United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 1994
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM to
Commission file number 0-15083
CAROLINA FIRST CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 57-0824914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 South Main Street, Greenville, South Carolina 29601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 255-7900
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X No
The number of outstanding shares of the issuer's $1.00 par value common
stock as of November 10, 1994 was 4,538,460.
Consolidated Balance Sheets
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
September 30, December 31,
ASSETS 1994 1993
Cash and due from banks.......................................... $ 43,444 27,320
Federal funds sold and securities
purchased under resale agreements.............................. 8,904 54,212
Securities
Trading....................................................... 722 250
Available for sale............................................ 54,904 64,871
Held for investment (market value $58,668 in 1994
and $50,024 in 1993).......................................... 60,912 49,605
Total securities............................................ 116,538 114,726
Loans............................................................ 817,404 567,379
Less unearned income.......................................... (1,063) (2,221)
Less allowance for loan losses................................ (5,029) (5,688)
Net loans................................................... 811,312 559,470
Premises and equipment........................................... 36,389 28,990
Accrued interest receivable...................................... 8,050 4,811
Other assets..................................................... 43,027 26,892
$1,067,664 816,421
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing.......................................... $ 108,575 67,776
Interest-bearing............................................. 831,700 656,809
Total deposits............................................. 940,275 724,585
Borrowed funds................................................. 31,926 17,993
Accrued interest payable....................................... 4,062 3,041
Other liabilities.............................................. 4,377 7,933
Total liabilities........................................... 980,640 753,552
Stockholders' Equity
Preferred stock-no par value; authorized 10,000,000 shares;
issued and outstanding 920,000 shares (Series 1994),
621,000 shares (Series 1993) and 60,000 shares (Series 1993B)
in 1994 and 621,000 shares (Series 1993) and 60,000 shares
(Series 1993B) in 1993; liquidation preference $25 per share
(Series 1994 and 1993) and $20 per share (Series 1993B)...... 37,063 15,662
Common stock-par value $1 per share; authorized 20,000,000
shares; issued and outstanding 4,524,361 shares in 1994
and 4,279,724 in 1993........................................ 4,524 4,280
Surplus........................................................ 38,247 35,412
Retained earnings.............................................. 8,591 8,400
Nonvested restricted stock..................................... (547) (709)
Guarantee of ESOP debt......................................... (176) (176)
Unrealized gain (loss) on securities available for sale........ (678) --
Total stockholders' equity.................................. 87,024 62,869
$1,067,664 816,421
2
Consolidated Statements of Income
Carolina First Corporation and Subsidiaries
($ in thousands, except share data)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1994 1993 1994 1993
Interest income
Interest and fees on loans...........................$ 17,618 $ 11,186 $ 44,915 $ 30,193
Interest on securities
Taxable............................................ 1,206 1,681 3,760 4,514
Exempt from federal income taxes................... 279 147 710 328
Total interest on securities..................... 1,485 1,828 4,470 4,842
Interest on federal funds sold and securities
purchased under resale agreements.................. 40 29 343 330
Total interest income.............................. 19,143 13,043 49,728 35,365
Interest expense
Interest on deposits................................. 7,467 5,508 19,731 15,693
Interest on borrowed funds........................... 685 182 1,133 326
Total interest expense............................. 8,152 5,690 20,864 16,019
Net interest income................................ 10,991 7,353 28,864 19,346
Provision for loan losses.............................. 250 330 450 909
Net interest income after
provision for loan losses........................ 10,741 7,023 28,414 18,437
Noninterest income
Service charges on deposit accounts.................. 1,085 750 2,682 1,822
Mortgage banking income.............................. 533 436 1,583 924
Fees for trust services.............................. 185 174 681 412
Gain on sale of securities........................... 54 21 189 546
Sundry............................................... 403 211 1,068 515
Total noninterest income........................... 2,260 1,592 6,203 4,219
Noninterest expenses
Salaries and wages................................... 3,770 2,598 10,397 6,638
Employee benefits.................................... 921 623 2,697 1,738
Occupancy............................................ 942 544 2,597 1,435
Furniture and equipment.............................. 619 404 1,660 1,096
Sundry............................................... 3,820 2,674 9,835 6,742
Total noninterest expenses......................... 10,072 6,843 27,186 17,649
Income before income taxes......................... 2,929 1,772 7,431 5,007
Income taxes........................................... 928 466 2,184 1,599
Net income ........................................ 2,001 1,306 5,247 3,408
Dividends on preferred stock........................... 731 530 1,702 1,381
Net income applicable to common shareholders.......$ 1,270 $ 776 $ 3,545 $ 2,027
Net income per common share:
Primary*..........................................$ 0.28 $ 0.23 $ 0.79 $ 0.61
Fully diluted*.................................... 0.27 n/a 0.77 n/a
Average shares outstanding:
Primary*.......................................... 4,519,486 3,325,608 4,510,744 3,313,613
Fully diluted*.................................... 7,464,782 5,668,690 6,820,618 5,370,798
*Share data have been restated to reflect 5% stock dividends.
3
Consolidated Statements of Cash Flows
Carolina First Corporation and Subsidiaries
(Unaudited)
(All Amounts, Except Per Share Data, in Thousands)
Nine Months Ended September 30,
1994 1993
Cash Flows from Operating Activities
Net income..................................................... $ 5,247 $ 3,408
Adjustments to reconcile net income to net cash
provided by operations
Depreciation............................................... 1,899 1,184
Amortization of intangibles................................ 1,215 760
Provision for loan losses.................................. 450 909
Gain on sale of securities................................. (189) (546)
Proceeds from sale of trading securities................... 291,155 --
Proceeds from maturity of trading securities............... 24,480 --
Purchase of trading securities............................. (316,107) --
Originations of mortgage loans held for sale............... (31,663) --
Proceeds from sale of mortgage loans held for sale......... 38,127 39,042
Increase in interest receivable............................ (3,239) (609)
Increase in interest payable............................... 1,021 220
Increase in other assets................................... (15,933) (2,418)
Increase (decrease) in other liabilities................... (3,696) 322
FHLB stock dividend........................................ (50) (54)
Net cash used for operating activities....................... (7,283) 42,218
Cash Flows from Investing Activities
Proceeds from sale or maturity of securities................... -- 257,436
Proceeds from sale of securities available for sale............ 24,086 --
Proceeds from maturity of securities available for sale........ 154,840 --
Proceeds from maturity of securities held for investment....... 5,116 --
Purchase of securities......................................... -- (318,232)
Purchase of securities available for sale...................... (169,699) --
Purchase of securities held for investment..................... (16,373) --
Net decrease in federal funds sold and securities
purchased under resale agreements............................ 45,308 2,466
Net increase in loans.......................................... (216,571) (137,406)
Capital expenditures........................................... (9,298) (12,612)
Net cash used for investing activities ...................... (182,591) (208,348)
Cash Flows from Financing Activities
Acquired deposits (net)........................................ 97,735 156,145
Net increase (decrease) in deposits............................ 74,515 (29,134)
Increase in borrowed funds..................................... 13,933 30,729
Issuance of preferred stock.................................... 21,401 14,462
Dividends on preferred and common stock........................ (1,979) (851)
Other common stock activity.................................... 393 367
Net cash provided by financing activities.................... 205,998 171,718
Net change in cash and due from banks............................ 16,124 5,588
Cash and due from banks at beginning of year..................... 27,320 21,846
Cash and due from banks at end of period......................... $ 43,444 $ 27,434
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of these policies is included in the 1993 Annual
Report to Stockholders.
(2) SECURITIES
The change in the net unrealized loss on securities
available for sale for the three months ended September 30,
1994 was $59,000.
(3) STATEMENTS OF CASH FLOWS
Cash includes currency and coin, cash items in process of
collection and due from banks. Interest paid, net of
interest capitalized as a part of the cost of construction,
amounted to $19,843,000 for the nine months ended September
30, 1994. Income tax payments of $3,077,000 were made for
the nine months ended September 30, 1994.
(4) COMMON STOCK
The Board of Directors of Carolina First Corporation (the
"Company") issued a five percent common stock dividend on
May 16, 1994 to common stockholders of record as of April
29, 1994. This dividend resulted in the issuance of 214,380
shares of the Company's $1.00 par value common stock. Per
share data of prior periods have been restated to reflect
this dividend.
(5) PREFERRED STOCK
On April 15, 1994, the Company issued 920,000 shares of
7.32% Noncumulative Convertible Preferred Stock Series 1994
("Series 1994 Preferred Stock"), which raised $21,442,000 in
equity. Dividends on the Series 1994 Preferred Stock will
be payable quarterly, when, as, and if declared by the Board
of Directors, at an annual rate of $1.83 per share.
Dividends on the Series 1994 Preferred Stock are not
cumulative. To date, all regular quarterly dividends have
been paid. A Series 1994 Preferred Stock share may be
converted at the option of the holder into 1.7931 shares of
common stock. In addition, the Company may redeem the
Series 1994 Preferred Stock at the redemption prices and in
accordance with the other terms set forth in the Company's
Articles of Amendment related to the Series 1994 Preferred
Stock.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
(Continued)
(6) ACQUISITIONS
On April 29, 1994, the Company purchased the insured
deposits of Citadel Federal Savings and Loan Association
("Citadel Federal") from the Resolution Trust Corporation,
as receiver for Citadel Federal. On May 2, 1994, the
Company acquired certain assets and deposits associated
principally with seven branches from Republic National Bank.
The branches are located in Columbia, Edgefield, Johnston,
Bennettsville, Lake City and McColl.
Effective October 13, 1994, the Company entered into a
definitive agreement with Aiken County National Bank ("Aiken
County National") for the merger of Aiken County National
into Carolina First Bank. The Company will acquire all the
outstanding common shares of Aiken County National in
exchange for approximately 453,000 shares of the Company's
common stock (assuming no dissenter's rights are exercised).
Aiken County National has assets of approximately $42
million, loans of $30 million and deposits of $38 million.
This transaction, which is subject to regulatory and Aiken
County National shareholder approval, is expected to be
completed in the first quarter of 1995.
Effective November 14, 1994, the Company entered into a
definitive agreement with Midlands National Bank
("Midlands") for the merger of Midlands into Carolina First
Bank. The Company will acquire all the outstanding common
shares of Midlands in exchange for approximately 584,000
shares of the Company's common stock (assuming no
dissenter's rights are exercised). Midlands has assets of
approximately $43 million, loans of $28 million and deposits
of $39 million. This transaction, which is subject to
regulatory and Midlands shareholder approval, is expected to
be completed in the first quarter of 1995.
(7) MANAGEMENT'S OPINION
The financial statements in this report are unaudited. In
the opinion of management, all adjustments necessary to
present a fair statement of the results for the interim
periods have been made. All such adjustments are of a
normal, recurring nature.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Carolina First Corporation (the "Company") is a bank and
thrift holding company which owns Carolina First Bank (the
"Bank"), a South Carolina-chartered commercial bank headquartered
in Greenville, South Carolina; Carolina First Savings Bank,
F.S.B. (the "Savings Bank"), a federally-chartered savings bank
headquartered in Georgetown, South Carolina; and Carolina First
Mortgage Company (the "Mortgage Company"), a mortgage banking
operation headquartered in Columbia, South Carolina. The
Company, which commenced operations in December 1986, currently
conducts business through 46 locations in South Carolina. At
September 30, 1994, the Company had approximately $1,067,664,000
in assets, $816,341,000 in loans, $940,275,000 in deposits and
$87,024,000 in stockholders' equity. At September 30, 1994, the
Company's nonperforming assets (which exclude loans which are 90
days or more past due and still accruing interest) totaled 0.12%
of total loans and other real estate owned.
The Company was formed principally in response to perceived
opportunities resulting from the takeovers of several South
Carolina-based banks by large southeastern regional bank holding
companies. A significant number of the Company's executive
officers and management personnel were previously employed by
certain of the larger South Carolina-based banks that were
acquired by these southeastern regional institutions.
Consequently, these officers and management personnel have
significant customer relationships and commercial banking
experience that have contributed to the Company's loan and
deposit growth. The Company targets individuals and small to
medium-sized businesses in South Carolina that require a full
range of quality banking services.
The Company currently serves three principal market areas:
the Greenville metropolitan area and surrounding counties
(located in the Upstate region of South Carolina); the Columbia
metropolitan area and surrounding counties (located in the
Midlands region of South Carolina); and Georgetown and Horry
counties (located in the Coastal region of South Carolina). The
Company's principal market areas represent three of the four
largest Metropolitan Statistical Areas in the state. In April
1994, the Company entered the Charleston market, the second
largest Metropolitan Statistical Area in the state, with the
purchase of the insured deposits of Citadel Federal Savings and
Loan Association ("Citadel Federal"). See "Growth Strategy and
Acquisitions." The Company also has branch locations in other
counties in South Carolina.
7
The Company began its operations with the de novo opening of
Carolina First Bank in Greenville and has pursued a strategy of
growth through internal expansion and through the acquisition of
branch locations and financial institutions in selected market
areas.
For the first nine months of 1994, the Company had
consolidated net income of $5,247,000, an increase of 54% over
the $3,408,000 earned in the same period of 1993. Net income per
common share, adjusted to reflect the 5% common stock dividends,
was $0.79 for the nine months ended September 30, 1994, up 30%
from the $0.61 earned in the first nine months of 1993. Net
income per fully diluted share for the nine months ended
September 30, 1994 was $0.77. A higher level of average earning
assets, an increased net interest margin, good growth in
noninterest income and continued good credit quality were the
primary reasons for the growth in net income. Increases in
average earning assets resulted primarily from the acquisition of
branches, discussed in "Growth Strategy and Acquisitions", and
internal growth.
At September 30, 1994, assets totaled $1,067,664,000, an
increase of $313,015,000, or 41%, over September 30, 1993. Total
stockholders' equity increased 40% from September 30, 1993 to
September 30, 1994 to $87,024,000. Loans increased 52% to
$816,341,000 at September 30, 1994 compared with $536,890,000 at
September 30, 1993. Deposits at September 30, 1994 were
$940,275,000, up 44% from $651,997,000 at September 30, 1993.
On April 15, 1994, the Company issued 920,000 shares of the
Series 1994 Preferred Stock, which raised approximately
$21,442,000 in equity after deduction of expenses. See "Capital
Resources and Dividends."
The Board of Directors approved a 5% common stock dividend,
issued on May 16, 1994, to common stockholders of record as of
April 29, 1994. This dividend resulted in the issuance of
214,380 shares of the Company's $1.00 par value common stock.
Per share data of prior periods have been restated to reflect
this dividend. This is the sixth consecutive year that the
Company has issued a 5% common stock dividend. In addition to
the 5% common stock dividend, the Company began paying a regular
quarterly cash dividend of $0.05 per share in the first quarter
of 1994. See "Capital Resources and Dividends."
The Company is considering the merger of the Savings Bank
into the Bank. This merger is being considered because the
Company believes that there may be significant economic and
managerial benefits in such a combination. Such benefits would
include the elimination of duplicative administration, the
8
consolidation of the Company's regulators, reduced regulatory
burdens and increased management focus. If such a merger occurs,
the Company would pay income taxes of approximately $1,000,000
due to the different tax treatment accorded the allowance for
loan losses at the Savings Bank. The Company will only proceed
with the merger of the Savings Bank into the Bank if management
believes that the long-term economic benefits would offset the
initial tax liability. The Company has preliminary indications
that such a merger could save up to $500,000 per year. However,
the Company has not at this time reached a final conclusion on
this issue. In the event that the Company elects to proceed with
such a merger, the Company expects that the tax liability would
be recorded in the fourth quarter of 1994 and that the merger
would be completed in the first quarter of 1995.
For certain information regarding the potential write-down
of assets in the fourth quarter and the sale or securitization of
credit cards, see the final 8 paragraphs of "Growth Strategy and
Acquisitions" below.
GROWTH STRATEGY AND ACQUISITIONS
Since its inception in 1986, the Company has pursued a
strategy of growth through internal expansion and through the
acquisition of branch locations and financial institutions in
selected market areas. The Company has emphasized internal
growth through the acquisition of market share from the large
out-of-state bank holding companies. It attempts to acquire
market share by
providing quality banking services and personal service to
individuals and business customers.
The Company's past acquisitions include the following: In
August 1990, the Company acquired the Savings Bank in a merger
transaction which resulted in the acquisition of approximately
$100,500,000 in deposit liabilities and $12,000,000 in capital.
In April 1991, the Bank purchased two branches in Anderson, South
Carolina which resulted in the acquisition of approximately
$20,127,000 in deposits, on which a premium of $1.2 million was
paid, and approximately $3,843,000 in loans. In December 1991,
the Savings Bank purchased four branches in Myrtle Beach which
resulted in the acquisition of approximately $36,768,000 in
deposits, on which a premium of $1.3 million was paid, and
approximately $10,000,000 in loans.
In March 1993, the Bank purchased the Piedmont, South
Carolina branch location from Republic National Bank ("Republic
Bank") which resulted in the acquisition of approximately
$15,378,000 in deposits, on which a premium of $600,000 was paid,
and approximately $2,334,000 in loans. On March 22, 1993, the
Bank purchased 12 branches principally located in central South
Carolina
9
(the "12 Republic Branches") from Republic Bank. The
branches are located in Columbia (3), Irmo, Salley, Springfield,
Hardeeville, Barnwell, Williston, Blackville, Ridgeland and
Swansea, South Carolina. In this acquisition, the Bank assumed
$189,485,000 in deposits, on which a premium of $6,300,000 was
paid, and $28,905,000 in selected loans.
In five transactions during the period of time from December
1990 through November 1993, Carolina First Bank purchased an
aggregate of approximately $35 million in credit card receivables
and related accounts from Republic Bank.
In September 1993, the Company acquired First Sun Mortgage
Corporation (subsequently renamed Carolina First Mortgage
Company), which resulted in the acquisition of servicing rights
to a portfolio of approximately $250 million in mortgages and two
origination offices. The cost of the acquisition in excess of
the fair value of net assets acquired aggregated approximately
$3.1 million. This excess was assigned to goodwill and is being
amortized over 15 years. The Mortgage Company's principal
activities include the origination and servicing of one-to-four
family residential mortgage loans through 8 offices in South
Carolina. At September 30, 1994, the Mortgage Company was
servicing approximately 10,400 loans having an aggregate
principal balance of approximately $802 million. The servicing
portfolio includes purchased mortgage servicing rights for
approximately $680 million in mortgage loans; the related
intangible asset for excess and purchased mortgage servicing
rights totaled $9.2 million at September 30, 1994.
In December 1993, Carolina First Bank acquired the three
Columbia branches of Bay Savings Bank, F.S.B., which resulted in
the assumption of approximately $38,489,000 in deposits, on which
a premium of approximately $1.1 million was paid, and the
acquisition of approximately $143,000 in loans.
On April 29, 1994, the Company purchased the insured
deposits of Citadel Federal from the Resolution Trust
Corporation, as receiver for Citadel Federal. This acquisition
resulted in the acquisition of one branch office in Charleston
with deposits of approximately $5,849,000, on which a premium of
approximately $533,000 was paid.
On May 2, 1994, the Company acquired six branches from
Republic Bank. The acquired branches are located in Columbia,
Edgefield, Johnston, Bennettsville, Lake City and McColl. In
addition, Carolina First acquired the deposits and select loans
from Republic Bank's main office branch in Columbia, which was
not acquired. With this transaction, the Company acquired
deposits of approximately $135,326,000, on which a premium of
approximately $5.4 million was paid, and loans of approximately
$37,511,000.
10
Effective October 13, 1994, the Company entered into a
definitive agreement with Aiken County National Bank ("Aiken
County National") for the merger of Aiken County National into
Carolina First Bank. The Company will acquire all the
outstanding common shares of Aiken County National in exchange
for approximately 453,000 shares of the Company's common stock
(assuming no dissenter's rights are exercised). Aiken County
National has assets of approximately $42 million, loans of $30
million and deposits of $38 million. This transaction, which is
subject to regulatory and Aiken County National shareholder
approval, is expected to be completed in the first quarter of
1995.
Effective November 14, 1994, the Company entered into a
definitive agreement with Midlands National Bank ("Midlands") for
the merger of Midlands into Carolina First Bank. The Company
will acquire all the outstanding common shares of Midlands in
exchange for approximately 584,000 shares of the Company's common
stock (assuming no dissenter's rights are exercised). Midlands
has assets of approximately $43 million, loans of $28 million and
deposits of $39 million. This transaction, which is subject to
regulatory and Midlands shareholder approval, is expected to be
completed in the first quarter of 1995.
The Company has entered into an agreement with Telepay,
Inc., a South Carolina corporation ("Telepay"), regarding the
delivery of certain home banking services. This agreement is
included as an exhibit hereto. The Company can give no assurance
regarding the probability of success of Telepay, or whether and
to what extent the Company will be involved with Telepay.
At September 30, 1994, the Company had $26,654,000 in
intangible assets which were generated principally in connection
with the acquisition of branch locations, credit card accounts
and receivables, the Mortgage Company and mortgage servicing
rights. As noted in previous Company filings, the Company has
undertaken a study to determine whether any adjustments in
intangible assets or the related amortization is appropriate.
This study has been substantially completed. Its preliminary
conclusion is that, except for certain intangible assets
associated with credit card receivables, the Company should not
make any adjustments to the amortization schedules. However,
approximately $3 million before taxes of intangible assets associated
with the origination of credit cards accounts should be written off.
In addition, in the event that the Company securitizes all or a
portion of its credit card portfolio (as discussed below), the
Company would be able to write off an additional $5 million before
taxes in intangible assets as a result of such securitization. Any
write-offs of intangible assets are expected to occur in the fourth
quarter of 1994.
Although any write-down of intangible assets would have a one-
11
time material adverse effect on the Company's earnings, such
write-down of intangible assets would have a positive effect on
its net income on a going-forward basis. Furthermore, the
Company believes that in connection with the write-down, the
Company will be able to engage in either a securitization or sale
of the credit cards, which, if consummated, will improve the
Company's financial performance.
Concurrent with the contemplated securitization or possible
sale of the credit card portfolio, the Company is considering the
merger of its two subsidiaries (as discussed above). However,
at this time the Company has not determined the form or extent
of such restructuring or the total amounts of intangible assets
that will be written off.
In view of the foregoing and the other anticipated benefits
discussed below, the Company has determined to pursue, as its
first priority, the securitization of up to approximately
$100,000,000 of its credit card loans. As an alternative to
securitization, the Company has determined to pursue the sale of
such credit card loans. Either such alternative would improve
the Company's liquidity and provide the Company with significant
funds which could be used to fund loan demand.
The contemplated securitization would involve the transfer
of the Company's credit card accounts to a trust, in return for
which, the Company would be paid an amount equal to the principal
balance of the credit cards. The Company would use a portion of
such proceeds to purchase approximately a 25% interest in the
trust and the balance of the proceeds would be retained by the
Company. Interests in the balance of the trust would sold exclusively
to accredited investors in a private offering exempt from
registration under the federal securities laws. Such offering
would be made only pursuant to a private placement memorandum.
The Company believes that it will be successful in such regard;
however, there can be no assurance that such transaction will be
completed. In the event that the Company engages in such
securitization of the credit cards, the Company would be required
to write down approximately $5,000,000 before taxes in intangible
assets. Such write-down would be expected to occur in the fourth
quarter of 1994. The Company believes that the securitization would
provide substantial benefits to the Company, including the
provision of significant liquidity, the ability to retain a
portion of the expected earnings from the credit cards while
moving them off the balance sheet, and the continued ability to
service the credit cards and receive the related servicing
income. The Company expects in the near future to enter into a
preliminary agreement with an investment banking firm in which
the parties agree to use their best efforts to proceed with the
securitization of such credit cards.
Under the securitization arrangement, the Company retains
the obligation to guarantee a stated return to purchasers of the
trust
12
interests. However, the Company believes that this
liability is not materially greater than the liability that would
exist if the Company retained its credit card portfolio.
As an alternative to securitization, the Company has also
engaged in preliminary negotiations with third parties regarding
the purchase of the credit cards. Based on these negotiations,
the Company believes that it could reach an agreement with a
third party which would result in the sale of such credit cards
on terms which are satisfactory to the Company. Based on current
market conditions, in the event that the Company sells all or a
portion of its credit card portfolio, the substantial portion of
the $3 million write-off for intangibles discussed above and
other credit card intangible assets would likely be offset by an
anticipated gain realized in such sale. Although the Company
believes that it would be able to effect such sale on
satisfactory terms, there can be no assurance of such fact.
The Company has built its credit card loan portfolio, in
part, through the acquisition of approximately $35,000,000 in
credit card accounts and receivables from Republic Bank in
several transactions since December 1990. In connection with
these acquisitions, Republic Bank escrowed funds to offset losses
in the purchased credit cards. Such escrowed funds were
exhausted by the end the second quarter of 1994. Accordingly,
absent a sale or securitization of the credit cards, any losses
in the credit card portfolio would have to be covered by the
allowance for loan losses as compared to escrowed funds (as was
the case in the past). Credit card losses have generally been
approximately 6.5% per year on a portfolio ranging from
approximately $25 million to $95 million.
EARNINGS REVIEW
Net Interest Income
The largest component of the Company's net income is the net
interest income of the Bank and the Savings Bank. Net interest
income is the difference between the interest earned on assets
and the interest paid for the liabilities used to support such
assets. Variations in the volume and mix of assets and
liabilities and their relative sensitivity to interest rate
movements determine changes in net interest income. As the
primary contributor to the Company's earnings, net interest
income constituted 82% of net
13
revenues (net interest income plus
other income) for the first nine months of 1994 and for the same
period of 1993.
Fully tax-equivalent net interest income adjusts the yield
for assets earning tax-exempt income to a comparable yield on a
taxable basis. For the first nine months of 1994, the Company's
fully tax-equivalent net interest income was $29,405,000 compared
with $19,494,000 for the same period of 1993, for an increase of
$9,911,000, or 51%. The increase resulted from a higher level of
average earning assets and an improvement in the net interest
margin. The growth in average earning assets, which increased to
$827,444,000 for the first nine months of 1994 from $611,634,000
for the first nine months of 1993, resulted primarily from
internal loan growth and the acquisition of branches from
Republic Bank. The majority of this increase was in loans, which
averaged $216,139,000 higher in the first nine months of 1994
than in the same period of 1993. The improvement in net interest
margin, which increased to 4.71% in the first nine months of 1994
from 4.26% in the first nine months of 1993, primarily resulted
from lower deposit interest rates and a higher proportion of
noninterest-bearing deposits. In addition, the yield on loans
has risen due to increases in the prime interest rate and
increased consumer loan volume from the retail branch network.
Provision and Allowance for Loan Losses
Management maintains an allowance for loan losses which it
believes is adequate to cover possible losses in the loan
portfolio. However, management's judgment is based upon a number
of assumptions about future events which are believed to be
reasonable, but which may or may not prove valid. Thus, there
can be no assurance that charge-offs in future periods will not
exceed the allowance for loan losses or that additional increases
in the allowance for loan losses will not be required.
The allowance for loan losses is established through charges
in the form of a provision for loan losses and purchased loan
adjustments. Loan losses and recoveries are charged or credited
directly to the allowance. The amount charged to the provision
for loan losses by the Company is based on management's judgment
as to the amount required to maintain an allowance adequate to
provide for potential losses in the Company's loan portfolio.
The level of this allowance is dependent upon the total amount of
past due loans, general economic conditions and management's
assessment of potential losses.
The Company attempts to deal with repayment risks through
the establishment of, and adherence to, internal credit policies.
These policies include officer and customer limits, periodic
documentation examination and follow-up procedures for any
14
exceptions to credit policies. A summary of the Company's
approach to managing credit risk is provided below in the "Asset
Quality" section.
At September 30, 1994, the Company had $397,000 in non-
accruing loans and $1,372,000 in loans greater than ninety days
past due on which interest was still being accrued. This
compares favorably with $905,000 and $1,335,000, respectively, at
September 30, 1993. Non-performing assets as a percentage of
loans and other real estate owned were 0.12% and 0.48% at
September 30, 1994 and 1993, respectively. Charge-offs as a
percentage of average loans have remained low during the first
nine months of 1994 at a 0.10% annual rate for the Company
compared with a 0.28% annual rate for the first nine months of
1993. These asset quality measures compare favorably to the
Company's FDIC peer group.
The allowance for loan losses totaled $5,029,000, or 0.62%
of total loans, at the end of September 1994, compared with
$5,352,000, or 1.0% of total loans, at the end of September 1993.
The allowance for loan losses as a percentage of non-performing
loans was 1,267% and 591% as of September 30, 1994 and 1993,
respectively. The Company made a $450,000 provision for loan
losses for the first nine months of 1994, compared with $909,000
for the comparable period of 1993.
In five transactions during the period of time from December
1990 through November 1993, the Bank purchased an aggregate of
approximately $35 million in credit card receivables and related
accounts from Republic Bank. In connection with these
transactions, a series of escrow agreements were established in
which portions of the various purchase prices were set aside by
Republic Bank to be used in absorbing credit losses in the
purchased credit card portfolio. The Company exhausted the
escrow balances in the second quarter of 1994. As set forth in
the final 8 paragraphs of "Growth Strategy and Acquisitions," the
Company is considering the sale or securitization of
substantially all of its credit card portfolio. Such discussion
is incorporated herein by reference. See also "Liquidity and
Interest Rate Sensitivity."
The Bank was examined in December 1993 by the Federal
Deposit Insurance Corporation, and the Savings Bank was examined
in February 1994 by the Office of Thrift Supervision. No
significant increases in reserves resulted from these
examinations. In the most recent Community Reinvestment Act
evaluations, the Bank received an "outstanding" rating, the
highest rating, and the Savings Bank received a "satisfactory"
rating, the second highest rating.
15
Noninterest Income
Noninterest income, excluding securities transactions,
increased 64% to $6,014,000 for the nine months ended September
30, 1994 from $3,673,000 for the same period of 1993, for an
increase of $2,341,000. This increase resulted principally from
service charges on deposit accounts, fees for trust services and
mortgage banking income. The Company realized gains on the sale
of securities of $189,000 and $546,000 in the first nine months
of 1994 and 1993, respectively.
Service charges on deposit accounts, the largest contributor
to noninterest income, rose 47% to $2,682,000 for the first nine
months of 1994 from $1,822,000 for the first nine months of 1993.
The increase in service charges is attributable to acquiring
branches and new deposit accounts, increasing fee charges and
improving collection rates. Average deposits for the same period
increased 37%.
Mortgage banking income for the first nine months of 1994
increased $659,000, or 71%, to $1,583,000 from $924,000 in the
first nine months of 1993. Mortgage banking income includes
origination fees, profits from the sale of loans and servicing
fees (which started in 1993). Origination fees totaled $808,000
in the first nine months of 1994 and $642,000 in the first nine
months of 1993. Until the third quarter of 1992, mortgage loans
were originated primarily for the account of correspondent
financial institutions, with the Bank retaining an origination
fee. Beginning in the third quarter of 1992, the Company
expanded the activities of its mortgage loan operations and began
self-funding the loans through the Savings Bank prior to sale in
the secondary market. Mortgage loans totaling approximately $38
million and $39 million were sold during the first nine months of
1994 and 1993, respectively. Income from this activity totaled
$192,000 in the first nine months of 1994 and $259,000 in the
first nine months of 1993.
The Mortgage Company's mortgage servicing operations consist
of servicing loans that are owned by the Savings Bank and
subservicing loans, to which the right to service is owned by the
Savings Bank and other non-affiliated financial institutions.
Mortgage loans serviced are all one to four family residential
mortgage loans. At September 30, 1994, approximately 10,400
loans with an aggregate principal amount of approximately $802
million were being serviced or subserviced by the Mortgage
Company. Servicing income from non-affiliated companies, net of
the related amortization, was $583,000 for the first nine months
of 1994. Servicing income in 1993 was not significant.
Fees for trust services in the first nine months of 1994
16
increased to $681,000, up 65% from the $412,000 earned in the
first nine months of 1993. Fees for trust services increased as
a result of the generation of new trust business and additional
assets under management. Assets under management of the trust
department increased to approximately $183 million at September
30, 1994 from approximately $68 million at September 30, 1993.
Sundry income items were $553,000 higher for the first nine
months of 1994 than the same period of 1993, primarily because of
higher customer service fees, appraisal fee income and insurance
commissions from increased lending and deposit activity. In
addition, during the first nine months of 1994, the Company
earned approximately $108,000 in real estate rental income, the
majority of which is not expected to continue.
On August 18, 1993, the Bank entered into an investor
services agreement with Edgar M. Norris & Co., Inc. ("Norris &
Co."), a broker-dealer registered with the National Association
of Securities Dealers, Inc., to offer certain brokerage services
to the Bank's customers. Under this affiliate arrangement, the
Bank offers certain brokerage services to its customers through
dual employees (a Bank employee who is also employed by Norris &
Co.). The commissions or mark up charges on transactions will be
shared between the Bank and Norris & Co. as set forth in the
investor services agreement. Brokerage services activity for
1994 has been limited.
Noninterest Expenses
Noninterest expenses for the nine months ended September 30,
1994 were $27,186,000, compared with $17,649,000 for the same
period of 1993, for an increase of $9,537,000, or 54%. The
increased expenditures primarily reflect the costs of additional
personnel to support the Company's current and anticipated
growth.
Salaries and wages and benefits increased 56% to $13,094,000
for the first nine months of 1994 from $8,376,000 for the first
nine months of 1993. Full-time equivalent employees rose to 502
as of September 30, 1994 from 363 as of September 30, 1993.
Staff increases were attributable to the addition of 15 banking
offices, higher loan and deposit activity resulting from internal
growth and acquisitions, and the expansion of the mortgage
banking operations.
Occupancy and furniture and equipment expenses increased
$1,726,000, or 68%, to $4,257,000 for the nine months ended
September 30, 1994 due to the addition of 15 banking offices
including a new Myrtle Beach main office, the opening of a
regional headquarters office in Columbia for the Midlands region
of South Carolina, the establishment of the Mortgage Company and
the expansion of its administrative offices in Greenville to a
second
17
location. In addition, the Company relocated its
operations center from Greenville, South Carolina to Columbia,
South Carolina, a location more central to its branches.
Federal deposit insurance premiums increased $454,000, or
48%, in the first nine months of 1994 to $1,398,000. This
increase was primarily due to a higher levels of deposits.
Intangibles amortization increased $455,000, or 60%, in the first
nine months of 1994 to $1,215,000, principally as a result of
intangibles relating to the acquisition of branches, credit card
receivables and the mortgage company. For information regarding
the review of the Company's intangible assets and the potential
write-down of such assets, see the final 8 paragraphs of "Growth
Strategy and Acquisitions" above.
Service charges for processing credit cards increased
$401,000 in the first nine months of 1994, principally as a
result of credit card solicitations by the Company and the
purchase of approximately $16.3 million in credit card
receivables in June 1993 and November 1993. Advertising and
public relations expenses increased $328,000, or 97%, due to the
Company's statewide expansion, advertising campaigns in key
markets and special deposit promotions. The increase in the
remaining sundry noninterest expense was primarily attributable
to the overhead and operating expenses associated with higher
lending and deposit activities. The largest sundry noninterest
expenses were stationery, supplies and printing, telephone,
postage, and professional fees.
BALANCE SHEET REVIEW
Loans
The Company's loan portfolio consists principally of
one-to-four family residential mortgage loans, commercial
mortgage loans and other commercial and consumer loans. A
substantial portion of these borrowers are located in South
Carolina and are concentrated in the Company's market areas. The
Company has no foreign loans or loans for highly leveraged
transactions. The loan portfolio does not contain any
concentrations of credit risk exceeding 10% of the portfolio. At
September 30, 1994, the Company had total loans outstanding of
$816,341,000 which equaled approximately 87% of the Company's
total deposits and approximately 76% of the Company's total
assets. The composition of the Company's loan portfolio at
September 30, 1994 was as follows: commercial 45%, residential
mortgage 26%, consumer 12%, credit card 12% and construction 5%.
The Company's loans increased $279,451,000, or 52%, to
$816,341,000 at September 30, 1994 from $536,890,000 at
September 30, 1993. Of this increase, $48,666,000 resulted from
18
loans acquired in branch acquisitions and credit card purchases.
The balance was internal loan growth. This increase was net of
$79,263,000 of mortgage loans sold, which were predominantly
current production, fixed rate mortgage loans. During 1994, the
Bank began a mail campaign to solicit new credit card customers.
These solicitations resulted in approximately $46 million in new
credit card balances, which doubled the size of the Company's
credit card portfolio.
As noted above, the Company has experienced significant
growth in its commercial, multi-family mortgage and commercial
mortgage loans over the past several years. Furthermore, these
loans constitute approximately 45% of the Company's total loans
at September 30, 1994. These loans generally range in size from
$250,000 to $500,000 and are typically made to small to
medium-sized, owner-operated companies. There are certain risks
inherent in making all loans, including risks resulting from
uncertainties as to the future value of collateral, risks
resulting from changes in economic and industry conditions and
risks inherent in dealing with individual borrowers. However,
commercial, multi-family mortgage and commercial mortgage loans
are generally more risky than one-to-four family or consumer
loans because they are unique in character, are generally larger
in amount and are dependent upon the business' generating cash to
service the loan.
For the first nine months of 1994, the Company's loans
averaged $683,421,000 with a yield of 8.81%, compared with
$467,282,000 and a yield of 8.64% for the same period of 1993.
The interest rates charged on loans vary with the degree of risk
and the maturity and amount of the loan. Competitive pressures,
money market rates, availability of funds, and government
regulations also influence interest rates. The slight decline in
loan yield was more than offset by the downward repricing of
deposits which resulted in a higher net interest margin.
Securities
Debt securities held as assets are classified as investment
securities, securities available for sale or trading securities.
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards 115, "Accounting for Certain
Investments in Debt and Equity Securities." Securities
classified as investments are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts. In
order to qualify as an investment asset, the Company must have
the ability and a positive intention to hold them to maturity.
Securities available for sale are carried at market value with
unrealized gains or losses reported in stockholders' equity.
These securities may be disposed of if management believes that
the sale would provide the Company and its subsidiaries with
increased liquidity or, based
19
upon prevailing or projected economic conditions, that such
sales would be a safe and sound banking practice and in the
best interest of the stockholders. Trading securities are carried
at market value with adjustments for unrealized gains or losses
reported in noninterest income. The Company's policy is to acquire
trading securities only to facilitate their sale to customers.
The Company's subsidiaries are generally limited to
investments in (i) United States Treasury securities or United
States Government guaranteed securities, (ii) securities of
United States Government agencies, (iii ) mortgage-backed
securities, (iv) general obligation municipal bonds and revenue
bonds which are investment grade rated and meet certain other
standards, and (v) money market instruments which are investment
grade rated and meet certain other standards.
During the first quarter of 1993, the Company received
approval to establish dealer bank operations to sell United
States Treasury, Federal agency and municipal bonds to
individuals, corporations and municipalities through its
investments division. Income from the Company's dealer activity
is not material.
At September 30, 1994, the Company's total investment
portfolio had a book value of $117,466,000 and a market value of
$114,293,000 for an unrealized loss of $3,173,000. The
investment portfolio has a weighted average duration of
approximately 2.14 years. Securities (i.e., investment
securities, securities available for sale and trading securities)
averaged $131,442,000 in the first nine months of 1994, 1% above
the 1993 average of $130,025,000. The average portfolio yield
declined from 5.13% for the first nine months of 1993 to 4.81%
for the first nine months of 1994. The portfolio yield declined
due to a declining interest rate environment in 1993 when the
Company increased the size of its investment portfolio.
At September 30, 1994, securities totaled $116,538,000, down
$23,200,000 from the $139,738,000 invested as of the third
quarter end 1993. This decrease in quarter-end investments
resulted from the deployment of the excess funds acquired in the
acquisition of the 12 Republic branches into loans during 1993.
To date, the Company and its subsidiaries have not engaged
in any derivative products or any structured notes.
Other Assets
At September 30, 1994, other assets included other real
estate owned of $600,000 and intangible assets of $26,654,000.
The intangible assets balance is attributable to goodwill of
$6,795,000, core deposit balance premiums of $9,496,000, excess
and
20
purchased mortgage servicing rights of $9,211,000 and
purchased credit card premiums of $1,152,000.
For information regarding the review of the Company's
intangibles assets and the potential write-down of such assets,
see the final 8 paragraphs of "Growth Strategy and Acquisitions"
above.
Deposits
The Banks' primary source of funds for loans and investments
is its deposits which are gathered through the Bank's and the
Savings Bank's branch networks. Competition for deposit accounts
is primarily based on the interest rates paid thereon and the
convenience of and the services offered by the branch locations.
The Company's pricing policy with respect to deposits takes into
account the liquidity needs of the Company, the direction and
levels of interest rates, and local market conditions. The
Company does not believe that any of its deposits qualify as
brokered deposits. It is the Company's policy not to accept
brokered deposits.
During the first nine months of 1994, interest-bearing
liabilities averaged $765,060,000, compared with $543,274,000 for
the comparable period of 1993. This increase resulted
principally from branch acquisitions. The average interest rates
were 3.64% and 3.86% for the first nine months of 1994 and 1993,
respectively. At September 30, 1994, interest-bearing deposits
comprised approximately 88% of total deposits and 96% of
interest-bearing liabilities.
The Company uses its deposit base as its primary source of
funds. Deposits grew 30% to $940,275,000 at September 30, 1994
from $724,585,000 at September 30, 1993. Of the $215,690,000
increase in deposits, approximately $179,564,000 resulted from
the acquisition of branches. Internal growth generated the
remaining new deposits. During the first nine months of 1994,
total deposits averaged $814,394,000 with a rate of 3.42%,
compared with $596,018,000 with a rate of 3.44% in 1993. As the
level of interest rates continued to fall in 1993, the Company
was able to reprice deposits to more than recover declines in the
yields on earning assets. During the first half of 1994, which
was a period of rising interest rates, the Company generally kept
deposit interest rates unchanged. Beginning with the third
quarter of 1994, however, the Company raised deposit interest
rates, causing the Company's interest rate paid on deposits to
rise. In 1994, the Company has also maintained a higher level of
noninterest-bearing deposits, reducing the interest rate paid on
deposits.
The Company's core deposit base consists of consumer time
deposits, savings, NOW accounts, money market accounts and
checking
21
accounts. Although such core deposits are becoming
increasingly interest sensitive for both the Company and the
industry as a whole, such core deposits continue to provide the
Company with a large and stable source of funds. Core deposits
as a percentage of average total deposits averaged approximately
86% for the first nine months of 1994. The Company closely
monitors its reliance on certificates of deposit greater than
$100,000, which are generally considered less stable and less
reliable than core deposits.
Generally, certificates of deposits greater than $100,000
have a higher degree of interest rate sensitivity than other
certificates of deposit. The percentage of Company deposits
represented by certificates of deposit greater than $100,000 is
higher than the percentage of such deposits held by the Company's
peers. However, the Company does not believe that this
higher-than-peer percentage of certificates of deposits greater
than $100,000 will have a material adverse effect on the Company
because such certificates are principally held by long-term
customers located in the Company's market areas.
As a result of the acquisition of deposits from the
purchased branches, increased commercial business and changes in
economic conditions, the deposit mix adjusted favorably. Average
noninterest-bearing deposits, which increased 67% during the
year, increased to 10.8% of average total deposits for the first
nine months of 1994 from 8.85% of average total deposits for the
first nine months of 1993. In addition, the relative level of
time deposits declined as customers, reluctant to lock in
deposits at the current low interest rates, switched to savings
or money market accounts.
Capital Resources and Dividends
The Company's capital needs have been met principally
through public offerings of common and preferred stock and
through the retention of earnings. In addition, the Company
issued both common and preferred stock in connection with the
acquisitions of the Savings Bank and the Mortgage Company.
The Company's initial public offering in 1986 raised
$15,316,000 in common equity and, to date, represents the largest
amount of initial equity raised in connection with the startup of
a financial institution in South Carolina. Other public
offerings of capital stock include the offering of the 8.32%
Cumulative Convertible Preferred Stock ("Series 1992 Preferred
Stock") in May 1992, which raised $10,319,000, the offering of
the 7.50% Noncumulative Convertible Preferred Stock Series
("Series 1993 Preferred Stock") in March 1993, which raised
$14,462,000, and the offering of the Series 1994 Preferred Stock
in April 1994, which raised $21,442,000. In December 1993, the
Company redeemed the
22
Series 1992 Preferred Stock. In connection with such redemption,
substantially all of the outstanding shares of Series 1992
Preferred Stock were converted into 1,089,674 shares of Common
Stock.
On September 30, 1993, the Company completed the acquisition
of all of the outstanding stock of First Sun in exchange for
60,000 shares of Series 1993B Preferred Stock which added
$1,200,000 in equity. There is currently no market for the
Series 1993B Preferred Stock, and it is not expected that any
market for such stock will develop.
The Company completed the offering of its Series 1994
Preferred Stock on April 15, 1994. In connection with this
offering, the Company raised approximately $21,442,000 after
deduction of the related expenses. In the offering, the Company
issued 920,000 shares of its Series 1994 Preferred Stock. Each
share of Series 1993 Preferred Stock provides for cash dividends,
when, as, and if declared by the Board of Directors, at the
annual rate of $1.83 per share. Dividends on the Series 1994
Preferred Stock are not cumulative. A Series 1994 Preferred
Stock share may be converted at the option of the holder into
1.7931 shares of common stock. The conversion ratio has been
restated to reflect the 5% common stock dividend. In addition,
and upon compliance with certain conditions, the Company may
redeem the Series 1994 Preferred Stock at the redemption prices
set forth in the Company's Articles of Amendment related to the
Series 1994 Preferred Stock.
Total stockholders' equity increased $24,155,000, or 38%, to
$87,024,000 at September 30, 1994 from $62,869,000 at September
30, 1993. This change primarily reflects the capital raised in
connection with the Series 1994 Preferred Stock offering
discussed above, which was issued on April 15, 1994, and the
retention of earnings.
Book value per share increased to $10.45 at September 30,
1994 from $10.17 at September 30, 1993. Tangible book value per
share at September 30, 1994 was $6.85, up from $6.39 at September
30, 1993. Tangible book value is significantly below the
Company's book value as a result of the purchase premiums
associated with branch acquisitions and the purchase of the
Mortgage Company.
Risk-based capital guidelines for financial institutions
adopted by the regulatory authorities went into effect after
December 31, 1990. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), signed into law on December
19, 1991, provides authority for special assessments against
insured deposits and for development of a general risk-based
deposit insurance assessment system, which the Federal Deposit
Insurance Corporation ("FDIC") implemented on a transitional
basis effective January 1, 1993.
23
Effective January 1, 1993, the FDIC replaced the uniform
insurance assessment rate with a transitional risk-based
assessment schedule (which is required by FDICIA to be fully
effective by January 1994), having assessments ranging from 0.23%
to 0.31% of an institution's average assessment base. The actual
assessment to be paid is based on the institution's assessment
risk classification, which will be determined based on (i)
whether the institution is considered "well capitalized,"
"adequately capitalized" or "undercapitalized," as such terms
have been defined in applicable federal regulations adopted to
implement prompt corrective action provisions of FDICIA, and (ii)
whether such institution is considered by its supervisory agency
to be financially sound or to have supervisory concerns.
At September 30, 1994, the Company and its subsidiaries were
in compliance with each of the applicable regulatory capital
requirements. In addition, the Company, Bank and the Savings
Bank exceeded the "adequately capitalized" regulatory guidelines.
The risk-based insurance assessments for the Bank and Savings
Bank have been set at 0.26% and 0.23%, respectively, of the
average assessment basis. The following table sets forth various
capital ratios for the Company and its subsidiaries.
Capital Ratios
Requirement as of 9/30/94 Actual
Well Adequately as of
Capitalized Capitalized 9/30/94
Company:
Total Risk-based 10.0% 8.0% 9.47%
Tier 1 Risk-based 6.0 4.0 8.84
Leverage Ratio 5.0 4.0 6.73
Carolina First Bank:
Total Risk-based 10.0 8.0 8.48
Tier 1 Risk-based 6.0 4.0 7.91
Leverage Ratio 5.0 4.0 6.36
Carolina First Savings Bank:
Total Risk-based 10.0 8.0 8.99
Tier 1 Risk-based 6.0 4.0 8.16
Leverage Ratio 5.0 4.0 5.25
The Company and its subsidiaries are subject to certain
regulatory restrictions on the amount of dividends they are
permitted to pay.
During each of the last six years, the Company issued 5%
common stock dividends to common stockholders. The Company has
paid all scheduled cash dividends on the Series 1993 Preferred
24
Stock, the Series 1993B Preferred Stock and the Series 1994
Preferred Stock since their respective issuances.
In November 1993, the Board of Directors initiated a regular
quarterly cash dividend of $0.05 per share payable on the common
stock, the first of which was paid on February 1, 1994. Cash
dividends of $0.05 have been paid on a quarterly basis since the
initiation of the cash dividend. The Company presently intends
to continue to pay this quarterly cash dividend on the common
stock; however, future dividends will depend upon the Company's
financial performance and capital requirements.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset/liability management is the process by which the
Company monitors and controls the mix and maturities of its
assets and liabilities. The essential purposes of
asset/liability management are to ensure adequate liquidity and
to maintain an appropriate balance between interest sensitive
assets and liabilities. Liquidity management involves meeting
the cash flow requirements of the Company. These cash flow
requirements primarily involve withdrawals of deposits,
extensions of credit, payment of operating expenses and repayment
of purchased funds. The Company's principal sources of funds for
liquidity purposes are customer deposits, principal and interest
payments on loans, maturities and sales of debt securities,
temporary investments and earnings. Temporary investments
averaged 2.20% and 3.16% of earning assets in the first half of
1994 and 1993, respectively. Management believes that the
Company maintains an adequate level of liquidity by retaining
liquid assets and other assets that can easily be converted into
cash, and by maintaining access to alternate sources of funds,
including federal funds purchased from correspondent banks and
borrowings from the Federal Home Loan Bank.
The liquidity ratio is an indication of a company's ability
to meet its short-term funding obligations. FDIC examiners
suggest that a commercial bank maintain a liquidity ratio of
between 20% and 25%. At September 30, 1994, Carolina First
Bank's liquidity ratio was approximately 13%, a level below FDIC
guidelines. At September 30, 1994, the Bank and Savings Bank had
unused short-term lines of credit with correspondent banks of $26
million. All of the lenders have reserved the right to withdraw
these lines of credit at their option. In addition, the Company,
through its subsidiaries, has access to borrowings from the
Federal Home Loan Bank. At September 30, 1994, unused borrowing
capacity from the Federal Home Loan Bank totaled $47 million.
The Company believes that these sources are adequate to meet its
liquidity needs.
To provide additional liquidity, the Company is considering
the sale or securitization of a significant portion of its credit
25
card loans, which, at September 30, 1994, totaled approximately
$97 million. The sale or securitization of credit card loans
would provide the Company with funds to make additional
commercial and consumer loans in its market areas. The Company
has experienced steady loan demand in its market areas and wants
to be able to meet this demand without impairing its liquidity,
which is currently below FDIC guidelines. Selling or securitizing the
majority of its credit card receivables, which are largely outside of
the Company's market area, would provide funds for this in-market
lending activity and improve the Company's liquidity. The
Company expects to complete the sale or securitization of credit card
receivables during the remainder of 1994. However, the Company can
give no assurance that such a sale will, in fact, occur. See the
final 8 paragraphs of "Growth Strategy and Acquisitions" above.
As reported in the Consolidated Statements of Cash Flows,
increases in deposits, borrowed funds, investments and equity
provided cash in the first nine months of 1994 of $172,250,000,
$13,933,000, $43,278,000 and $21,794,000, respectively. The
Company used this cash to increase loans by $216,571,000, capital
expenditures by $9,298,000, cash balances by $16,124,000,
operating activities by $7,283,000 and dividends by $1,979,000.
The Bank is building a branch office in Lexington, which is
currently open in temporary offices, at an estimated cost of
approximately $1.4 million. The Lexington branch is expected to
be completed in the fourth quarter of 1994.
The Company plans to meet its future cash needs through the
proceeds of stock offerings, liquidation of temporary
investments, maturities or sales of loans and investment
securities and generation of deposits. By increasing the rates
paid on deposits, the Company would be able to raise deposits.
The interest sensitivity gap is the difference between total
interest sensitive assets and liabilities in a given time period.
The objective of interest sensitivity management is to maintain
reasonably stable growth in net interest income despite changes
in market interest rates by maintaining the proper mix of
interest sensitive assets and liabilities. Management seeks to
maintain a general equilibrium between interest sensitive assets
and liabilities in order to insulate net interest income from
significant adverse changes in market rates.
The Company's Asset/Liability Management Committee uses a
variety of tools to analyze the Company's interest sensitivity.
A "static gap" presentation reflects the difference between total
interest- sensitive assets and liabilities within certain time
periods. While the static gap is a widely-used measure of
interest sensitivity, it is not, in management's opinion, a true
indicator of the Company's sensitivity position. It presents a
static view
26
of the timing of maturities and repricing
opportunities, without taking into consideration that changes in
interest rates do not affect all assets and liabilities equally.
For example, rates paid on a substantial portion of savings and
core time deposits may contractually change within a relatively
short time frame, but those rates are significantly less
interest-sensitive than market based rates such as those paid on
non-core deposits. Accordingly, a liability sensitive gap
position is not as indicative of the Company's true interest
sensitivity as would be the case for an organization which
depends to a greater extent on purchased funds to support earning
assets. Net interest income would also be impacted by other
significant factors in a given interest rate environment,
including the spread between the prime rate and the incremental
borrowing cost and the volume and mix of earning asset growth.
Accordingly, the Company uses an asset/liability simulation model
which quantifies balance sheet and earnings variations under
different interest rate environments to measure and manage
interest rate risk.
ASSET QUALITY
Prudent risk management involves assessing risk and managing
it effectively. Certain credit risks are inherent in making
loans, particularly commercial, real estate and consumer loans.
The Company attempts to manage credit risks by adhering to
internal credit policies and procedures. These policies and
procedures include a multi-layered loan approval process, officer
and customer limits, periodic documentation examination and
follow-up procedures for any exceptions to credit policies.
Loans are assigned a grade and those that are determined to
involve more than normal credit risk are placed in a special
review status. Loans that are placed in special review status
are required to have a plan under which they will be either
repaid or restructured in a way that reduces credit risk. Loans
in this special review status are reviewed monthly by the loan
committee of the Board of Directors.
As demonstrated by the following key analytical measures of
asset quality, management believes the Company has effectively
managed its credit risk. Net loan charge-offs totaled $517,000
in the first nine months of 1994 and $997,000 in the first nine
months of 1993, or 0.10% and 0.28%, respectively, as a percentage
of average loans. Non-performing assets as a percentage of loans
and other real estate owned were 0.12% and 0.48% as of September
30, 1994 and 1993, respectively.
27
INDUSTRY DEVELOPMENTS
Certain recently-enacted and proposed legislation could have
an effect on both the costs of doing business and the competitive
factors facing the financial institutions industry. The Company
is unable at this time to assess the impact of this legislation
on its financial condition or operations. See "Capital Resources
and Dividends."
28
PART II
ITEM 1 LEGAL PROCEEDINGS
On October 31, 1994, JW Charles Clearing Corp. filed a
lawsuit against the Bank in the Court of Common Pleas
in Lexington County, South Carolina. Such action, in
general, claims that the Bank improperly paid
approximately $600,000 in checks to Harold McCarley
and/or McCarley and Associates, Inc. The complaint
seeks actual and punitive damages in an amount to be
determined by a jury, plus interest on the damages and
other costs. Unless an extension is received, the Bank
must answer the complaint on or before December 1,
1994. The Bank intends to answer and vigorously defend
such complaint. The Bank believes that there are valid
defenses available to it. In connection with the
litigation, the Bank also expects to make a claim under
insurance policies for any losses it may suffer which,
if determined to cover the loss, could pay for
substantially all of the actual damages, if any,
determined to be appropriate by a jury. However, no
assurance can be given at this time regarding whether
it will be determined that any losses suffered in this
litigation will be covered by the insurance policy.
Furthermore, the Company is not in a position at this
time to assess the likely outcome of the litigation or
any damages for which it may become liable.
ITEM 2 CHANGE IN SECURITIES
On July 1, 1994, the Company filed Articles of
Correction with the South Carolina Secretary of State.
Such Articles of Correction corrected a typographical
error which erroneously listed the premium on the
Company's Noncumulative Convertible Preferred Stock
Series 1993 as 8% over $25 on July 1, 1993 instead of
7% as referenced in all public offering documents used
in connection with the sale of the Noncumulative
Convertible Preferred Stock Series 1993. See
Prospectus of Carolina First Corporation dated February
26, 1993 filed with the Securities and Exchange
Commission.
29
Part II
(continued)
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5 OTHER INFORMATION
Proposed Merger
On October 13, 1994, the Company signed a definitive
agreement with Aiken County National Bank ("Aiken
County National") for the merger of Aiken County
National into Carolina First Bank. The Company will
acquire all the outstanding common shares of Aiken
County National in exchange for approximately 453,000
shares of the Company's common stock (assuming no
dissenter's rights are exercised). Aiken County
National has assets of approximately $42 million, loans
of $30 million and deposits of $38 million. This
transaction, which is subject to regulatory and Aiken
County National shareholder approval, is expected to be
completed in the first quarter of 1995.
On November 14, 1994, the Company signed a definitive
agreement with Midlands National Bank ("Midlands") for
the merger of Midlands into Carolina First Bank. The
Company will acquire all the outstanding common shares
of Midlands in exchange for approximately 584,000
shares of the Company's common stock (assuming no
dissenter's rights are exercised). Midlands has assets
of approximately $43 million, loans of $28 million and
deposits of $39 million. This transaction, which is
subject to regulatory and Midlands shareholder
approval, is expected to be completed in the first
quarter of 1995.
30
PART II
(continued)
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Reorganization Agreement By and Between Carolina First
Corporation, Carolina First Bank, and Aiken County
National Bank
2.2 Reorganization Agreement By and Between Carolina First
Corporation, Carolina First Bank, and Midlands National
Bank
4.1 Articles of Correction filed with the Secretary of
State on July 1, 1994
10.1 All material contracts in the December 31, 1993 Form
10-K, March 31, 1994 Form 10-Q and June 30, 1994 Form
10-Q plus the following:
10.2 Agreement Between Carolina First Corporation, Richard
E. Greer, William Graham and Telepay, Inc.
11.1 Computation of Primary and Fully Diluted Earnings Per
Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K: None.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Carolina First Corporation
/S/ William S. Hummers, III
William S. Hummers, III
Executive Vice President,
Secretary
(Principal Financial and
Accounting Officer)
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Carolina First Corporation
William S. Hummers, III
Executive Vice President,
Secretary
(Principal Financial and
Accounting Officer)
32