SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
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or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission file Number 0-17939
CAROLINA FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1655882
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
236 East Main Street, Lincolnton, N.C. 28092
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (704) 732-2222
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $2.50 per share
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(Title of class)
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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the $2.50 par value common stock held by
non-affiliates of registrant as of January 31, 1999: $142,292,850 based on the
last sale price on January 31, 1999, using the beneficial ownership rules
adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude
voting stock owned by directors and certain executive officers, some of whom may
not be held to be affiliates upon judicial determination.
As of March 20, 1999, 5,438,567 shares of the registrant's $2.50 par value
common stock were issued and outstanding.
SPECIAL CAUTIONARY NOTICE
REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements made herein under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual Report are forward-looking statements for purposes of
the Securities Act of 1933, as amended (the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such
may involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. Such forward-looking statements
include statements using the words such as "may," "will," "anticipate,"
"should," "would," "believe," "contemplate," "expect," "estimate," "continue,"
"may," "intend" or other similar words and expressions of the future. Our actual
results may differ significantly from the results we discuss in these
forward-looking statements.
These forward-looking statements involve risks and uncertainties and may
not be realized due to a variety of factors, including, without limitation: the
effects of future economic conditions; governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes in
interest rates on the level and composition of deposits, loan demand, and the
values of loan collateral, securities, and other interest-sensitive assets and
liabilities; interest rate risks; the effects of competition from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and
other mutual funds and other financial institutions operating in the Company's
market area and elsewhere, including institutions operating, regionally,
nationally and internationally, together with such competitors offering banking
products and services by mail, telephone, computer and the Internet; the
possible effects of the Year 2000 problem on the Company, including such
problems at the Company's vendors, counter-parties and customers; and the
failure of assumptions underlying the establishment of reserves for possible
loan losses. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.
PART I
ITEM 1. BUSINESS
Carolina First BancShares, Inc. (the "Company"), a North Carolina
corporation, is registered as a bank holding company with the Board of Governors
of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company
Act of 1956, as amended (the "BHC Act"). Carolina First was incorporated on
November 8, 1988, for purposes of becoming a bank holding company, and acquired
Lincoln Bank of North Carolina ("Lincoln Bank"), a North Carolina bank, on June
6, 1989. The Company owns all the outstanding common stock of Cabarrus Bank of
North Carolina ("Cabarrus Bank") and Community Bank & Trust Co. ("Community
Bank"), both of which are North Carolina banks. Community Bank was acquired on
December 23, 1998. Lincoln Bank, Cabarrus Bank and Community Bank, (collectively
the "Banks") operate 31 branch offices, and through them the Company provides a
broad range of banking and financial services principally in the greater
Charlotte, North Carolina area, including Lincoln County, southeastern Catawba
County, Iredell County, Cabarrus County and north and west Mecklenburg County.
Community Bank operates in Avery, Buncombe, Jackson, McDowell, Rutherford and
Transylvania Counties, North Carolina in the western part of the state. The
Banks are members of the Federal Deposit Insurance Corporation ("FDIC"), and
Lincoln Bank's and Community Bank's deposits are insured by the Bank Insurance
Fund ("BIF") and Cabarrus Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF").
Lincoln Bank and Cabarrus Bank jointly own a mortgage company, Carolina
First Mortgage Corp., which originates mortgage loans for resale in the
secondary market, and a financial services company, Carolina First Financial
Services Corporation, ("Financial Services"), which offers, as an agent for its
customers, mutual funds and annuity products. During the third quarter of 1997,
the Company became the majority owner of Lincoln Center at Mallard Creek, LLC.
Lincoln Center is a three-story office building occupied in part by Lincoln
Bank. This branch opened in the third quarter of 1998.
The Company owns approximately 17% of the total common stock of First
Gaston Bank of North Carolina, Gastonia, North Carolina ("First Gaston").
Gastonia, which is located just west of Charlotte and south of Lincolnton, is
contiguous to the markets served by Lincoln Bank. First Gaston opened in July
1995 and operates three branches in markets not currently served by the Company.
The Company provides certain operational functions for First Gaston. The Federal
Reserve, in approving this investment under the BHC Act, required the Company to
enter into a commitment to serve as a "source of strength" for First Gaston. The
Company's investment in First Gaston is accounted for under the equity method of
accounting and thus the Company's portion of income or losses is reflected in
current period earnings. See "Supervision and Regulation." The Company engages
in no significant operations other than the ownership of its subsidiaries. The
Company maintains its principal executive offices at 236 East Main Street,
Lincolnton, North Carolina 28092, and its telephone number is (704) 732-2222.
The Banks provide a wide range of commercial banking products and services.
Services include checking accounts, NOW accounts, savings and other time
deposits of various types, including retirement accounts and certificates of
deposit. Loan services include mortgage loan originations, loans for business,
real estate, personal and household purposes, lines of credit and credit cards.
Considering the volatility of quality loan demand, the Company maintains an
investment portfolio. Other services include safe deposit boxes, wire transfer
facilities, and electronic banking facilities. At year-end 1994, Lincoln Bank
began exercising trust powers, and at December 31, 1998, Lincoln Bank had trust
assets under management of $31.0 million.
COMPETITION
Commercial banking is highly competitive. The Banks compete with other
financial institutions located in metropolitan Charlotte and elsewhere in
western North Carolina. Other competitors include banks, savings and loan
associations, finance companies, credit unions, mortgage bankers, pension
trusts, out-of-state banks and other institutions that provide loan and
investment services and money market funds. Competition between commercial banks
and thrift institutions has intensified significantly as a result of the
elimination of many previous distinctions between the various types of financial
institutions. The Banks also compete for interest-bearing funds with a number of
other financial intermediaries and investment alternatives, including mutual
funds, brokerage and insurance firms, investment advisors, governmental and
corporate bonds, and short-term money market securities. The ability of the
Banks to retain deposits depends on their ability to generally provide a rate of
return, liquidity and risk comparable to that offered by competing investment
opportunities.
The Banks compete for deposits, loans and other business with a number of
major banks and bank holding companies which have numerous offices and
affiliates operating over wide geographic areas. Other competitors such as
thrifts, credit unions, mortgage companies, brokerage firms, finance companies,
and specialty lenders and other local and non-local financial institutions also
compete with the Banks, through a local presence or through offerings by mail,
telephone or over the Internet. Among the advantages certain of these
institutions may have compared to the Banks, are the ability to finance
extensive advertising campaigns, and the ability to allocate and diversify their
assets among loans and securities of the highest yield in locations with the
greatest demand. Some of such competitors are subject to less regulation and
more favorable tax treatment than the Company. Many of the major commercial
banks, or their affiliates, in the Company's service area offer services such as
international banking and investment services, which are not offered directly by
the Banks. Such competitors, because of their greater capitalization, also have
substantially higher lending limits than the Banks, and because of their size
and geographic diversification are better able to absorb risk.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under federal
and state law. This discussion is qualified in its entirety by reference to the
particular statutory and regulatory provisions referred to below and is not
intended to be an exhaustive description of the status or regulations applicable
to the Company's and the Banks' business. Supervision, regulation, and
examination of the Company and the Banks and their respective subsidiaries by
the bank regulatory agencies are intended primarily for the protection of
depositors rather than holders of Company capital stock. Any change in
applicable law or regulation may have a material effect on the Company's
business.
BANK HOLDING COMPANY REGULATION The Company, as a bank holding company, is
subject to supervision and regulation by the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the BHC Act. The Company is
required to file with the Federal Reserve periodic reports and such other
information as the Federal Reserve may request. The Federal Reserve examines the
Company, and may examine the Company's Subsidiaries. The Company is also
registered as a bank holding company with the North Carolina Commissioner of
Banks (the "Commissioner"), and files reports with the Commissioner.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC Act
prohibits a bank holding company from acquiring direct or indirect ownership or
control of voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company, may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Certain acquisitions by bank holding companies are subject to approval by the
Commissioner.
The Company is a legal entity separate and distinct from the Banks and its
other subsidiaries. Various legal limitations restrict the Banks from lending or
otherwise supplying funds to the Company or its non-bank subsidiaries. The
Company and the Banks are subject to Section 23A of the Federal Reserve Act.
Section 23A defines "covered transactions", which include extensions of credit,
and limits a bank's covered transactions with any affiliate to 10% of such
bank's capital and surplus. All covered and exempt transactions between a bank
and its affiliates must be on terms and conditions consistent with safe and
sound banking practices and banks and their subsidiaries are prohibited from
purchasing low-quality assets from the bank's affiliates. Finally, Section 23A
requires that all of a bank's extensions of credit to an affiliate be
appropriately secured by acceptable collateral, generally United States
government or agency securities. The Company and the Banks also are subject to
Section 23B of the Federal Reserve Act, which generally limits covered and other
transactions among affiliates to terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the bank
or its subsidiary as prevailing at the time for transactions with unaffiliated
companies.
The BHC Act, as amended by the interstate banking provisions of the
Reigle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the
"Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks by
bank holding companies, such that the Company and any other bank holding company
located in North Carolina may now acquire a bank located in any other state, and
any bank holding company located outside North Carolina may lawfully acquire any
bank based in another state, regardless of state law to the contrary, in either
case subject to certain deposit-percentage, age of bank charter requirements,
and other restrictions. The Interstate Banking Act also generally provides that,
after June 1, 1997, national and state-chartered banks may branch interstate
through acquisitions of banks in other states. By adopting legislation prior to
that date, a state has the ability to either "opt in" and accelerate the date
after which interstate branching is permissible or "opt out" and prohibit
interstate branching altogether. North Carolina adopted legislation opting into
interstate branching effective July 1, 1995, including de novo interstate
branching prior to July 1, 1997 with states where reciprocal branching is
permitted, and thereafter without limit.
Federal Reserve policy requires a bank holding company to act as a source
of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. In addition, under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), where a bank holding
company has more than one bank or thrift subsidiary, each of the bank holding
company's subsidiary depository institutions are responsible for any losses to
the Federal Deposit Insurance Corporation ("FDIC") as a result of an affiliated
depository institution's failure. As a result, a bank holding company may be
required to loan money to its subsidiaries in the form of capital notes or other
instruments which qualify as capital under regulatory rules. However, any loans
from the holding company to such subsidiary banks likely will be unsecured and
subordinated to such bank's depositors and perhaps to other creditors of the
bank. The Company owns approximately 17% of the total common stock of First
Gaston Bank of North Carolina ("First Gaston").
The Federal Reserve has amended its Regulation Y implementing certain
provisions of The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("EGRPRA"). Among other things, these amendments to Federal Reserve Regulation Y
reduced the notice and application requirements applicable to bank and nonbank
acquisitions and de novo expansion by well-capitalized and well-managed bank
holding companies; expanded the list of nonbanking activities permitted under
Regulation Y; reduced certain limitations on previously permitted activities;
and amended Federal Reserve anti-tying restrictions to allow banks greater
flexibility to package products and services with their affiliates. The Federal
Reserve has advised the Company informally that, as a result of actions by D.
Mark Boyd, III, the Company's former Chairman and Chief Executive Officer, in
connection with his purchases of Community Bank common stock, that the Company
should not expect to receive expedited processing of any expansion applications
submitted to the Federal Reserve.
BANK AND BANK SUBSIDIARY REGULATION GENERALLY The Banks are subject to
supervision, regulation, and examination by the FDIC and the Commissioner which
monitor all areas of the operations of the Banks, including reserves, loans,
mortgages, issuances of securities, payment of dividends, establishment of
branches, capital adequacy, and compliance with laws. The Banks are members of
the FDIC and their deposits are insured by the FDIC to the maximum extent
provided by law. Lincoln Bank's and Community Bank's deposits are insured by the
FDIC's Bank Insurance Fund ("BIF") and Cabarrus Bank's deposits are primarily
insured by the Savings Association Insurance Fund ("SAIF"). See "FDIC Insurance
Assessments".
Under present North Carolina law, the Banks may establish and operate
branches throughout the State of North Carolina, subject to the maintenance of
adequate capital for each branch and the receipt of the necessary approvals of
the FDIC and the Commissioner.
In December, 1996, the FDIC adopted the Federal Financial Institutions
Examination Council's ("FFIEC") updated statement of policy entitled "Uniform
Financial Institutions Rating System" ("UFIRS"), effective January 1, 1997.
UFIRS is an internal rating system used by the federal and state regulators for
assessing the soundness of financial institutions on a uniform basis and for
identifying those institutions requiring special supervisory attention. Under
the previous UFIRS, each financial institution was assigned a confidential
composite rating based on an evaluation and rating of five essential components
of an institution's financial condition and operations including capital
adequacy, asset quality, management, earnings, and liquidity. The major changes
include an increased emphasis on the quality of risk management practices and
the addition of a sixth component for sensitivity to market risk. For most
institutions, the FFIEC has indicated that market risk primarily reflects
exposures to changes in interest rates. When regulators evaluate this component,
consideration is expected to be given to: (i) management's ability to identify,
measure, monitor, and control market risk; (ii) the institution's size; (iii)
the nature and complexity of its activities and its risk profile; and (iv) the
adequacy of its capital and earnings in relation to its level of market risk
exposure. Market risk is rated based upon, but not limited to, an assessment of
the sensitivity of the financial institution's earnings or the economic value of
its capital to adverse changes in interest rates, foreign exchange rates,
commodity prices, or equity prices; management's ability to identify, measure,
monitor and control exposure to market risk; and the nature and complexity of
interest rate risk exposure arising from nontrading positions.
COMMUNITY REINVESTMENT ACT The Company and the Banks are subject to the
provisions of the Community Reinvestment Act of 1977, as amended (the "CRA") and
the federal banking agencies' regulations thereunder. Under the CRA, all banks
and thrifts have a continuing and affirmative obligation, consistent with their
safe and sound operation to help meet the credit needs for their entire
communities, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions,
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires a depository institution's primary
federal regulator, in connection with its examination of the institution, to
assess the institution's record of assessing and meeting the credit needs of the
community served by that institution, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the institution's record is
made available to the public. Further, such assessment is required of any
institution which has applied to: (i) charter a national bank; (ii) obtain
deposit insurance coverage for a newly-chartered institution; (iii) establish a
new branch office that accepts deposits; (iv) relocate an office; or (v) merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. In the case of a bank holding company
applying for approval to acquire a bank or other bank holding company, the
Federal Reserve will assess the records of each subsidiary depository
institution of the applicant bank holding company, and such records may be the
basis for denying the application. A less than satisfactory CRA rating will
slow, if not preclude the expansion of banking activities.
The Banks also are subject to, among other things, the provisions of the
Equal Credit Opportunity Act (the "ECOA") and the Fair Housing Act (the "FHA"),
both of which prohibit discrimination based on race or color, religion, national
origin, sex, and familial status in any aspect of a consumer or commercial
credit or residential real estate transaction. Based on recently heightened
concerns that some prospective home buyers and other borrowers may be
experiencing discriminatory treatment in their efforts to obtain loans, the
Department of Housing and Urban Development, the Department of Justice (the
"DOJ"), and the federal banking agencies in April 1994 issued an Interagency
Policy Statement on Discrimination in Lending in order to provide guidance to
financial institutions in determining whether discrimination exists, how the
agencies will respond to lending discrimination, and what steps lenders might
take to prevent discriminatory lending practices. The DOJ also has increased its
efforts to prosecute what it regards as violations of the ECOA and FHA.
PAYMENT OF DIVIDENDS The Company is a legal entity separate and distinct
from its banking and other subsidiaries. The prior approval of the FDIC is
required if the total of all dividends declared by a state non-member bank (such
as the Banks) in any calendar year will exceed the sum of such bank's net
profits for the year and its retained net profits for the preceding two calendar
years, less any required transfers to surplus. North Carolina law also prohibits
any state non-member bank from paying dividends if its surplus is less than 50%
of its paid-in capital stock.
The Company and the Banks are subject to various general regulatory
policies and requirements relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory minimums. The
appropriate federal regulatory authority is authorized to determine under
certain circumstances relating to the financial condition of a state non-member
bank or a bank holding company that the payment of dividends would be an unsafe
or unsound practice and to prohibit payment thereof. The FDIC has indicated that
paying dividends that deplete a state non-member bank's capital base to an
inadequate level would be an unsound and unsafe banking practice. The FDIC and
the Federal Reserve have each indicated that financial depository institutions
and their holding companies, respectively, should generally pay dividends only
out of current operating earnings.
CAPITAL The Federal Reserve and the FDIC have risk-based capital guidelines
for bank holding companies and state non-member banks, respectively. These
guidelines require a minimum ratio of capital to risk-weighted assets (including
certain off-balance-sheet activities, such as standby letters of credit) of 8%.
At least half of the total capital must consist of common equity, retained
earnings and a limited amount of qualifying preferred stock, less goodwill and
certain core deposit intangibles ("Tier 1 capital"). The remainder may consist
of non-qualifying preferred stock, qualifying subordinated, perpetual, and/or
mandatory convertible debt, term subordinated debt and intermediate term
preferred stock and up to 45% of pretax unrealized holding gains on
available-for-sale equity securities with readily determinable market values
that are prudently valued, and a limited amount of any loan loss allowance and
up to 45% of pretax ("Tier 2 capital" and, together with Tier 1 capital, "Total
Capital").
In addition, the Federal Reserve and the FDIC have established minimum
leverage ratio guidelines for bank holding companies and state non-member banks,
which provide for a minimum leverage ratio of Tier 1 capital to adjusted average
quarterly assets ("leverage ratio") equal to 3%, plus an additional cushion of
1.0% - 2.0%, if the institution has less than the highest regulatory rating. The
guidelines also provide that institutions experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. Higher capital may be required in individual cases, and depending upon a
bank holding company's risk profile. All bank holding companies and banks are
expected to hold capital commensurate with the level and nature of their risks
including the volume and severity of their problem loans. Lastly, the Federal
Reserve's guidelines indicate that the Federal Reserve will continue to consider
a "tangible Tier 1 leverage ratio" (deducting all intangibles) in evaluating
proposals for expansion or new activity. None of the Federal Reserve, the FDIC
or the Commissioner have advised the Company or the Banks of any specific
minimum leverage ratio or tangible Tier 1 leverage ratio applicable to them.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, requires the federal banking agencies to take
"prompt corrective action" regarding depository institutions that do not meet
minimum capital requirements. FDICIA establishes five capital tiers: (i) "well
capitalized"; (ii) "adequately capitalized"; (iii) "undercapitalized"; (iv)
"significantly undercapitalized"; and (v) "critically undercapitalized". A
depository institution's capital tier will depend upon how its capital levels
compare to various relevant capital measures and certain other factors, as
established by regulation.
All of the federal banking agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. The relevant capital
measures are the Total Capital ratio, Tier 1 capital ratio, and the leverage
ratio. Under the regulations, a state non-member bank will be: (i) well
capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 capital
ratio of 6% or greater, and is not subject to any written agreement, order,
capital directive, or prompt corrective action directive by a federal bank
regulatory agency to meet and maintain a specific capital level for any capital
measure; (ii) adequately capitalized if it has a Total Capital ratio of 8% or
greater, a Tier 1 capital ratio of 4% or greater, and a leverage ratio of 4% or
greater (3% in certain circumstances); (iii) undercapitalized if it has a Total
Capital ratio of less than 8%, a Tier 1 capital ratio of less than 4% (3% in
certain circumstances); or (iv) critically undercapitalized if its tangible
equity is equal to or less than 2% of average quarterly tangible assets.
As of December 31, 1998, the consolidated capital ratios of the Company and
the Banks were as follows:
Regulatory Lincoln Cabarrus Community
Minimum Company Bank Bank Bank
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Tier 1 capital ratio 4.0% 11.6% 10.6% 9.5% 11.8%
Total capital ratio 8.0% 12.8% 11.8% 10.7% 13.0%
Leverage ratio 3.0-5.0% 8.3% 7.6% 7.0% 6.5%
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan for approval.
For a capital restoration plan to be acceptable, the depository institution's
parent holding company must guarantee that the institution comply with such
capital restoration plan. The aggregate liability of the parent holding company
is limited to the lesser of 5% of the depository institution's total assets at
the time it became undercapitalized and the amount necessary to bring the
institution into compliance with applicable capital standards. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. If the controlling holding company fails to
fulfill its obligations under FDICIA and files (or has filed against it) a
petition under the federal Bankruptcy Code, the claim would be entitled to a
priority in such bankruptcy proceeding over third-party creditors of the bank
holding company. Significantly undercapitalized depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator. Because the Company and the Banks exceed applicable
capital requirements, the respective management of the Company and the Banks do
not believe that the provisions of FDICIA have had any material impact on the
Company and the Banks or their respective operations.
FDICIA FDICIA directs that each federal banking regulatory agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth compensation, a maximum ratio of classified assets-to-capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value-to-book
value for publicly traded shares, and such other standards as the federal
regulatory agencies deem appropriate.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company and the Banks, including new reporting requirements,
regulatory standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch, and a prohibition on the
acceptance or renewal of brokered deposits by depository institutions that are
not well capitalized or are adequately capitalized and have not received a
waiver from the FDIC. Under regulations relating to brokered deposits, the Banks
are well capitalized and not restricted.
ENFORCEMENT POLICIES AND ACTIONS The Federal Reserve, the FDIC and the
Commissioner monitor compliance with laws and regulations. Violations of laws
and regulations, or other unsafe and unsound practices, may result in these
agencies imposing fines or penalties, cease and desist orders, or taking other
enforcement actions. Under certain circumstances, these agencies may enforce
these remedies directly against officers, directors, employees and others
participating in the affairs of a bank or bank holding company.
DEPOSITOR PREFERENCE The Omnibus Budget Reconciliation Act of 1993 provides
that deposits and certain claims for administrative expenses and employee
compensation against an insured depository institution would be afforded a
priority over other general unsecured claims against such an institution in the
"liquidation or other resolution" of such an institution by any receiver.
FISCAL AND MONETARY POLICY Banking is a business which depends on interest
rate differentials. In general, the difference between the interest paid by a
bank on its deposits and its other borrowings, and the interest received by a
bank on its loans and securities holdings, constitutes the major portion of a
bank's earnings. Thus, the earnings and growth of the Company and the Banks are
subject to the influence of economic conditions generally, both domestic and
foreign, and also to the monetary and fiscal policies of the United States and
its agencies, particularly the Federal Reserve. The Federal Reserve regulates
the supply of money through various means, including open market dealings in
United States government securities, the discount rate at which banks may borrow
from the Federal Reserve, and the reserve requirements on deposits. The nature
and timing of any changes in such policies and their effect on the Company and
its subsidiaries cannot be predicted.
FDIC INSURANCE ASSESSMENTS The Banks are subject to FDIC deposit insurance
assessments. Lincoln Bank's and Community Bank's deposits are primarily insured
by BIF. Having converted from a thrift charter, Cabarrus Bank's deposits are
insured by SAIF The FDIC assesses deposits under a risk-based premium schedule.
Each financial institution is assigned to one of three capital groups: (i) "well
capitalized"; (ii) "adequately capitalized"; or (iii) "undercapitalized", and
further assigned to one of three subgroups within a capital group, on the basis
of supervisory evaluations by the institution's primary federal and, if
applicable, state regulators and other information relevant to the institution's
financial condition and the risk posed to the applicable insurance fund. The
actual assessment rate applicable to a particular institution, therefore,
depends in part upon the risk assessment classification so assigned to the
institution by the FDIC. In the third quarter of 1996, a special one-time SAIF
assessment of $0.657 per $100 of deposits was levied, resulting in a $500,000
charge to the Banks. During the years ended December 31, 1998, and 1997, the
Banks paid no insurance deposit premiums, but paid $133,570 and $124,845 of FICO
assessments in 1998 and 1997, respectively.
The FDIC's Board of Directors has continued the 1998 BIF and SAIF
assessment schedule of zero to 27 basis points per annum for the first
semiannual period of 1999. EGRPRA recapitalized the FDIC's SAIF fund to bring it
into parity with BIF. As part of this recapitalization, The Deposit Insurance
Funds Act of 1996 (the "Funds Act") authorized FICO to levy assessments through
the earlier of December 31, 1999 or the merger of BIF and SAIF, on
BIF-assessable deposits at a rate equal to one-fifth of the FICO assessment rate
applied to SAIF deposits. The FICO assessments are set quarterly and ranged from
1.256 and 6.28 basis points for BIF and SAIF, respectively, in the first quarter
of 1998, to 1.164 and 5.82 basis points in the last quarter of 1998. These
assessment rates are 1.22 basis points for BIF, and 6.10 basis points for SAIF,
for the first quarter of 1999.
LEGISLATIVE AND REGULATORY CHANGES Various changes have been proposed with
respect to restructuring and changing the regulation of the financial services
industry. FIRREA required a study of the deposit insurance system. On February
5, 1991, the Department of the Treasury released "Modernizing the Financial
System; Recommendations for Safer, More Competitive Banks". Among other matters,
this study analyzed and made recommendations regarding reduced bank
competitiveness and financial strength, overextension of deposit insurance, the
fragmented regulatory system and the undercapitalized deposit insurance fund. It
proposed restoring competitiveness by allowing banking organizations to
participate in a full range of financial services outside of insured commercial
banks. Deposit insurance coverage would be narrowed to promote market
discipline.
The Interstate Banking Act also directed the Secretary of the Treasury to
take a broad look at the strengths and weaknesses of the United States'
financial services system. In June 1997, the Treasury Department proposed
legislation to eliminate what it deemed outmoded barriers to competition among
financial services providers. On November 17, 1997, the United States Department
of the Treasury released its study "American Finance for the 21st Century" which
considered changes in the financial services industry during the next 10 years
and beyond and reviewed the adequacy of existing statutes and legislation.
Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions and bank and
bank holding company powers are being considered by the executive branch of the
federal government, Congress and various state governments, including North
Carolina. Among other items under consideration are the possible combination of
the BIF and SAIF, changes in or repeal of the Glass-Steagall Act which separates
commercial banking from investment banking, and changes in the BHC Act to
broaden the powers of "financial services" companies to own and control
depository institutions and engage in activities not closely related to banking.
The FDIC is considering possibly adding risk measures in determining deposit
insurance assessments. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted whether any of these proposals will be adopted,
and, if adopted, how these proposals will affect the Company and the Banks.
PERSONNEL
As of December 31, 1998, the Company and its subsidiaries employed 334
full-time equivalent employees.
ITEM 2. PROPERTIES
The Company's principal executive office is located at 236 East Main
Street, Lincolnton, North Carolina. The Company leases four branch offices of
Cabarrus Bank, five branch offices of Lincoln Bank and two branch offices of
Community Bank; however, the Company owns all other branch locations and the
Company's operation center located at 207 South Poplar Street in Lincolnton,
North Carolina. Lincoln Bank currently leases the principal executive office
building in Lincolnton, North Carolina from D. Mark Boyd, III, the Company's
former Chairman and Chief Executive Officer, and his wife, Diane Boyd. The
buildings of Lincoln Bank were purchased beginning in 1983 and have been
renovated as necessary to accommodate the Company's needs. The buildings of
Cabarrus Bank were acquired as a result of the acquisition of Cabarrus Savings
Bank in 1992 and Community Bank's buildings were purchased in 1998 as a result
of the acquisition of Community Bank. For Cabarrus Bank, the Kannapolis branch
building is leased from Atlantic American Properties, Inc. in Kannapolis, and
the Super-K Kmart branch is leased from International Banking Technologies, Inc.
For Lincoln Bank, the SouthPark branch building is leased from Colony Associates
Limited Partnership, and the Troutman branch is leased from Vernon and Jackie
Overcash. For Community Bank, the Black Mountain branch building and the Brevard
branch building is leased from NationsBank. At December 31, 1998, the Company
had book values of $2,896,148 for land, $6,776,775 for buildings and
improvements and $3,989,815 for furniture, fixtures and equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company learned on September 23, 1998 that D. Mark Boyd, III, the
Company's former Chairman and Chief Executive Officer and the largest
shareholder of the Company, was the subject of various "true bills"
(indictments) rendered by grand juries in Haywood, Jackson and Swain Counties,
North Carolina in late September 1998. These indictments alleged violations of
the antifraud provisions of the North Carolina Securities Act, which provide
that such violations are felonies, punishable upon conviction by possible jail
sentences and/or monetary fines. Such indictments followed an investigation by
the North Carolina Securities Division into Mr. Boyd's purchases of Community
Bank common stock prior to the public announcement of a nonbinding letter of
intent regarding the Company's possible acquisition of Community Bank. Mr. Boyd
caused certain of the Community Bank shares he purchased to be transferred to
the Company (the "Transferred Shares").
One lawsuit was filed against Mr. Boyd and the Company in connection with
purchases of Community Bank shares by Mr. Boyd. The Company also placed all the
Transferred Shares in a Settlement Trust with an independent trustee. The
Settlement Trust permitted the nine former Community Bank shareholders that sold
Community Bank shares to Mr. Boyd and which became Transferred Shares, to elect
to rescind their sales, or receive the difference between and the value of
Carolina First common stock issuable in respect of such shares in the merger
with Carolina First, and the cash price received from Mr. Boyd, based upon the
price of such Carolina First common stock as of December 23, 1998, when the
Company closed the merger with Community Bank. The one shareholder suit has been
settled, and all but one of the former Community Bank shareholders whose shares
comprised the Transferred Shares has elected to participate in one of the
options under the Settlement Trust. The Company understands that Mr. Boyd also
established a settlement trust to resolve related claims with respect to other
shares of Community Bank common stock that he purchased and retained in his
name.
The Company incurred costs of approximately $215,000 through year-end 1998
in connection with issues related to Mr. Boyd's purchases of Community Bank
shares. The Company also delivered $6,000 in cash and approximately 13,626
shares of Company Common Stock into the Settlement Trust to address claims
related to the Transferred Shares. It is estimated that the aggregate net cost
to the Company pursuant to the terms of the Settlement Trust to place the
holders of Transferred Shares in the same position as if they had not sold such
shares will be approximately $243,000, based upon the value of Company Common
Stock on December 23, 1998, when the Community Bank merger was completed. Since
year-end 1998, the Company has incurred additional costs related to this issue,
and the total costs to the Company of resolving these issues cannot be
determined at this time. The Company does not believe it has any further
material liability to former holders of Community Bank shares that became
Transferred Shares.
Mr. Boyd's criminal trial(s) have not yet been held, but the Company
believes they are currently scheduled for Spring 1999. The outcome of such
trials, or the possibility of a pretrial diversion or settlement, cannot be
predicted.
The matters related to Mr. Boyd's purchases of Community Bank common stock
were investigated by the North Carolina Banking Commissioner, the Federal
Reserve staff and the FDIC, in connection with their consideration and approval
of the Company's applications to acquire Community Bank. Mr. Boyd has entered
into written agreements with the FDIC, suspending his services as an officer and
director of Carolina First and its subsidiaries, as well as First Gaston, and
that prohibit his participation in the affairs of the Company and its
subsidiaries, and agreed to have the Board of Directors of Carolina First vote
all shares of Carolina First common stock beneficially owned by him pro-rata to
the votes of all shareholders, generally. In addition, Mr. Boyd resigned as a
director of Carolina First and its subsidiaries, as well as First Gaston, on
November 27, 1998. Mr. Boyd cannot be an officer, director or employee of the
Company or any of its subsidiaries at any time without the prior approval of the
Federal Reserve. Similar restrictions have been imposed by the FDIC and preclude
Mr. Boyd's participation in the affairs of the Banks and First Gaston, for the
period specified in Section 8(g) of the Federal Deposit Insurance Act.
The Federal Reserve has advised the Company that as a result of Mr. Boyd's
transactions, it should not expect to receive expedited processing of any
expansion applications submitted under the BHC Act. The Company's compliance
with the conditions and commitments related to Mr. Boyd that were given in
connection with the acquisition of Community Bank will be reviewed as part of
the Federal Reserve's examinations of the Company. The Company and its
subsidiaries also may be subject to closer regulatory scrutiny as a result of
Mr. Boyd's transactions in Community Bank shares. See "Supervision and
Regulation."
In January 1999, the Company was advised by the United States Securities
and Exchange Commission ("SEC") that it had begun an informal inquiry that the
Company believes relates to Mr. Boyd's purchases of Community Bank shares. The
Company has been cooperating with the SEC, and five officers of the Company and
its subsidiaries have either provided voluntary testimony to, or have been
interviewed by, the SEC. The Company has insufficient information to evaluate
the scope of the SEC's informal inquiry, and the timing and outcome of this
inquiry cannot be predicted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of the shareholders of the Company,
through the solicitation of proxies, or otherwise, during the fourth quarter of
the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and is
quoted in the "pink sheets" (the "Pink Sheets") under the symbol "CAFP". The
following table set forth the high and low bid quotations for shares of the
Company's common stock as reported in The Charlotte Observer and the cash
dividends declared per share for the periods indicated. Such quotations reflect
inter-dealer prices without markup, markdown or commission and may not
necessarily represent actual transactions. The prices and dividends have been
adjusted to reflect the 5-for-4 stock split paid on August 23, 1996, and the
2-for-1 stock split paid on August 22, 1997.
The Company's application to have its common stock approved for quotation
on the Nasdaq National Market is pending. However, there can be no assurance
such application will be approved or that any active trading market will develop
for the Company's common stock or, if developed, will be maintained.
Cash Dividends
Quarter Ended High Low per Share
- ------------------------------- --------------------- --------------------- ----------------------
March 31, 1998 $31.00 $28.00 $.08
June 30, 1998 $34.00 $31.00 $.08
September 30, 1998 $34.00 $34.00 $.09
December 31, 1998 $34.00 $25.00 $.09
March 31, 1997 $17.00 $16.00 $.06
June 30, 1997 $19.25 $17.00 $.06
September 30, 1997 $22.00 $19.25 $.08
December 31, 1997 $28.00 $22.00 $.08
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's consolidated financial statements and the accompanying notes
presented elsewhere herein. Prior year information has been restated to reflect
the 1998 merger with Community Bank. Cash dividends have not been restated for
the merger.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Earnings
Interest income $52,051,833 $45,236,993 $39,128,283 $32,820,087 $26,982,197
Interest expense 22,070,734 19,572,746 17,009,779 14,522,348 10,992,568
Net interest income 29,981,099 25,664,247 22,118,504 18,297,739 15,989,629
Provision for loan losses 1,365,000 997,333 1,178,925 710,200 667,303
Operating earnings* 8,494,510 6,720,785 5,220,774 4,393,563 3,913,148
Net income 6,708,929 6,720,785 5,220,774 4,393,563 3,913,148
Per Share
Operating earnings per share - basic* $1.58 $1.32 $1.03 $0.92 $0.85
Operating earnings per share - diluted* 1.54 1.30 1.03 0.92 0.85
Net income per share - basic 1.25 1.32 1.03 0.92 0.85
Net income per share - diluted 1.22 1.30 1.03 0.92 0.85
Cash dividends per share 0.34 0.28 0.21 0.18 0.17
Shareholders' equity (book value) 11.48 10.55 8.76 7.94 6.54
Balance Sheet Data at Year End
Total assets $731,626,244 $618,076,746 $520,227,733 $459,157,713 $368,486,681
Loans 476,109,833 404,025,180 361,888,469 299,223,658 244,892,345
Allowance for possible loan losses 6,723,516 5,837,328 5,313,424 4,406,705 3,662,523
Securities 187,690,188 159,387,578 110,250,169 113,264,241 91,366,338
Deposits 652,602,570 545,050,400 463,971,919 413,611,684 333,500,123
Shareholders' equity 61,977,731 56,210,800 44,464,067 40,237,599 32,281,001
Ratios
Return on average assets:
Operating earnings* 1.27% 1.18% 1.07% 1.08% 1.09%
Net income 1.00% 1.18% 1.07% 1.08% 1.09%
Return on average equity :
Operating earnings* 14.63% 13.98% 12.56% 12.37% 12.52%
Net income 11.55% 13.98% 12.56% 12.37% 12.52%
Average equity to average assets 8.67% 8.47% 8.49% 8.72% 8.70%
Allowance for possible loan losses to
loans, net of unearned income 1.41% 1.44% 1.47% 1.47% 1.50%
Dividend payout:
Operating earnings* 21.52% 21.21% 20.39% 19.57% 20.00%
Net income 27.20% 21.21% 20.39% 19.57% 20.00%
*Operating earnings in 1998 reflects earnings prior to merger-related
and restructuring charges associated with the December 23, 1998
acquisition of Community Bank & Trust Co. of $2.1 million ($1.8 million
after tax). All per share amounts, shown herein, for all years
presented reflect the 5% stock dividends paid on November 29, 1994 and
December 22, 1995, the 5-for-4 stock split effected on August 23, 1996
and the 2-for-1 stock split effected on August 22, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and related notes and other information
appearing elsewhere in this Annual Report and the more detailed information
provided in the Company's Annual Report on Form 10-K and are discussed as a
single business segment. The Company consummated one merger in 1998, which has
been accounted for as a pooling-of-interest. In accordance with the accounting
for pooling-of-interest, the financial statements of the Company have been
restated to reflect the respective merger as if it had been effective as of the
earliest period presented.
GENERAL
The Company owns all of the outstanding stock of three commercial banks,
Lincoln Bank of North Carolina ("Lincoln Bank"), Cabarrus Bank of North Carolina
("Cabarrus Bank") and Community Bank & Trust Co. ("Community Bank")
(collectively, the "Banks"). The Banks are North Carolina-chartered commercial
banks that are members of the FDIC. Cabarrus Bank is also a member of the
Federal Home Loan Bank of Atlanta ("FHLB"). The primary business of the Banks
includes retail and commercial banking and mortgage lending. Jointly, Lincoln
Bank and Cabarrus Bank own a mortgage company, Carolina First Mortgage Corp.
("Mortgage"), which originates mortgage loans for resale in the secondary
market, and a financial services company, Carolina First Financial Services
Corporation, ("Financial Services"), which offers, as agent for its customers,
mutual funds and annuity products. Financial Services began business in October
1994.
Lincoln Bank, which commenced operations in 1983, currently operates in 18
offices located in 12 communities in areas primarily to the north and west of
Charlotte, North Carolina with three offices in southeast Charlotte. Lincoln
Bank had assets of $453 million at December 31, 1998, after opening a branch in
Weddington and another in Matthews. The Mallard Creek branch in northwest
Charlotte was opened during the third quarter of 1998. During the fourth quarter
of 1998, the Plaza Drive branch in Mooresville was acquired with $9.0 million in
deposits.
Cabarrus Bank was organized in 1889 as Cabarrus Savings Bank. In January
1992, the Company acquired Cabarrus Savings, and in October 1992, Cabarrus
Savings was converted from a state savings bank to a commercial bank. Cabarrus
Bank operates six full service branches in Cabarrus County. Cabarrus Bank had
assets of $162 million at December 31, 1998.
Community Bank was organized in 1987 and acquired by the Company in
December 1998. Community Bank operates seven branches in Marion, Rutherfordton,
Forest City, Sylva, Banner Elk, Black Mountain and Brevard, North Carolina.
Community Bank had assets of $110 million at December 31, 1998.
The Company also owns approximately 17% of the total common stock of First
Gaston Bank of North Carolina, Gastonia, North Carolina ("First Gaston"). First
Gaston opened in July 1995 and operates three branches in markets contiguous to
Lincoln Bank's markets. (Certain operational functions are provided for First
Gaston by Carolina First.) The Federal Reserve, under the BHC Act, has required
Carolina First to enter into a commitment to serve as a source of strength for
First Gaston. The Company's investment in First Gaston is accounted for under
the equity method of accounting and thus its portion of income or losses are
reflected in current period earnings. During 1998, the Company recognized
income, net of applicable income taxes, of $59,156. See "Supervision and
Regulation".
The Company continues to actively consider possible acquisitions, including
purchases of branches and deposits. In 1997 the Company purchased three branches
and related deposits, in 1998 purchased one branch and related deposits, and
acquired Community Bank & Trust through a tax-free exchange of stock whereby
each outstanding share of Community Bank was exchanged for .72716 of a share of
the Company's common stock. The transaction was accounted for as a
pooling-of-interest method of accounting.
RESULTS OF OPERATIONS
In 1998 operating earnings, or earnings before merger and restructuring
charges were $8.5 million or $1.54 per share-diluted in 1998, a 26% increase
over 1997. Earnings after merger and restructuring charges, were $6.7 million,
or $1.22 per share-diluted in 1998, an .18% decrease from 1997. Earnings were
$6.7 million, or $1.30 per share-diluted in 1997, a 29% increase over 1996. The
Company's strategy of strong growth in consumer and small commercial customers
has been the basis for these results. The economically vibrant locations and
sound loan philosophy has rewarded the Company with solid growth and earnings.
The growth in current markets has been achieved by growth in existing branches,
de novo branches and acquisitions of deposits from competitors as they divest
branch sites.
The Company's primary source of income is net interest income, which is the
difference between interest earned and interest paid. The net interest margin is
calculated as net interest income as a percentage of average earning assets. The
Company's net interest margin has been indicative of the strong balance sheets
the three banks have assembled. The growth within the counties served by the
Company's three banks has significantly outpaced the overall growth within North
Carolina. Such positive demographics translate into increased opportunities for
building banking relationships which enhance deposit and loan growth.
Net interest income as a percentage of average earning assets was 4.89% in
1998, down from 5.00% in 1997 and 5.02% in 1996. Interest income, which is
substantially comprised of interest received from loans and to a lesser degree
the interest earned on the Company's security portfolio decreased from 8.78% in
1997 to 8.46% in 1998. Interest expense, which is primarily the amount of
interest paid to depositors, has decreased to 4.22% in 1998 from 4.31% in 1997.
Interest rates declined generally in 1998, which affects loans almost
immediately causing a declining net interest margin. With the passage of time
interest expense will decrease and the net interest margin should strengthen,
subject to competitive pressures. This decrease came primarily as a result of
the securities portfolio earning less in 1998 than in 1997. The Company's net
interest income is expected to grow as a result of increases in loan volume
anticipated from the new and expanding markets. The rate earned on assets and
the rate paid on liabilities is expected to continue to be influenced by
competition for solid customers as well as economic conditions and governmental
fiscal and monetary policies.
The Company's allowance for loan losses is analyzed monthly. This
judgmental analysis is based upon a model that considers the current status of
the loan portfolio, historical experience and key market indicators within the
counties served by the Company. Additionally, the Company monitors the overall
portfolio as well as current economic conditions and other factors which affect
the allowance. The monthly provision for loan losses fluctuates based on the
results of this analysis.
Noninterest income has continued to grow as reflected in the 19.0% increase
from 1997 to 1998 and the 20.1% increase from 1996 to 1997. Our growth in
deposit accounts has led the way for this increase. Additionally, Cabarrus Bank
has been successful in changing from a savings and loan with few deposit service
charges to that of a commercial bank with fees for services rendered. Insurance
commissions relate to the fees generated by Financial Services from the sale of
annuity products and mutual funds, which totaled $603,025 in 1998 compared to
$725,474 in 1997 and $606,848 in 1996. This decrease is due to the restructuring
of Financial Services and the transition to outsourcing the sales department to
a new third party vendor. Although sales of nondeposit investment products are
growing generally, recently proposed tax legislation, if enacted, could
adversely affect annuity sales. Other service fees and commissions relate to the
Company's growth in the trust and credit/debit card divisions as well as fees
for non-customers using the Banks' automated teller machines. Included in 1998's
other income are fees of $161,895 generated from services provided to First
Gaston. These services include account operations, item processing, bookkeeping
and internal auditing that are terminable by either party.
Operating expenses decreased as a percentage of average assets in 1996,
1997 and 1998, but total operating expenses increased in general because of the
additional growth experienced from 1997 to 1998. Specifically, four new branch
locations were opened during 1997 and another four locations were opened in
1998. Management will continue to be challenged to maintain operating expenses
at a level adequate to support growth while maintaining favorable operating
efficiency ratios. One method of improving operating efficiencies is through the
use of technology. Expenses associated with technology are included in equipment
expense and represent a capital outlay of $476,738 and $740,923 in 1997 and
1998, respectively.
The Company's operating efficiency ratio has continued to improve, falling
from 71% in 1993 to 68% in 1998. Absent unusual expenses, management seeks to
further reduce the operating efficiency ratio, however unusual expenses will
effect this ratio. Management believes this ratio is adversely affected in the
short term by growth into new market areas and acquisitions and related
transition costs. However, as these markets mature the operating efficiency
ratio should continue to improve.
YEAR 2000 ISSUE
The Company is aware of and is making every effort to address the
potentially severe implications of the Year 2000. The "Year 2000 Issue" is a
general term used to describe problems that may arise as a result of improper
processing of dates and date-sensitive calculations as the Year 2000 approaches.
The Year 2000 Issue is due to the fact that many of the world's existing
computer programs use only two digits to identify the year in a date field. When
these programs were developed there was a lack of consideration of the impact of
the upcoming century date change. These programs could experience malfunctions
when the last two digits of the year change to "00" and interpret it as 1900
rather than 2000. This misinterpretation could result in disruption to normal
business operations. Due to these possible ramifications, the Company is taking
the Year 2000 Issue very seriously.
The Company's Year 2000 Preparedness Team is comprised of a representative
from all the major areas of the Company. The Company's Board of Directors has
approved a plan submitted by the Year 2000 Preparedness Team. The plan was
developed in accordance with the guidelines set by the Federal Financial
Institutions Examination Council ("FFIEC").
The first phase of the plan required the Company to assess or inventory all
known processes that could be impacted by the Year 2000 Issue and their vendors,
if applicable. The inventory included not only typical computer processes, but
all systems and equipment that could be impacted by embedded micro-chip
malfunctions. These include, but are not limited to, the Company's alarm
systems, telephone systems, elevators, and ATM machines. This assessment phase
is complete, and is being updated as needed.
The second phase of the plan required the Company to contact all third
party vendors and service providers. Documentation regarding their Year 2000
efforts was required. This is significant for the Company due to its extreme
dependence on external sources. This is an ongoing phase to track the vendors'
and service providers' continuing efforts.
Additionally, the Company's plan deals with the assessment of its
significant borrowers and depositors and their Year 2000 readiness. Through
letters, questionnaires, and personal contacts, the Company is in the process of
assessing the Year 2000 risk associated with these customers, but is behind
where the FFIEC Interagency Statements regarding Year 2000 state it should be.
The Year 2000 Issue is being addressed as an addendum to the Company's loan
policy. New loans will be subject to Year 2000 assessment as part of the
approval process.
Another important phase of the plan is the comprehensive testing of all
known processes. The testing of hardware and all mission-critical applications
has been completed. All upgrades to software and other processes will be
complete by March 31, 1999. All upgrades to software and test scripts have been
received from the vendors and service providers. If any problems arise during
testing, the Company will request a fix from the providers.
The Company believes that the potential effects of the Year 2000 Issue on
internal operations can and will be addressed prior to the Year 2000. In the
event that required modifications or conversions are not completed on a timely
basis prior to the Year 2000, normal business operations could be disrupted.
Even after tests have been completed and results are satisfactory, the Company
must consider the fact that systems could still fail when the actual date
arrives. Therefore, the Company is in the process of preparing a Business
Resumption Contingency Plan that addresses all areas of operations, such as
power, telecommunications, etc. and how it will resume business if any or all
areas experience difficulties, until the Year 2000 problems are fixed.
The costs associated with the Year 2000 project and the date the Company
plans to complete its Year 2000 compliance are based on management estimates.
Management currently believes the Company has limited exposure and expects the
cost of addressing all Year 2000 issues to be less than $75,000 in 1999. Such
expenses were $28,202 in 1998.
ASSET/LIABILITY MANAGEMENT
The Banks' Asset/Liability Committees are responsible for managing the
risks associated with changing interest rates and their impact on earnings. The
regular evaluation of the sensitivity of net interest income to changes in
interest rates is an integral part of the Company's interest rate risk
management.
The following table summarizes net interest income and average yields and
rates paid for the years indicated. For purposes of this analysis, the interest
on non-taxable investment securities has been adjusted to a taxable-equivalent
amount to facilitate comparison with other asset yields. The adjustment gives
effect to the exemption from federal income taxes for earnings on obligations of
state and political subdivisions and assumes a marginal tax rate of 34%.
Non-accrual loans are excluded from the interest-earning loan balances shown.
1998 1997 1996
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ------- ------- ------- ------- ------- -------- -------
(Thousands)
ASSETS
Interest bearing deposits
in other banks............. $714 $43 6.02% $574 $56 9.76% $457 $46 10.07%
Taxable securities............ 162,674 9,555 5.87% 121,499 7,335 6.04% 98,313 6,005 6.11%
Non-taxable securities........ 5,569 500 8.98% 6,972 722 10.36% 9,712 891 9.17%
Federal funds sold............ 24,772 1,276 5.15% 15,117 818 5.41% 9,711 498 5.13%
Loans......................... 423,246 40,848 9.65% 373,910 36,552 9.78% 328,517 31,990 9.74%
------- ------- ----- -------- ------- ----- -------- ------- -----
Interest earning assets 616,975 52,222 8.46% 518,072 45,483 8.78% 446,710 39,430 8.83%
------- ----- ------ ----- ------- -----
Other assets................. 53,004 49,461 42,937
-------- -------- ------
Total assets................. $669,979 $567,533 $489,647
======== ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing deposits
Demand....................... $145,141 $3,341 2.30% $125,583 $3,028 2.41% $106,967 $2,435 2.28%
Savings...................... 61,516 1,426 2.32% 55,459 1,425 2.57% 51,848 1,318 2.54%
Time......................... 306,807 16,805 5.48% 266,301 14,769 5.55% 230,616 12,931 5.61%
Notes payable and other
Interest bearing liabilities. 9,084 499 5.49% 7,221 351 4.86% 6,835 326 4.77%
------ ---- ----- ------- ------- ----- ------- ------- -----
Interest bearing
Liabilities.................. 522,548 22,071 4.22% 454,564 19,573 4.31% 396,266 17,010 4.29%
------ ----- ------- ----- ------- -----
Other
liabilities.................. 89,362 64,900 51,821
Shareholders' equity......... 58,069 48,069 41,560
------- ------- ------
Total liabilities and
Shareholders' equity......... $669,979 $567,533 $489,647
======== ======== ========
Interest rate spread......... 4.24% 4.47% 4.54%
===== ===== =====
Net interest earned and
net yield on earning
assets (Margin)........... $30,151 4.89% $25,910 5.00% $22,420 5.02%
======= ===== ======== ===== ======= =====
The following table presents the dollar amount of changes in interest
income and interest expense on a taxable-equivalent basis. The table
distinguishes between the changes related to average outstanding (volume) of
earning assets and interest-bearing liabilities, as well as the changes related
to average interest rates (rate) on such assets and liabilities. Changes
attributable to both volume and rate have been allocated proportionately.
1998 1997 1996
Income/ Income/ Income/
Expense Volume Rate Expense Volume Rate Expense
------- ------ ---- -------- ------ ---- -------
(Thousands)
Interest earning assets:
Interest bearing deposits in other banks.. $43 $8 ($21) $56 $11 ($1) $46
Taxable investment securities............. 9,555 2,419 (199) 7,335 1,400 (70) 6,005
Non-taxable investment securities......... 500 (126) (96) 722 (284) 115 891
Federal funds sold and securities
purchased with agreements to resell...... 1,276 497 (39) 818 293 27 498
Loans..................................... 40,848 4,761 (465) 36,552 4,437 125 31,990
------ ----- ----- ------ ----- ----- ------
Total interest income................ 52,222 7,559 (820) 45,483 5,857 196 39,430
------ ----- ----- ------ ----- ----- ------
Interest bearing liabilities:
Interest bearing demand deposits.......... 3,341 450 (137) 3,028 449 144 2,435
Savings deposits.......................... 1,426 140 (139) 1,425 95 12 1,318
Time deposits............................. 16,805 2,219 (183) 14,769 1,979 (141) 12,931
Notes payable and other interest
bearing liabilities....................... 499 102 46 351 19 6 326
------ ----- ----- ------ ------ ----- ------
Total interest expense................ 22,071 2,911 (413) 19,573 2,542 21 17,010
------ ----- ----- ------ ------ ----- ------
Net interest income................... $30,151 $4,648 ($407) $25,910 $3,315 $175 $22,420
======== ======= ====== ======== ======= ===== =======
Financial institutions are subject to interest rate risk to the degree that
their interest bearing liabilities (consisting principally of customer deposits)
mature or reprice more or less frequently, or on a different basis, than their
interest earning assets (generally consisting of intermediate or long-term loans
and investment securities). The match between the scheduled repricing and
maturities of the Company's earning assets and liabilities within defined time
periods is referred to as "gap" analysis. At December 31, 1998, the cumulative
one-year gap for the consolidated Company was a positive or asset sensitive
$17.2 million, or 2.35% of total assets. At December 31, 1998, the cumulative
five-year gap was a negative $31.9 million, or 4.36% of total assets. A negative
gap means that liabilities would reprice faster than assets if interest rates
changed. Accordingly, an increase in rates would adversely affect the Company's
earnings. The Company's one-year gap is considered immaterial and pretax net
income would be virtually unchanged with a one percent change in interest rates.
The Company's five year cumulative gap would result in a change of $424,000 with
a one percent change in interest rates. As interest rates declined during 1998,
depositors were unwilling to extend the maturity of time deposits, as the yield
curve was somewhat flat and did not reward depositors sufficiently for longer
maturities. Intense competition in the Company's markets continues to pressure
quality loan rates downward while conversely pressuring deposit rates upward.
The following table reflects the Company's rate sensitive assets and
liabilities by maturity as of December 31, 1998. Variable rate loans are shown
in the category of due "within one year" because they reprice with changes in
the prime lending rate. These variable rate loans have actual maturities of
$61.8 million maturing within one year, with an additional $47.8 million
maturing within five years, and $80.5 million maturing after five years. Fixed
rate loans are presented assuming the entire loan matures on the final due date.
Actually, payments are made at regular intervals and are not reflected in this
schedule. Additionally, demand deposits and savings accounts have no stated
maturity, however, it has been the Company's experience that these accounts are
not totally rate sensitive, and thus, are presented in the categories that
management believes best identifies their actual repricing patterns. This
analysis assumes 20% of these deposits reprice within one year and the remaining
80% within one to five years.
Prime Within One 1-5 Over 5 Non
Loans Year Years Years Market Total
----- ---------- ------- ------- ------ ------
ASSETS:
Securities held to maturity:
U.S. Treasury.......................... $-- $4,015 $1,995 $-- $-- $6,010
U.S. government agencies............... -- 1,756 1,279 -- -- 3,035
States and political subdivisions...... -- 20 1,139 6,996 -- 8,155
Mortgage-backed securities............. -- 387 3,280 12,439 -- 16,106
--------- --------- -------- -------- -------- --------
Total securities held to maturity.... -- 6,178 7,693 19,435 -- 33,306
Securities available for sale:
U.S. Treasury.......................... -- 30,438 12,776 -- -- 43,214
U.S. government agencies............... -- 55,769 45,945 7,399 -- 109,113
Mortgage-backed securities............. -- -- -- 767 -- 767
Other (1).............................. -- -- -- -- 1,290 1,290
--------- --------- -------- -------- -------- --------
Total securities available for sale.. -- 86,207 58,721 8,166 1,290 154,384
Federal funds sold........................ -- 13,221 -- -- -- 13,221
Loans:
Commercial and financial............... 29,113 10,781 22,475 5,664 -- 68,033
Real estate:
Construction.......................... 33,067 7,886 6,319 7,169 -- 54,441
Mortgage (2).......................... 124,175 12,726 71,163 91,332 -- 299,396
Consumer (3)........................... 3,818 11,832 36,211 2,239 140 54,240
--------- --------- -------- -------- -------- --------
Total loans.......................... 190,173 43,225 136,168 106,404 140 476,110
Other (4)................................. -- -- -- -- 777 777
--------- --------- -------- -------- -------- --------
Total earning assets................. 190,173 148,831 202,582 134,005 2,207 677,798
Noninterest-earning assets................ -- -- -- -- 53,828 53,828
========= ========= ======== ======== ======== ========
Total assets......................... $190,173 $148,831 $202,582 $134,005 $56,035 $731,626
========= ========= ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
Interest-bearing checking............. $-- $7,631 $30,523 $-- $-- $38,154
Savings............................... -- 12,767 51,067 -- -- 63,834
Market deposit accounts............... -- 25,795 103,182 -- -- 128,977
Time, $100,000 and over............... -- 72,781 15,067 100 -- 87,948
Other time (5)........................ -- 192,277 51,724 22 -- 244,023
Total interest-bearing deposits........... -- 311,251 251,563 122 -- 562,936
Borrowed funds........................ -- 10,400 -- -- -- 10,400
Other liabilities......................... -- 149 100 88 -- 337
--------- --------- -------- -------- -------- --------
Total interest-bearing liabilities.... -- 321,800 251,663 210 -- 573,673
Noninterest-bearing liabilities....... -- -- -- -- $95,975 95,975
Shareholders' equity.................. -- -- -- -- 61,978 61,978
--------- --------- -------- -------- -------- --------
Total liabilities and
shareholders' equity...................... $-- $321,800 $251,663 $210 $157,953 $731,626
--------- --------- -------- -------- -------- --------
Gap $190,173 ($172,969) ($49,081) $133,795 ($101,918) --
========= ========= ======== ======== ======== ========
Cumulative Gap $190,173 $17,204 ($31,877) $101,918 -- --
========= ========= ======== ======== ======== ========
Adjustments:
Exclude noninterest-earning assets,
noninterest-bearing liabilities and
Shareholders' equity................. -- -- -- -- 78,362 --
--------- --------- -------- -------- -------- --------
Adjusted cumulative gap.............. $190,173 $17,204 ($31,877) $101,918 $78,362 --
========= ========= ======== ======== ======== ========
- -------------------------
(1) The nonmarket column consists of Federal Home Loan Bank stock, mutual funds,
and Peoples Bank stock. (2) Mortgage loans consist primarily of residential
loans and home equity lines of credit.
(3) The nonmarket column consists of overdrafts.
(4) The nonmarket column consists of interest-bearing deposits due from other
banks.
(5) Other time deposits within one year consist of $41,164 maturing within three
months and $46,554 maturing after three months but within six months.
LIQUIDITY
Liquidity refers to the Company's ability to meet the needs of daily
operations. The Company relies primarily on dividends and management fees from
the Banks for liquidity. These sources have provided adequate liquidity for the
Company. The Banks' liquidity refers to the ability or financial flexibility to
adjust its future cash flows to meet the withdrawal needs of depositors, and to
fund loans to borrowers and operations on a timely and cost effective basis. The
Banks' primary sources of funds are cash generated by repayments of outstanding
loans, interest payments on loans and new deposits. Additional liquidity is
available from the maturity and earnings on securities and liquid assets, as
well as the ability to liquidate securities available for sale. The Banks also
had federal funds lines of credit of $33.4 million at year end under which they
can borrow funds to meet short-term liquidity needs. Lines available for Lincoln
Bank are: through Wachovia Bank, $2 million, The Banker's Bank, Atlanta Georgia,
$5 million and NationsBank, $10 million. Cabarrus Bank has unsecured lines
available through the FHLB of $8.5 million and through NationsBank of $5
million. Community Bank has unsecured lines available through Wachovia of $1.5
million and through NationsBank of $1.4 million. These sources have been and are
presently considered adequate to provide appropriate liquidity for the Banks.
Net cash provided from operations results primarily from net income,
adjusted for the following noncash accounting items: the provision for possible
loan losses, depreciation and amortization, and deferred income taxes or
benefits. These items amounted to $3.0 million in 1998 and $2.4 million in 1997.
This cash was available during 1998 to increase earning assets and to pay
dividends. As of December 31, 1998, the Banks had combined retained earnings of
approximately $35,461,000 all of which are available to be paid as dividends
without prior regulatory approval, provided the Banks maintain adequate capital.
FINANCIAL CONDITION
The Company's consolidated assets increased 18.3%, 18.8% and 13.3% during
1998, 1997 and 1996, respectively. Asset growth is directly related to deposit
growth, both internally and through acquisitions, and the funds available to the
Company for investment. The Company has been successful in expanding existing
market share as well as adding new branch locations, and the 1998 growth
reflects the acquisition of Community Bank and its $110 million of assets.
During 1998 and 1997, the Company purchased approximately $9.0 and $30.0,
million, respectively, of deposit accounts pursuant to branch acquisitions.
During 1996, Cabarrus Bank purchased approximately $3.5 million of deposit
accounts and consolidated them with its Copperfield branch. This acquired
growth, as well as the strong growth expected of the Company's existing markets
is expected to produce continued strong growth trends for the Company. Deposit
growth will allow the Company to continue to take advantage of the vibrant local
economy and quality loan demand experienced over the past several years.
The Company's commercial loan portfolio has grown over the past several
years as the Company has employed seasoned commercial lenders to develop these
opportunities. Also, loans secured by real estate have increased as the Company
believes real estate has provided attractive collateral for loans with different
purposes. Management believes the Company is not dependent on any single
customer or group of customers concentrated in a particular industry, the loss
of whose deposits or whose insolvency would have a material adverse effect on
operations.
As interest rates reflect a relatively flat yield curve, customers have
continued to select shorter terms for their deposits and in many cases chose
transaction deposit accounts, including negotiable order of withdrawal ("NOW")
and money market deposit ("MMDA") accounts without a stated maturity. This shift
from longer-term deposits allows the depositor to react more quickly to rising
rates. Conversely, the Company should be able to restore the traditional
interest spread as short-term deposits reprice downward. Fluctuating interest
rates and competitive pressure enforce the need for effective asset liability
management.
Securities have been segregated into two categories, "held to maturity" and
"securities available for sale". While the Company has no plans to liquidate a
significant amount of any securities, the securities available for sale may be
used for liquidity purposes should management deem it to be in the best interest
of the Company. Due to declines in interest rates, the majority of securities
purchased have been relatively short term and categorized as available for sale
in anticipation that these would be available to the Company if interest rates
begin to rise or if quality loan demand accelerates. United States government
and government agency securities continue to represent the majority of both
securities held to maturity and securities available for sale. During 1998,
securities available for sale increased as a percentage of total assets, due to
in part to a shift from the held to maturity category, but more significantly in
1997 from the reinvestment of cash received from branch acquisitions.
ASSET QUALITY
Management considers the Banks' asset quality to be of primary importance.
The allowance for possible loan losses represents management's estimate of an
amount adequate to absorb estimated probable losses inherent in the loan
portfolio. The allowance is comprised of both allocated and general reserves.
The allocation of the allowance is based on management's grading of the
loan portfolio and the assignment of risk factors to compute the respective
reserves. All commercial loans of $25,000 and greater are risk rated at
inception, at renewal, and at any point at which management becomes aware of
information that may affect the risk rating (e.g. deterioration in financial
condition, payment delinquency, loss of collateral value). To accomplish this,
an eleven-grade risk rating system, ranging from superior to loss is utilized.
The risk grades assigned are determined based on several elements, including
current and historical financial strength and cash flow of the borrower,
collateral value, terms of financing, and compliance with loan policy.
Additionally, on a semi-annual basis, a historical loss analysis is preformed on
the loan portfolio, utilizing three running years of historical loss experience.
This historical loss information is then utilized to assign reserve factors to
each major segment of the loan portfolio.
For the general reserve, management determines the appropriate level of
general reserve to absorb estimated probable losses inherent in the loan
portfolio. Management considers the Banks' historical loan losses, past due and
non-performing loans, current economic conditions, underlying collateral values
securing loans and other factors which affect the allowance. This evaluation is
heavily dependent upon estimates and appraisals, which are susceptible to rapid
changes because of economic conditions and the economic prospects of borrowers.
The general reserve has increased over the past year. The trend of loans
made over the past several years has been toward larger commercial loans and as
a result, the loan portfolio has had limited historical loss experience for
which to base a specific reserve. Thus, the general reserve has been increased
to compensate for loan growth and the lack of historical experience with the
volume of such loans. In addition, nonaccrual loans have increased over the
prior year. This also supports the increased level of general reserve.
The following table depicts the allocation of the allowance for loan losses
at December 31, 1998, 1997, 1996, 1995 and 1994.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Thousands)
Amount Amount Amount Amount Amount
of of of of of
Allowance Loan Allowance Loan Allowance Loan Allowance Loan Allowance Loan
For Type For Type For Type For Type For Type
Possible to Possible to Possible to Possible to Possible to
Loan Total Loan Total Loan Total Loan Total Loan Total
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ ------
Commercial and
financial ........... $617 14% $182 12% $269 12% $347 10% $302 10%
Real Estate:
Residential
construction....... 205 11 12 8 157 8 44 5 48 5
Commercial
construction ...... -- -- -- -- -- -- -- -- -- --
Residential
mortgage........... 413 35 482 33 511 46 428 40 504 48
Commercial
mortgage........... 347 29 501 34 237 21 338 31 237 23
Consumer ............ 986 11 949 13 353 13 356 14 291 14
General ............. 4,156 -- 3,711 -- 3,786 -- 2,894 -- 2,281 --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total allowance for
possible loan
losses ............ $6,724 100% $5,837 100% $5,313 100% $4,407 100% $3,663 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize changes to the
allowance based on their judgment about information available at the time of
examination.
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. Interest of $77,817 was reported on these loans during 1998 and an
additional amount of $50,652 would have been earned if these loans had been
performing. At December 31, 1998 and 1997, the recorded investment in loans that
are considered to be impaired was $1,432,000 and $872,000, respectively, (all of
which $1,432,000 and $720,000 were on a nonaccrual basis at December 31, 1998
and 1997, respectively). Included in this amount is $854,000 and $305,000 in
1998 and 1997, respectively, of impaired loans for which the related allowance
for credit losses is $346,000 and $82,000 in 1998 and 1997, respectively. No
amount of loans that have been classified by regulatory examiners as loss,
substandard, doubtful or special mention has been excluded from amounts
disclosed as non-performing loans. While non-performing assets represent
potential losses to the Company, management does not anticipate any material
losses thereon, since most are believed to be adequately secured. Management
believes the current allowance for loan losses is sufficient to absorb probable
losses inherent in the portfolio. No assurance can be given that adverse
economic conditions will not adversely affect borrowers and result in increased
losses.
-------------------------------------------------------------------------
December 31,
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
(Thousands)
Nonaccrual loans.................... $1,432 $720 $690 $812 $693
Loans 90 days or more past due and
still accruing interest............. 111 152 51 106 29
------------ ------------- ------------ ------------ ------------
Total non-performing loans.......... 1,543 872 741 918 722
Other real estate................... 326 514 144 686 1,021
------------ ------------- ------------ ------------ ------------
Total non-performing assets......... $1,869 $1,386 $885 $1,604 $1,743
============ ============= ============ ============ ============
Net charge-offs as a percentage of average loans outstanding decreased
slightly from .13% in 1997 to .11% in 1998. This ratio continues to reflect the
moderate level of losses experienced by the Company.
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -----------
Balance at beginning of year................ $5,837 $5,313 $4,407 $3,662 $3,072
Charge-offs:
Commercial, financial and agricultural.. (119) (29) (46) (101) (12)
Real estate:
Construction................................ -- -- -- -- --
Mortgage.................................... (72) (93) (24) (77) (24)
Consumer.................................... (489) (516) (350) (229) (150)
------------- ------------- ------------- ------------- -----------
Total charge-offs........................... (680) (638) (420) (407) (186)
Recoveries:
Commercial, financial and agricultural.. 20 41 28 14 38
Real estate:
Construction................................ -- -- -- -- --
Mortgage.................................... 51 27 48 87 12
Consumer.................................... 131 97 71 95 60
------------- ------------- ------------- ------------- -----------
Total recoveries............................ 202 165 147 196 110
------------- ------------- ------------- ------------- -----------
Net charge-offs............................. (478) (473) (273) (211) (76)
Provision for loan losses................... 1,365 997 1,179 956 667
------------- ------------- ------------- ------------- -----------
Balance at end of year...................... $6,724 $5,837 $5,313 $4,407 $3,663
============= ============= ============= ============= ===========
Loans, net of unearned interest at end
of year................................ $476,110 $404,025 $361,888 $299,224 $244,892
Ratio of allowance for loan losses to net
loans at end of year.................... 1.41% 1.44% 1.47% 1.47% 1.50%
Average loans, net of unearned interest..... $423,246 $373,910 $328,517 $262,685 $228,605
Ratio of net charge-offs to average loans
outstanding during the year............. 0.11% 0.13% 0.08% 0.08% 0.03%
CAPITAL RESOURCES
Banks and bank holding companies, as regulated institutions, must meet
required levels of capital. The FDIC and the Federal Reserve, the primary
Federal regulators for the Banks and the Company, respectively, 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, Cabarrus Bank and Community Bank all maintain capital levels exceeding the
minimum levels for well capitalized bank holding companies and banks.
Well Carolina Lincoln Cabarrus Community
Capitalized First Bank Bank Bank
--------------- ------------- ------------- ------------ ---------------
Tier I capital to risk adjusted assets.. 6.0% 11.6% 10.6% 9.5% 11.8%
Total capital to risk adjusted assets... 10.0% 12.8% 11.8% 10.7% 13.0%
Leverage ratio.......................... 5.0% 8.3% 7.6% 7.0% 6.5%
ACCOUNTING AND REGULATORY MATTERS
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employees Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 standardizes
the disclosure requirements of pensions and other postretirement benefits. SFAS
No. 132 is effective for fiscal year beginning after December 15, 1997. The
Company adopted SFAS No. 132 in 1998 with no impact on its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company plans to adopt SFAS No. 133 in 2000 without any impact on its
financial statements as the Company does not have any derivative financial
instruments and is not involved in any hedging activities.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". SFAS No. 134 establishes accounting and
reporting standards for certain mortgage banking activities. SFAS No 134 is
effective for financial statements for the first fiscal quarter beginning after
December 15, 1998. The Company plans to adopt SFAS No. 134 in 1999 without any
impact on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is inherent to all industries, and financial institutions'
assets and liabilities all are affected by market risks. 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 risks are listed in order of the perceived level of risk imposed upon the
Company. The Company does not believe foreign exchange risk to be significant
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 Company'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 securities brokers 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-year cumulative gap of +/- 8%. As of December 31, 1998, the Company
had a modified duration of 2.18% and a one-year cumulative gap of 2.35% and a
one to five year cumulative gap of 4.36%. 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 December 31, 1998, the price change was less than 5.8%
with such a rate shock.
LIQUIDITY RISK. Liquidity risk is the risk to earnings or capital from the
Company'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 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 risk is 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" for the Company's
quantitative sensitivity analyses.
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 $480,244,000 and $401,885,000
at December 31, 1998 and 1997, 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 $652,617,000 and $542,306,000 at December 31, 1998 and 1997,
respectively
INDEPENDENT AUDITORS' REPORT
The Shareholders and the Board of Directors of
Carolina First BancShares, Inc.
We have audited the accompanying consolidated balance sheets of Carolina
First BancShares, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of income, changes in shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 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
First BancShares, Inc. and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG, LLP
---------------
KPMG, LLP
Charlotte, North Carolina
January 20, 1999
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Carolina First BancShares, Inc.
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
------------------ ----------------
ASSETS
Cash and due from banks...................................................... $28,611,146 $28,146,377
Federal funds sold........................................................... 13,220,957 1,800,000
------------------ ----------------
Total cash and cash equivalents.............................................. 41,832,103 29,946,377
Interest bearing deposits in other banks..................................... 777,346 673,860
Securities held to maturity (market value $33,609,910 in 1998 and
$37,024,089 in 1997).................................................... 33,306,113 36,708,867
Securities available for sale (cost of $153,255,268 in 1998 and
$121,716,598 in 1997)................................................... 154,384,075 122,678,711
Loans, net of unearned income ($565,714 in 1998; $539,329 in 1997)........... 476,109,833 404,025,180
Allowance for loan losses............................................... (6,723,516) (5,837,328)
------------------ ----------------
Loans, net.............................................................. 469,386,317 398,187,852
Premises and equipment, net.................................................. 13,662,738 13,101,070
Other real estate owned...................................................... 326,206 513,757
Other assets................................................................. 17,951,346 16,266,252
------------------ ----------------
Total assets................................................................. $731,626,244 $618,076,746
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand....................................................................... $89,666,447 $67,833,505
Interest bearing transaction accounts................................... 167,131,413 137,889,248
Savings................................................................. 63,833,667 57,626,789
Time, $100,000 and over................................................. 87,947,784 60,123,071
Other time.............................................................. 244,023,259 221,577,787
------------------ ----------------
Total deposits............................................................... 652,602,570 545,050,400
Borrowed funds............................................................... 10,399,634 10,923,498
Other liabilities............................................................ 6,646,309 5,892,048
------------------ ----------------
Total liabilities............................................................ 669,648,513 561,865,946
Shareholders' equity:
Preferred stock, $1.00 par value; authorized - 5,000,000 shares;
none issued and outstanding; Common stock, $2.50 par value; author-
ized-20,000,000 shares; issued and outstanding - 5,396,736 in 1998,
and 5,325,769 shares in 1997......................................... 13,491,840 13,314,423
Additional paid in capital.............................................. 22,758,001 22,335,466
Retained earnings....................................................... 25,031,771 19,980,565
Accumulated other comprehensive income....................................... 696,119 580,346
------------------ ----------------
Total shareholders'equity.................................................... 61,977,731 56,210,800
------------------ ----------------
Commitments and contingent liabilities....................................... --- ---
Total liabilities and shareholders' equity................................... $731,626,244 $618,076,746
================== ================
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------------- ---------------- ----------------
INTEREST INCOME:
Interest and fees on loans............................................. $40,848,120 $36,552,020 $31,990,042
Interest and dividends on securities:
Taxable income.................................................... 9,554,933 7,334,682 6,005,498
Non-taxable income................................................ 329,685 476,200 588,209
Other interest income.................................................. 1,319,095 874,091 544,534
---------------- ---------------- ----------------
Total interest income............................................... 52,051,833 45,236,993 39,128,283
---------------- ---------------- ----------------
INTERESE EXPENSE:
Interest on deposits................................................... 21,571,800 19,221,687 16,683,702
Interest on borrowed funds............................................. 498,934 351,059 326,077
---------------- ---------------- ----------------
Total interest expense.............................................. 22,070,734 19,572,746 17,009,779
---------------- ---------------- ----------------
NET INTEREST INCOME.................................................... 29,981,099 25,664,247 22,118,504
PROVISION FOR LOAN LOSSES.............................................. 1,365,000 997,333 1,178,925
---------------- ---------------- ----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.................... 28,616,099 24,666,914 20,939,579
---------------- ---------------- ----------------
NONINTEREST INCOME:
Charges on deposit accounts............................................ 3,864,796 3,357,917 3,062,360
Insurance commissions.................................................. 603,025 725,474 606,848
Other service fees and commissions..................................... 1,445,217 1,203,393 845,858
Mortgage banking commission income..................................... 671,448 483,047 416,302
Securities gains (losses), net......................................... 267,304 82,508 (10,482)
Other income........................................................... 1,196,584 910,447 712,061
---------------- ---------------- ----------------
Total noninterest income............................................ 8,048,374 6,762,786 5,632,947
---------------- ---------------- ----------------
NONINTEREST EXPENSE:
Salaries and benefits.................................................. 12,037,794 11,251,266 9,546,647
Occupancy and equipment................................................ 3,252,949 2,810,863 2,299,468
Federal and other insurance premiums................................... 208,822 185,798 857,366
Office supplies........................................................ 938,063 857,966 676,571
Data processing........................................................ 680,130 546,395 485,665
Restructuring and merger related expenses.............................. 2,069,570 --- ---
Other expenses......................................................... 6,667,773 5,566,486 4,517,508
---------------- ---------------- ----------------
Total noninterest expense........................................... 25,855,101 21,218,774 18,383,225
---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES............................................. 10,809,372 10,210,926 8,189,301
INCOME TAXES........................................................... 4,100,443 3,490,141 2,968,527
---------------- ---------------- ----------------
NET INCOME............................................................. $6,708,929 $6,720,785 $5,220,774
================ ================ ================
Earnings per share
Net Income Per Common Share - Basic.................................... $1.25 $1.32 $1.03
================ ================ ================
Net Income Per Common Share - Diluted.................................. $1.22 $1.30 $1.03
================ ================ ================
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income
For The Years Ended December 31, 1998, 1997 and 1996
Common Stock Accumulated
---------------------------- Additional Other
Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
-------------- -------------- -------------- -------------- --------------- ---------------
Carolina First BancShares, Inc....... 1,632,458 $4,081,145 $17,377,333 $9,585,436 $79,065 $31,122,979
Community Bank & Trust Co............ 1,331,223 3,328,057 4,934,895 776,761 74,907 9,114,620
Adjustments for
pooling-of-interest.................. (363,211) (908,027) 908,027 --- --- ---
-------------- -------------- -------------- -------------- -------------- --------------
BALANCE DECEMBER 31, 1995,
RESTATED............................. 2,600,470 $6,501,175 $23,220,255 $10,362,197 $153,972 $40,237,599
Exercise of stock options............ 9,412 23,531 68,748 --- --- 92,979
Cash dividend ($.48 per share)....... --- --- --- (991,997) --- (991,997)
5-for-4 stock split.................. 409,586 1,023,965 (1,049,260) --- --- (25,295)
Retirement of stock.................. (3,589) (8,973) (102,103) --- --- (111,076)
Dividend reinvestment plan........... 5,104 12,760 148,092 --- --- 160,852
Net income........................... --- --- --- 5,220,774 --- 5,220,774
Other comprehensive income -
Unrealized gain (loss) on
Securities available for sale,
net of taxes of $(46,377)......... --- --- --- --- (119,069) (119,069)
--------------
Total comprehensive income........... --- --- --- --- --- 5,101,705
-------------- -------------- -------------- -------------- -------------- --------------
BALANCE DECEMBER 31, 1996............ 3,020,983 7,552,458 22,285,732 14,590,974 $34,903 $44,464,067
Issuance of stock in public
offering............................. 225,000 562,500 4,988,907 --- --- 5,551,407
Exercise of stock options............ 18,311 45,778 32,432 --- --- 78,210
Cash dividend ($.28 per share)....... --- --- --- (1,331,194) --- (1,331,194)
2-for-1 stock split.................. 2,054,569 5,136,422 (5,136,422) --- --- ---
Retirement of stock.................. (1,412) (3,530) (38,174) --- --- (41,704)
Dividend reinvestment plan........... 8,318 20,795 202,991 --- --- 223,786
Net income........................... --- --- --- 6,720,785 --- 6,720,785
Other comprehensive income -
Unrealized gain (loss)on
securities available for sale,
net of taxes of $341,498.......... --- --- --- --- 545,443 545,443
--------------
Total comprehensive income........... --- --- --- --- --- 7,266,228
-------------- -------------- -------------- -------------- -------------- --------------
BALANCE, DECEMBER 31, 1997........... 5,325,769 13,314,423 22,335,466 19,980,565 $580,346 $56,210,800
Exercise of stock options............. 70,229 175,572 210,055 --- --- 385,627
Cash dividend ($.34 per share)........ --- --- --- (1,657,723) --- (1,657,723)
Retirement of stock................... (3,694) (9,235) (112,707) --- --- (121,942)
Dividend reinvestment plan............ 4,432 11,080 110,049 --- --- 121,129
Settlement of merger-related
claims................................ --- --- 215,138 --- --- 215,138
Net income............................ --- --- --- 6,708,929 --- 6,708,929
Other comprehensive income -
Unrealized gain (loss) on
Securities available for sale,
net of taxes of $50,921............ --- --- --- --- 115,773 115,773
--------------
Total comprehensive income............ --- --- --- --- --- 6,824,702
-------------- -------------- -------------- -------------- -------------- --------------
BALANCE, DECEMBER 31, 1998............ 5,396,736 $13,491,840 $22,758,001 $25,031,771 $696,119 $61,977,731
============== ============== ============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------------- ------------------ --------------
OPERATING ACTIVITIES:
Net Income ...................................................................... $6,708,929 $6,720,785 $5,220,774
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .............................................. 2,297,164 2,125,307 1,683,899
Accretion and amortization of securities discounts and premiums,net ........ (326,143) 701,698 250,074
Provision for loan losses .................................................. 1,365,000 997,333 1,178,925
Deferred taxes (benefit).................................................... (699,363) (771,281) (556,979)
Gains on sales of securities available for sale ............................ (287,166) (99,938) 16,841
Losses on sales of securities available for sale ........................... 19,862 19,106 --
Gains on calls and maturities of securities held to maturity ............... -- (1,812) (8,490)
Losses on calls and maturities of securities held to maturity .............. -- 136 2,131
Losses (gains) on sales of equipment, net .................................. 309 (4,810) (63,273)
Losses (gains) on sales of real estate, net ................................ 71,501 (65,702) (141,750)
Increase in other assets ................................................... (634,362) (1,588,494) (193,955)
Increase in other liabilities .............................................. 829,437 1,289,214 943,110
Settlement of merger-related claims ........................................ 215,138 -- --
------------- ------------- -------------
Net cash provided by operating activities ............................. 9,560,306 9,321,542 8,331,307
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale ....................... 70,451,327 35,612,012 10,201,659
Proceeds from sales of securities available for sale ............................ 599,964 5,809,688 6,543,161
Purchases of securities available for sale ...................................... (101,960,784) (101,121,315) (35,699,300)
Proceeds from calls and maturities of securities held to maturity ............... 16,662,401 18,320,504 26,549,774
Purchases of securities held to maturity......................................... (13,295,379) (7,490,547) (5,074,375)
Purchases and maturities of certificates of deposit, net......................... (103,486) (247,094) (76,638)
Originations of loans, net....................................................... (72,922,802) (43,072,427) (63,251,666)
Proceeds from sale of real estate................................................ 509,903 211,609 999,241
Proceeds from sale of premises and equipment..................................... 2,115 611,477 221,380
Cash acquired, net of cash paid, in purchase of branches ........................ 7,674,161 26,556,399 --
Capital expenditures............................................................. (1,899,152) (2,147,923) (2,373,112)
------------- ------------- -------------
Net cash used in investing activities.................................. (94,281,732) (66,957,617) (61,959,876)
------------- ------------- -------------
FINANCING ACTIVITIES:
Increase in time deposits ....................................................... 44,876,631 20,560,322 30,353,343
Net increase in other deposits .................................................. 53,602,469 30,945,214 20,006,892
Net increase (decrease) in borrowed funds ....................................... (523,864) 3,754,186 5,558,751
Repayment of notes payable ...................................................... (75,176) (19,601) (18,544)
Repurchase of stock ............................................................. (121,942) (41,704) (111,076)
Payment of cash dividends and fractional shares ................................. (1,657,723) (1,331,194) (1,017,292)
Issuance of stock................................................................ 506,756 5,853,403 253,131
------------- ------------- -------------
Net cash provided by financing activities ............................ 96,607,151 59,720,626 55,025,205
------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................................... 11,885,725 2,084,551 1,396,636
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................................... 29,946,377 27,861,826 26,465,190
============= ============= =============
CASH AND CASH EQUIVALENTS, END OF YEAR........................................... $41,832,102 $29,946,377 $27,861,826
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid .............................................................. $21,540,710 $19,177,341 $16,835,027
Income taxes paid .......................................................... $4,791,163 $4,340,169 $3,603,382
============= ============= =============
Supplemental disclosure of noncash investing and financing activities:
Increase (decrease) in net unrealized loss ................................. $115,773 $545,443 $(119,069)
Assets transferred to other real estate .................................... $359,337 $533,687 $317,449
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Carolina First BancShares, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company, the Banks, and their subsidiaries (referred
to herein collectively as the "Company"). All significant intercompany items and
transactions have been eliminated in consolidation. Certain 1997 and 1996
amounts have been reclassified to conform with 1998 classifications. The
reclassifications have no effect on shareholders' equity or net income as
previously reported. The Company's chief operating decision maker reviews the
results of operations of the Company and its subsidiaries as a single
enterprise.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements and the amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -- Cash and cash equivalents include cash on
hand, due from banks and overnight federal funds sold.
Securities -- Securities are classified in accordance with Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" which prescribes the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Securities that the Company has the positive
intent and ability to hold to maturity are classified as held to maturity and
reported at cost. Securities held for current resale are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in income. The Company currently has no such securities. Securities not
classified as held to maturity or trading securities are classified as available
for sale and reported at fair value, with unrealized gains and losses net of the
related tax effect excluded from income and reported as a separate component of
shareholders' equity. The effect of the foregoing will cause fluctuations in
shareholders' equity based on changes in values of debt and equity securities.
The classification of securities as held to maturity, trading or available for
sale is determined at the date of purchase.
Realized gains or losses on the sale of securities are recognized on the
specific identification method. Premiums and discounts are amortized to interest
income over the life of the security using a method approximating a level yield
method. The market value of securities is generally based on quoted market
prices or dealer quotes.
As a member of the Federal Home Loan Bank of Atlanta (the "FHLB"), the
Company is required to maintain an investment in the stock of the FHLB. This
stock, which is classified in the other asset category at December 31, 1998, is
carried at cost since it has no quoted market value.
Allowance for Loan Losses -- The provision for loans losses charged to
operations is an amount that management believes is sufficient to bring the
allowance for loan losses to an amount considered adequate to absorb estimated
probable losses inherent in the portfolio. Management's determination of the
adequacy of the allowance is based on an evaluation of the portfolios, current
economic conditions, historical loan loss experience and other risk factors.
This evaluation is heavily dependent upon estimates and appraisals that are
susceptible to rapid changes because of economic conditions and the economic
prospects of borrowers.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize changes to the
allowance based on their judgment about information available at the time of
examination.
Nonaccrual Loans -- Generally, a loan is classified as nonaccrual and the
accrual of interest on such loan (including impaired loans) is discontinued when
the contractual payment of principal or interest has become 90 days past due or
management has doubts about further collectibility of principal or interest even
though the loan currently is performing. A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well secured.
When a loan is placed on nonaccrual status, unpaid interest credited to income
in the current year is reversed and unpaid interest accrued in prior years is
charged against the allowance for credit losses. Interest received on nonaccrual
loans (including impaired loans) generally is either applied against principal
or reported as interest income according to management's judgment as to the
collectibility of principal. Generally, loans are restored to accrual status
when the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
Premises and Equipment -- Premises and equipment are stated at cost less
accumulated depreciation. Additions and major replacement or betterments, which
extend the useful lives of premises and equipment, are capitalized. Maintenance,
repairs and minor improvements are expensed as incurred. Depreciation of
buildings and improvements is computed on the straight-line method over 15
years. Depreciation of furniture, fixtures and equipment is computed on the
straight-line method over periods that approximate the estimated useful lives of
the assets. Accelerated depreciation methods are used for tax purposes. Gains
and losses on dispositions of premises and equipment are reflected in income.
Other Real Estate Owned -- Other real estate owned is carried at the lower
of cost (principal balance of the loan plus costs of obtaining title and
possession) or fair value less selling costs. Subsequent to acquisition, a
provision for loss, if required, is recorded to reduce the carrying value of the
asset to fair value.
Intangible Assets -- Deposit based premiums and goodwill arising from
branch acquisitions result from the Company paying amounts in excess of fair
value for the branches and core deposits acquired. Such amounts are included in
other assets and deposit based premiums are amortized on an accelerated basis
over 10 years and goodwill is amortized on a straight-line basis over 25 years.
Earnings Per Share -- The Company adopted SFAS No. 128, "Earnings per
Share, during 1997. SFAS No. 128 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. In addition, the weighted average number of shares
for each year presented has been retroactively adjusted for the two-for-one
stock split in 1997 and the five-for-four stock split in 1996.
Financial Instruments -- Financial instruments are valued in accordance
with SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", which
requires disclosure of the estimated fair values of the Company's financial
instruments. Such instruments include investment securities (see note 3), loans
(see note 4), and deposit accounts (see note 7). Fair value estimates, methods,
and assumptions for each of these instruments are set forth in their respective
footnotes.
The carrying amounts for cash, overnight federal funds sold and interest
bearing deposits in other banks approximate fair value because they mature in
less than 90 days and do not present unanticipated credit concerns. The carrying
amounts for borrowed funds also approximate fair value because of the daily
maturity of most of these items.
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.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other
significant assets and liabilities that are not considered financial assets or
liabilities include the mortgage banking operation, property, plant, equipment,
and goodwill. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
SFAS No. 107 specifies that fair values should be calculated based on the
value of one unit without regard to any premium or discount that may result from
concentration of ownership of a financial instrument, possible tax
ramifications, or estimated transaction cost.
Stock Options -- On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires either the (i) fair
value of employee stock-based compensation plans be recorded as a component of
compensation expense in the statement of income as of the date of grant of
awards related to such plans, or (ii), the impact of such fair value on net
income and earnings per share be disclosed on a pro forma basis in a footnote to
financial statements for awards granted after December 15, 1994, if the
accounting for such awards continues to be in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees "
("APB Opinion 25"). The Company has elected to continue to apply the provisions
of APB Opinion 25 and provide the pro forma disclosure provisions of SFAS No.
123.
Income and Expense -- The Company utilizes the accrual method of accounting
except for immaterial amounts of loan income and other minor fees, which are
recorded as income when collected. Substantially all loans earn interest on the
level yield method based on the daily outstanding balance. The accrual of
interest is discontinued when, in management's judgment, the interest may not be
collected.
The Banks defer the recognition of the net amounts of loan origination fees
and certain loan origination costs and amortize these deferred amounts over the
life of each related loan as an adjustment to the loan yield.
Income Taxes -- Income taxes are accounted for under SFAS No. 109,
"Accounting for Income Taxes". According to SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the statutory tax rates expected to apply to a
taxable income in the years in which those temporary differences are expected to
be recovered in income in the period that includes the enactment date. The
Company files consolidated Federal income tax returns with its subsidiaries.
Comprehensive Income - On January 1, 1998 the Company adopted SFAS No. 130
"Reporting Comprehensive Income". As required by the SFAS No. 130, prior year
information has been modified to conform to the new presentation. Comprehensive
income includes net income and all non-owner changes to the Company's equity.
The Company's only component of other comprehensive income is the change in
unrealized gains and losses on available-for-sale securities.
The Company's total comprehensive income for the three years ended December
31, 1998, 1997, and 1996 was $6,824,702, $7,266,228 and $5,101,705 respectively.
Information concerning the Corporation's other comprehensive income for the
three years ended December 31, 1998, 1997, and 1996 is as follows:
1998 1997 1996
----------- ----------- -----------
Unrealized holding gains (losses) arising during the period .......................... $281,501 $596,598 ($125,568)
Less: reclassification adjustment for realized gains (losses), net of tax ............ 165,728 51,155 (6,499)
--------- --------- ----------
Unrealized gains (losses) on securities available for
sale, net of applicable income taxes ................................................. $115,773 $545,443 ($119,069)
========= ========= ==========
Disclosures Regarding Segments -- The Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" in 1998.
SFAS No. 131 establishes standards for the way that public businesses report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company adopted SFAS No. 131 without any impact on their
consolidated financial statements as the chief operating decision maker reviews
the results of operations of the Company and its subsidiaries as a single
enterprise.
2. MERGERS ACCOUNTED FOR AS POOLING-OF-INTERESTS
On December 23, 1998, the Company merged with Community Bank, a $110
million community bank headquartered in Rutherfordton, North Carolina. The
merger was effected through a tax-free exchange of stock whereby each
outstanding share of Community Bank was exchanged for .72716 of a share of the
Company's common stock. Consequently, the Company issued and reserved for issue
approximately 1,021,202 shares of common stock and cash in-lieu of fractional
shares for all of the outstanding shares of Community Bank. Community Bank is
continuing to operate as a wholly-owned subsidiary of the Company. The merger
with Community Bank has been accounted for as a pooling-of-interests.
Certain charges were brought against the Company and one of the Company's
officers related to the merger. In connection with the litigation the Company
formed a settlement trust and irrevocably transferred all of the shares of
Community Bank which it owned to the trustee to be available for settlement of
the claims. The Company incurred costs of approximately $215,000 for the
settlement of the merger-related claims. Such costs are included in
restructuring and merger related expenses as discussed below.
The financial statements of the Company have been restated to reflect the
Community Bank merger as if it had been effective as of the earliest period
presented. The respective contributions of the pooled entities to consolidated
total income, net interest income after provision for loan losses and net income
for the three years ended December 31, 1998 were as follows:
Total income: 1998 1997 1996
-----------------------------------------------------------------
Carolina First BancShares, Inc. ...................... $51,575,670 $44,037,368 $37,124,545
Community Bank & Trust Co. ........................... 8,524,537 7,962,411 7,636,685
------------- ------------- -------------
Combined ............................................. $60,100,207 $51,999,779 $44,761,230
Net interest income after provision for loan losses:
Carolina First BancShares, Inc. ...................... $24,482,693 $20,508,156 $17,058,775
Community Bank & Trust Co. ........................... 4,133,406 4,158,758 3,880,804
------------- ------------- -------------
Combined ............................................. $28,616,099 $24,666,914 $20,939,579
1998 1997 1996
-----------------------------------------------------------------
Net income:
Carolina First BancShares, Inc. ...................... $7,349,951 $6,159,839 $4,678,299
Community Bank & Trust Co. ........................... (641,022) 560,946 542,475
------------- ------------- -------------
Combined ............................................. $6,708,929 $6,720,785 $5,220,774
Earnings per share - basic:
Carolina First BancShares, Inc. ...................... $1.67 $1.49 $1.14
Community Bank & Trust Co. ........................... (0.42) (0.17) (0.11)
------------- ------------- ------------
Combined ............................................. $1.25 $1.32 $1.03
Earnings per share - diluted:
Carolina First BancShares, Inc. ...................... $1.65 $1.47 $1.14
Community Bank & Trust Co. ........................... (0.43) (0.17) (0.11)
------------- ------------- ------------
Combined ............................................. $1.22 $1.30 $1.03
In connection with the Community Bank merger, the Company incurred
restructuring and merger related expenses of $2,070,000 in 1998. The after
tax-effect of the restructuring and merger-related expense was $1,786,000. Such
expenses were comprised of severance payments and other payments under
employment contracts, professional fees, costs for the settlement of merger
related claims, systems conversion costs and other restructuring and merger
related expenses as follows:
Severance payments................................................. $171,000
Employment contracts............................................... 489,000
System conversion costs and write-off of old equipment............. 190,000
Settlement of merger related claims................................ 215,000
Professional fees.................................................. 897,000
Other.............................................................. 108,000
==========
Total.............................................................. $2,070,000
==========
At December 31, 1998, the remaining accruals related to the above
captioned charges, consisting mainly of severance payments and payments under
employment contracts, totaled approximately $563,000 and are included in other
liabilities in the accompanying consolidated balance sheet.
3. SECURITIES
Amortized cost, market values and unrealized gains and losses of securities
as of December 31, 1998 and 1997 are summarized as follows:
December 31, 1998
- ----------------- Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
HELD TO MATURITY
U.S. Treasury securities ............................. $6,010,186 $68,878 -- $6,079,064
U.S. government agencies ............................. 3,034,710 14,266 -- 3,048,976
Mortgage-backed securities ........................... 16,105,620 112,974 (17,244) 16,201,350
State and political subdivisions ....................... 8,155,597 163,271 (38,348) 8,280,520
------------ ------------ ------------ ------------
Total ..................................................... $33,306,113 $359,389 ($55,592) $33,609,910
============ ============ ============ ============
AVAILABLE FOR SALE
U.S. Treasury securities ............................. $42,663,530 $550,230 -- $43,213,760
U.S. government agencies ............................. 108,964,028 424,080 (275,303) 109,112,805
Mortgage-backed securities ........................... 743,928 23,695 -- 767,623
Mutual funds and marketable equity securities ........ 883,782 416,155 (10,050) 1,289,887
------------ ------------ ------------ ------------
Total ..................................................... $153,255,268 $1,414,160 ($285,353) $154,384,075
============ ============ ============ ============
December 31, 1997 Amortized Unrealized Unrealized Market
- ----------------- Cost Gains Losses Value
------------ ------------ ------------ ------------
Held to Maturity
U.S. Treasury securities . ........................... $6,538,398 $33,766 ($4,984) $6,567,180
U.S. government agencies ............................. 9,400,620 26,157 (6,461) 9,420,316
Mortgage-backed securities ........................... 14,253,008 99,506 (18,524) 14,333,990
State and political subdivisions ..................... 6,516,841 185,762 -- 6,702,603
------------ ------------ ------------ ------------
Total ..................................................... $36,708,867 $345,191 ($29,969) $37,024,089
============ ============ ============ ============
Available For Sale
U.S. Treasury securities ... ......................... $46,659,093 $358,543 ($14,849) $47,002,787
U.S. government agencies ............................. 73,113,843 85,814 (94,656) 73,105,001
Mortgage-backed securities ........................... 848,888 24,738 -- 873,626
Mutual funds and marketable equity securities ........ 1,094,774 647,643 (45,120) 1,697,297
------------ ------------ ------------ ------------
Total ..................................................... $121,716,598 $1,116,738 ($154,625) $122,678,711
============ ============ ============ ============
Amortized cost and market values of securities at December 31, 1998, by
maturity, are shown below.
Held to Maturity Available for Sale
------------------------------- --------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------- -------------
Due within one year .................................... $6,178,147 $6,207,073 $85,839,018 $86,206,700
Due after one year but within 5 years .................. 7,692,474 7,830,518 58,316,771 58,721,007
Due after 5 years but within 10 years .................. 2,347,629 2,435,088 7,504,789 7,431,877
Due after 10 years ..................................... 17,087,863 17,137,231 710,908 734,604
Mutual funds and marketable equity
securities ............................................. -- -- 883,782 1,289,887
------------ ------------ ------------ ------------
Total .................................................. $33,306,113 $33,609,910 $153,255,268 $154,384,075
============ ============ ============ ============
Investment securities with an amortized cost of $42,551,311 at December 31,
1998 were pledged to secure public deposits and for other purposes required or
permitted by law.
Included in other assets is an investment in the common stock of First
Gaston Bank of North Carolina with a carrying amount of approximately $1,151,000
at December 31, 1998. Although the investment only represents an approximate 17%
interest in the bank, the Company accounts for the investment under the equity
method as the Company has committed to serve as a source of strength, as defined
by the Federal Reserve, for First Gaston Bank; has representation on the bank's
board of directors; and provides certain operational functions to First Gaston
Bank. Under the equity method, the Company adjusts the carrying value of the
investment for its portion of the First Gaston Bank's earnings or losses. During
1998, the Company recognized income, net of applicable income taxes, of $59,156.
Also included in other assets is an investment in the stock of the Federal Home
Loan Bank of Atlanta ("FHLB") of $915,000 at December 31, 1998 and 1997, and
which is pledged as collateral for advances from the FHLB. No ready market
exists for the FHLB stock, which is carried at cost.
4. LOANS
Major classifications of loans as of December 31, 1998 and 1997 are as
follows:
1998 1997
-------------- ----------------
Commercial ........................................................... $68,033,080 $49,063,298
Real estate:
Construction ......................................................... 54,441,169 34,245,805
Mortgage ............................................................. 299,396,025 269,373,722
Consumer ............................................................. 48,630,111 46,870,845
Other ................................................................ 5,609,448 4,471,510
------------- -------------
Total loans ......................................... 476,109,833 404,025,180
Allowance for loan losses ............................................ (6,723,516) (5,837,328)
------------- -------------
Total loans,net ..................................... $469,386,317 $398,187,852
============= =============
Included in real estate mortgage loans at December 31, 1998 and 1997 are
approximately $144,138,000 and $136,928,000, respectively, in 1 - 4 family
residential loans.
Certain officers and directors, and companies in which they have 10% or
more beneficial ownership, were indebted to the Banks in the aggregate amount of
$4,817,455 and $4,641,112 at December 31, 1998 and 1997, respectively. During
1998, additions to such loans were $3,539,938 and repayments totaled $3,363,595.
These loans represented 7.8% and 8.3% of the Company's total shareholder equity
at December 31, 1998 and 1997, respectively. In the opinion of management, these
loans do not involve more than the normal risk of collectibility, nor do they
present other unfavorable features.
Loans past due 90 days or more and still accruing interest totaled $111,272
as of December 31, 1998 and $151,620 as of December 31, 1997, while nonaccrual
loans as of December 31, 1998 and 1997 were $1,432,086 and $720,411
respectively. Nonaccrual loans at December 31, 1998 consist of 61 loans, the
largest of which had a balance of $496,000. Management considers collateral on
nonaccrual loans to be adequate to avoid any significant losses on the loans,
exclusive of allowance for loan losses. Additional interest of $50,652 and
$18,519 would have been earned in 1998 and 1997, respectively, if the nonaccrual
loans as of each year-end had been earning throughout each year. Income of
$77,817 and $41,535 was recognized on these loans during 1998 and 1997,
respectively.
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 $480,244,000 and $401,885,000
at December 31, 1998 and 1997, respectively.
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 were as follows:
1998 1997 1996
------------- ------------- -------------
Balance at beginning of year ............................ $5,837,328 $5,313,424 $4,406,705
Charge-offs ............................................. (680,309) (638,266) (419,688)
Recoveries .............................................. 201,497 164,837 147,482
----------- ----------- -----------
Net charge-offs ......................................... (478,812) (473,429) (272,206)
----------- ----------- -----------
Provision for loan losses ............................... 1,365,000 997,333 1,178,925
----------- ----------- -----------
Balance at end of year .................................. $6,723,516 $5,837,328 $5,313,424
=========== =========== ===========
At December 31, 1998 and 1997, the recorded investment in loans that are
considered to be impaired under SFAS 114 was approximately $1,432,000 and
$872,000, respectively (of which $1,432,000 and $720,000 were on a nonaccrual
basis at December 31, 1998 and 1997, respectively). Included in this amount is
$854,355 and $304,910 in 1998 and 1997, respectively, of impaired loans for
which the related allowance for loan losses is $345,720 and 81,633 in 1998 and
1997, respectively. The amount of interest income recognized on impaired loans
was not considered material during the year.
6. PREMISES AND EQUIPMENT
Major classifications of these assets as of December 31, 1998 and 1997 are
as follows:
1998 1997
------------- -------------
Land ................................................................. $2,896,148 $2,905,313
Buildings and improvements ........................................... 9,409,296 9,020,586
Furniture, fixtures and equipment .................................... 10,315,467 8,422,759
----------- -----------
Total cost ........................................................... $22,620,911 $20,348,658
Accumulated depreciation ............................................. 8,958,173 7,247,588
----------- -----------
Carrying value ....................................................... $13,662,738 $13,101,070
=========== ===========
7. LIABILITIES
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 time deposits is estimated using the rates currently offered for
deposits of similar remaining maturities. The estimated fair market value of
deposits is approximately $652,617,000 and $542,306,000 at December 31, 1998 and
1997, respectively.
Time deposits maturing in each of the five years subsequent to December 31,
1998 are as follows: 1999, $265,622,000; 2000, $43,533,000; 2001, $14,175,000;
2002, $4,633,000; 2003, $3,878,000; and subsequent years, $130,000.
Borrowed funds primarily consist of repurchase agreements of $10,400,000.
Repurchase agreements generally mature daily. On December 31, 1998, the rate for
repurchase agreements for Lincoln and Cabarrus Banks was 3.96% for balances less
than or equal to $250,000 and 4.40% for balances greater than $250,000 and
approximately 4.33% for Community Bank.
Treasury, tax and loan funds on deposit are payable on demand to the U. S.
Treasury and are collateralized by U. S. Treasury securities. At December 31,
1998 and 1997, these funds totaled $484,000 and $639,000, respectively, and had
weighted average interest rates of approximately 4.41% and 5.10% at December 31,
1998 and 1997, respectively.
At December 31, 1998, the Banks had available federal funded lines of
credit of $33.4 million at various financial institutions. Such lines are
subject to annual renewal and bear varying interest rates.
8. BRANCH ACQUISITIONS
During 1998, the Company acquired one branch office with approximately $9.0
million in deposits and in 1997 the Company acquired three branch offices with
$30 million in deposits. These acquisitions were accounted for as purchases and
the excess of the purchase price over the fair value of the assets and the core
deposits produced approximately $670,000 and $2,197,725 in goodwill and $195,000
and $645,000 in deposit based premiums in 1998 and 1997, respectively. Such
amounts are included in other assets and deposit based premiums are amortized on
an accelerated basis over 10 years and goodwill is amortized on a straight-line
basis over 25 years. Total goodwill was $4,839,733 and $4,437,709 at the end of
1998 and 1997, respectively. Total deposit based premiums were $1,313,622 and
$1,173,093 at the end of 1998 and 1997, respectively.
9. INCOME TAXES
Income tax expense consists of:
Current Deferred Total
------------- -------------- --------------
Year ended December 31, 1998
Federal .................................. $4,386,184 ($584,781) $3,801,403
State .................................... 413,622 (114,582) 299,040
----------- ----------- -----------
Total ............................... $4,799,806 ($699,363) $4,100,443
=========== =========== ===========
Year ended December 31, 1997
Federal .................................. $3,796,329 ($565,699) $3,230,630
State .................................... 465,093 (205,582) 259,511
----------- ----------- -----------
Total .............................. $4,261,422 ($771,281) $3,490,141
=========== =========== ===========
Year ended December 31, 1996
Federal .................................. $3,091,356 ($478,691) $2,612,665
State .................................... 434,150 (78,288) 355,862
----------- ----------- -----------
Total .............................. $3,525,506 ($556,979) $2,968,527
=========== =========== ===========
A reconciliation of total income tax expense for the years ended December
31, to the amount of tax expense computed by multiplying income before income
taxes by the statutory federal income tax rate of 34 percent for 1996 and 1997
and 35 percent for 1998 is as follows:
1998 1997 1996
------------- ------------- --------------
Tax provision at statutory rate ........................................... $3,783,280 $3,471,715 $2,784,363
Increase (reduction) in income taxes resulting from:
Tax-exempt interest income ........................................... (126,217) (160,883) (203,354)
Merger expenses ...................................................... 432,007 -- --
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets allocated
to income tax expense ............................................. -- (71,355) 35,030
State income taxes, net of federal tax benefit ....................... 194,376 171,278 234,869
Other .................................................................... (183,003) 79,386 117,619
----------- ----------- -----------
Total Income taxes ............................................ $4,100,443 $3,490,141 $2,968,527
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 1998 and
1997, respectively, are presented below:
1998 1997
------------ -------------
Deferred tax assets:
Loan loss reserves ............................................................ $2,607,716 $1,949,381
Accrued expenses, deductible when paid ........................................ 153,601 --
Deferred compensation ......................................................... 684,202 784,166
Intangible assets ............................................................. 158,795 127,030
Other ......................................................................... 105,184 86,291
----------- -----------
Total gross deferred tax assets ............................................. 3,709,498 2,946,868
Less valuation allowance .................................................... -- --
----------- -----------
Net deferred tax assets ..................................................... 3,709,498 2,946,868
----------- -----------
Deferred tax (liabilities):
Bad debt reserve recapture, tax accounting adjustment ......................... (290,189) --
Financial reporting stock basis in excess of tax basis ........................ (177,480) (150,712)
Depreciable basis of fixed assets ............................................. (232,622) (399,690)
Unrealized gains on securities available for sale ............................. (430,876) (379,955)
Other ......................................................................... (78,765) (165,387)
----------- -----------
Total gross deferred tax liability .......................................... (1,209,932) (1,095,744)
----------- -----------
Net deferred tax asset included in other assets ............................. $2,499,566 $1,851,124
=========== ===========
A portion of the change in the net deferred tax asset relates to unrealized
gains and losses on securities available for sale. The related current period
deferred tax expense of $50,921 has been recorded directly to shareholders'
equity. The balance of the change in the net deferred tax asset results from the
current period deferred tax benefit of $699,363. It is management's contention
that realization of the net deferred tax asset is more likely than not, based
upon the Company's history of taxable income and estimates of future taxable
income.
10. SHAREHOLDERS' EQUITY
Earnings per share - Basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted net income per share reflects the potential dilution that could
occur if the Company's dilutive stock options were exercised. The numerator of
the basic net income per share computation is the same as the numerator of the
diluted net income per share computation for all periods presented. A
reconciliation of the denominator of the basic net income EPS computation is as
follows:
1998 1997 1996
----------- ------------ -----------
Basic EPS denominator: weighted average number of common
shares outstanding ........................................................... 5,371,686 5,102,854 5,064,347
Dilutive effect arising from assumed exercise of stock
options ...................................................................... 137,212 62,436 13,603
========= ========= =========
Diluted EPS denominator ...................................................... 5,508,898 5,165,290 5,077,950
========= ========= =========
Stock Based Compensation - In 1990, the Board of Directors of the Company
adopted the Carolina First BancShares, Inc. 1990 Stock Option and Stock
Appreciation Rights Plan (the "1990 Plan"), and certain amendments to the 1990
Plan were approved in 1991 (as amended, "the Plan"). In January 1991, stock
appreciation rights were granted in accordance with the 1990 Plan. These rights
were granted at market value on the date of the grant and 20% of each grant
becomes exercisable on each anniversary of the date of the grant and expires
five years after they become exercisable. Stock appreciation rights totaling
50,139 are currently outstanding, with a measurement price of $4.71. The expense
related to these rights is included in compensation expense and for the years
ended December 31, 1998, 1997 and 1996 was $92,181, $826,606, and $504,000,
respectively.
Since inception of the Plan, options to purchase shares of Company common
stock have been granted to key employees of the Company and 52,110 such options
are still available. The Plan provides that options are granted at market value
on the date of the grant and 20% of each grant becomes exercisable on each
anniversary of the date of the grant. All currently outstanding options have
been granted for a ten-year term, unless the recipient leaves the Company's
employment earlier. A summary of all stock option activity for 1998 and the
status at December 31, 1998 follows. All share and per share amounts give
retroactive effect to stock dividends and splits declared by the Company.
EMPLOYEE STOCK OPTION PLAN:
Outstanding Options Exercisable Options
------------------------------------------------------------------
Average Average
Shares Option Price Shares Option Price
--------- ------------ -------- ------------
Balance, December 31, 1995 ........................... 245,487 $5.81 152,709 $5.09
Additional Options Granted............................ 44,124 12.54 -- --
Became Exercisable.................................... -- -- 31,553 7.27
Less:
Exercised ............................................ (22,144) 4.16 (22,144) 4.16
Forfeited ............................................ (4,608) 9.07 -- --
-------- ------ -------- ------
Balance, December 31, 1996 ........................... 262,859 $7.03 162,118 $5.69
Additional Options Granted ........................... 9,200 18.42 -- --
Became Exercisable ................................... -- -- 36,384 6.67
Less:
Exercised ............................................ (18,310) 4.27 (18,310) 4.27
Forfeited ............................................ (1,631) 8.90 (873) 12.61
-------- ------ -------- ------
Balance, December 31, 1997 ........................... 252,118 $13.16 179,319 $6.18
Additional Option Granted ............................ 18,450 30.05 -- --
Became Exercisable ................................... -- -- 16,702 9.47
Less:
Exercised ............................................ (70,230) 5.51 (70,230) 5.51
Forfeited ............................................ (5,943) 9.93 -- --
-------- ------ -------- ------
Balance, December 31, 1998 ........................... 194,395 $10.45 125,791 $6.80
======== ====== ======== ======
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
Options Outstanding
--------------------------------------------------------------------------
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices At 12/31/98 Contractual Life Exercise Price
- --------------------- ------------------ ------------------------ -----------------------
Less than $5 80,522 2.63 $4.70
6 to 10 45,221 2.55 9.13
11 to 15 40,002 7.28 12.50
16 to 20 8,000 8.19 17.00
21 to 29 9,700 9.68 27.53
30 to 32 10,950 9.63 30.76
- --------------------- ------------------ ------------------------ -----------------------
$1 to 32 194,395 4.54 $10.45
===================== ================== ======================== =======================
The Company applies APB Opinion 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below.
The weighted-average fair value per share of options granted in 1998 and
1997 amounted to $5.94 and $7.55, respectively. Fair values were estimated on
the date of grant using the Black-Scholes Option-Pricing Model with the
following weighted average assumptions:
1998 1997
----------------- ----------------
Risk-free interest rate 4.56% 6.31%
Dividend yield 1.00 1.00
Volatility 20.00 29.20
Expected life 7 years 7 years
Net Income
As reported $6,708,929 $6,720,785
Pro forma 6,291,036 6,528,843
Net Income per share
As reported - diluted $1.22 $1.30
Pro forma - diluted $1.14 $1.26
Pro forma net income reflects only options granted since December 31, 1994.
Therefore, the effects of applying SFAS No. 123 pro forma disclosures during the
initial phase-in period may not be representative of the effects on reported net
income in future years.
11. BENEFIT PLANS
The Company sponsors a contributory profit-sharing plan, which provides
for participation by substantially all employees. Participants may make
voluntary contributions resulting in salary deferrals in accordance with Section
401(k) of the Internal Revenue Code. The plan provides for employee
contributions up to 15% of the participant's annual salary and an employer
contribution of 50% matching of the employee contribution up to 6% of the
participant's salary. Contributions to the plan for the years ended December 31,
1998, 1997 and 1996 were $793,500, $703,000 and $607,000, respectively.
A deferred compensation plan allows the directors of the Company and the
Banks to defer the compensation they earn for attendance at meetings of the
Board or various committees. Each director elects annually to either receive
that year's compensation currently or to defer receipt until his death,
disability or retirement as a director. The amount deferred is credited to the
director's account and invested in various options available through the Lincoln
Bank Trust Department. The obligation of the Company under the plan is fully
funded.
The Company does not provide benefits contemplated by SFAS No. 106,
"Employers' Accounting for Post-retirement Benefits Other Than Pensions".
12. REGULATION AND REGULATORY RESTRICTIONS
As a bank holding company, Carolina First BancShares, Inc. is regulated by
the Federal Reserve. The Company also must file periodic reports with, and
comply with securities regulations of, the Securities and Exchange Commission.
The Banks are subject to the regulations of the FDIC, the North Carolina State
Banking Commission and the Federal Reserve.
The primary source of funds for the payment of dividends by the Company is
excess cash or dividends received from the Banks. The Banks, as North Carolina
banking corporations, may pay dividends only out of retained earnings as
determined pursuant to the North Carolina General Statutes. As of December 31,
1998, the Banks had combined retained earnings of approximately $35,461,000, all
of which is available to be paid as dividends without prior regulatory approval,
provided the Banks maintain adequate capital.
The Company is required by federal regulations to maintain various ratios
of capital to assets. Failure to meet the minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Management believes that, as of December 31, 1998, the Company meets
all capital adequacy requirements to which it is subject.
As of December 31, 1998, the Company was well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a bank holding company must maintain at least the minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There have been no conditions or events since that notification that
management believes have changed the institution's category.
The table below also presents the actual capital amounts and ratios for the
Company, Lincoln Bank, Cabarrus Bank, and Community Bank as computed for
regulatory purposes.
Minimum Minimum
For Capital To be Well
Actual Adequacy Purposes: Capitalized:
-------------------- ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------- ----------- --------- ------------ ---------
As of December 31, 1998:
Total Capital to Risk Weighted
Assets
CONSOLIDATED ................................ $61,098,000 12.8% >$38,145,000 >8.0%
- -
Lincoln Bank ................................ 37,175,000 11.8% > 25,195,000 >8.0% >$31,493,000 >10.0%
- - - -
Cabarrus Bank ............................... 12,614,000 10.7% > 9,429,000 >8.0% > 11,786,000 >10.0%
- - - -
Community Bank .............................. 7,326,000 13.0% > 4,493,000 >8.0% > 5,616,000 >10.0%
- - - -
Tier I Capital to Risk
Weighted Assets
Consolidated ................................ $55,128,000 11.6% >$19,072,000 >4.0%
- -
Lincoln Bank ................................ 33,235,000 10.6% > 12,597,000 >4.0% >$18,896,000 > 6.0%
- - - -
Cabarrus Bank ............................... 11,138,000 9.5% > 4,714,000 >4.0% > 7,072,000 > 6.0%
- - - -
Community Bank .............................. 6,623,000 11.8% > 2,247,000 >4.0% > 3,370,000 > 6.0%
- - - -
Tier I Capital to Average Assets
CONSOLIDATED ................................ $55,128,000 8.3% >$26,553,000 >4.0%
- -
Lincoln Bank ................................ 33,235,000 7.6% > 17,606,000 >4.0% >$22,007,000 > 5.0%
- - - -
Cabarrus Bank ............................... 11,138,000 7.0% > 6,345,000 >4.0% > 7,932,000 > 5.0%
- - - -
Community Bank .............................. 6,623,000 6.5% > 4,058,000 >4.0% > 5,072,000 > 5.0%
- - - -
As of December 31, 1997:
Total Capital to Risk Weighted
Assets
CONSOLIDATED ................................ $54,792,000 13.8% >$31,688,000 >8.0%
- -
Lincoln Bank ................................ 30,338,000 11.7% > 20,722,000 >8.0% >$25,902,000 >10.0%
- - - -
Cabarrus Bank ............................... 10,432,000 11.4% > 7,332,000 >8.0% > 9,166,000 >10.0%
- - - -
Community Bank .............................. 7,630,000 14.8% > 4,115,000 >8.0% > 5,144,000 >10.0%
- - - -
Tier I Capital (to Risk
Weighted Assets)
CONSOLIDATED ................................ $49,830,000 12.6% >$15,844,000 >4.0%
- -
Lincoln Bank ................................ 27,095,000 10.5% > 10,361,000 >4.0% >$15,541,000 > 6.0%
- - - -
Cabarrus Bank ............................... 9,283,000 10.1% > 3,666,000 >4.0% > 5,499,000 > 6.0%
- - - -
Community Bank .............................. 6,985,000 13.6% > 2,058,000 >4.0% > 3,086,000 > 6.0%
- - - -
Tier I Capital (to Average Assets)
CONSOLIDATED ................................ $49,830,000 8.9% >$22,469,000 >4.0%
- -
Lincoln Bank ................................ 27,095,000 7.4% > 14,705,000 >4.0% >$18,381,000 > 5.0%
- - - -
Cabarrus Bank ............................... 9,283,000 6.7% > 5,560,000 >4.0% > 6,950,000 > 5.0%
- - - -
Community Bank .............................. 6,985,000 7.8% > 3,589,000 >4.0% > 4,486,000 > 5.0%
- - - -
13. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are various commitments and
contingent liabilities outstanding which are not reflected in the accompanying
consolidated financial statements. The Company's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the
contract amount of these instruments. Management does not expect any material
loss as a result of these transactions. The following is a summary of
commitments and contingent liabilities:
December 31,
------------------------------------------
1998 1997
------------ -----------
Commitments for additional loans ....................................... $127,931,000 $90,076,000
Standby letters of credit .............................................. 1,445,000 1,010,000
The Banks make contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. The same credit standards used in the lending
process are applied when issuing these commitments. Additional risks arise when
these commitments are drawn upon, such as the demands on the Banks' liquidity if
a significant portion were drawn down at once. This is considered unlikely as
many commitments expire without being used.
The fair value of commitments to extend credit is considered to approximate
carrying value, since the large majority of these would result in loans that
have variable rates and/or relatively short terms to maturity. For other
commitments, generally of a short-term nature, the carrying value is considered
to be a reasonable estimate of fair value.
Minimum operating lease payments due in each of the five years subsequent
to December 31, 1998 are as follows: 1999, $718,000; 2000, $717,000; 2001,
$698,000; 2002, $654,000; 2003, $427,000; and subsequent years, $2,209,000.
Rental expense for all operating leases for the three years ended December 31,
was $665,000, 1998; $426,000, 1997; $321,000, 1996.
14. CONDENSED BALANCE SHEET
PARENT COMPANY ONLY
December 31,
--------------------------------------
CONDENSED BALANCE SHEET 1998 1997
--------------------------------------
Assets:
Cash on deposit with subsidiary banks ................................... $639,052 $5,192,035
Investment in subsidiary banks .......................................... 57,597,401 49,387,357
Other investments ....................................................... 1,289,887 1,473,829
Other assets ............................................................ 5,149,521 2,767,748
----------- -----------
Total ................................................................... $64,675,861 $58,820,969
=========== ===========
Liabilities .................................................................. $2,698,130 $2,610,169
Shareholders'equity .......................................................... 61,977,731 56,210,800
----------- -----------
Total ................................................................... $64,675,861 $58,820,969
=========== ===========
Years ended December 31,
----------------------------------------------------
1998 1997 1996
----------- ----------- -------------
CONDENSED RESULTS OF OPERATIONS
Equity in earnings of subsidiary Banks:
Dividends ......................................................... $--- $3,807,871 $---
Undistributed ..................................................... 8,005,656 3,877,921 6,143,494
Other income ( expense), net ........................................... (1,296,727) (965,007) (922,720)
----------- ----------- -----------
Net income ............................................................. $6,708,929 $6,720,785 $5,220,774
=========== =========== ===========
CONDENSED CASH FLOW
Cash flows from operating activities:
Net income ........................................................ $6,708,929 $6,720,785 $5,220,774
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in undistributed earnings of subsidiary banks .............. (8,005,656) (3,877,921) (6,143,494)
Settlement of merger-related claims ............................... 215,138 -- --
Increase in other assets .......................................... (268,185) (3,952,290) (12,961)
Increase in liabilities ........................................... 87,962 1,277,295 752,681
----------- ----------- -----------
Net cash provided by (used in) operating activities .................... (1,261,812) 167,869 (183,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of investments ........................................... (349,500) (150,000) (306,000)
Proceeds from sales of investments ................................ 349,657 539,085 --
Originations of loans, net ........................................ (2,018,419) (347,588) --
----------- ----------- -----------
Net cash used in investing activities .................................. (2,018,262) 41,497 (306,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................ 506,756 5,853,403 253,131
Dividends and fractional shares paid .............................. (1,657,723) (1,331,194) (1,017,292)
Repurchase of stock ............................................... (121,942) (41,704) (111,076)
----------- ----------- -----------
Net cash provided by (used in) financing activities .................... (1,272,909) 4,480,505 (875,237)
----------- ----------- -----------
Net increase (decrease) in cash ........................................ (4,552,983) 4,689,871 (1,364,237)
Cash at beginning of year .............................................. 5,192,035 502,164 1,866,401
----------- ----------- -----------
Cash at end of year .................................................... $639,052 $5,192,035 $502,164
=========== =========== ===========
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
See the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on April 20, 1999, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on April 20, 1999, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on April 20, 1999, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on April 20, 1999, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements
See the following financial statements included herein at Item 8.
o Independent Auditors' Report
o Consolidated Balance Sheets at December 31, 1998 and 1997
o Consolidated Statements of Income for each of the years in
the three-year period ended December 31, 1998
o Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income for each of the years in the
three-year period ended December 31, 1998
o Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1998
o Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company during the
fourth quarter of the fiscal year ended December 31, 1998.
o On October 21, 1998, the Registrant filed a Form 8-K
describing the voluntary suspension of the Chairman, CEO and
Director, D. Mark Boyd, III, pending the outcome of certain
alleged violations of the North Carolina securities laws in
connection with certain purchases of Community Bank & Trust
Co. common stock.
o On October 21, 1998, the Registrant filed a Form 8-K
containing the earnings press release for the nine months
ended September 30, 1998, and the delay of the pending
acquisition of Community Bank & Trust Co. due to certain
charges brought against the Company and D. Mark Boyd, III.
o On December 7, 1998, the Registrant filed a Form 8-K
announcing the resignation of D. Mark Boyd, III as the
Chairman of the Board and Chief Executive Officer and as a
director of the Registrant and its subsidiaries and the
extension of the Merger Agreement between the Registrant and
Community Bank & Trust Co through December 31, 1998.
(c) Exhibits
The following Exhibits are attached hereto or incorporated by
reference herein (numbered to correspond to Item 601 of Regulation
S-K).
Exhibit
No. Description of Exhibit
2.0 Agreement and Plan of Merger dated as of June 4, 1998 by
and between the Registrant and Community Bank & Trust Co.
(incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K (File No.
0-17939), dated June 19, 1998).
3.0 Amended and Restated Articles of Incorporation of the
Registrant, (incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on Form S-4 (File
No. 333-59729), dated July 23, 1998).
3.1 Amended and Restated Bylaws of the Registrant (incorporat-
ed by reference to Exhibit 3.2 to the Registrant's Current
Report on Form 8-K (File No. 0-17939), dated January 6,
1999).
4.0 Specimen of Common Stock Certificate of the Registrant
(incorporated by reference to the Registrant's
Registration Statement (File No. 33-26861).
10.0 Registrant's Deferred Compensation Plan for Directors (in-
corporated by reference to Registrant's Registration
Statement (File No. 33-26861).
10.1 Registrant's Profit Sharing Plan (incorporated by refer-
ence to Registrant's Registration Statement (File No. 33-
26861).
10.2 Registrant's 1990 Stock Option and Stock Appreciation
Rights Plan, as amended (incorporated by reference to the
Registrant's Registration Statement (File No. 33-43037)
dated October 1, 1991).
10.3 Registrant's 1999 Long-Term Incentive Plan.
10.4 Employment Agreement dated December 31, 1996, and Deferred
Compensation Agreement dated as of December 31, 1996 by
and between Carolina First BancShares, Inc. and James E.
Burt, III (incorporated by reference to Registrant's
Annual Report on Form 10-K (File No. 0-17939) for the
fiscal year ended December 31, 1997).
10.5 Employment Agreement dated November 10, 1998 by and bet-
ween Lincoln Bank of North Carolina and Stephen S.
Robinson.
10.6 Employment Agreement dated October 21, 1996 by and bet-
ween Cabarrus Bank of North Carolina and Ronald D. Smith.
10.7 Deferred Compensation Agreement dated as of February 18,
1993 by and between Cabarrus Bank of North Carolina and
Ronald D. Smith.
10.8 Employment Agreement dated February 1, 1999 by and between
the Registrant and Janet H. Hollar.
10.9 Lease Agreement dated September 1, 1997 by and between
Lincoln Bank of North Carolina and D. Mark Boyd, III and
Diane H. Boyd.
10.10 Addendum to Lease Agreement dated October 30, 1998 by
and between Lincoln Bank of North Carolina and D. Mark
Boyd, III and Diane H. Boyd.
10.11 Employment Agreement dated June 4, 1998 by and between
Community Bank & Trust Co. and Ronnie D. Blanton
(incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-4 (File No.
333-59729) dated July 23, 1998).
13 Annual Report to Security Holders (incorporated by
reference to Registrant's Proxy Statement dated March 30,
1999 (File No. 0-17939).
11 Statement regarding computation of earnings per share.
21 List of subsidiaries of the Registrant.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Lincolnton, State of North Carolina, on the 26th day of March, 1999.
CAROLINA FIRST BANCSHARES, INC.
By: \s\ L.D. Warlick, Jr.
--------------------------
L.D. Warlick, Jr.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated:
Signatures Title Date
- ---------- ----- -----
Principal Executive Officers:
\s\ L.D. Warlick, Jr. Chairman of the Board March 26, 1999
- ------------------------------------ of Directors
L.D. Warlick, Jr.
\s\ James E. Burt, III President, CEO March 26, 1999
- ------------------------------------ and Director
James E. Burt, III
Principal Financial Officer and
Principal Accounting Officer:
\s\ Jan H. Hollar Sr. Vice President, CFO March 26, 1999
- ------------------------------------ Treasurer & Secretary
Jan H. Hollar
Directors:
\s\ Harold D. Alexander Director March 26, 1999
- ------------------------------------
Harold D. Alexander
\s\ John R. Boger, Jr. Director March 26, 1999
- ------------------------------------
John R. Boger, Jr.
\s\ Charles A. James Director March 26, 1999
- ------------------------------------
Charles A. James
\s\ Samuel C. King, Jr. Director March 26, 1999
- ------------------------------------
Samuel C. King, Jr.
\s\ Jack L. Lutz Director March 26, 1999
- ------------------------------------
Jack L. Lutz
\s\ Harry D. Ritchie Director March 26, 1999
- ------------------------------------
Harry D. Ritchie
\s\ Thomas M. Robbins Director March 26, 1999
- ------------------------------------
Thomas M. Robbins
\s\ Estus B. White Director March 26, 1999
- ------------------------------------
Estus B. White
Exhibit
No. Description of Exhibit
2.0 Agreement and Plan of Merger dated as of June 4, 1998 by
and between the Registrant and Community Bank & Trust Co.
(incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K (File No.
0-17939), dated June 19, 1998).
3.0 Amended and Restated Articles of Incorporation of the
Registrant, (incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on Form S-4 (File
No. 333-59729), dated July 23, 1998).
3.1 Amended and Restated Bylaws of the Registrant (incorporat-
ed by reference to Exhibit 3.2 to the Registrant's Current
Report on Form 8-K (File No. 0-17939), dated January 6,
1999).
4.0 Specimen of Common Stock Certificate of the Registrant
(incorporated by reference to the Registrant's
Registration Statement (File No. 33-26861).
10.0 Registrant's Deferred Compensation Plan for Directors (in-
corporated by reference to Registrant's Registration
Statement (File No. 33-26861).
10.1 Registrant's Profit Sharing Plan (incorporated by refer-
ence to Registrant's Registration Statement (File No. 33-
26861).
10.2 Registrant's 1990 Stock Option and Stock Appreciation
Rights Plan, as amended (incorporated by reference to the
Registrant's Registration Statement (File No. 33-43037)
dated October 1, 1991).
10.3 Registrant's 1999 Long-Term Incentive Plan.
10.4 Employment Agreement dated December 31, 1996, and Deferred
Compensation Agreement dated as of December 31, 1996 by
and between Carolina First BancShares, Inc. and James E.
Burt, III (incorporated by reference to Registrant's
Annual Report on Form 10-K (File No. 0-17939) for the
fiscal year ended December 31, 1997).
10.5 Employment Agreement dated November 10, 1998 by and bet-
ween Lincoln Bank of North Carolina and Stephen S.
Robinson.
10.6 Employment Agreement dated October 21, 1996 by and bet-
ween Cabarrus Bank of North Carolina and Ronald D. Smith.
10.7 Deferred Compensation Agreement dated as of February 18,
1993 by and between Cabarrus Bank of North Carolina and
Ronald D. Smith.
10.8 Employment Agreement dated February 1, 1999 by and between
the Registrant and Janet H. Hollar.
10.9 Lease Agreement dated September 1, 1997 by and between
Lincoln Bank of North Carolina and D. Mark Boyd, III and
Diane H. Boyd.
10.10 Addendum to Lease Agreement dated October 30, 1998 by
and between Lincoln Bank of North Carolina and D. Mark
Boyd, III and Diane H. Boyd.
10.11 Employment Agreement dated June 4, 1998 by and between
Community Bank & Trust Co. and Ronnie D. Blanton
(incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-4 (File No.
333-59729) dated July 23, 1998).
11 Statement regarding computation of earnings per share.
13 Annual Report to Security Holders (incorporated by
reference to Registrant's Proxy Statement dated March 30,
1999 (File No. 0-17939).
21 List of subsidiaries of the Registrant.
23 Consent of KPMG LLP.
27 Financial Data Schedule.