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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File: 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
incorporated or organization) Identification No.)
402 East Main Street, Lincolnton, N.C. 28093
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (704) 732-2222
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $2.50 per share
Indicate by check mark whether the registrant 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. [ ]
The aggregate market value of the $2.50 par value common stock held by
non-affiliates of registrant as of January 31, 1998: $109,688,026 based on the
last sale price on January 31, 1998, 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 10, 1998, there were issued and outstanding 4,364,458
shares of the registrant's $2.50 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the 1997 Annual Report to Shareholders for the year
ended December 31, 1997 (Part II, Item 5, 6, 7 and 8; Part IV, Item 14)
2. Portions of the definitive Proxy Statement, dated March 21, 1998 for
the Annual Meeting of Shareholders to be held on April 21, 1998, filed with the
Securities and Exchange Commission pursuant to Regulation 14A (Part III, Items
10, 11, 12, and 13).
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FORM 10-K CROSS-REFERENCE INDEX
Pages of
Page 1997 Annual
of 10-K Report
------- ------
Part I
Item 1. Business I-1 --
Item 2. Properties I-12 --
Item 3. Legal Proceedings I-12 --
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters II-1 40
Item 6. Selected Financial Information II-1 1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-1 4-14
Item 8. Financial Statements and Supplementary Data II-1 17-33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-1 --
Pages of
Page Proxy
of 10-K Statement
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Part III
Item 10. Directors and Executive Officers of the Registrant III-1 2-4
Item 11. Executive Compensation III-1 6-8
Item 12. Security Ownership of Certain Beneficial Owners III-1 1-10
Item 13. Certain Relationships and Related Transactions III-2 10
Pages of
Page 1997 Annual
of 10-K Statement
------- ---------
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K IV-1 --
Documents files:
(a) (1) List of Financial Statements IV-1 --
Consolidated Balance Sheets at December 31, 1997 and
1996 -- 17
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Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 -- 20
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1997, 1996 and
1995 -- 21
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 -- 22
Notes to Consolidated Financial Statements -- 21-33
Independent Auditors' Report -- 16
(a) (2) List of Financial Statement Schedules IV-1 --
(a) (3) Listing of Exhibits IV-1 --
(b) Reports on Form 8-K IV-2 --
(c) Exhibits IV-2 --
(d) Financial Statement Schedules IV-2 --
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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 ("BHC Act"). Carolina First was incorporated on November
8, 1988, for purposes of becoming a bank holding company and acquiring Lincoln
Bank of North Carolina ("Lincoln Bank"), a North Carolina state chartered bank
that is not a member of the Federal Reserve System. The holding company
formation was completed on June 6, 1989. The Company owns all the outstanding
common stock of Cabarrus Bank of North Carolina ("Cabarrus Bank"), a North
Carolina state bank that is not a member of the Federal Reserve System. Cabarrus
Bank operates as a separate entity in the market it currently serves. Through
Lincoln Bank and Cabarrus Bank (the "Banks") and their 20 branch offices, the
Company provides a broad range of banking and financial services in the greater
Charlotte, North Carolina area, including Lincoln County, southeastern Catawba
County, Iredell County, Cabarrus County and north and west Mecklenburg County,
all in the western Piedmont area of North Carolina. The Banks are the Company's
principal subsidiaries and are North Carolina banking corporations engaged in
general commercial banking business. Lincoln Bank and Cabarrus Bank are both
members of the Federal Deposit Insurance Corporation ("FDIC"), and their
deposits are insured by the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"), respectively. Jointly, the Banks 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. This will be a three story office building occupied in part
by Lincoln Bank during late 1998. At December 31, 1997, the Company's
involvement in this corporation was considered insignificant. In November 1994,
the Company invested $1,375,000 to purchase approximately 17% of the total
common stock of a de novo commercial bank, First Gaston Bank of North Carolina,
Gastonia, North Carolina ("First Gaston"), which is just west of Charlotte and
south of Lincolnton. First Gaston, of which the Company's chairman was an
organizer, is located in a market contiguous to others served by Lincoln Bank.
First Gaston opened in July of 1995 and operates three branches in markets not
currently served by the Company. Certain operational functions are provided for
First Gaston by the Company. The Federal Reserve, in approving this investment,
under the BHC Act, has 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, Regulation and Effects of Governmental Policies." The Company
engages in no significant operations other than the ownership of its
subsidiaries.
The Company maintains its principal executive offices at 402 East Main
Street, P.O. Box 657, Lincolnton, North Carolina 28093, and its telephone number
is (704) 732-2222.
General Banking Business
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 its trust powers and at the end of that year had
11 active trust accounts, with assets under management of $7.8 million. At
December 31, 1997, Lincoln Bank had 46 active trust accounts, with assets under
management of $24.2 million.
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Investment Securities
The Company has an investment portfolio that consists primarily of U.S.
Treasury and government agency securities and state, county and municipal
securities. Effective January 1, 1994, the Company adopted 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. 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 foregoing causes 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 and gains or losses on the sale of securities are
recognized when realized using the specific identification method. Prior to
January 1, 1994, debt securities included in securities held to maturity were
carried at amortized cost adjusted for amortization of premiums and accretion of
discounts, whereas debt securities included in securities available for sale
were carried at the lower of cost or market value. Prior to such time, the
mutual fund investments and other marketable equity securities were carried at
the lower of cost or market value with any unrealized loss shown as a reduction
of shareholders' equity.
Lending Activities
The Banks offer a range of lending services, including commercial, real
estate and consumer loans. The Banks consider individual consumers and small to
medium businesses to be their primary market for business loans and deposits.
The Banks have no concentration of loans to particular borrowers and no loans to
foreign entities. At December 31, 1997, the Banks had no agricultural loan
balances in their loan portfolios.
The Board of Directors of the Company recognizes that the extension of
credit is an integral banking function. Accordingly, it is the Board's desire to
grant sound, profitable loans that will benefit the area economy, provide a
reasonable return on each shareholder's investment, and promote the growth of
the Banks. When allocating resources for loans, primary consideration is given
to customers within the Banks' trade areas and to those customers and
prospective customers whose overall relationships generate the greatest level of
profitability, measured against risk. Management strives to maintain quality in
the loan portfolio and to accept only those risks which meet the Banks'
standards.
The Company grants loans throughout its market area for all legitimate
and worthwhile purposes. The Banks generally will extend the following types of
credit. The terms described below are necessarily general and the Company and
its subsidiaries may in their sole judgment, extend credit on different terms
and to change any of the following.
Commercial Loans
The Banks will consider loans to business concerns on a short-term
basis supported by satisfactory balance sheet and earnings statements. Personal
guarantees and financial statements of guarantors generally also are obtained on
non-public company credits. Any loan request for a period longer than twelve
(12) months generally must have monthly or quarterly principal reductions.
Real Estate Loans
Commercial Real Estate Loans. Commercial real estate loans are secured
principally by a mortgage on a commercial property. Maturities generally do not
exceed ten years, but longer maturities up to 15 years may be considered.
Variable rate pricing is preferable on loans with longer maturities. Repayment
sources are specified and will generally be from the borrower's cash flow, or if
the source is to be from the liquidation of an asset, that asset generally also
is taken as collateral. The Banks' loan-to-value ratio on these types of loans
generally will not
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exceed the lower of 80% of appraised value or 80% of cost (or in the case of
unimproved land, the lower of 75% of appraised value or 75% of cost).
Real Estate Construction Loans. Real estate construction loans are
interim loans made to finance the initial construction period. Construction
loans generally have a maturity of one year or less, have a permanent take-out
commitment, and collect interest monthly on the outstanding balance. Progress
inspection reports are required to be documented prior to disbursing advances.
The maximum loan-to-value ratio will be the lower of 80% of appraised value or
80% of cost.
Residential Real Estate Loans. Residential real estate loans are
secured by first and second mortgages on one-to-four family residences. Loans
held in the portfolio are usually for a term of 15 years or less, with a maximum
loan-to-market-value ratio of 80%. However, loans conforming to certain Federal
National Mortgage Association ("FNMA") guidelines are also made and subsequently
sold in the secondary market on a servicing released basis.
Home Equity Lines. Equity lines are secured by first or second
mortgages on a borrower's primary residence and are open-end revolving lines of
credit scheduled for interest payments only for ten years and then converted to
a five-year term loan. Because of these terms, special consideration is given to
the borrower's capacity to repay the loan. Debt to income ratios are calculated
using a payment amount sufficient to repay the debt in ten years. Care is taken
to ensure that the loan-to-value ratio does not exceed 80%, including prior
liens.
Unsecured Consumer Loans
Installment and short-term personal loans may be granted to persons of
good character with reliable income and satisfactory credit records. A complete
application is required for each request. A current financial statement is
required when the total direct or indirect unsecured credit exceeds $5,000.
Total unsecured credit generally does not exceed 10% of the applicant's net
worth.
Normally, unsecured loans do not exceed 36 months. Any loan requests
for a maturity longer than one year generally are made subject to monthly or
quarterly principal and interest payments. Loans with maturities of one year or
less must show a source of repayment and interest generally is collected
monthly, quarterly or semi-annually.
Unsecured home improvement loans may not exceed 50% of the owner's
equity in the house and payment terms will not exceed five years. Unsecured
loans for the purpose of making a down payment generally are not granted.
Secured Consumer Loans
In granting loans secured by collateral, the evaluation of the borrower
remains the same as for an unsecured borrower; character, purpose of loan,
credit history, capacity to repay and collateral are all considered, and a
current financial statement generally is obtained prior to making the loan if
the total exposure of the borrower exceeds $25,000.
Auto Loans. For new cars, the loan amount generally does not exceed 80%
of the window price of a foreign-made auto and 75% of the window price for an
American-made auto. Loans generally are not to be made on automobiles which are
five years older than current models. Maximum terms: 1 year old - 42 months; 2-3
years old - 36 months; 4 years old - 30 months; 5 years old - 24 months.
Boat and Camper Loans. Loans to finance the purchase of boats and
campers are granted using the following guidelines: new boats and campers, 60
months - 25% down payment; new boats and campers, 36 months - 20% down payment;
1 year old boats and campers, 36 months - 20% down payment; 2 year old boats and
campers, 30 months - 20% down payment. If the amount of the loan is $15,000 or
greater, the term of the loan may
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be increased to eight years. Any extension of credit in excess of seven years
requires at least a five year call provision.
Motor Homes. Motor homes usually call for special handling due to the
high cost of the unit. The maximum term is 60 months with a 25% down payment.
Financial statements are required to show ability to repay.
Mobile Homes. When possible a deed of trust is placed on the property
where the mobile home will be located. When real estate is not part of the
collateral, a landlord waiver is required. Second mortgage or second liens
generally are not taken as collateral. All units to be financed must be
underpinned, and a landlord waiver must be obtained prior to disbursing any
funds. Any mobile home over seven years old will be considered unacceptable as
collateral.
Savings Accounts/Time Deposits. A loan secured by the Banks' savings
instruments may be advanced to 100% of its face value. The interest rate
generally will be not less than 2% higher than the effective yield on the
instrument held as collateral on loans of $2,500 or over, and market rates on
loans under $2,500. The maturity of the loan should not exceed the maturity of
the collateral. Loans secured by other financial institution's savings accounts
or certificates are priced by market conditions. These financial institutions
must be federally insured.
Bonds. Loans secured by bonds must comply with the following
guidelines: US Government & Federal Agencies - 90% of Current Market Value;
Corporate Bonds ( Investment grade or better) - 80% of current market value;
Municipal Bonds (Investment grade or better) - 60% of current market value,
provided any purpose credit extended on Bonds that are margin securities are
subject to the limitations of Federal Reserve Regulation U.
Stocks. Loans secured by stock must comply with Federal Reserve
Regulation U, and in cases of nonpurpose credit, the loan to value ratios for
marketable stocks are subject to a 70% limit that must be maintained: NYSE and
AMEX traded securities - 70% of market value; Actively traded over-the-counter
(NASDAQ) securities - 70% of market value; Local Pink Sheet (actively traded and
have two or more market makers) - 70% of market value. Loans secured by stock of
closely held corporations must have the prior approval of the Finance Committee.
Cash Surrender Value of Life Insurance
Loans secured by the pledge of life insurance policies with cash
surrender values generally may not exceed 90% of the cash surrender value of the
policy.
Competition
Commercial banking is highly competitive. The Banks compete with other
financial institutions located in metropolitan Charlotte and elsewhere in 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
other securities.
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, and other local and nonlocal
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 Company, 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.
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Many of the major commercial banks in the Company's service area or
their affiliates 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 are better able to absorb risk.
Supervision, Regulation and Effects of Governmental Policies
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 its bank and nonbank subsidiaries by the bank
regulatory agencies is 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 had determined by regulation or order to be so closely related to
banking or managing or controlling banks to be a proper incident thereto.
Certain acquisitions by holding companies are subject to approval by the
Commissioner.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("EGRPRA") was signed into law on September 30, 1996. EGRPRA streamlined the
non-banking activities application process for well-capitalized and well-managed
bank holding companies. Under EGRPRA, qualified bank holding companies may
commence a regulatory approved non-banking activity without prior notice to the
Federal Reserve; written notice is required within 10 days after commencing the
activity. Under EGRPRA, the prior notice period is reduced to 12 days in the
event of any non-banking acquisition or share purchase or de novo non-banking
activity previously approved by order of the Federal Reserve, but not yet
implemented by regulations, assuming the size of the acquisition or proposed
activity does not exceed 10% of risk-weighted assets of the acquiring bank
holding company and the consideration does not exceed 15% of Tier 1 capital.
On February 20, 1997, the Federal Reserve adopted, effective April 21,
1997, amendments to its Regulation Y implementing certain provisions of The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"), which
was signed into law on September 30,1996. Among other things, these amendments
to Federal Reserve Regulation Y reduce the notice and application requirements
applicable to bank and nonbank acquisitions and de novo expansion by
well-capitalized and well-managed bank holding companies; expand the list of
nonbanking activities permitted under Regulation Y and reduce certain
limitations on previously permitted activities; and amend Federal Reserve
anti-tying restrictions that include provisions that allow banks greater
flexibility to package products with their affiliates.
The Company is a legal entity separate and distinct from the Banks and
its other subsidiaries. Various legal limitations restrict the Bank from lending
or otherwise supplying funds to the Company or its non-bank subsidiaries. The
Company and the Banks also are subject to Section 23A of the Federal Reserve
Act. Section 23A defines
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"covered transactions," which includes 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
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("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, aging 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 either to "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. In November 1994, the Company invested $1,375,000 to purchase
approximately 17% of the total common stock of a de novo commercial bank, First
Gaston Bank of North Carolina, Gastonia, North Carolina ("First Gaston"), which
is just west of Charlotte and south of Lincolnton. The Company's Chairman was an
organizer of First Gaston, which is located in a market contiguous to others
served by Lincoln Bank and operates in a market not currently served by the
Company. Certain operational functions are provided for First Gaston by the
Company. The Federal Reserve, in approving this investment, under the BHC Act,
has required the Company to enter into a commitment to serve as a source of
strength for First Gaston.
Bank and Bank Subsidiary Regulation Generally. The Banks are subject to
supervision, regulation, and examination by the FDIC and the North Carolina
Commissioner of Banking (the "Commissioner"), which examine and monitor all
areas of the operations of the Banks, including reserves, loans, mortgages,
issuance of securities, payment of dividends, establishment of branches, and
capital. 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 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 Bank currently 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.
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
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thereunder. Under the CRA, all banks and thrifts have a continuing and
affirmative obligation, consistent with 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
requirement 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 in 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.
Under new CRA regulations, effective January 1, 1996, the process-based
CRA assessment factors were replaced with a new evaluation system that rates
institutions based on their actual performance in meeting community credit
needs. The evaluation system used to judge an institution's CRA performance
consists of three tests: a lending test; an investment test; and a service test.
Each of these tests are applied by the institution's primary federal regulator
taking into account such factors as: (i) demographic data about the community;
(ii) the institution's capacity and constraints; (iii) the institution's product
offerings and business strategy; and (iv) data on the prior performance of the
institution and similarly-situated lenders. The new lending test - the most
important of the three tests for all institutions other than wholesale and
limited purpose (e.g., credit card) banks - evaluates an institution's lending
activities as measured by its home mortgage loans, small business and farm
loans, community development loans, and, at the option of the institutions, its
consumer loans.
Each of these lending categories are weighed to reflect its relative
importance to the institution's overall business and, in the case of community
development loans, the characteristics and needs of the institution's service
area and the opportunities available for this type of lending. Assessment
criteria for the lending test include: (i) geographic distribution of the
institution's lending; (ii) distribution of the institution's home mortgage and
consumer loans among different economic segments of the community; (iii) the
number and amount of small business and small farm loans made by the
institution; (iv) the number and amount of community development loans
outstanding; and (v) the institution's use of innovative or flexible lending
practices to meet the needs of low-to-moderate income individuals and
neighborhoods. At the election of an institution, or if particular circumstances
so warrant, the banking agencies will take into account in making their
assessments lending by the institution's affiliates as well as community
development loans made by any lending consortia and other lenders in which the
institution has invested. As part of the new regulation, all financial
institutions are required to report data on their small business and small farm
loans as well as their home mortgage loans.
The investment test focuses on the institution's qualified investments
within its service area that (i) benefit low-to-moderate income individuals and
small businesses or farms, (ii) address affordable housing needs, or (iii)
involve donations of branch offices to minority or women's depository
institutions. Assessment of an institution's performance under the investment
test is based upon the dollar amount of the institution's qualified investments,
its use of innovative or complex techniques to support community development
initiatives, and its responsiveness to credit and community development needs.
The service test evaluates an institution's systems for delivering
retail banking services, taking into account such factors as (i) the geographic
distribution of the institution's branch offices and ATMs, (ii) the
institution's record of opening and closing branch offices and ATMs, and (iii)
the availability of alternative product delivery systems such as home banking
and loan production offices in low-to-moderate income areas. The federal
regulators also will consider an institution's community development service as
part of the service test. A separate community development test is applied to
wholesale or limited purpose financial institutions.
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Institutions having total assets of less than $250 million will be
evaluated under more streamlined criteria. The Company and the Banks are
eligible for these streamlined criteria at this time. In addition, a financial
institution will have the option of having its CRA performance evaluated based
on a strategic plan of up to five years in length that it had developed in
cooperation with local community groups. In order to be rated under a strategic
plan, the institution will be required to obtain the prior approval of its
federal regulator.
The interagency CRA regulations provide that an institution evaluated
under a given test will receive one of five ratings for that test: outstanding,
high satisfactory, low satisfactory, needs to improve, or substantial
non-compliance. An institution will receive a certain number of points for its
rating on each test, and the points are combined to produce an overall composite
rating of either outstanding, satisfactory, needs to improve, or substantial
noncompliance. Under the agencies' rating guidelines, an institution that
receives an "outstanding" rating on the lending test will receive an overall
rating of at least "satisfactory", and no institution can receive an overall
rating of "satisfactory" unless it receives a rating of at least "low
satisfactory" on its lending test. In addition, evidence of discriminatory or
other illegal credit practices would adversely affect an institution's overall
rating. Under the new regulations, an institution's CRA rating would continue to
be taken into account by its primary federal regulator in considering various
types of applications. As a result of the Banks' most recent CRA examinations in
March 13, 1995 and January 16, 1996, Lincoln Bank and Cabarrus Bank have CRA
ratings of "2" and "1", respectively.
The Banks are also subject, among other things, to 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. Bases 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 all of the federal banking agencies in April 1994 issued an
Interagency Policy Statement on Discrimination in Lending in order to provide
guidance to financial institutions as to what the agencies consider 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 has also recently increased its
efforts to prosecute what it regards as violators of the ECOA and FHA.
Payments 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 that would be greater than such
bank's undivided profits after deducting statutory bad debt in excess of such
bank's allowance for loan losses.
In addition, the Company and Banks are subject to various general
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital. The appropriate federal
regulatory authority is authorized to determine under certain circumstances
relating to the financial condition of a national or state 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 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 depository institutions and their holdings should generally
pay dividends only out of current operating earnings.
Capital. The Federal Reserve and the FDIC have adopted final risk-based
capital guidelines for bank holding companies and state non-member banks. The
guideline for a minimum ratio of capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least half of the total capital must consist of common equity, retained
earnings and a limited amount of qualifying preferred stock, less goodwill
("Tier 1 capital"). The remainder may consist of subordinated debt, non
qualifying preferred stock and a limited amount of any loan loss allowance
("Tier 2 capital" and, together with Tier 1 capital, "Total Capital").
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In addition, the federal bank regulatory agencies 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 100 to 200 basis points (i.e., 1%-2%) 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.
Furthermore 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. The Federal
Reserve, the FDIC and the Commissioner have not advised the Company or either
Bank 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: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "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 is has a Total Capital ratio of 10% or greater, a Tier 1 capital
ratio of 6% or greater, and leverage ratio of 5% or greater and is not subject
to any order or written directive by a federal bank regulatory agency to meet
and maintain a specific capital level for any capital measure, (ii) adequately
capitalized if is 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, 1997, the consolidated capital ratios of the Company
and Banks were as follows:
Regulatory Lincoln Cabarrus
Minimum Company Bank Bank
------- ------- ---- ----
Tier I capital ratio 4.0% 12.43% 10.46% 10.10%
Total capital ratio 8.0% 13.69% 11.71% 11.35%
Leverage ratio 3.0-5.0% 9.08% 7.37% 6.68%
The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the federal banking agencies have, pursuant to FDICIA,
recently adopted final regulations which require regulators to consider interest
rate risk (when the interest rate sensitivity of an institution's assets does
not match the sensitivity of its liabilities or its off-balance-sheet position)
in the evaluation of a bank's capital adequacy. The bank regulatory agencies
have concurrently proposed a methodology for evaluating interest rate risk which
would require banks with excessive interest rate risk exposure to hold
additional amounts of capital against such exposures.
In December 1996, the OCC 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
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emphasis on the quality of risk management practices and the addition of a sixth
component for Sensitivity to market risk. For most institutions, the FDIC 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: management's ability to identify, measure, monitor, and control market
risk; the institution's size; the nature and complexity of its activities and
its risk profile; and 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 exchanges 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.
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 system, 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 agency
deems appropriate. These standards are not expected to have material effect on
the Company and the Banks.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company and the Banks, including reporting requirements,
regulatory standards for 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 prohibition on the
acceptance or renewal of brokered deposits by depository 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.
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 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, requirement 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 managements of the Company and the Banks do not
believe that the capital adequacy provisions of FDICIA have had any material
impact on the Company and the Bank or their respective operations.
Enforcement Policies and Actions. FIRREA and subsequent federal
legislation significantly increased the enforcement authorities of the FDIC and
other federal depository institution regulators, and authorizes the imposition
of civil money penalties of up to $1 million per day. Persons who are affiliated
with depository institutions can be removed from any office held in such
institution and banned for life from participating in the affairs of any such
institution.
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
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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 it other borrowings, and 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 deposits are primarily insured by the
FDIC's BIF. Having converted from a thrift charter, Cabarrus Bank's deposits are
insured by the FDIC's SAIF. In 1996, the FDIC adopted a new risk-based premium
schedule which decreased the assessment rates for BIF depository institutions.
Under this schedule, which took effect for assessment periods after January 1,
1996, the annual premiums range from zero to $.27 for every $100 of deposits.
Each financial institution is assigned to one of three capital groups - well
capitalized, adequately or 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 will, therefore, depend in part upon the risk
assessment classification so assigned to the institution by the FDIC. Since
October 1, 1996, for Sasser and Oakar institutions, and since January 1, 1997
for other SAIF-insured institutions, SAIF-insured deposits have been assessed
annual SAIF premiums of four to 31 basis points per $100 of deposits, based upon
the institution's assigned risk category and supervisory evaluation. During the
year ended December 31, 1996 and 1997, Lincoln Bank paid $30,364 and $43,850 in
BIF deposit insurance premiums. Cabarrus Bank paid SAIF deposit insurance
premiums of $111,972 and $62,267 in 1996 and 1997, respectively.
The FDIC's Board of Directors has retained the 1996 BIF assessment
schedule of zero to 27 basis points per annum for the first semiannual period of
1997. In addition, the FDIC Board eliminated the $2,000 minimum annual
assessment and authorized the refund of the fourth-quarter minimum assessment of
$500 paid by certain BIF-insured institutions on September 30, 1996 by crediting
such amount against each BIF member's first semiannual assessment in 1997. The
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 on BIF-assessable deposits at a
rate equal to one-fifth of the FICO assessment rate that is applied to deposits
assessable by SAIF. The actual annual assessment rates for FICO for 1997 have
been set at 1.30 basis points for BIF-assessable deposits and 6.48 basis points
for SAIF deposits.
Community Development Act. The Community Development Act has several
titles. Title I provides for the establishment of community development
financial institutions to provide equity investments, loans and development
services to financially undeserved communities. A portion of this Title also
contains various provisions regarding reverse mortgages, consumer protections
for qualifying mortgages and hearings for home equity lending, among other
things. Title II provides for small business loan securitization and
securitizations of other loans, including authorizing a study on the impact of
additional securities based on pooled obligations. Small business capital
enhancement is also provided. Title III of the Act provides for paperwork
reduction and regulatory improvement, including certain examination and call
report issues, as well as changes in certain consumer compliance requirements,
certain audit requirements and real estate appraisals, and simplification and
expediting processing of bank holding company applications, merger applications
and securities filings, among other things. It also provides for commercial
mortgage-related securities to be added to the definition of a "mortgage-related
security" in the Exchange Act. This will permit commercial mortgages to be
pooled and securitized, and permit investment in such instruments without
limitation by insured depository institutions. It also pre-empts state legal
investment and blue sky laws related to qualifying commercial mortgage
securities. Title IV deals with money
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laundering and currency transaction reports, and Title V reforms the national
flood insurance laws and requirements.
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 under capitalized deposit insurance
fund. It proposed restoring competitiveness by allowing banking organizations to
participate in a full range of financial service outside of insured commercial
banks. Deposit insurance coverage would be narrowed to promote market
discipline. Risk based deposit insurance premiums were proposed with feasibility
tested through an FDIC demonstration project using private reinsurers to provide
market pricing for risk based premiums.
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 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 a possible combination of
BIF and SAIF, changes in or repeal of the Glass-Steagall Act which separates
commercial banking form 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. 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, 1997, the Company and its subsidiaries employed 239
full-time equivalent employees, none of whom are represented by a collective
bargaining unit. Management of the Company considers relations with its
employees to be excellent.
Item 2. Properties.
The Company's principal executive office is located at 402 East Main
Street, Lincolnton, North Carolina. The Company leases four branch offices of
Cabarrus Bank and five branch office buildings of Lincoln Bank; however, the
Company owns all other branch locations and the Company's operation center.
Also, Lincoln Bank currently leases an office building in Lincolnton, North
Carolina from D. Mark Boyd, III 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 on January
30, 1992. For Cabarrus Bank, the Kannapolis branch building is leased from
Atlantic American Properties, Inc. in Kannapolis, and the Super-K 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. At December
31, 1997, the Company had book values of $2,423,093 for land, $6,812,048 for
buildings and improvements and $5,862,297 for furniture, fixtures and equipment.
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Item 3. Legal Proceedings.
The Company's subsidiaries are subject to claims and suits arising in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters.
Stock Prices and Dividends
Carolina First BancShares, Inc.'s common stock trades infrequently in
the local Charlotte, North Carolina over-the-counter market (pink sheets) under
the symbol CAFP. Its stock is listed in The Charlotte Observer under the
Interdealer stock section. The following table sets forth the high and low bid
quotations for the common stock and the cash dividends per share of common stock
paid by the Company for the indicated periods. Such quotations reflect
interdealer prices without markup, markdown, or commissions and may not
necessarily represent actual transactions.
Cash
Dividends
Quarter Ended High Low Per Share
- --------------------------------------------------------------------------------
March 31, 1996 $12.00 $10.80 $.05
June 30, 1996 $13.00 $12.00 $.05
September 30, 1996 $15.00 $19.25 $.05
December 31, 1996 $16.00 $22.00 $.06
March 31, 1997 $17.00 $16.00 $.06
June 30, 1997 $19.25 $17.00 $.06
September 31, 1997 $22.00 $19.25 $.08
December 31, 1997 $28.00 $22.00 $.08
Item 6. Selected Financial Information.
The information contained in the table captioned "Financial Highlights"
on page 1 of the Company's 1996 Annual Report to Shareholders is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information contained under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" set
forth on pages 4 through 14 of the Company's 1997 Annual Report to Shareholders
is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Risk is inherent to all industries, but perhaps more prevalent to the
banking industry. The Company considers credit to be the most significant,
however, interest rate risk is a close second. There are eight risks that must
be considered in managing the Company. These risk are listed in order of the
perceived level of risk imposed upon the Company. Another risk associated with
some banks is foreign exchange risk. The Company does not consider this a
significant risk and thus, does not address it in this assessment. The Company
has identified certain critical risks to these subsidiary banks.
Credit Risk. Credit risk is the risk to the bank's earnings or capital
from the potential of an obligator or related group of obligators failing to
fulfill its or their contractual commitments to the bank. Credit risk is most
closely associated with a bank's lending. It encompasses the potential of loss
on a particular loan as well as the potential for loss from a group of related
loans, i.e., a credit concentration. Credit risk extends also to less
traditional bank activities. It includes the credit behind the bank's investment
portfolio, the credit of counterparties to interest rate contracts, and the
credit of stockbrokers holding the bank's investment portfolio in street name.
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Interest Rate Risk. Interest rate risk is the risk to earnings or
capital from the potential of movement in interest rates. It is the sensitivity
of the bank's future earnings to interest rate changes. Interest rate risk is
generally measured on the basis of duration analysis or gap analysis. Duration
analysis measures the degree of risk in a particular instrument or portfolio and
gap analysis defines the timing when loss may occur. The Company is willing to
accept a modified duration of 5% and a one year cumulative gap or +/- 5% and a
one to five cumulative gap of +/- 8%. As of December 31, 1997, the Company had a
modified duration of 1.7% and a one year cumulative gap of 1.11% and a one to
five year cumulative gap of .21%. 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, 1997, the price change was less than 4.5%
with such a rate shock.
Liquidity Risk. Liquidity risk is the risk to earnings or capital from
a bank's inability to meet its obligations when they come due without incurring
unacceptable losses or costs. Depositors withdraw their deposits and the bank
does not have the liquid assets to fund the withdrawals and to meet its loan
funding obligations. The risk is particularly great with brokered deposits of
which the Company currently has none.
Transaction Risk. Transaction risk is the risk to earnings or capital
arising from problems with service or product delivery. Transaction risk is the
risk of a failure in a bank's operating processes. It is a risk of failure in a
bank's automation, its employee integrity, or its internal controls.
Compliance Risk. Compliance risk is the risk to earnings or capital
from noncompliance with laws, rules, and regulations.
Strategic Risk. Strategic 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" on pages 4 through 15
of the Company's Annual Report to Shareholders.
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. The estimated
fair market value of loans outstanding is approximately $347,040,000 and
$309,811,000 at December 31, 1997 and 1996, respectively. The fair value of
noninterest-bearing demand deposits and NOW, savings and money market deposits
is the amount payable on demand at the reporting date. The fair value of the
time deposits is estimated using the rates currently offered for deposits of
similar remaining maturities. The estimated fair market value of deposits is
approximately $459,703,000 and $386,920,000 at December 31, 1997 and 1996,
respectively.
Item 8. Financial Statements and Supplementary Information.
The report of KPMG Peat Marwick LLP, independent certified public
accountants, and the consolidated financial statements of the Company, set forth
on pages 17 through 33 of the Company's 1997 Annual Report to Shareholders is
incorporated herein by reference.
Supplementary information is not applicable.
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Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not applicable.
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PART III
Item 10. Directors and Executive Officers.
The information contained under the heading "Proposal I, Election of
Directors" in the Company's definitive Proxy Statement, dated March 21, 1998 for
the 1998 Annual Meeting of Shareholders to be held on April 21, 1998 (the "Proxy
Statement"), filed with the Commission pursuant to Regulation 14A, is
incorporated herein by reference. The information required by this item with
respect to executive officers is set forth above in Part I, Item 4A of this
Annual Report on Form 10-K.
The following list contains certain information regarding the executive
officers of the Company.
D. Mark Boyd, III, age 60, is the Chairman of the Board and Chief
Executive Officer of the Company. He also serves as Chairman of the Board of
Lincoln Bank, a position he has held since its organization. He has been a
member of the North Carolina Banking Commission since 1993 and a director of
First Gaston Bank since 1995. In addition, Mr. Boyd has been President of Times
Oil Corporation, a fuel and heating oil distributor, since 1965 and a director
of Kentucky Fried Chicken of Lincolnton, Inc., a fast-food restaurant franchise,
since 1968. Since 1974, Mr. Boyd has served as a director of Carolina Mills,
Inc., a manufacturer of yarn, and cloth in Maiden, N.C.
James E. Burt, III, age 60, has been President of the Company and
Lincoln Bank and Chief Executive Officer of Lincoln Bank since 1990, a Director
of Cabarrus Bank since 1993, and a Director of First Gaston Bank since 1995.
James A. Atkinson, age 41, has served as Vice President and Auditor of
the Company since April 1992. Mr. Atkinson has served in various bank audit
positions since 1978.
Jan H. Hollar, age 42, has served as the Treasurer of the Company since
December 1990 and currently serves as Vice President and Secretary of the
Company. In addition, Ms. Hollar has served as the Chief Financial Officer of
Lincoln Bank since November 1990 and principal accounting officer at Cabarrus
Bank since January 1993.
Joy G. Keever, age 61, has been an officer of Lincoln Bank since its
organization, having served as Cashier from 1983 to 1986, when she was elected
Vice President. She was named Vice President - Human Resources of the Company
effective June 1, 1996.
James H. Mauney, II, age 50, has served as Vice President and Manager
of Loan Administration of the Company since February 1996. Mr. Mauney previously
served as Vice President of Hibernia National Bank from 1988 to 1996.
Item 11. Executive Compensation.
The information contained under the heading "Executive Compensation" in
the Company's definitive Proxy Statement, filed with the Commission pursuant to
Regulation 14A, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information contained under the headings "Principal Shareholders"
and "Election of Directors" in the Company's definitive Proxy Statement, filed
with the Commission pursuant to Regulation 14A, is incorporated herein by
reference.
III-1
21
Item 13. Certain Relationships and Related Transactions.
The information contained under heading "Executive Compensation -
Compensation Committee Interlocks and Insider Participation" and "Executive
Compensation - Certain Transactions" in the Company's definitive Proxy
Statement, filed with the Commission pursuant to Regulation 14A, is incorporated
herein by reference.
III-2
22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
Page(s) in
Annual Report*
(a) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Balance Sheets at
December 31, 1997 and 1996 17
Consolidated Statements of Income
for the years ended December 31,
1997, 1996 and 1995 18
Consolidated Statements of Changes
in Shareholders' Equity for the
years ended December 31, 1997,
1996 and 1995 19
Consolidated Statements of Cash Flows
for the years ended December 31, 1997,
1996 and 1995 20
Notes to Consolidated Financial
Statements 21-33
Independent Auditor's Report 16
* Incorporated by reference from the indicated pages of
the 1997 Annual Report.
(2) Financial Statement Schedules N/A
(3) The following Exhibits are filed as part of this report in 14(c).
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.0 Articles of Incorporation of the Registrant, incorporated
herein by reference to Registrant's Registration Statement No.
33-26861.
3.1 Bylaws of the Registrant, incorporated herein by reference to
Registrant's Registration Statement No. 33-26861.
4.0 Specimen of Common Stock certificate of the Registrant,
incorporated herein by reference to Registrant's Registration
Statement No. 33-26861.
10.0 Lincoln Bank of North Carolina Deferred Compensation Plan for
Directors, incorporated herein by reference to Registrant's
Registration Statement No. 33-26861.
10.1 Lincoln Bank of North Carolina 1988 Incentive Stock Option
Plan, incorporated herein by reference to Registrant's
Registration Statement No. 33-26861.
IV-1
23
10.2 Lincoln Bank of North Carolina 1983 Incentive Stock Option
Plan, incorporated herein by reference to Registrant's
Registration Statement No. 33-26861.
10.3 Profit Sharing Plan of Lincoln Bank of North Carolina,
incorporated herein by reference to Registrant's Registration
Statement No. 33-26861.
10.4 Registrant's 1990 Stock Option and Stock Appreciation Rights
Plan, as amended incorporated herein by reference to
Registrant's Registration Statement No. 33-43037.
10.5 Employment Agreement and Deferred Compensation Agreement dated
as of December 31, 1996 by and between Carolina First
BancShares, Inc. and James E. Burt, III.
10.6 Employment Agreement dated September 8, 1992 by and between
Lincoln Bank of North Carolina and James R. Beam, incorporated
herein by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992, No. 0-17939.
10.7 Employment Agreement dated September 8, 1992 by and between
Lincoln Bank of North Carolina and Stephen S. Robinson,
incorporated herein by reference to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1992, No.
0-17939.
10.8 Employment Agreement dated October 19, 1993 by and between
Lincoln Bank of North Carolina and Carroll G. Heavner,
incorporated herein in reference to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993, No.
0-17939.
11 Calculation of earnings per share.
13 Registrant's 1997 Annual Report to Shareholders.
21 List of Subsidiaries of the Registrant, incorporated herein by
reference to Registrant's Registration Statement No. 33-26861.
23 Consent of Independent Auditors.
27 Financial Data Schedule
(b) Reports on Form 8-K.
NONE
(c) The response to this portion of Item 14 is submitted
as a separate section of this report.
(d) Financial Statement Schedules.
N/A
IV-2
24
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 27th day of March, 1998.
CAROLINA FIRST BANCSHARES, INC.
By: /s/ D. Mark Boyd, III
----------------------------
D. Mark Boyd, III
Chairman of the Board and
Chief Executive Officer
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\ D. Mark Boyd, III Chairman of the Board March 27, 1998
- ---------------------------------- of Directors and Chief
D. Mark Boyd, III Executive Officer
\s\ James E. Burt, III President and Director March 27, 1998
- ----------------------------------
James E. Burt, III
Principal Financial Officer and
Principal Accounting Officer:
\s\ Jan H. Hollar Treasurer March 27, 1998
- ----------------------------------
Jan H. Hollar
Directors:
\s\ John R. Boger, Jr. Director March 27, 1998
- ----------------------------------
John R. Boger, Jr.
\s\ Charles A. James Director March 27, 1998
- ----------------------------------
Charles A. James
\s\ Samuel C. King, Jr. Director March 27, 1998
- ----------------------------------
Samuel C. King, Jr.
\s\ Harry D. Ritchie Director March 27, 1998
- ----------------------------------
Harry D. Ritchie
\s\ L.D. Warlick, Jr. Director March 27, 1998
- ----------------------------------
L. D. Warlick, Jr.
\s\ Estus B. White Director March 27, 1998
- ----------------------------------
Estus B. White
25
INDEX TO EXHIBITS
Sequential
Exhibit No. Description of Exhibit
- ----------- ----------------------
Number Pages
- ------------
3.0 Articles of Incorporation of the Registrant, incorporated
herein by reference to Registrant's Registration Statement No.
33-26861.
3.1 Bylaws of the Registrant, incorporated herein by reference to
Registrant's Registration Statement No. 33-26861.
4.0 Specimen of Common Stock certificate of the Registrant,
incorporated herein by reference to Registrant's Registration
Statement No. 33-26861.
10.0 Lincoln Bank of North Carolina Deferred Compensation Plan for
Directors, incorporated herein by reference to Registrant's
Registration Statement No. 33-26861.
10.1 Lincoln Bank of North Carolina 1988 Incentive Stock Option
Plan, incorporated herein by reference to Registrant's
Registration Statement No. 33-26861.
10.2 Lincoln Bank of North Carolina 1983 Incentive Stock Option
Plan, incorporated herein by reference to Registrant's
Registration Statement No. 33-26861.
10.3 Profit Sharing Plan of Lincoln Bank of North Carolina,
incorporated herein by reference to Registrant's Registration
Statement No. 33-26861.
10.4 Registrant's 1990 Stock Option and Stock Appreciation Rights
Plan, as amended incorporated herein by reference to
Registration Statement No. 33-43037.
10.5 Employment Agreement and Deferred Compensation Agreement dated
as of December 31, 1996 by and between Carolina First
BancShares, Inc. and James E. Burt, III.
10.6 Employment Agreement dated September 8, 1992 by and between
Lincoln Bank of North Carolina and James R. Beam, incorporated
herein by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992, No. 0-17939.
10.7 Employment Agreement dated September 8, 1992 by and between
Lincoln Bank of North Carolina and Stephen S. Robinson,
incorporated herein by reference to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1992, No.
0-17939.
10.8 Employment Agreement dated October 19, 1993 by and between
Lincoln Bank of North Carolina and Carroll G. Heavner,
incorporated herein by reference to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993, No.
0-17939.
11 Calculation of earnings per share.
13 Registrant's 1997 Annual Report to Shareholders.
21 List of Subsidiaries of the Registrant.
23 Consent of Independent Auditors
27 Financial Data Schedule
- ----------------------------