UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-17939
CAROLINA FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-165582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
402 East Main Street
Lincolnton, North Carolina 28092
(Address of principal executive office) (Zip Code)
704-732-2222
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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
4,392,166 SHARES OF COMMON STOCK, PAR VALUE $2.50
PER SHARE, OUTSTANDING AS OF May 11, 1998
<PAGE>
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1998
and 1997 4
Consolidated Statements of Changes in
Shareholder's Equity - Three Months Ended
March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9 -14
Item 3. Quantitative and Qualitative Disclosures about 15-16
Market Risk
PART II. OTHER INFORMATION 17
Signatures 18
</TABLE>
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CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- ------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------- ------------------
1998 1997
-------------------- ------------------
<S> <C> <C>
Assets:
Cash and due from banks $19,724,351 $20,160,505
Federal funds sold 14,445,000 ---
-------------------- ------------------
Total cash and cash equivalents 34,169,351 20,160,505
Interest bearing deposits in other banks 690,088 673,860
Investment securities (market value $26,979,458
in 1998 and $29,555,613 in 1997) 26,732,770 29,292,273
Securities available for sale (cost of $114,944,776 in
1998 and $106,694,428 in 1997) 115,912,552 107,630,916
Loans, net of unearned income ( $424,467 in 1998 and
$434,953 in 1997) 352,303,709 347,919,688
Allowance for loan losses (5,178,477) (5,039,035)
-------------------- ------------------
Loans, net 347,125,232 342,880,653
Premises and equipment, net 9,556,130 9,566,175
Other real estate owned 248,810 442,310
Other assets 12,631,731 12,570,635
-------------------- ------------------
Total Assets $547,066,664 $523,217,327
==================== ==================
Liabilities and Shareholders' Equity
Deposits:
Demand $59,763,956 $50,979,999
Interest bearing demand accounts 115,927,102 115,725,015
Savings 49,899,994 47,001,921
Time, $100,000 and over 61,456,428 53,896,333
Other time 199,076,413 194,994,519
-------------------- ------------------
Total deposits 486,123,893 462,597,787
Repurchase agreements 7,226,584 8,993,205
Other liabilities 5,772,163 5,301,899
-------------------- ------------------
Total Liabilities 499,122,640 476,892,891
Shareholders' Equity:
Common stock, $2.50 par value;
authorized --- 5,000,000 shares;
issued and outstanding - 4,387,988 shares in
1998, and 4,357,757 shares in 1997 10,969,970 10,894,393
Additional paid-in capital 16,631,779 16,492,544
Retained earnings 19,752,302 18,366,627
Accumulated other comprehensive income 589,973 570,872
-------------------- ------------------
Total Shareholders' Equity 47,944,024 46,324,436
Commitments and Contingent Liabilities ----- -----
Total Liabilities and Shareholders' Equity $547,066,664 $523,217,327
==================== ==================
</TABLE>
3
<PAGE>
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- ------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended
March 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $8,326,465 $7,286,496
Interest and dividends on securities:
Taxable income 1,926,645 1,196,544
Non-taxable income 97,627 127,891
Other interest income 112,552 98,352
------------- -------------
Total interest income 10,463,289 8,709,283
Interest Expense:
Interest on deposits 4,418,495 3,798,283
Interest on other borrowed funds 102,878 60,723
------------- -------------
Total interest expense 4,521,373 3,859,006
------------- -------------
Net Interest Income 5,941,916 4,850,277
Provision for Loan Losses 209,000 285,600
------------- -------------
Net Credit Income 5,732,916 4,564,677
Other Income:
Charges on deposit accounts 691,097 558,151
Insurance commissions 140,396 172,577
Other service fees and commissions 290,489 204,206
Mortgage banking income 131,297 108,585
Securities gains, net --- 524
Other income 258,156 164,120
------------- -------------
Total other income 1,511,435 1,208,163
Operating Expenses:
Salaries and benefits 2,477,944 1,977,674
Occupancy and equipment 569,275 426,588
Federal and other insurance premiums 42,345 30,145
Office supplies 178,172 114,081
Data processing 126,476 102,548
Other expenses 1,240,153 928,115
------------- -------------
Total operating expenses 4,634,365 3,579,151
------------- -------------
Income Before Income Taxes 2,609,986 2,193,689
Income Taxes 875,150 756,276
------------- -------------
Net income $1,734,836 $1,437,413
============= =============
Net Income Per Common Share - Basic $0.40 $0.35
============= =============
Net Income Per Common Share - Diluted $0.39 $0.35
============= =============
Cash Dividend Per Common Share $0.08 $0.06
============= =============
</TABLE>
4
<PAGE>
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
---------- ----------- ------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 2,052,971 $5,132,428 $16,442,810 $13,378,236 $48,382 $35,001,856
EXERCISE OF STOCK OPTIONS 2,608 6,520 28,703 35,223
CASH DIVIDEND ($.12 PER SHARE) (246,572) (246,572)
RETIREMENT OF STOCK (861) (2,153) (27,142) (29,295)
CHANGE IN UNREALIZED GAIN
ON SECURITIES AVAILABLE FOR SALE (115,043) (115,043)
NET INCOME 1,437,413 1,437,413
---------- ----------- ------------ ----------- --------------- ----------------
BALANCE, MARCH 31, 1997 2,054,718 5,136,795 16,444,371 14,569,077 (66,661) 36,083,582
BALANCE, DECEMBER 31, 1997 4,357,757 10,894,393 16,492,544 18,366,627 570,872 46,324,436
EXERCISE OF STOCK OPTIONS 27,064 67,660 63,945 131,605
CASH DIVIDEND ($.08 PER SHARE) (349,161) (349,161)
RETIREMENT OF STOCK (1,264) (3,160) (34,732) (37,892)
DIVIDEND REINVESTMENT PLAN 4,431 11,077 110,022 121,099
CHANGE IN UNREALIZED GAIN
ON SECURITIES AVAILABLE FOR SALE 19,101 19,101
NET INCOME 1,734,836 1,734,836
----------- ------------ ------------ ----------- -------------- --------------
BALANCE, MARCH 31, 1998 4,387,988 $10,969,970 $16,631,779 $19,752,302 $589,973 $47,944,024
=========== ============ ============ =========== =============== ==============
</TABLE>
5
<PAGE>
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- -------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, March 31,
--------------- ---------------
1998 1997
--------------- ---------------
<S> <C> <C>
Operating Activities:
Net Income $1,734,836 $1,437,413
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 369,510 251,068
Accretion and amortization of securities discounts
and premiums, net (123,462) (76,275)
Provision for loan losses 209,000 285,599
Gains on sales of securities available for sale ----- (4,469)
Losses on calls and maturities of securities held to maturity ----- 1,248
Gains on sales of real estate, net ----- (20,262)
Decrease (increase) in other assets (126,376) 326,733
Increase in other liabilities 475,444 110,768
--------------- ---------------
Net cash provided by operating activities 2,538,952 2,311,823
--------------- ---------------
Investing Activities:
Proceeds from maturities of securities available for sale 10,157,259 6,505,424
Purchases of securities available for sale (18,294,640) (7,484,408)
Proceeds from calls and maturities of securities held to maturity 2,557,811 2,918,324
Purchases and maturities of certificates of deposit, net (16,228) (187,998)
Originations of loans, net (4,453,679) (4,802,724)
Proceeds from sale of real estate 195,100 21,725
Capital expenditures (295,685) (320,091)
--------------- ---------------
Net cash used in investing activities (10,150,062) (3,349,748)
--------------- ---------------
Financing Activities:
Increase in time deposits, net 11,641,989 5,094,041
Net increase in other deposits 11,884,117 8,788,827
Net decrease in borrowed funds (1,766,621) (1,211,259)
Repayment of notes payable (5,180) (4,829)
Repurchase of stock (37,892) (29,295)
Payment of cash dividends and fractional shares (349,161) (246,572)
Issuance of stock 252,704 35,223
--------------- ---------------
Net cash provided by financing activities 21,619,956 12,426,136
--------------- ---------------
Net Increase in Cash and Cash Equivalents 14,008,846 11,388,211
Cash and Cash Equivalents, Beginning of Year 20,160,505 19,325,459
=============== ===============
Cash and Cash Equivalents, End of Year $34,169,351 $30,713,670
=============== ===============
Supplemental disclosures of cash flow information:
Interest paid $4,519,647 $3,783,160
Income taxes paid 978,500 882,456
Supplemental disclosure on noncash investing and financing activities:
Decrease in net unrealized loss 19,101 (115,043)
Assets transferred to other real estate 100 -----
Disclosure of accounting policy:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, due from banks and federal funds sold.
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of Management, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Carolina First
BancShares, Inc. and Subsidiary Companies as of March 31, 1998 and December 31,
1997 the results of operations for the three-month periods ended March 31, 1998
and 1997, and cash flows for the three-month periods ended March 31, 1998 and
1997.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's audited financial statements for the year ended December 31, 1997.
2. The consolidated financial statements include the accounts of the holding
company, and its wholly owned subsidiaries, Cabarrus Bank of North Carolina,
("Cabarrus Bank"), and Lincoln Bank of North Carolina, ("Lincoln Bank").
Jointly, Lincoln Bank and Cabarrus Bank own a mortgage company, Carolina First
Mortgage Corporation and a financial services company, Carolina First Financial
Services Corporation. All significant intercompany items and transactions have
been eliminated in consolidation.
3. The results of operations for the three-month periods ended March 31, 1998
and 1997, are not necessarily indicative of the results that might be expected
for the full year ending December 31, 1998 and 1997.
4. The Company adopted the provisions for SFAS No. 128, "Earnings Per Share",
during 1997. The Statement establishes standards for computing and presenting
earnings per share (EPS). SFAS No. 128 simplifies the standards for computing
EPS previously found in APB Opinion No. 15, "Earnings Per Share", and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. In accordance with SFAS No. 128, all prior period EPS
data has been restated. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects potential dilution that could occur if the Company's dilutive stock
options were exercised. The numerator of the basic EPS computation is the same
as the numerator of the diluted EPS computation for all periods presented. A
reconciliation of the denominator of the basic EPS computation is as follows.
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
<S> <C> <C>
Basic EPS denominator: weighted average number of common shares outstanding 4,366,018 4,105,670
Dilutive effect arising from assumed exercise of stock options 125,221 36,533
Diluted EPS denominator 4,491,239 4,142,203
</TABLE>
In addition, the weighted average number of shares for each year presented have
been retroactively adjusted for the two-for-one stock split in August 1997, the
five-for four stock split in 1996, and the 5% stock dividend in 1995.
5. On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components (revenues, expense, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that an enterprise
(a) classify items of other comprehensive income by their nature in the
financial statement and (b) display the accumulated balance of other
comprehensive income separately form retained earnings and additional
paid-in-capital in the equity section of a statement of financial position. In
accordance with the provisions of SFAS No. 130, comparative financial statements
presented for earlier periods have been reclassified to reflect the provisions
of the statement.
7
<PAGE>
Comprehensive income is the change in equity of a Corporation during the period
from transactions and other events and circumstances from non-owner sources.
Comprehensive income is divided into net income and other comprehensive income.
The Company's other comprehensive income for the three months ended March 31,
1998 and 1997 consists of unrealized gains and losses on certain investments in
debt and equity securities. Comprehensive income for the three months ended
March 31, 1998 and 1997 is $1,753,937 and $1,322,370, respectively.
6. On April 15, 1998, the Company and Community Bank & Trust Co. ("CBT")
announced the signing of a letter of intent whereby the Company would acquire
CBT. CBT is headquartered in Marion, North Carolina with assets of approximately
$100 million with seven branches in Western North Carolina. According to the
terms of the proposed merger, CBT would continue as a separately chartered
commercial bank and would retain its name, Board of Directors and management.
The proposed merger is expected to be finalized in the third quarter of 1998 and
is subject to a number of conditions, including the signing of a definitive
agreement between the Company and CBT and approval by regulatory authorities and
the shareholders of the Company and CBT.
8
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis sets forth the major factors which
affected the Company's results of operations and financial condition reflected
in the unaudited financial statements for the three-month periods ended March
31, 1998 and 1997.
General
Net income for the quarter ended March 31, 1998, was $1,734,836, or $.40 per
basic share, compared to net income of $1,437,413, or $.35 per basic share, for
the same period in 1997.
The Company has been assessing possible effects of the Year 2000 problem in
connection with its technology investments and operations, and management
currently believes the Company has limited exposure and expects the cost of
addressing all Year 2000 issues to be less than $50,000 in each of 1998 and
1999. As part of its assessment, Company management has been evaluating Year
2000 compliance by those with whom it does business, and to date has not
discovered any Year 2000 problem with significant counter-parties that it
believes are reasonable likely to have a material adverse effect upon the
Company. However, no assurance can be given that potential Year 2000 problems at
those with whom the Company does business will not occur, and if these occur,
consequences to the Company. Many of the Company's technology systems have
already been certified as year 2000 compliant.
On April 15, 1998, the Company and Community Bank & Trust Co. ("CBT") announced
the signing of a letter of intent whereby the Company would acquire CBT. CBT is
headquartered in Marion, North Carolina with assets of approximately $100
million with seven branches in Western North Carolina. According to the terms of
the proposed merger, CBT would continue as a separately chartered commercial
bank and would retain its name, Board of Directors and management. The proposed
merger is expected to be finalized in the third quarter of 1998 and is subject
to a number of conditions, including the signing of a definitive agreement
between the Company and CBT and approval by regulatory authorities and the
shareholders of the Company and CBT.
Net Interest Income/Margins
Net interest income of $5,941,916 during the first three-months of 1998 resulted
from a net interest margin of 4.91% on average earning assets of $488.6 million.
This compares with a net interest margin of 4.91% on average earning assets of
$400.1 million generating net interest income of $4,850,277 for the same period
in 1997. The interest rate earned on taxable securities has been reduced as the
Company continues to invest in relatively short term government securities. The
Company has, however, been able to sustain the strong net interest margin as
average interest bearing liabilities have decreased slightly as a percentage of
total liabilities and capital. This is the result of both increased capital and
increases in noninterest bearing deposits. Interest rates have remained
relatively stable and thus the change in the net interest margin is more a
function of competition and investment options than changes in interest rates.
The increase in loan demand experienced by the Company positively affects the
net interest margin, as noted by the large volume related increase, and is an
indicator of the continued strong local economy. The increase in net interest
income consists of an increase of $111,000 relative to rate and an increase of
$965,000 relative to volume.
Management reviews asset/liability volumes and rates on a weekly basis. As
Carolina First's loans have continued to grow, the funds have been obtained
primarily through customer deposits and the maturing of investment securities.
Deposit and loan rates are adjusted as market conditions and Company needs
allow.
Analysis of average balances and interest rates for the three-months ended March
31, 1998 and 1997, is presented on pages 11 and 12 of this report. Such analysis
is presented on a fully-taxable equivalent basis at the federal statutory rate
of 34 %.
9
<PAGE>
Loan Loss Allowance/Provision
The allowance for loan losses represents management's determination as to an
adequate amount in relation to the risk of future losses inherent in the loan
portfolio. In evaluating the allowance and its adequacy, management considers
the bank's loan loss experience, the amount of past due and non-performing
loans, current and anticipated economic conditions and other appropriate
information. While it is the Company's policy to charge-off in the current
period the loans in which a loss is considered probable, there are additional
risks for future losses which cannot be quantified precisely or attributed to
particular loans or classes of loans. Because these risks are continually
changing in response to facts beyond the control of the Company, such as the
state of the economy, management's judgment as to the adequacy of the provision
is approximate and imprecise. It is also subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as
methodology used to calculate the allowance for loan losses and the size of the
loan loss allowance in comparison to a group of peer banks identified by the
regulatory agencies.
In assessing the adequacy of the allowance, management relies predominantly on
its ongoing review of the loan portfolio, which is undertaken to both ascertain
whether there are probable losses which must be charged-off and to assess the
risk characteristics of the portfolio in the aggregate. This review considers
the judgments of management, and also those of bank regulatory agencies that
review the loan portfolio as part of their regular bank examination process.
There are no loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that the Company reasonably expects will
materially impact future operating results, liquidity, or capital resources. The
Company has no concentrations or credit risks by type of credit or industry
group within its loan or investment portfolio.
On a monthly basis, the Company reviews the adequacy of its allowance for loan
losses. The loan review staff prepares a listing of loans believed to be
deserving of a closer review by management. These loans are rated as to the
presumed collectibility, and a statistical loss factor is assigned to each
category of loans that directly relates to the associated risk. In addition to
these specific allowances, an additional component of the allowance is computed
by applying a factor based on historical loss experience to all loans by type
that are not listed on the above referenced schedule. Finally, an additional
factor is assigned to the entire portfolio to cover unexpected losses from any
borrower that may not be identified. This final component reflects the economic
conditions of the market areas served. These factors are multiplied by the
balances in each category and totaled to determine the required allowance for
loan losses. The actual allowance for loan losses (after charge-offs) is
compared with the required level to determine if an additional provision should
be made in the current period. The allowance for loan losses was $5,178,477 or
1.47% of outstanding loans, at March 31, 1998 and $5,039,035 or 1.45% of
outstanding loans, at December 31, 1997.
The provision for loan losses charged to operations during the first three
months was $209,000 in 1998 and $285,600 in 1997. Charge-offs, net of
recoveries, were $69,558 or .02% of average loans outstanding, during the three
months ended March 31, 1998, as compared to $44,730 or .01% of average loans
outstanding, during the same period in 1997. The ratio of non-accrual loans to
total loans was .27% at March 31, 1998, .21% at December 31, 1997, and .22% at
March 31, 1997. While this ratio increased from December, it is still
significantly less than peer banks. Management believes that reserves and asset
values are adequate to facilitate the timely disposition of these assets.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance at beginning of year 5,039,035 4,488,958
Charge-offs (89,698) (76,368)
Recoveries 20,140 31,637
Provision for loan losses 209,000 285,600
Balance at March 31, 5,178,477 4,729,827
</TABLE>
10
<PAGE>
Net Non-Interest Income
Non-interest income increased 25.10% for the first three months of 1998 as
compared to the same period a year earlier. Non-interest income from core
operations continues to increase as the Company expands fee income areas such as
trust services and credit cards. Also, the additional deposits recently acquired
have boosted deposit related income.
Non-interest expense increased $1,055,214 or 29.48%, for the three-month period
ended March 31, 1998, as compared to the same period a year earlier.
Non-interest expense increased in relation to the additional branch acquisitions
and branch openings. Specifically, occupancy and supplies were directly effected
as well as other expenses which includes the amortization of the premium paid to
acquire the deposits. Additionally, the expenses relative to our technology
expenditures are apparent in the increase in equipment expense.
Financial Condition
The Company's total assets at March 31, 1998 and 1997, were $547,066,664 and
$443,570,565 respectively, and $523,217,327 at December 31, 1997. Average
earning assets for the first three months of 1998 were $488,599,000 versus
$400,146,000 for the same period a year earlier, an increase of 22.11%. This
growth is the result of the strong local economy and the Company's continued
expansion of its customer base. During the past year, the Company has acquired
the deposits of three branches, has opened three supermarket branches and one
stand alone branch. The Company will continue to look for ways to acquire
business and grow in market share in the existing markets.
Average loans of $345,655,000 represented 70.74% of average earning assets
during the first three months of 1998. During the same period in 1997, average
loans totaled $306,046,000, or 76.48% of average earning assets. Gross loans
increased to $352,303,709 at March 31, 1998, a 12.25% increase over loans a year
ago at March 31, 1997 and a 1.26% increase over December 31, 1997. It is
anticipated that general loan growth will continue to mirror the economy
generally, however, competition for quality loans may adversely effect the net
interest margins.
Securities averaged $135,500,000 during the three months ended March 31, 1998
versus $86,434,000 for the same period a year ago. The securities portfolio
represented 27.73% of earning assets at March 31, 1998 and 21.60% at March 31,
1997. This increase in the portfolio directly relates to the acquisition of the
branch deposits during 1997. As quality loan demand absorbs these deposits the
historical percentages should return. At March 31, 1998, the securities
portfolio had an unrealized gain of approximately $967,776 for securities
available for sale. No gains were realized during the first quarter of 1998.
Securities held to maturity with a carrying value of approximately $19.1 million
were scheduled to mature within the next five years. Of this amount, $4.7
million were scheduled to mature within one year. Securities available for sale
with a carrying value of $113.1 million were scheduled to mature within the next
five years. Of this amount, $55.7 million were scheduled to mature within one
year. The Company currently has the ability and intent to hold its investment
securities to maturity. Certain debt securities are designated by management as
held for sale and are carried at the lower of cost or market because management
may sell them before they mature. The Company's securities portfolio has shifted
toward the available for sale category due to the added flexibility allowed over
the securities held to maturity.
Average interest bearing liabilities rose 19.20%, to $424,023,000 in the first
three months of 1998, from an average of $355,714,000 in the first three months
of 1997. Total deposits increased 21.87% from March 31, 1997 to March 31, 1998,
and 5.09% from December 31, 1997 to March 31, 1998. The second quarter
acquisitions of 1997 resulted in large growth rates. As the Company capitalizes
on these acquisitions and gains market share, deposits will continue to
increase.
The Company continues to maintain capital ratios in excess of regulatory minimum
requirements. The current capital standards call for a minimum total capital of
8% of risk-adjusted assets, including 4% Tier I capital, and a minimum leverage
ratio of Tier I capital to total tangible assets of at least 4-5%. At March 31,
1998, the Company's ratio of total capital to risk-adjusted assets was 12.09%
which includes 10.84% Tier I capital and the Company's ratio of total Tier I
capital to total assets, adjusted for the loans loss allowance and intangibles,
was 7.81%.
11
<PAGE>
Liquidity
The liquidity position of the Company's subsidiaries, Lincoln Bank ("Lincoln")
and Cabarrus Bank of North Carolina ("Cabarrus"), is primarily dependent upon
their need to respond to withdrawals from deposit accounts and upon the
liquidity of their assets. Primary liquidity sources include cash and due from
banks, federal funds sold, short-term investment securities and loan repayments.
At March 31, 1998, the Company had a liquidity ratio of 36.62%. Management
believes the liquidity sources are adequate to meet operating needs. Except as
discussed above, there are no known trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations.
Capital Resources
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The primary Federal regulators for the Banks and the Company
have adopted minimum capital regulations or guidelines that categorize
components and the level of risk associated with various types of assets.
Financial institutions are expected to maintain a level of capital commensurate
with the risk profile assigned to its assets in accordance with the guidelines.
The Company, Lincoln Bank and Cabarrus all maintain capital levels exceeding the
minimum levels for well capitalized banks and bank holding companies.
<TABLE>
<CAPTION>
Well Adequately Carolina Lincoln Cabarrus
Capitalized Capitalized First Bank Bank
<S> <C> <C> <C> <C> <C>
Tier I capital to risk adjusted assets 6.00% 4.00% 12.51% 10.84% 10.36%
Total capital to risk adjusted assets 10.00% 8.00% 13.76% 12.09% 11.60%
Leverage ratio 5.00% 4.00% 8.50% 7.81% 6.81%
</TABLE>
12
<PAGE>
CAROLINA FIRST BANCSHARES, INC.
- ----------------------------------------
AVERAGE BALANCE SHEET AS MARCH 31,
- ----------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Int. bear. deposits in other banks $672 $28 16.67% 451 $9 7.98%
Taxable securities 129,775 1,927 5.94% 78,874 $1,197 6.07%
Non-taxable securities 5,725 148 10.34% 7,560 194 10.26%
Federal funds sold and securities
purchased with agreements to
resell 6,772 84 4.96% 7,215 89 4.93%
Loans 345,655 8,326 9.64% 306,046 7,286 9.52%
------------ ---------- ---------- ---------
Interest earning assets 488,599 10,513 8.61% 400,146 8,775 8.77%
--------- ----------
Cash and due from banks 16,887 15,167
Other assets 21,004 17,191
------------ ----------
Total assets $526,490 $432,504
============ ===========
Liabilities and Shareholders' Equity
Interest bearing deposits
Demand $114,419 $698 2.44% $92,178 $550 2.39%
Savings 48,044 306 2.55% 39,722 248 2.50%
Time 253,230 3,414 5.39% 218,107 3,000 5.50%
Other borrowings 8,330 103 4.95% 5,707 61 4.28%
------------ ----------- ----------- -----------
Interest bearing liabilities 424,023 4,521 4.26% 355,714 3,859 4.34%
------------ ----------- ----------- -----------
Other liabilities 59,228 40,634
Shareholders' equity 43,239 36,156
------------ -----------
Total liabilities and shareholders'
equity $526,490 $432,504
============= ===========
Interest rate spread 4.34% 4.43%
========= ========
Net interest earned and net
yield on earning assets $5,992 4.91% $4,916 4.91%
=========== ========= ========== ========
</TABLE>
13
<PAGE>
CAROLINA FIRST BANCSHARES, INC.
- ----------------------------------------------
RATE / VOLUME ANALYSIS
- ----------------------------------------------
FOR THE PERIOD ENDED MARCH, 1998 AND 1997
- ----------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Increase/(Decrease)
due to
1997 Volume Rate 1998
Inc/exp Inc/exp
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans 7,286 954 86 8,326
Securities - tax - exempt 194 (47) 1 148
Securities - taxable 1,197 756 (26) 1,927
Federal funds sold & interest bearing
balances in other banks 98 (3) 17 112
-------- -------- --------- --------
Total Interest Income 8,775 1,660 78 10,513
Interest Expense:
Interest Bearing Demand 550 136 12 698
Savings 248 53 5 306
Time 3,000 474 (60) 3,414
Other Borrowings 61 32 10 103
-------- -------- --------- --------
Total Interest Expense 3,859 695 (33) 4,521
-------- -------- --------- ---------
Net Interest Income 4,916 965 111 5,992
======== ======== ========= =========
</TABLE>
14
<PAGE>
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk is inherent to all industries, but perhaps more prevalent to the banking
industry. The Company considers credit to be the most significant, however,
interest rate risk is a close second. There are eight risks that must be
considered in managing the Company. These risk are listed in order of the
perceived level of risk imposed upon the Company. Another risk associated with
some banks is foreign exchange risk. The Company does not consider this a
significant risk and thus, does not address it in this assessment. The Company
has identified certain critical risks to these subsidiary banks.
Credit Risk. Credit risk is the risk to the bank's earnings or capital from the
potential of an obligator or related group of obligators failing to fulfill its
or their contractual commitments to the bank. Credit risk is most closely
associated with a bank's lending. It encompasses the potential of loss on a
particular loan as well as the potential for loss from a group of related loans,
i.e., a credit concentration. Credit risk extends also to less traditional bank
activities. It includes the credit behind the bank's investment portfolio, the
credit of counterparties to interest rate contracts, and the credit of
stockbrokers holding the bank's investment portfolio in street name.
Interest Rate Risk. Interest rate risk is the risk to earnings or capital from
the potential of movement in interest rates. It is the sensitivity of the bank's
future earnings to interest rate changes. Interest rate risk is generally
measured on the basis of duration analysis or gap analysis. Duration analysis
measures the degree of risk in a particular instrument or portfolio and gap
analysis defines the timing when loss may occur. The Company is willing to
accept a modified duration of 5% and a one year cumulative gap or +/- 5% and a
one to five cumulative gap of +/- 8%. As of March 31, 1998, the Company had a
modified duration of less than 1.23%. As of December 31, 1997, the Company had a
one year cumulative gap of 1.11% and a one to five year cumulative gap of .21%.
Gap has remained relatively unchanged since December 31, 1997. The major
components of interest rate risk are described as repricing risk, basis risk,
yield curve risk, and options risk.
Price Risk. Price risk is the risk to earnings or capital from changes in the
value of portfolios of financial instruments. Frequently this is referred to as
market risk. Price risk is generally reflected as the risk of a decline in
market value of its securities portfolio and the Company is willing to accept a
7.5% change in value after experiencing a 300 basis point rate shock, either
positive or negative. At March 31, 1998, the price change was less than 4.0%
with such a rate shock.
Liquidity Risk. Liquidity risk is the risk to earnings or capital from a bank's
inability to meet its obligations when they come due without incurring
unacceptable losses or costs. Depositors withdraw their deposits and the bank
does not have the liquid assets to fund the withdrawals and to meet its loan
funding obligations. The risk is particularly great with brokered deposits of
which the Company currently has none.
Transaction Risk. Transaction risk is the risk to earnings or capital arising
from problems with service or product delivery. Transaction risk is the risk of
a failure in a bank's operating processes. It is a risk of failure in a bank's
automation, its employee integrity, or its internal controls.
Compliance Risk. Compliance risk is the risk to earnings or capital from
noncompliance with laws, rules, and regulations.
Strategic Risk. Strategic riskis the risk to earnings or capital arising from
adverse business decisions or improper implementation of those decisions.
Reputation Risk. Reputation risk is the risk to earnings or capital from
negative public opinion.
Most of these risks are interrelated and thus all must be considered by
management regardless of the implied risk. Management reviews the performance
against these ranges on a quarterly basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 4 through 15
of the Company's Annual Report to Shareholders.
15
<PAGE>
The fair value 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. The estimated fair market
value of loans outstanding is approximately $347,040,000 and $309,811,000 at
December 31, 1997 and 1996, respectively. The fair value of noninterest-bearing
demand deposits and NOW, savings and money market deposits is the amount payable
on demand at the reporting date. The fair value of the time deposits is
estimated using the rates currently offered for deposits of similar remaining
maturities. The estimated fair market value of deposits is approximately
$459,703,000 and $386,920,000 at December 31, 1997 and 1996, respectively. As
interest rates have remained relatively constant, there have been no material
changes in the above since year end.
16
<PAGE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item
<S> <C>
1 - Legal Proceedings None
2 - Changes in Securities None
3 - Defaults upon Senior Securities None
4 - Submission of Matters to a Vote of
Security Holders None
5 - Other Information None
6 - Exhibits and Reports on Form 8-K
(a) Exhibits: 27.1 - Financial Data Schedule (SEC Use Only)
Exhibits: 27.2 - Restated Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
</TABLE>
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAROLINA FIRST BANCSHARES, INC.
(Registrant)
Date: May 13, 1998 By: /s/ D. Mark Boyd,III
D. Mark Boyd, III
Chairman and Chief Executive Officer
Date: May 13, 1998 By: /s/ Jan H.Hollar
Jan H. Hollar
Principal Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000846465
<NAME> CAROLINA FIRST BANCSHARES, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<PERIOD-TYPE> 3-MOS
<EXCHANGE-RATE> 1
<CASH> 19,724,351
<INT-BEARING-DEPOSITS> 690,088
<FED-FUNDS-SOLD> 14,445,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,912,552
<INVESTMENTS-CARRYING> 26,732,770
<INVESTMENTS-MARKET> 26,979,458
<LOANS> 352,303,709
<ALLOWANCE> 5,178,477
<TOTAL-ASSETS> 547,066,664
<DEPOSITS> 486,123,893
<SHORT-TERM> 0
<LIABILITIES-OTHER> 12,998,747
<LONG-TERM> 0
<COMMON> 10,969,970
0
0
<OTHER-SE> 36,974,054
<TOTAL-LIABILITIES-AND-EQUITY> 547,066,664
<INTEREST-LOAN> 8,326,465
<INTEREST-INVEST> 2,024,272
<INTEREST-OTHER> 112,552
<INTEREST-TOTAL> 10,463,289
<INTEREST-DEPOSIT> 4,418,495
<INTEREST-EXPENSE> 102,878
<INTEREST-INCOME-NET> 5,941,916
<LOAN-LOSSES> 209,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,634,365
<INCOME-PRETAX> 2,609,986
<INCOME-PRE-EXTRAORDINARY> 2,609,986
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,734,836
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.39
<YIELD-ACTUAL> 4.91
<LOANS-NON> 947,000
<LOANS-PAST> 4,518,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,039,035
<CHARGE-OFFS> 89,698
<RECOVERIES> 20,139
<ALLOWANCE-CLOSE> 5,178,477
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000846465
<NAME> CAROLINA FIRST BANCSHARES, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<PERIOD-TYPE> 3-MOS
<EXCHANGE-RATE> 1
<CASH> 16,663,670
<INT-BEARING-DEPOSITS> 614,764
<FED-FUNDS-SOLD> 14,050,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,595,714
<INVESTMENTS-CARRYING> 35,990,715
<INVESTMENTS-MARKET> 36,079,899
<LOANS> 313,870,002
<ALLOWANCE> 4,729,827
<TOTAL-ASSETS> 443,570,565
<DEPOSITS> 398,886,154
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,600,829
<LONG-TERM> 0
<COMMON> 5,136,795
0
0
<OTHER-SE> 30,946,787
<TOTAL-LIABILITIES-AND-EQUITY> 443,570,565
<INTEREST-LOAN> 7,286,496
<INTEREST-INVEST> 1,324,435
<INTEREST-OTHER> 98,352
<INTEREST-TOTAL> 8,709,283
<INTEREST-DEPOSIT> 3,798,283
<INTEREST-EXPENSE> 60,723
<INTEREST-INCOME-NET> 4,850,277
<LOAN-LOSSES> 285,600
<SECURITIES-GAINS> 524
<EXPENSE-OTHER> 3,579,151
<INCOME-PRETAX> 2,193,689
<INCOME-PRE-EXTRAORDINARY> 2,193,689
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,437,413
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 4.92
<LOANS-NON> 668,056
<LOANS-PAST> 258,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,488,958
<CHARGE-OFFS> 76,368
<RECOVERIES> 31,638
<ALLOWANCE-CLOSE> 4,729,827
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
