
__________shares beginning on ______________, _____
__________shares beginning on ______________, _____
__________shares beginning on ______________, _____
__________shares beginning on ______________, _____
Subject to the terms and conditions of the Plan, the
Nonqualified Options can be exercised in annual installments
as follows:
__________shares beginning on ______________, _____
__________shares beginning on ______________, _____
__________shares beginning on ______________, _____
__________shares beginning on ______________, _____
The right to exercise the Option(s) in annual installments
shall be cumulative. In addition, the option(s) shall be
exercisable upon disability, death, retirement and a change
in control as set forth in the Plan.
(c) [_] (Marked if applicable) Immediate Vesting: Subject to
-----------------
the terms and conditions of the Plan, all of the Options are
vested, nonforfeitable and exercisable.
(d) Method of Exercise: The Options granted under this
------------------
Agreement shall be exercisable by a written notice to the
Secretary of the Corporation which shall:
(1) State the election to exercise the Option, the
number of shares in respect of which the Option is
being exercised, the person in whose name any
stock certificate or certificates for such shares
of Common Stock is to be registered, his or her
address, and social security number;
2
<PAGE>
(2) Contain any such representation and agreements
as to Optionee's investment intent with respect to
shares of Common Stock as may be required by the
Committee;
(3) Be signed by the person entitled to exercise
the Option and, if the Option is being exercised
by any person or persons other than the Optionee,
be accompanied by proof, satisfactory to the
Corporation, of the right of such person or
persons to exercise the Option in accordance with
the Plan; and
(4) Be accompanied by payment of the purchase
price of any shares with respect to which the
Option is being exercised which payment shall be
in form acceptable to the Committee pursuant to
Section 6(b) of the Plan.
(e) Representations and Warranties: In order to exercise
------------------------------
an Option, the person exercising the Option must make the
representations and warranties to the Corporation as may be
required by any applicable law or regulation, or as may
otherwise be required pursuant to the Plan.
(f) Approvals. In order for an Option to be exercised, all
---------
filings and approvals required by applicable law and
regulations or pursuant to the Plan must have been made and
obtained.
4. Non-transferability. This Option may not be transferred in
-------------------
any manner otherwise than by will or the laws of descent and
distribution and such Option may be exercised during the
life of the Optionee only by him or her.
5. Investment Purpose. This Option may not be exercised if the
------------------
issuance of shares upon such exercise would constitute a
violation of any applicable federal or state securities law
or other law or valid regulation.
6. Expiration. This Option shall expire on _____________,
_________.
7. Escrow. All stock purchased pursuant to an Incentive Stock
------
Option shall be held in escrow for a period which ends on
the later of (i) two (2) years from the date of the granting
of the Option or (ii) one (1) year after the transfer of the
stock pursuant to the exercise of the
3
<PAGE>
Option. The stock shall be held by the Corporation or its
designee. During such period, the Optionee who has exercised
the Option shall have all rights of a stockholder,
including, but not limited to, the rights to vote, receive
dividends and sell the stock. The sole purpose of the escrow
is to inform the Corporation of a disqualifying disposition
of the stock within the meaning of Section 422 of the Code,
and it shall be administered solely for this purpose.
8. Tax Withholding. All stock, cash and other assets distributed pursuant to
---------------
this Agreement shall be subject to applicable federal, state and local
withholding for taxes. The Optionee expressly acknowledges and agrees to
such withholding. The Optionee acknowledges and agrees to the tax
withholding provisions which are set forth in the Plan.
9. Resolution of Disputes. Any dispute or disagreement which
----------------------
should arise under, or as a result of, or in any way relate
to, the interpretation, construction, or application of this
Agreement or the Plan will be determined by the Committee
designated in Section 2 of the Plan. Any determination made
by such Committee shall be final, binding, and conclusive
for all purposes.
10. Construction Controlled by Plan. The Options evidenced
-------------------------------
hereby shall be subject to all of the requirements,
conditions and provisions of the Plan. This Agreement shall
be construed so as to be consistent with the Plan; and the
provisions of the Plan shall be deemed to be controlling in
the event that any provision should appear to be
inconsistent therewith.
11. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such a manner as to be
valid and enforceable under applicable law, but if any
provision of this Agreement is determined to be
unenforceable, invalid or illegal, the validity of any other
provision or part thereof shall not be affected thereby and
this Agreement shall continue to be binding on the parties
hereto as if such unenforceable, invalid or illegal
provision or part thereof had not been included herein.
12. Modification of Agreement; Waiver. This Agreement may be
---------------------------------
modified, amended, suspended or terminated, and any terms,
representations or conditions may be waived, but only by a
written instrument signed by each of the parties hereto and
only subject to the limitations set forth in the Plan. No
waiver hereunder shall constitute a waiver with respect to
any subsequent occurrence or other transaction hereunder or
of any other provision.
4
<PAGE>
13. Captions and Headings; Gender and Number. Captions and
----------------------------------------
paragraph headings used herein are for convenience
only, do not modify or affect the meaning of any
provision herein, are not a part, and shall not serve
as a basis for interpretation or construction, of this
Agreement. As used herein, the masculine gender shall
include the feminine and neuter, and the singular
number shall include the plural, and vice versa,
whenever such meanings are appropriate.
14. Governing Law; Venue and Jurisdiction. Without regard
-------------------------------------
to the principles of conflicts of laws, the laws of the
State of North Carolina shall govern and control the
validity, interpretation, performance, and enforcement
of this Agreement.
15. Binding Effect. This Agreement shall be binding upon
--------------
and shall inure to the benefit of the Corporation, and
its successors and assigns, and shall be binding upon
and inure to the benefit of the Optionee, and his or
her heirs, legatees, personal representative, executor,
administrator and permitted assigns.
16. Entire Agreement. This Agreement and the Plan
----------------
constitute and embody the entire understanding and
agreement of the parties hereto and, except as
otherwise provided hereunder, there are no other
agreements or understandings, written or oral, in
effect between the parties hereto relating to the
matters addressed herein.
17. Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which when executed and
delivered shall be deemed an original, but all of which
taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have set their hands and seals the day and
year first above written.
ATTEST: CAROLINA FINCORP, INC.
__________________________________ By:_____________________________________
Karen M. Rickett, Secretary R. Larry Campbell, President
[Corporate Seal]
OPTIONEE:
__________________________________(SEAL)
5
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Net income per common share of $.54 for the year ended June 30, 1999 was
calculated by dividing net income of $933,136 for the year ended June 30, 1999
by the weighted average number of common shares outstanding of 1,725,843. Net
income per common share of $0.61 for the year ended June 30, 1998 was calculated
by dividing net income of $1,069,480 for the year ended June 30, 1998 by the
weighted average number of common shares outstanding of 1,763,678. Net income
per common share of $0.46 for the year ended June 30, 1997 was calculated by
dividing net income of $831,586 for the year ended June 30, 1997 by the weighted
average number of common shares outstanding of 1,790,311. Because the conversion
was not effective until November 22, 1996, earnings per share data for the year
ended June 30, 1997 is comprised of the earnings for the post-Conversion period.
The number of shares purchased by the ESOP which have not been allocated or
committed to be released to participant accounts are not assumed to be
outstanding in calculating the weighted average number of common shares
outstanding.
<PAGE>
EXHIBIT 13
1999 ANNUAL REPORT TO SECURITY HOLDERS
The 1999 Annual Report to Security Holders which is Exhibit (13) to this
Form 10-KSB is separately bound. Pages 3-41 of the 1999 Annual Report to
Security Holders are attached.
<PAGE>
Carolina Fincorp, Inc. and Subsidiaries
Selected Financial and Other Data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ------------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 119,199 $ 113,911 $ 111,503 $ 94,110 $ 91,410
Investments(1) 25,220 24,511 27,259 21,782 18,540
Loans receivable, net 89,308 83,623 78,674 68,358 68,745
Deposits 101,998 93,415 83,760 83,715 81,437
Stockholders' equity 15,756 15,388 25,448 8,641 8,128
Book value per common share 8.42 8.08 13.74 - -
Operating Data:
Interest income $ 8,435 $ 8,628 $ 7,645 $ 6,836 $ 6,378
Interest expense 4,388 4,122 3,887 3,949 3,271
---------- ---------- ---------- ---------- ----------
Net interest income 4,047 4,506 3,758 2,887 3,107
Provision for loan losses 106 92 70 36 36
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 3,941 4,414 3,688 2,851 3,071
Non-interest income 721 624 561 532 430
Non-interest expense 3,212 3,385 3,094 2,493 2,452
---------- ---------- ---------- ---------- ----------
Income before income taxes 1,450 1,653 1,155 890 1,049
Income tax expense 517 584 402 299 329
---------- ---------- ---------- ---------- ----------
Net income $ 933 $ 1,069 $ 753 $ 591 $ 720
========== ========== ========== ========== ==========
Per Common Share Data:
Net income, basic(2), (3) $ 0.54 $ 0.61 $ 0.46(3) - -
Net income, diluted 0.54 0.61 - - -
Regular cash dividends 0.24 0.24 0.05 - -
Dividend payment ratio(4) 44.44% 39.58% 10.87% - -
Special return of capital dividend $ - $ 6.00 - - -
Selected Other Data:
Return on average assets 0.81% 0.93% 0.72% 0.64% 0.81%
Return on average equity 5.94% 4.24% 3.93% 7.01% 9.30%
Average equity to average assets 13.58% 21.84% 18.43% 9.12% 8.71%
Interest rate spread 3.20% 3.23% 3.01% 2.77% 3.24%
Net yield on average interest-earning assets 3.68% 4.12% 3.78% 3.26% 3.64%
Average interest-earning assets to average
interest-bearing liabilities 112.11% 123.79% 119.76% 110.90% 110.33%
Ratio of non-interest expense to average total
assets 2.78% 2.93% 2.98% 2.70% 2.76%
Nonperforming assets to total assets 0.16% 0.13% 0.18% 0.06% 0.08%
Nonperforming loans to total loans 0.19% 0.15% 0.26% 0.04% 0.11%
Allowance for loan losses to total loans 0.58% 0.51% 0.52% 0.57% 0.53%
Allowance for loan losses to nonperforming loans 299.08% 352.42% 194.17% 1,296.67% 484.00%
</TABLE>
(1) Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
(2) On November 22, 1996, Richmond Savings Bank, Inc., SSB converted from a
state-chartered mutual savings bank to a state-chartered stock savings bank
and became a wholly-owned subsidiary of Carolina Fincorp, Inc.
(3) Earnings per share is based on unaudited earnings from November 22, 1996 to
June 30, 1997 divided by the weighted average number of shares outstanding
during the same period.
(4) The dividend payment ratio represents regular cash dividends per share as a
percentage of earnings per share and excludes the special nonrecurring $6.00
return of capital dividend during the year ended June 30, 1998.
-3-
<PAGE>
Carolina Fincorp, Inc. and Subsidiaries
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of Carolina Fincorp, Inc. and Subsidiaries. It should be read in
conjunction with the audited consolidated financial statements and accompanying
notes included in this report and the supplemental financial data appearing
throughout this discussion and analysis.
Description of Business
Carolina Fincorp, Inc. ("Carolina" or "Parent") was incorporated under the laws
of the State of North Carolina for the purpose of becoming the bank holding
company of Richmond Savings Bank, Inc., SSB (the "Bank" or "Richmond Savings")
in connection with the Bank's conversion from a state-chartered mutual savings
bank to a state-chartered stock savings bank (the "Conversion"), pursuant to its
Plan of Conversion. Carolina was organized to acquire all of the common stock of
Richmond Savings upon its conversion to stock form. A subscription and community
offering (the "Offering") of Carolina's common stock closed on November 22,
1996, at which time Carolina acquired all of the outstanding common stock of the
Bank and commenced operations.
In accordance with the Plan of Conversion, Carolina issued common stock with a
value of $18.5 million in the Offering and received proceeds of $17.6 million,
net of Conversion costs. Carolina transferred a portion of the net proceeds to
Richmond Savings for the purchase of all of the outstanding common stock of the
Bank. On June 18, 1998, Carolina paid a special $6.00 per share return of
capital dividend, returning to shareholders approximately $11.4 million.
Carolina currently has no operations and conducts no business of its own other
than owning Richmond Savings and lending funds to the Richmond Savings Bank,
Inc., SSB Employee Stock Ownership Plan (the "ESOP"), which was formed in
connection with the Conversion. The principal business of the Bank is accepting
deposits from the general public and using those deposits and other sources of
funds to make loans secured by real estate located in the Bank's primary market
area of Richmond, Moore and Scotland counties in North Carolina. On June 30,
1999, approximately 90% of the Bank's net loan portfolio was composed of real
estate loans.
Carolina's principal sources of income have been capital retained by Carolina,
interest earned from the loan to the ESOP, and dividends paid by the Bank to
Carolina. Revenues of Richmond Savings are derived primarily from interest on
loans. Richmond Savings also receives interest income from its investment
securities and interest-earning deposit balances and various types of non-
interest income. The major expenses of Richmond Savings are interest on deposits
and general and administrative expenses such as salaries, employee benefits,
federal deposit insurance premiums, data processing and occupancy and related
expenses.
Richmond Investment Services, Inc. is a wholly-owned subsidiary of Richmond
Savings whose principal business activity is that of an agent for various
insurance products and non-bank investment products and services.
Carolina and its subsidiaries are collectively referred to herein as the
"Company."
-4-
<PAGE>
Carolina Fincorp, Inc. and Subsidiaries
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk primarily stems from interest rate risk, the potential
economic loss due to future changes in interest rates, which is inherent in
lending and deposit gathering activities. The Company's objective is to manage
the mix of interest-sensitive assets and liabilities to moderate interest rate
risk and stabilize the net interest margin while enhancing profitability.
Asset/Liability and Interest Rate Risk Management
The Company's asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond the Company's control, such as market interest rates and competition, may
also have an impact on the Company's interest income and interest expense.
In the absence of other factors, the yield or return associated with the
Company's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and, conversely, interest
income will decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and,
conversely, interest expense will decrease when interest rates decrease.
Interest Rate Gap Analysis. As a part of its interest rate risk management
policy, the Company calculates an interest rate "gap." Interest rate "gap"
analysis is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets and interest-
bearing liabilities which reprice within a specific time period, either through
maturity or rate adjustment. The "gap" is the difference between the amounts of
such assets and liabilities that are subject to repricing. A "negative" gap for
a given period means that the amount of interest-bearing liabilities maturing or
otherwise repricing within that period exceeds the amount of interest-earning
assets maturing or otherwise repricing within the same period. Accordingly, in a
declining interest rate environment, an institution with a negative gap would
generally be expected, absent the effects of other factors, to experience a
smaller decrease in the yield of its assets relative to the decrease in the cost
of its liabilities, and, as a result, its income should be positively affected.
Conversely, the cost of funds for an institution with a negative gap would
generally be expected to increase more quickly than the yield on its assets in a
rising interest rate environment, and, as a result, such institution's net
interest income would generally be expected to be adversely affected by rising
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "positive gap."
The Company's one-year interest sensitivity gap as a percentage of total
interest-earning assets at June 30, 1999 was negative 43.08%. At June 30, 1999,
the Company's three-year and five-year cumulative interest sensitivity gaps as a
percentage of total interest-earning assets were negative 24.25% and negative
9.26%, respectively.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999 which are projected to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liabilities. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. Passbook accounts,
money market deposit accounts and negotiable order of withdrawal or other
transaction accounts are assumed to be subject to immediate repricing and
-5-
<PAGE>
Carolina Fincorp, Inc. and Subsidiaries
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
depositor availability and have been placed in the shortest period. In making
the gap computations, none of the assumptions sometimes made regarding
prepayment rates and deposit decay rates have been used for any other interest-
earning assets or interest-bearing liabilities. In addition, the table does not
reflect scheduled principal payments which will be received throughout the lives
of the loans. The interest rate sensitivity of the Company's assets and
liabilities illustrated in the following table would vary substantially if
different assumptions were used or if actual experience differs from that
indicated by such assumptions.
<TABLE>
<CAPTION>
Terms to Repricing at June 30, 1999
-------------------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
--------- --------- ---------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans receivable:
Real estate loans:
Residential 1-4 family
Adjustable $ 10,941 $ 14,815 $ 13,416 $ 2,261 $ 41,433
Fixed 29 642 927 14,147 15,745
Multi-family residential and commercial
Adjustable 1,419 4,809 352 63 6,643
Fixed 5 11 27 685 728
Construction
Adjustable 4,475 - - - 4,475
Home equity credit lines
Adjustable 10,452 - - - 10,452
Other loans:
Adjustable - 10 77 147 234
Fixed 1,103 1,149 2,306 5,557 10,115
Interest-earning balances in other banks 7,118 - - - 7,118
Investments 2,481 13,755 1,023 116 17,375
Stock in FHLB (1) - - - 727 727
--------- --------- ---------- --------- ---------
Total interest-earning assets $ 38,023 $ 35,191 $ 18,128 $ 23,703 $ 115,045
========= ========= ========== ========= =========
INTEREST-BEARING LIABILITIES
Deposits:
Passbook and statement accounts $ 11,284 $ - $ - $ - $ 11,284
NOW and VIP checking accounts 13,067 - - - 13,067
Non-interest-bearing accounts 3,090 - - - 3,090
Certificate accounts 60,145 13,525 887 - 74,557
--------- --------- ---------- --------- ---------
Total interest-bearing liabilities $ 87,586 $ 13,525 $ 887 $ - $ 101,998
========= ========= ========== ========= =========
INTEREST SENSITIVITY GAP PER PERIOD $ (49,563) $ 21,666 $ 17,241 $ 23,703 $ 13,047
CUMULATIVE INTEREST SENSITIVITY GAP $ (49,563) $ (27,897) $ (10,656) $ 13,047 $ 13,047
CUMULATIVE GAP AS A PERCENTAGE
OF TOTAL INTEREST-EARNING ASSETS (43.08)% (24.25)% (9.26)% 11.34% 11.34%
CUMULATIVE INTEREST-EARNING
ASSETS AS A PERCENTAGE OF
INTEREST-BEARING LIABILITIES 43.41% 72.41% 89.55% 112.79% 112.79%
</TABLE>
(1) Nonmarketable equity security; substantially all required to be maintained
and assumed to mature in periods greater than 5 years.
-6-
<PAGE>
Carolina Fincorp, Inc, and Subsidiaries
Management's Discussion and Analysis
===============================================================================
In addition to the traditional gap analysis, the Company also uses a computer
based interest rate risk simulation model. This comprehensive model includes
rate sensitivity gap analysis, rate shock net interest margin analysis, and
asset/liability term and rate analysis. The Company uses this model to monitor
interest rate risk on a quarterly basis and to detect trends that may affect
overall interest income. As a result, this analysis more accurately predicts the
risk to net interest income over the upcoming twelve month period. The Company
has a policy establishing the maximum allowable risk to net interest income
caused by changes in interest rates. The modeling results indicate that the
Company is within the established parameters of its interest rate risk policy.
Net Interest Income
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance"). The following table sets forth information relating to
average balances of the Company's assets and liabilities for the years ended
June 30, 1999 and 1998. For the periods indicated, the table reflects the
average yield on interest-earning assets and the average cost of interest-
bearing liabilities (derived by dividing income or expense by the monthly
average balance of interest-earning assets or interest-bearing liabilities,
respectively) as well as the net yield on interest-earning assets (which
reflects the impact of the net earning balance). Nonaccruing loans were included
in the computation of average balances.
<TABLE>
<CAPTION>
Year Ended June 30, 1999 Year Ended June 30, 1998
----------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning balances $ 6,597 $ 379 5.75% $ 3,964 $ 227 5.73%
Investments 16,811 969 5.76% 23,088 1,491 6.46%
Loans 86,423 7,087 8.20% 82,222 6,910 8.40%
-------- -------- -------- ----------
Total interest-earning assets 109,831 8,435 7.68% 109,274 8,628 7.90%
Other assets 5,705 6,266
-------- --------
Total assets $115,536 $115,540
======== ========
Interest-bearing liabilities:
Deposits $ 97,940 4,387 4.48% $ 88,070 4,108 4.66%
Borrowings 26 1 3.85% 203 14 6.90%
-------- -------- -------- ----------
Total interest-bearing liabilities 97,966 4,388 4.48% 88,273 4,122 4.67%
-------- ----------
Other liabilities 1,875 2,037
Stockholders' equity 15,695 25,230
-------- --------
Total liabilities and stockholders'
equity $115,536 $115,540
======== ========
Net interest income and interest rate spread $ 4,047 3.20% $ 4,506 3.23%
======== ==== ========== ====
Net yield on average interest-earning assets 3.68% 4.12%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 112.11% 123.79%
======== ========
</TABLE>
-7-
<PAGE>
Carolina Fincorp, Inc, and Subsidiaries
Management's Discussion and Analysis
===============================================================================
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and interest-
bearing liabilities. The table distinguishes between (i) changes attributable to
volume (changes in volume multiplied by the prior period's rate), (ii) changes
attributable to rate (changes in rate multiplied by the prior period's volume),
and (iii) net change (the sum of the previous columns). The change attributable
to both rate and volume (changes in rate multiplied by changes in volume) has
been allocated equally to both the changes attributable to volume and the
changes attributable to rate.
<TABLE>
<CAPTION>
Year Ended June 30, 1999 vs. 1998
------------------------------------
Increase (Decrease) Due To
------------------------------------
Volume Rate Total
------------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income:
Interest-earning balances $ 151 $ 1 $ 152
Investments (374) (148) (522)
Loans 337 (160) 177
----------- --------- ---------
Total interest income 114 (307) (193)
----------- --------- ---------
Interest expense:
Deposits 432 (153) 279
Borrowings (9) (4) (13)
----------- --------- ---------
Total interest expense 423 (157) 266
----------- --------- ---------
Net interest income $ (309) $ (150) $ (459)
=========== ========= =========
</TABLE>
Comparison of Financial Condition at June 30, 1999 and June 30, 1998
Consolidated total assets increased by $5.3 million during the year ended June
30, 1999, from $113.9 million at June 30, 1998 to $119.2 million at June 30,
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 fiscal year, total deposits grew by 9.2% from $93.4 million to $102.0
million, an increase of $8.6 million. Of this increase, $5.7 million was
generated from the Bank's new full service branch that was opened on September
28, 1998 in Laurinburg, North Carolina.
During the current year, in addition to the $8.6 million of deposit growth
described above, the Company generated additional funds of $2.0 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
investment securities by $1.4 million, and to provide for an increase in loans
receivable of $5.7 million, which grew from $83.6 million at the beginning of
the year to $89.3 million at year-end. Of this increase, $3.1 million was
attributable to the growth in the consumer loan portfolio.
-8-
<PAGE>
Carolina Fincorp, Inc, and Subsidiaries
Management's Discussion and Analysis
===============================================================================
Asset Quality
Non-performing assets include non-accrual loans, accruing loans contractually
past due 90 days or more, restructured loans, other real estate and other real
estate under contract for sale. Loans are placed on non-accrual status when
management has concerns relating to the ability to collect the loan principal
and interest, and generally, when such loans are 90 days or more past due. While
non-performing assets represent potential losses to the Company, management does
not anticipate any material aggregate losses since most loans are believed to be
adequately secured. Management believes the allowance for loan losses is
sufficient to absorb known risks in the portfolio. No assurance can be given
that economic conditions will not adversely affect borrowers and result in
increased losses. The following table summarizes non-performing assets by type
at the dates indicated. Other than the amounts listed, there were no other loans
that (i) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity or
capital resources or (ii) represent material credits about which management has
information that causes them to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
Schedule of Non-Performing Assets
<TABLE>
<CAPTION>
At June 30,
------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Non-accrual loans $ 173 $ 124
Loans past due 90 days or more and still accruing - -
Other real estate 20 20
Renegotiated troubled debt - -
-------- --------
Total non-performing assets $ 193 $ 144
======== ========
</TABLE>
Comparison of Results of Operations for the Years Ended June 30, 1999 and
1998
Net Income. Net income for the year ended June 30, 1999 was $933,000, or $.54
per share, as compared with net income of $1.1 million, or $.61 per share, for
the year ended June 30, 1998, a decrease of $136,000 or $.07 per share. This net
decrease in consolidated net income and earnings per share resulted primarily
from a decrease in net interest income that was partially offset by an increase
in other income and a decrease in other expenses.
Net Interest Income. Net interest income for the year ended June 30, 1999 was
$4.0 million as compared with $4.5 million during the year ended June 30, 1998,
a decrease of $459,000 resulting from a lower level of average net interest-
earning assets. Average interest-bearing liabilities increased by $9.7 million
as a result of the increase in deposits, resulting in an increase of $266,000 in
interest expense, despite a slightly lower average cost of funds during the
year. Average interest-earning assets, however, did not increase significantly
during the year, as asset growth essentially offset the effects of payment of
the one-time special cash dividend of $11.4 million ($6.00 per share) paid on
June 18, 1998. Because of reductions in yields on loans and investments, the
average rate earned on interest-earning assets decreased by 22 basis points, and
total interest income declined by $193,000.
-9-
<PAGE>
Carolina Fincorp, Inc, and Subsidiaries
Management's Discussion and Analysis
===============================================================================
Provision for Loan Losses. The provision for loan losses was $106,000 and
$92,000 for the years ended June 30, 1999 and 1998, respectively. There were net
loan charge-offs of $26,000 during the year ended June 30, 1999 as compared with
net charge-offs of $55,000 during the year ended June 30, 1998. At June 30,
1999, nonaccrual loans aggregated $173,000, while the allowance for loan losses
stood at $517,000.
Other Income. Other income was $722,000 for the year ended June 30, 1999 as
compared with $624,000 for the year ended June 30, 1998, an increase of $98,000
resulting principally from an increase in gains from the sale of loans.
Other Expenses. Other expenses decreased to $3.2 million during the year ended
June 30, 1999 as compared with $3.4 million for the year ended June 30, 1998, a
decrease of $173,000. Substantially all of this decrease relates to personnel
costs which declined by $350,000. This decrease in personnel costs is
attributable to the significant reduction in costs for awards granted during the
prior year under the Management Recognition Plan, from $508,000 in 1998 to
$136,000 in 1999. Other components of this expense category have risen during
the current year 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 35.7% and 35.3% for the years ended June 30,
1999 and 1998, respectively.
Liquidity and Capital Resources
Carolina Fincorp, Inc. paid regular quarterly cash dividends totaling $.24 a
share during fiscal 1999. Although Carolina anticipates that it will continue to
declare cash dividends on a quarterly basis, the Board of Directors will
continue to review its policy on the payment of dividends on an ongoing basis,
and such payment will be subject to future earnings, cash flows, capital needs,
and regulatory restrictions.
Maintaining adequate liquidity while managing interest rate risk is the primary
goal of Carolina's asset and liability management strategy. Liquidity is the
ability to fund the needs of the Bank's borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Maturing investments, loan
and mortgage-backed security principal repayments, deposits and income from
operations are the main sources of liquidity. The Bank's primary uses of
liquidity are to fund loans and to make investments.
As of June 30, 1999, liquid assets (cash and cash equivalents, and marketable
investment securities) were approximately $25.1 million, which represents 24.6%
of deposits. As a North Carolina-chartered savings bank, Richmond Savings is
required to maintain liquid assets equal to at least 10% of its total assets.
For purposes of this requirement, liquid assets consist of cash and readily
marketable investment securities. At June 30, 1999, the Bank's liquidity ratio,
based on North Carolina regulations, was 21.0%. Management considers current
liquidity levels to be adequate to meet the Company's foreseeable needs.
-10-
<PAGE>
Carolina Fincorp, Inc, and Subsidiaries
Management's Discussion and Analysis
===============================================================================
At June 30, 1999, outstanding mortgage loan commitments were $1.8 million,
available line of credit balances were $16.0 million, and the undisbursed
portion of construction loans was $983,000. Funding for these commitments is
expected to be provided from deposits, loan and mortgage-backed securities
principal repayments, maturing investments and income generated from operations.
Under federal capital regulations, Carolina and Richmond Savings must satisfy
certain minimum leverage ratio requirements and risk-based capital requirements.
Failure to meet such requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on Richmond Savings' financial statements. At June 30,
1999 and 1998, Carolina and Richmond Savings exceeded all such requirements.
(See Note J to the consolidated financial statements.)
Regulatory Matters
Management is not aware of any known trends, events, uncertainties or current
recommendations by regulatory authorities that will have, or that are reasonably
likely to have, a material effect on the Company's liquidity, capital resources,
or other operations.
Impact of Inflation and Changing Prices
The financial statements and notes thereto, which are presented herein, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the Company's assets and liabilities are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Impact of New Accounting Standards
FASB Statement on Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, this Statement was amended by
SFAS No. 137 to defer the effective date to fiscal years beginning after June
15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the statement of financial condition
and measure them at fair value. If certain conditions are met, an entity may
elect to designate a derivative as follows: (a) a hedge of exposure to changes
in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of an unrecognized
firm commitment, an available-for-sale security, a foreign currency denominated
forecasted transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged. Depending
on the type of hedge, such recognition will be in either net income or other
comprehensive income. For a derivative not designated as a hedging instrument,
changes in fair value will be recognized in net income in the period of change.
Management anticipates that the statement will have no material effect on the
Company's consolidated financial statements.
-11-
<PAGE>
Carolina Fincorp, Inc, and Subsidiaries
Management's Discussion and Analysis
===============================================================================
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 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 was completed in early 1999. The
Company has also developed 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 relies 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.
-12-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Carolina Fincorp, Inc.
Rockingham, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Carolina Fincorp, Inc. and Subsidiaries as of June 30, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Carolina Fincorp,
Inc. and Subsidiaries at June 30, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Dixon Odom PLLC
Sanford, North Carolina
August 6, 1999
-13-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------------- ----------------
<S> <C> <C>
Cash on hand and in banks $ 565,445 $ 961,184
Interest-earning balances in other banks 7,117,848 7,810,843
Investment securities available for sale, at fair value (amortized cost of
$10,753,575 and $10,256,498 at June 30, 1999 and 1998, respectively) (Note B) 10,677,530 10,295,194
Investment securities held to maturity, at amortized cost (fair value of
$6,618,084 and $5,729,533 at June 30, 1999 and 1998, respectively) (Note B) 6,697,279 5,669,953
Loans held for sale 106,000 1,057,045
Loans receivable, net (Note C) 89,308,399 83,622,584
Accrued interest receivable 588,048 582,838
Premises and equipment, net (Note D) 2,328,699 2,076,418
Real estate acquired in settlement of loans 19,871 20,000
Stock in the Federal Home Loan Bank, at cost 727,300 734,700
Other assets 1,062,721 1,080,209
---------------- ----------------
TOTAL ASSETS $ 119,199,140 $ 113,910,968
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts (Note G) $ 101,998,496 $ 93,414,753
Other borrowed funds (Note F) - 3,200,000
Accrued interest payable 133,415 152,182
Advance payments by borrowers for property taxes and insurance 407,011 418,746
Accrued expenses and other liabilities 904,138 1,336,881
---------------- ----------------
TOTAL LIABILITIES 103,443,060 98,522,562
---------------- ----------------
Commitments and contingencies (Notes C, D and L)
STOCKHOLDERS' EQUITY (Notes J and K)
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued
and outstanding - -
Common stock, no par value, 20,000,000 shares
authorized; 1,871,545 and 1,905,545 issued and
outstanding at June 30, 1999 and 1998, respectively 7,669,053 7,852,262
Deferred management recognition plan (Note H) (341,074) (477,504)
ESOP note receivable (1,328,030) (1,392,166)
Unearned ESOP compensation (Note H) (566,724) (661,000)
Retained earnings, substantially restricted 10,372,284 10,041,662
Accumulated other comprehensive income (loss) (49,429) 25,152
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 15,756,080 15,388,406
---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 119,199,140 $ 113,910,968
================ ================
</TABLE>
See accompanying notes.
-14-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
INTEREST INCOME
Loans $ 7,087,279 $ 6,910,296
Investments and deposits in other banks 1,347,331 1,717,474
-------------- ---------------
TOTAL INTEREST INCOME 8,434,610 8,627,770
-------------- ---------------
INTEREST EXPENSE
Deposit accounts (Note G) 4,386,547 4,107,881
Borrowings 1,422 14,149
-------------- ---------------
TOTAL INTEREST EXPENSE 4,387,969 4,122,030
-------------- ---------------
NET INTEREST INCOME 4,046,641 4,505,740
PROVISION FOR LOAN LOSSES (Note C) 106,000 92,000
-------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,940,641 4,413,740
-------------- ---------------
OTHER INCOME
Transaction and other service fee income 388,903 350,779
Gain on sale of loans 215,947 90,526
Loss on sale of real estate acquired in settlement of loans (9,136) -
Gain (loss) on sale of investment securities (152) 1,157
Other income 126,266 181,866
-------------- ---------------
TOTAL OTHER INCOME 721,828 624,328
-------------- ---------------
OTHER EXPENSES
Personnel costs 1,761,143 2,110,772
Occupancy 177,345 143,841
Equipment rental and maintenance 206,833 196,239
Marketing 101,648 64,599
Data processing and outside service fees 363,408 304,323
Federal and other insurance premiums 89,368 89,230
Supplies, telephone and postage 133,356 126,511
Other 379,163 349,800
-------------- ---------------
TOTAL OTHER EXPENSES 3,212,264 3,385,315
-------------- ---------------
INCOME BEFORE INCOME TAXES 1,450,205 1,652,753
INCOME TAX EXPENSE (Note I) 517,069 583,273
-------------- ---------------
NET INCOME $ 933,136 $ 1,069,480
============== ===============
EARNINGS PER COMMON SHARE (Note A)
Basic and diluted $ 0.54 $ 0.61
============== ===============
DIVIDENDS PER COMMON SHARE
Regular dividends per common share $ 0.24 $ 0.24
============== ===============
Special nonrecurring return of capital dividend per common share $ - $ 6.00
============== ===============
</TABLE>
See accompanying notes.
-15-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deferred
management ESOP Unearned
Common stock recognition note ESOP
------------------------
Shares Amount plan receivable compensation
---------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 1,851,500 $ 17,585,611 $ - $ (1,491,000) $ -
Comprehensive income:
Net income - - - - -
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and income
taxes of $36,544 - - - - -
Total comprehensive income - - - - -
Cash dividends paid ($.24 per share) - - - - -
Return of capital dividend ($6.00 per share) - (10,761,270) - - (661,000)
Adoption of deferred management
recognition plan 54,045 986,321 (986,321) - -
Vesting of deferred management
recognition plan - - 508,817 - -
Release of ESOP shares - 41,600 - 98,834 -
------------- ------------ ------------- ------------- ---------------
Balance at June 30, 1998 1,905,545 7,852,262 (477,504) (1,392,166) (661,000)
Comprehensive income:
Net income - - - - -
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and
income taxes of $40,159 - - - - -
Total comprehensive income - - - - -
Purchase and retirement of common stock (34,000) (118,933) - - -
Cash dividends paid ($.24 per share) - - - - -
Vesting of deferred management
recognition plan - - 136,430 - -
Release of ESOP shares - (64,276) - 64,136 94,276
------------- ------------ ------------- ------------- ---------------
Balance at June 30, 1999 1,871,545 $ 7,669,053 $ (341,074) $ (1,328,030) $ (566,724)
============= ============ ============= ============= ===============
<CAPTION>
Accumulated
other Total
Retained comprehensive stockholders'
earnings income (loss) equity
------------ --------------- --------------
<S> <C> <C> <C>
Balance at June 30, 1997 $ 9,396,148 $ (42,715) $ 25,448,044
Comprehensive income:
Net income 1,069,480 - 1,069,480
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and income
taxes of $36,544 - 67,867 67,867
-------------
Total comprehensive income - - 1,137,347
-------------
Cash dividends paid ($.24 per share) (423,966) - (423,966)
Return of capital dividend ($6.00 per share) - - (11,422,270)
Adoption of deferred management
recognition plan - - -
Vesting of deferred management
recognition plan - - 508,817
Release of ESOP shares - - 140,434
-------------- ----------- ------------
Balance at June 30, 1998 10,041,662 25,152 15,388,406
Comprehensive income:
Net income 933,136 - 933,136
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and
income taxes of $40,159 - (74,581) (74,581)
-------------
Total comprehensive income - - 858,555
-------------
Purchase of common stock (183,822) - (302,755)
Cash dividends paid ($.24 per share) (418,692) - (418,692)
Vesting of deferred management
recognition plan - - 136,430
Release of ESOP shares - - 94,136
-------------- ----------- ------------
Balance at June 30, 1999 $ 10,372,284 $ (49,429) $ 15,756,080
============== =========== ============
</TABLE>
See accompanying notes.
-16-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
===============================================================================
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 933,136 $ 1,069,480
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 195,118 176,877
Amortization, net 41,313 (86,269)
(Gain) loss on sale of assets, net 9,428 (1,157)
ESOP expense 94,136 140,434
Vesting of deferred management recognition plan 136,430 508,817
Provision for loan losses 106,000 92,000
Deferred income taxes (50,174) (152,652)
Deferred compensation 118,901 108,022
Change in assets and liabilities
(Increase) decrease in loans held for sale 951,045 (1,570,045)
(Increase) decrease in accrued interest receivable (5,210) 119,651
Decrease in other assets 4,570 13,944
Decrease in accrued interest payable (18,767) (26,401)
Increase (decrease) in accrued expenses and other liabilities (461,311) 45,923
---------------- ---------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,054,615 951,624
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of:
Available for sale investment securities (6,506,774) (19,523,928)
Held to maturity investment securities (4,994,583) (502,920)
Proceeds from maturities and calls of:
Available for sale investment securities 5,500,000 25,200,000
Held to maturity investment securities 3,963,203 1,773,125
Proceeds from sales of:
Available for sale investment securities 500,000 1,989,688
Proceeds from redemption of stock in Federal Home Loan Bank 7,400 -
Net increase in loans (5,835,335) (5,162,085)
Purchase of premises and equipment (444,429) (132,141)
Proceeds from sale of real estate acquired in settlement of loans 17,061 55,223
Capital expenditures for real estate acquired in settlement of loans (453) (588)
---------------- ---------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (7,793,910) 3,696,374
---------------- ---------------
</TABLE>
-17-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
===============================================================================
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand accounts $ 1,742,849 $ 4,620,070
Net increase in certificates of deposit 6,840,894 5,035,123
Decrease in advance payments by borrowers for
taxes and insurance (11,735) (37,348)
Proceeds from other borrowings - 3,200,000
Repayments of other borrowings (3,200,000) -
Net decrease in advances from Federal Home Loan Bank - (500,000)
Regular cash dividends paid (418,692) (423,966)
Special return of capital dividend - (11,422,270)
Repurchase of common stock (302,755) -
---------------- ---------------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 4,650,561 471,609
---------------- ---------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (1,088,734) 5,119,607
CASH AND CASH EQUIVALENTS, BEGINNING 8,772,027 3,652,420
---------------- ---------------
CASH AND CASH
EQUIVALENTS, ENDING $ 7,683,293 $ 8,772,027
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 4,406,736 $ 4,148,431
================ ===============
Income taxes $ 998,650 $ 454,814
================ ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Loans receivable transferred to real estate acquired in settlement of loans $ 15,807 $ 74,635
================ ===============
Net unrealized gain (loss) on investment securities available for sale,
net of deferred income taxes $ (74,581) $ 67,867
================ ===============
Adoption of deferred management recognition plan $ - $ 986,321
================ ===============
</TABLE>
-18-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
===============================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
- ---------------------------
In November 1996, pursuant to a Plan of Conversion which was approved by its
members and regulators, Richmond Savings Bank, Inc., SSB ("Richmond Savings" or
"Bank") converted from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank (the "Conversion") and became a wholly-
owned subsidiary of Carolina Fincorp, Inc. ("Carolina" or "Parent"). Carolina
was formed to acquire all of the common stock of Richmond Savings upon its
conversion to stock form. Carolina currently has no operations and conducts no
business on its own other than owning Richmond Savings and lending funds to the
Employee Stock Ownership Plan (the "ESOP") which was formed in connection with
the Conversion.
Nature of Business
- ------------------
Richmond Savings maintains its offices and conducts its primary business in
Richmond, Moore and Scotland counties, North Carolina. The Bank is primarily
engaged in the business of attracting deposits from the general public and using
such deposits to make mortgage loans secured by one-to-four family residential
real estate located in its primary market area. The Bank also makes home equity
line of credit loans, multi-family residential loans, commercial loans,
construction loans, loans secured by deposit accounts, and various types of
consumer loans. Richmond Savings has been and intends to continue to be a
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. Richmond Investment
Services, Inc. is a wholly-owned subsidiary of Richmond Savings whose principal
business activity is that of an agent for various insurance products and non-
bank investment products and services.
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements include the accounts of the
Parent, the Bank and the Bank's wholly-owned subsidiary, together referred to as
the "Company." All significant intercompany transactions and balances are
eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
For the purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand and in banks and interest-earning balances in
other banks.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
-19-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
===============================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates (Continued)
- ----------------
Material estimates that are particularly sensitive to significant change relate
to the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals for
significant properties.
A majority of the Bank's loan portfolio consists of single-family residential
loans in its market area. The regional economy is currently stable and consists
of various types of industry. Real estate prices in this market are also stable;
however, the ultimate collectibility of a substantial portion of the Bank's loan
portfolio can be affected by changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Investment Securities
- ---------------------
The Company classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading securities at
June 30, 1999 or 1998. Securities held to maturity are those securities for
which the Company has the ability and intent to hold to maturity. All other
securities are classified as available for sale.
Available for sale securities consist of investment securities not classified as
trading securities or held to maturity securities and are recorded at fair
value. Held to maturity securities are recorded at cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses, net of the related tax effect, on securities available for sale are
excluded from earnings and are reported in other comprehensive income until
realized. Transfers of securities between categories are recorded at fair value
at the date of transfer. Unrealized holding gains or losses associated with
transfers of securities from held to maturity to available for sale are recorded
as a separate component of other comprehensive income.
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the expected life of the
related security as an adjustment to the yield. Realized gains and losses are
included in earnings and the costs of securities sold are derived using the
specific identification method.
-20-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
===============================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale
- -------------------
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans Receivable
- ----------------
Loans receivable are stated at unpaid balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
The Bank accounts for impaired loans in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of
a Loan, amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure. A loan is impaired when, based on
current information and events, it is probable that all amounts due according to
the contractual terms of the loan agreement will not be collected. Impaired
loans are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate, or at the loan's observable
market price, or the fair value of the collateral of the loan if the loan is
collateral dependent. Interest income from impaired loans is recognized using
the cash basis method of accounting during the time within that period in which
the loans were impaired.
Allowance for Loan Losses
- -------------------------
The Bank provides for loan losses on the allowance method. Accordingly, all loan
losses are charged to the related allowance and all recoveries are credited to
it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates the carrying value of loans periodically and the allowance
is adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
-21-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
===============================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
- -------------------------
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
Premises and Equipment
- ----------------------
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation of premises and equipment is recorded on a straight-line basis over
the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged to expense as incurred,
while those for improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or otherwise disposed of
are eliminated from the accounts, and any resulting gains or losses are credited
or charged to earnings.
Investment in Federal Home Loan Bank Stock
- ------------------------------------------
As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.
Real Estate Acquired In Settlement of Loans
- -------------------------------------------
Real estate acquired in settlement of loans is carried at the lower of cost or
fair value less estimated costs to dispose. Generally accepted accounting
principles define fair value as the amount that is expected to be received in a
current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
operations through the allowance for losses on other real estate in the period
in which the need arises.
Income Taxes
- ------------
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future tax
benefits are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which the assets
and liabilities are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
-22-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
===============================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
- ------------
In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of the Company's assets and liabilities result
in deferred tax assets, applicable accounting standards require an evaluation of
the probability of being able to realize the future benefits indicated by such
assets. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. In
assessing the realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
A deferred tax liability is not recognized for portions of the allowance for
loan losses for income tax purposes in excess of the financial statement
balance, as described in Note I. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
Stock Compensation Plans
- ------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan have no intrinsic value at the grant date, and,
under Opinion No. 25, no compensation cost is recognized for them. The Company
has elected to continue with the accounting methodology in Opinion No. 25 and,
as a result, has provided pro forma disclosures of net income and earnings per
share and other disclosures, as if the fair value based method of accounting had
been applied.
Earnings Per Common Share
- -------------------------
Basic earnings per share represent income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to outstanding
stock options, and are determined using the treasury stock method. The dilutive
effect of unearned shares in the management recognition plan was negligible for
the years ended June 30, 1999 and 1998.
-23-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share (Continued)
- -------------------------
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Average number of common shares outstanding used to
calculate basic earnings per common share 1,725,843 1,763,678
Effect of dilutive options 2,238 -
--------------- -------------
Average number of common shares outstanding used to
calculate diluted earnings per common share 1,728,081 1,763,678
=============== =============
</TABLE>
Comprehensive Income
- --------------------
The Company adopted SFAS 130, Reporting Comprehensive Income, as of July 1,
1998. Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. The Adoption of SFAS 130 had no effect on the Company's
net income or shareholders' equity.
Recent Accounting Pronouncements
- --------------------------------
FASB Statement on Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, this Statement was amended by
SFAS No. 137 to defer the effective date to fiscal years beginning after June
15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the statement of financial condition
and measure them at fair value. If certain conditions are met, an entity may
elect to designate a derivative as follows: (a) a hedge of exposure to changes
in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of an unrecognized
firm commitment, an available-for-sale security, a foreign currency denominated
forecasted transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged. Depending
on the type of hedge, such recognition will be in either net income or other
comprehensive income. For a derivative not designated as a hedging instrument,
changes in fair value will be recognized in net income in the period of change.
Management anticipates that the statement will have no material effect on the
Company's consolidated financial statements.
-24-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. government securities and obligations
of U.S. government agencies $ 10,753,575 $ 11,756 $ 87,801 $ 10,677,530
================ ============= =============== ==============
Securities held to maturity:
U.S. government securities and obligations
of U.S. government agencies $ 5,004,165 $ 5,328 $ 73,891 $ 4,935,602
Mortgage-backed securities 704,165 15,225 - 719,390
Corporate debt securities 988,949 - 25,857 963,092
---------------- ------------- --------------- --------------
$ 6,697,279 $ 20,553 $ 99,748 $ 6,618,084
================ ============= =============== ==============
<CAPTION>
June 30, 1998
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. government securities and obligations
of U.S. government agencies $ 10,256,498 $ 41,233 $ 2,537 $ 10,295,194
================ ============= =============== ==============
Securities held to maturity:
U.S. government securities and obligations
of U.S. government agencies $ 3,507,667 $ 16,852 $ 1,574 $ 3,522,945
Mortgage-backed securities 1,168,232 24,955 - 1,193,187
Corporate debt securities 994,054 19,347 - 1,013,401
---------------- ------------- --------------- --------------
$ 5,669,953 $ 61,154 $ 1,574 $ 5,729,533
================ ============= =============== ==============
</TABLE>
Gross realized gains were $-0- and $2,108 and gross realized losses were $152
and $951, on sales of available for sale securities during the years ended June
30, 1999 and 1998, respectively.
-25-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE B - INVESTMENT SECURITIES (Continued)
The amortized cost and fair values of securities available for sale and held to
maturity at June 30, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
--------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Due within one year $ 1,978,832 $ 1,980,582 $ 499,924 $ 502,531
Due after one year through five years 8,774,743 8,696,948 5,058,336 4,987,868
Due after five years through ten years - - 1,023,501 1,005,722
Due after ten years - - 115,518 121,963
-------------- -------------- -------------- --------------
$ 10,753,575 $ 10,677,530 $ 6,697,279 $ 6,618,084
============== ============== ============== ==============
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Securities with a carrying value of $1,012,000 and $738,000 and a fair value of
$1,000,000 and $760,000 at June 30, 1999 and 1998, respectively, were pledged to
secure public monies on deposit as required by law.
The following table sets forth certain information regarding the carrying
values, weighted average yields and contractual maturities of the Company's
investment portfolio at June 30, 1999. FHLB common stock, a nonmarketable equity
security, substantially all of which is required to be maintained, is assumed to
mature in periods greater than ten years.
<TABLE>
<CAPTION>
Carrying Value
--------------------------------------------------------------------------------
After After
One Year Five Years
One Year Through Through After Ten
or Less Five Years Ten Years Years Total
------------- -------------- --------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities $ 1,981 $ 8,697 $ - $ - $ 10,678
Securities held to maturity:
U. S. government and agency securities 500 4,003 501 - 5,004
Mortgage-backed securities - 557 31 116 704
Corporate bonds - 498 491 - 989
Other:
Interest-earning balances in other banks 7,118 - - - 7,118
Federal Home Loan Bank stock - - - 727 727
------------- ------------- ------------ ------------ ------------
Total $ 9,599 $ 13,755 $ 1,023 $ 843 $ 25,220
============= ============= ============ ============ ============
</TABLE>
-26-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE B - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
Average Yield
------------------------------------------------------------------------------
After After
One Year Five Years
One Year Through Through After Ten
or Less Five Years Ten Years Years Total
----------- --------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities 8.49% 5.78% - - 6.28%
Securities held to maturity:
U.S. government and agency securities 6.17% 5.47% 8.14% - 5.81%
Mortgage-backed securities - 6.89% 9.00% 8.50% 7.25%
Corporate bonds - 6.38% 6.38% - 6.38%
Other:
Interest-earning balances in other banks 5.64% - - - 5.64%
Federal Home Loan Bank stock - - - 7.50% 7.50%
Weighted average 6.26% 5.76% 7.32% 7.64% 6.07%
</TABLE>
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- -----------------------------------
Percentage Percentage
Amount of Total Amount of Total
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Type of loan:
Real estate loans:
One-to-four family residential $ 57,178,468 64.03% $ 58,270,874 69.68%
Multi-family residential and commercial 7,370,723 8.25% 4,714,574 5.64%
Construction 5,458,408 6.11% 7,195,787 8.61%
Home equity lines of credit 10,451,905 11.70% 8,908,799 10.65%
--------------- ------------ --------------- --------------
Total real estate loans 80,459,504 90.09% 79,090,034 94.58%
--------------- ------------ --------------- --------------
Other loans:
Consumer loans 9,470,976 10.60% 6,416,354 7.67%
Home improvement loans 203,782 0.23% 367,550 0.44%
Loans secured by deposits 674,683 0.76% 603,993 0.72%
--------------- ------------ --------------- --------------
Total other loans 10,349,441 11.59% 7,387,897 8.83%
--------------- ------------ --------------- --------------
Total loans 90,808,945 101.68% 86,477,931 103.41%
Less:
Construction loans in process 983,130 1.10% 2,417,928 2.89%
Allowance for loan losses 517,416 0.58% 437,419 0.52%
--------------- ------------ --------------- --------------
$ 89,308,399 100.00% $ 83,622,584 100.00%
=============== ============ =============== ==============
</TABLE>
-27-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE C - LOANS RECEIVABLE (Continued)
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Balance at beginning of year $ 437,419 $ 400,051
---------------- ---------------
Loans charged off:
Real estate - -
Other (28,719) (60,263)
---------------- ---------------
Total loans charged off (28,719) (60,263)
---------------- ---------------
Recoveries:
Real estate - -
Other 2,716 5,631
---------------- ---------------
Total loan recoveries 2,716 5,631
---------------- ---------------
Provision for loan losses 106,000 92,000
---------------- ---------------
Balance at end of year $ 517,416 $ 437,419
================ ===============
</TABLE>
The allocation of the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- -----------------------------------------
Percent of Percent Percent of Percent
Allowance of Loans Allowance of Loans
Amount of to Total to Gross Amount of to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans
----------- ----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family residential $ 79,000 15.27% 62.97% $ 67,000 15.32% 67.38%
Multi-family residential and commercial 64,000 12.37% 8.11% 39,000 8.92% 5.45%
Construction 8,000 1.55% 6.01% 23,000 5.26% 8.32%
Home equity lines of credit 47,000 9.08% 11.51% 45,000 10.28% 10.30%
----------- ----------- ----------- ---------- ----------- ------------
Total real estate loans 198,000 38.27% 88.60% 174,000 39.78% 91.45%
----------- ----------- ----------- ---------- ----------- ------------
Other loans:
Consumer loans 209,000 40.39% 10.43% 151,000 34.52% 7.42%
Home improvement loans 4,000 0.77% 0.23% 9,000 2.06% 0.43%
Loans secured by deposits - - 0.74% - - 0.70%
----------- ----------- ----------- ---------- ------------ ------------
Total other loans 213,000 41.16% 11.40% 160,000 36.58% 8.55%
----------- ----------- ----------- ---------- ----------- ------------
Unallocated 106,416 20.57% - 103,419 23.64% -
----------- ----------- ----------- ---------- ----------- ------------
Total allowance for loan $ 517,416 100.00% 100.00% $ 437,419 100.00% 100.00%
losses =========== =========== =========== ========== =========== ============
</TABLE>
Nonaccrual loans, which consisted of loans on which principal or interest was
delinquent for 90 days or more, totaled approximately $173,000 and $124,000 at
June 30, 1999 and 1998, respectively. Such loans had the effect of reducing
interest income by approximately $9,000 and $4,000 during the years ended June
30, 1999 and 1998, respectively.
-28-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE C - LOANS RECEIVABLE (Continued)
Loans serviced for other investors amounted to $4,948,000 and $6,602,000 at June
30, 1999 and 1998, respectively.
At June 30, 1999, the Bank had mortgage loan commitments outstanding of
$1,815,000 and pre-approved but unused lines of credit totaling $16,047,000. In
management's opinion, these commitments, and undisbursed proceeds on
construction loans in process reflected above, represent no more than normal
lending risk to the Bank and will be funded from normal sources of liquidity.
The Bank has had loan transactions with its directors and executive officers.
Such loans were made in the ordinary course of business and also on
substantially the same terms and collateral as those comparable transactions
prevailing at the time and did not involve more than the normal risk of
collectibility or present other unfavorable features. A summary of related party
loan transactions is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Balance at beginning of year $ 69,664 $ 81,395
Additional borrowings 103,456 -
Loan repayments (28,768) (11,731)
-------------- ----------------
Balance at end of year $ 144,352 $ 69,664
============== ===============
</TABLE>
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Land $ 648,069 $ 648,069
Building and improvements 1,739,600 1,721,168
Furniture and equipment 1,195,644 1,127,611
-------------- --------------
3,583,313 3,496,848
Accumulated depreciation (1,254,614) (1,420,430)
-------------- --------------
$ 2,328,699 $ 2,076,418
============== ==============
</TABLE>
During the year ended June 30, 1999, the Bank entered into contracts for the
construction of a new branch location in Pinehurst, North Carolina. Of the
approximately $417,000 in total contractual commitments, approximately $11,000
has been spent to date.
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
-29-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWED FUNDS
At June 30, 1999, Richmond Savings had $12,000,000 available on a line of credit
from the Federal Home Loan Bank. All advances are secured by a blanket floating
lien on the Bank's one-to-four family residential mortgage loans.
Other borrowed funds at June 30, 1998 consisted of a note payable to another
bank for $3,200,000 that was repaid on July 3, 1998.
NOTE G - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Demand accounts:
Passbook and statement accounts $ 11,283,657 2.52% $ 11,944,115 2.94%
NOW accounts 7,796,429 1.64% 6,481,463 1.98%
VIP checking accounts 5,270,951 3.51% 4,321,827 3.57%
Non-interest bearing accounts 3,090,363 - 2,951,146 -
---------------- --------------
27,441,400 2.18% 25,698,551 2.47%
Certificates of deposit 74,557,096 5.08% 67,716,202 5.39%
---------------- --------------
Total deposit accounts $ 101,998,496 4.30% $ 93,414,753 4.59%
================ ==============
</TABLE>
A summary of certificate accounts by maturity as of June 30, 1999 follows:
<TABLE>
<CAPTION>
Less than $100,000
$100,000 or More Total
-------------- --------------- --------------
(In thousands)
<S> <C> <C> <C>
One year or less $ 50,148 $ 9,997 $ 60,145
Over one year through three years 10,987 2,538 13,525
Over three years 487 400 887
-------------- --------------- --------------
Total certificate accounts $ 61,622 $ 12,935 $ 74,557
============== =============== ==============
</TABLE>
-30-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE G - DEPOSIT ACCOUNTS (Continued)
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Passbook and statement account $ 313,903 $ 330,016
NOW and VIP checking accounts 301,748 245,927
Certificates of deposit 3,779,916 3,543,836
-------------- ---------------
4,395,567 4,119,779
Penalties for early withdrawal 9,020 11,898
-------------- ---------------
$ 4,386,547 $ 4,107,881
============== ===============
</TABLE>
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Management Recognition Plan
- ---------------------------
At the Company's annual meeting which was held on November 27, 1997, the
stockholders approved the Richmond Savings Bank, Inc., SSB Management
Recognition Plan (the "MRP"). 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 plan through the issuance of authorized
but unissued shares, or by purchasing shares 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 at the date of grant. Personnel costs for years ended
June 30, 1999 and 1998 include $136,430 and $508,817, respectively, which
represent the value of MRP shares earned through those dates.
Stock Option Plan
- -----------------
At the Company's annual meeting on November 27, 1997, the stockholders approved
the Carolina Fincorp, Inc. Stock Option Plan (the "SOP"). 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. On February 19,
1999, the Company granted options to purchase 138,857 shares of the Company's
common stock at an exercise price of $7.75 per share, including 41,657 options
granted to the Company's directors and 97,200 options granted to the Company's
executive officers and employees. Options granted to directors were fully vested
on the date of grant. Options granted to executive officers and employees vested
40% on the date of grant and will vest 20% annually thereafter. All options will
expire if not exercised within ten years from the date of grant. None of the
options were exercised during the year ended June 30, 1999. At such date,
options to purchase 80,537 shares at $7.75 per share were exercisable. As
permitted by SFAS No. 123, the Company has applied APB Opinion No. 25 for
measurement of stock-based compensation in the accompanying financial
statements. If the Company had used the fair value based method of accounting
for stock-based compensations, operating results for the year ended June 30,
1999 would have been affected as set forth below:
-31-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES O CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Stock Option Plan (Continued)
- -----------------
As Reported Pro Forma
----------- -----------
Net income $ 933,136 $ 822,860
Net income per share, basic and diluted $ 0.54 $ 0.48
In determining the pro forma disclosures above, the fair value of options
granted was estimated to be $1.49 per option as of the grant date under the
Black-Scholes Option Pricing Model using the following assumptions: a risk-free
interest rate of 5.25%, a dividend yield of 3.10%, an expected life of 6 years,
and a volatility ratio of 18%. The effects of applying SFAS No. 123 in the above
pro forma disclosure are not indicative of future amounts.
Employee Stock Ownership Plan
- -----------------------------
The Bank has established an ESOP to benefit all qualified employees. The ESOP
purchased 112,000 shares of common stock in the Conversion with proceeds
received from a loan of $1,549,551 from the Parent. The loan is to be repaid
over fifteen years in quarterly installments of principal and interest. Interest
is based upon the prime rate and will be adjusted annually. The loan may be
prepaid without penalty. The unallocated shares of stock held by the ESOP are
pledged as collateral for the loan. The ESOP is funded by contributions made by
the Bank in amounts sufficient to retire the debt. At June 30, 1999 and 1998,
the outstanding balance of the loan is $1,328,030 and $1,392,166, respectively,
and is presented as a reduction of stockholders' equity.
Shares released as the debt is repaid and earnings from the common stock held by
the ESOP are allocated among active participants on the basis of compensation in
the year of allocation. Benefits become 100% vested after seven years of
credited service. Forfeitures of nonvested benefits will be reallocated among
remaining participating employees in the same proportion as contributions.
Dividends on unallocated shares may be used by the ESOP to repay the loan to the
Company and are not reported as dividends in the financial statements. Dividends
on allocated or committed to be allocated shares are credited to the accounts of
the participants and reported as dividends in the financial statements. Special
return of capital dividends on unallocated ESOP shares totaling $661,000 are
recorded as unearned compensation and reported as a separate component of
stockholders' equity. Through June 30, 1999, $640,000 of these funds has been
used by the ESOP to purchase 71,666 additional shares of the Company's common
stock, resulting in the ESOP owning a larger percentage of the outstanding
common stock than was originally anticipated at the time of the Conversion.
Expense of $94,136 and $140,434 during the years ended June 30, 1999 and 1998,
respectively, has been incurred in connection with the ESOP. The expense for the
years ended June 30, 1999 and 1998 includes, in addition to the cash
contribution necessary to fund the ESOP, $30,000 and $41,600, respectively,
which represents the difference between the fair value of the shares which have
been released or committed to be released to participants, and the cost to the
ESOP to release these shares. The Bank has credited this amount to common stock.
-32-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES O CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Employee Stock Ownership Plan (Continued)
- -----------------------------
At June 30, 1999, 33,270 shares held by the ESOP have been released or committed
to be released to the plan's participants for purposes of computing earnings per
share. The fair value of the unallocated shares amounted to approximately $1.4
million at June 30, 1999.
Deferred Compensation Plans
- ---------------------------
The Bank has deferred compensation plans for certain directors and officers.
These plans provide benefits upon disability, death or attainment of a certain
age. The Bank has made current provisions for future payments under these plans,
and the related liabilities and deferred income tax benefits are included in the
accompanying consolidated financial statements. Expenses associated with these
plans were $118,901 and $108,022 for the years ended June 30, 1999 and 1998,
respectively.
401(k) Retirement Plan
- ----------------------
The Bank maintains for the benefit of its eligible employees a 401(k) plan.
Under the plan, the Bank does not make contributions. It does, however, match
fifty percent of eligible employee contributions, but the amount matched shall
not exceed three percent of compensation. The plan eligibility requirement is
completion of one year's full time service for employees who have attained the
age of twenty-one. At June 30, 1999 and 1998, substantially all full-time
employees were eligible and were covered by the plan. Provisions for
contributions to the plan totaled $23,654 and $21,273 for the years ended June
30, 1999 and 1998, respectively.
Employment Agreements
- ---------------------
The Bank has entered into employment agreements with its chief executive officer
and one other executive officer to ensure a stable and competent management
base. The agreements provide for a three-year term, but the agreements may be
extended for an additional year at the end of the initial term and annually
thereafter. The agreements provide for benefits as spelled out in the contracts
and cannot be terminated by the Board of Directors, except for cause, without
prejudicing the officers' rights to receive certain vested rights, including
compensation. In the event of a change in control of the Bank, as defined in the
agreements, the acquirer will be bound to the terms of the contracts.
Severance Plan
- --------------
The Bank has also adopted a severance plan for the benefit of its employees in
the event of a change in control of the Bank which provides for varying
severance benefits for employees based on their salaries and length of service
with the Bank.
-33-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES O CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE I - INCOME TAXES
The components of income tax expense are as follows for the years ended June 30,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Current tax expense $ 567,243 $ 735,925
Net deferred tax benefit included in operations (50,174) (152,652)
---------- ----------
$ 517,069 $ 583,273
========== ==========
</TABLE>
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before income
taxes were as follows for the years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Income tax at federal statutory rate $ 493,070 $ 561,936
State income tax, net of federal tax benefit 8,736 21,401
Other 15,263 (64)
---------- ----------
$ 517,069 $ 583,273
========== ==========
</TABLE>
Deferred tax assets and liabilities arising from temporary differences at June
30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets relating to:
Deferred compensation $ 424,512 $ 401,755
Unrealized losses on investment securities
available for sale 26,159 -
---------- ----------
Gross deferred tax assets 450,671 401,755
Valuation allowance - -
---------- ----------
Net deferred tax assets 450,671 401,755
---------- ----------
Deferred tax liabilities relating to:
Unrealized gains on investment securities available for sale - (14,000)
Allowance for loan losses (2,388) (64,264)
Premises and equipment (61,802) (42,475)
FHLB stock dividends (132,318) (135,948)
Loan fees and costs (62,879) (44,117)
---------- ----------
Total deferred tax liabilities (259,387) (300,804)
---------- ----------
Net deferred tax asset $ 191,284 $ 100,951
========== ==========
</TABLE>
-34-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES O CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE I - INCOME TAXES (Continued)
Retained earnings at June 30, 1999 included approximately $1.4 million for which
no deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for income tax purposes only.
Reductions of the amount so allocated for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate.
During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on these pre-1987 bad debt reserves. Further, the
use of the reserve method is now required for all thrifts. The Bank will be
recapturing $484,000 of its bad debt reserve created in prior years by using the
percentage of taxable income method, requiring payment of additional income
taxes of approximately $184,000. Deferred income taxes have been previously
established for the taxes arising from the reserve recapture, and thus the
ultimate payment of the taxes will not result in a charge to earnings.
NOTE J - REGULATORY RESTRICTIONS
Capital Requirements
- --------------------
The Parent is regulated by the Board of Governors of the Federal Reserve System
and is subject to securities registration and public reporting regulations of
the Securities and Exchange Commission. The Bank is regulated by the Federal
Deposit Insurance Corporation ("FDIC") and the Savings Institutions Division,
North Carolina Department of Commerce (the "Administrator").
The Bank is subject to the capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier 1
capital to risk-weighted assets and total capital to risk-weighted assets of 4%
and 8%, respectively. Tier 1 capital consists of total shareholders' equity
calculated in accordance with generally accepted accounting principles less
intangible assets, and total capital is comprised of Tier 1 capital plus certain
adjustments, the only one of which applies to the Bank is the allowance for
possible loan losses. Risk-weighted assets refer to the on- and off-balance
sheet exposures of the Bank adjusted for their relative risk levels using
formulas set forth in FDIC regulations. The Bank is also subject to an FDIC
leverage capital requirement, which calls for a minimum ratio of Tier 1 capital
(as defined above) to quarterly average total assets of 3% to 5%, depending on
the institution's composite ratings as determined by its regulators. The
Administrator requires a net worth equal to at least 5% of total assets.
-35-
<PAGE>
CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES O CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
================================================================================
NOTE J - REGULATORY RESTRICTIONS (Continued)
At June 30, 1999, the Bank was in compliance with all of the aforementioned
capital requirements as shown below:
<TABLE>
<CAPTION>
Leverage Tier 1 Risk
Ratio Adjusted Risk-Based N. C. Savings
Tier 1 Capital Capital Capital Bank Capital
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Consolidated stockholders' equity $ 15,756,080 $ 15,756,080 $ 15,756,080 $ 15,756,080
Separate equity of the Bank (676,577) (676,577) (676,577) (676,577)
Unrealized (gain) loss on securities 49,429 49,429 49,429 49,429
Loan loss allowance - - 517,416 517,416
---------------- ---------------- --------------- ---------------
Regulatory capital 15,128,932 15,128,932 15,646,348 15,646,348
Minimum capital requirement 3,586,000 2,738,000 5,477,000 5,959,000
---------------- ---------------- --------------- ---------------
Excess regulatory capital $ 11,542,932 $ 12,390,932 $ 10,169,348 $ 9,687,348
================ ================ =============== ===============
</TABLE>
Liquidation Account
- -------------------
At the time of Conversion, the Bank established a liquidation account in an
amount equal to its net worth at June 30, 1996. The liquidation account will be
maintained for the benefit of eligible deposit account holders who continue to
maintain their deposit accounts in the Bank after Conversion. Only in the event
of a complete liquidation will each eligible deposit account holder be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted subaccount balance for deposit accounts then held
before any liquidation distribution may be made from the Bank to the Parent.
Dividends cannot be paid from this liquidation account.
Dividends
- ---------
Subject to applicable law, the Boards of Directors of the Bank and the Parent
may each provide for the payment of dividends. Future declarations of cash
dividends, if any, by the Parent may depend upon dividend payments by the Bank
to the Parent. Subject to regulations of the Administrator, the Bank may not
declare or pay a cash dividend on, or repurchase any of, its common stock if its
stockholders' equity would thereby be reduced below either (i ) the aggregate
amount then required for the liquidation account or (ii) the minimum regulatory
capital requirements imposed by federal and state regulations. In addition, for
a period of five years after the Conversion, the Bank will be required, under
existing North Carolina regulations, to obtain prior written approval of the
Administrator before it can declare and pay a cash dividend on its capital stock
in an amount in excess of one-half of the greater of (i) its net income for the
most recent fiscal year, or (ii) the average of its net income after dividends
for the most recent fiscal year and not more than two of the immediately
preceding fiscal years, if applicable.
During the year ended June 30, 1999, the Bank paid dividends of $4,190,000 to
the Parent. During the year ended June 30, 1998, the Bank did not pay any
dividends to the Parent.
-36-
<PAGE>
CAROLINA FINCORP,INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
===============================================================================
NOTE J - REGULATORY RESTRICTIONS (Continued)
Carolina paid regular quarterly cash dividends totaling $.24 per share during
each of the years ended June 30, 1999 and 1998, and a special nonrecurring
return of capital dividend of $6.00 per share during the year ended June 30,
1998.
NOTE K - STOCK REPURCHASE PLAN
On April 8, 1999, the Company's Board of Directors adopted a stock repurchase
plan under which the Company is authorized to repurchase shares of its
outstanding common stock in the open market or in privately negotiated
transactions at times deemed appropriate. Under the plan, the Company could
repurchase up to 5% of the outstanding common stock. During the year ended June
30, 1999, the Company repurchased 34,000 shares of its common stock at an
aggregate cost of $302,755.
NOTE L - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its primary
lending area of Richmond County. The Bank's underwriting policies require such
loans to be made at no greater than 80% loan-to-value based upon appraised
values unless private mortgage insurance is obtained. These loans are secured by
the underlying properties.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit on mortgage loans,
standby letters of credit and equity lines of credit. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
A summary of the approximate contract amount of the Bank's exposure to
off-balance sheet risk as of June 30, 1999 is as follows:
<TABLE>
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans $ 1,815,000
Undisbursed construction loans 983,000
Undisbursed lines of credit 16,047,000
</TABLE>
NOTE M - LEGAL CONTINGENCIES
Various legal claims arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
the Company's consolidated financial statements.
-37-
<PAGE>
CAROLINA FINCORP,INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
===============================================================================
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company has implemented Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments ("SFAS 107"), which
requires disclosure of the estimated fair values of the Company's financial
instruments whether or not recognized in the balance sheet, where it is
practical to estimate that value. Such instruments include cash and
interest-earning balances in other banks, investment securities, loans held for
sale, loans receivable, stock in the Federal Home Loan Bank of Atlanta, deposit
accounts, advances from the Federal Home Loan Bank, and other borrowed funds.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no active market readily exists for a portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Interest-Earning Balances in Other Banks
The carrying amounts for cash on hand and in banks and interest-
earning balances in other banks approximate fair value because of the
short maturities of those instruments.
Investment Securities
Fair value for investment securities equals quoted market price if
such information is available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans Held for Sale
Fair value for loans held for sale is determined by available market
prices.
Loans Receivable
For certain homogenous categories of loans, such as residential
mortgages, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated
by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
-38-
<PAGE>
CAROLINA FINCORP,INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
===============================================================================
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Stock in Federal Home Loan Bank of Atlanta
The fair value for FHLB stock is its carrying value, since this is
the amount for which it could be redeemed. There is no active market
for this stock, and the Bank is required to maintain a minimum
balance based on the unpaid principal of home mortgage loans.
Deposit Liabilities
The fair value of demand deposits is the amount payable on demand at
the reporting date. The fair value of certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining maturities.
Borrowed Funds
The fair values of borrowings are based upon the discounted value
using current rates at which borrowings of similar maturity could be
obtained.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk
discussed in Note L, it is not practicable to estimate the fair
value of future financing commitments.
The carrying amounts and estimated fair values of the Company's financial
instruments, none of which are held for trading purposes, are as follows at June
30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and interest-earning balances in
other banks $ 7,683,293 $ 7,683,293 $ 8,772,027 $ 8,772,027
Investment securities 17,374,809 17,295,614 15,965,147 16,024,727
Loans held for sale 106,000 106,000 1,057,045 1,074,545
Loans receivable 89,308,399 88,782,000 83,622,584 86,222,000
Stock in FHLB of Atlanta 727,300 727,300 734,700 734,700
Financial liabilities:
Deposits 101,998,496 101,999,000 93,414,753 92,528,000
Borrowed funds - - 3,200,000 3,193,000
</TABLE>
-39-
<PAGE>
CAROLINA FINCORP,INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
===============================================================================
NOTE O - PARENT COMPANY FINANCIAL DATA
Following are condensed financial statements of Carolina Fincorp, Inc. as of and
for the years ended June 30, 1999 and 1998:
Condensed Statements of Financial Condition
June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Assets:
Cash $ 631,848 $ 423,285
Investment in Richmond Savings Bank, Inc., SSB 15,079,503 18,220,348
Other assets 50,063 5,480
---------------- ----------------
$ 15,761,414 $ 18,649,113
================ ================
Liabilities and Stockholders' Equity:
Liabilities:
Accrued expenses and other liabilities $ 5,334 $ 60,707
Other borrowed funds - 3,200,000
---------------- ----------------
Total liabilities 5,334 3,260,707
---------------- ----------------
Stockholders' equity:
Common stock 7,485,231 7,852,262
Deferred management recognition plan (566,724) (477,504)
ESOP note receivable (1,328,030) (1,392,166)
Unearned ESOP compensation (341,074) (661,000)
Retained earnings 10,556,106 10,041,662
Unrealized holding gain (loss), net of tax (49,429) 25,152
---------------- ----------------
15,756,080 15,388,406
---------------- ----------------
$ 15,761,414 $ 18,649,113
================ ================
</TABLE>
Condensed Statements of Operations
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Equity in earnings of subsidiaries $ 952,558 $ 779,260
Interest income 120,560 596,019
Other income 4,058 -
Operating expenses (141,062) (134,306)
Interest expense (1,422) (9,956)
Income taxes (1,556) (161,537)
---------------- ----------------
Net income $ 933,136 $ 1,069,480
================ ================
</TABLE>
-40-
<PAGE>
CAROLINA FINCORP, INC.
COMMON STOCK INFORMATION
===============================================================================
The Company's stock began trading on November 25, 1996. There were 1,871,545
shares of common stock outstanding which were held by approximately 660
stockholders of record (excluding shares held in street name) on June 30, 1999.
The Company's common stock is quoted on the NASDAQ National Market under the
symbol "CFNC." The following table reflects the stock trading and dividend
payment frequency of the Company for the years ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Stock price Dividends, per share
-------------------------------- --------------------------------
High Low Regular Special
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
For the year ended June 30, 1999:
First quarter ending September 30 $ 11.00 $ 8.81 $ 0.06 $ -
Second quarter ending December 31 $ 9.75 $ 8.00 $ 0.06 $ -
Third quarter ending March 31 $ 8.13 $ 6.88 $ 0.06 $ -
Fourth quarter ending June 30 $ 9.75 $ 7.50 $ 0.06 $ -
For the year ended June 30, 1998:
First quarter ending September 30 $ 17.88 $ 15.00 $ 0.06 $ -
Second quarter ending December 31 $ 18.50 $ 17.25 $ 0.06 $ -
Third quarter ending March 31 $ 18.75 $ 17.13 $ 0.06 $ -
Fourth quarter ending June 30 $ 19.75 $ 9.50 $ 0.06 $ 6.00
</TABLE>
-41-
<PAGE>
Exhibit 23
[Dixon Odom PLLC Letterhead]
CONSENT TO INDEPENDENT AUDITORS
To the Board of Directors
Carolina Fincorp, Inc.
Rockingham, North Carolina
As independent auditors, we hereby consent to the incorporation of our report,
dated August 6, 1999 incorporated by reference in this annual report of Carolina
Fincorp, Inc. and Subsidiary on Form 10-KSB into the Company's previously filed
Form S-8 Registration Statement File No. 333-43035.
/s/ Dixon Odom PLLC
Sanford, North Carolina
September 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 565
<INT-BEARING-DEPOSITS> 7,118
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,678
<INVESTMENTS-CARRYING> 6,697
<INVESTMENTS-MARKET> 6,618
<LOANS> 89,931
<ALLOWANCE> 517
<TOTAL-ASSETS> 119,199
<DEPOSITS> 101,998
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,445
<LONG-TERM> 0
0
0
<COMMON> 7,669
<OTHER-SE> 8,087
<TOTAL-LIABILITIES-AND-EQUITY> 119,199
<INTEREST-LOAN> 7,087
<INTEREST-INVEST> 1,348
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,435
<INTEREST-DEPOSIT> 4,387
<INTEREST-EXPENSE> 4,388
<INTEREST-INCOME-NET> 4,047
<LOAN-LOSSES> 106
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,212
<INCOME-PRETAX> 1,450
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 933
<EPS-BASIC> .54
<EPS-DILUTED> .54
<YIELD-ACTUAL> 3.68
<LOANS-NON> 173
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 229
<ALLOWANCE-OPEN> 437
<CHARGE-OFFS> 29
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 517
<ALLOWANCE-DOMESTIC> 411
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 106
</TABLE>
