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 JUNE 30, 1995
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 $1.00 par value common
stock as of August 9, 1995 was 5,848,799.
Consolidated Balance Sheets
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
June 30, December
ASSETS 1995 1994
Cash and due from banks................... $ 56,351 59,750
Federal funds sold and securities
purchased under resale agreements....... 530 4,420
Securities
Trading................................ 1,004 1,155
Available for sale..................... 74,947 59,078
Held for investment (market value
$79,041 in 1995 and $66,820 in 1994)... 79,907 70,264
Total securities..................... 155,858 130,497
Loans held for sale....................... 3,175 71,695
Loans..................................... 968,742 852,246
Less unearned income................... (534) (873)
Less allowance for loan losses......... (8,275) (6,002)
Net loans............................ 963,108 917,066
Premises and equipment.................... 38,900 39,823
Accrued interest receivable............... 8,866 7,674
Other assets.............................. 54,889 45,120
$1,278,502 1,204,350
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing................... $ 136,798 126,974
Interest-bearing...................... 881,575 874,774
Total deposits...................... 1,018,373 1,001,748
Borrowed funds.......................... 135,378 107,236
Subordinated notes...................... 25,172 --
Accrued interest payable................ 5,428 4,141
Other liabilities....................... 4,094 4,743
Total liabilities.................... 1,188,445 1,117,868
Shareholders' Equity
Preferred stock-no par value; authorized
10,000,000 shares; issued and
outstanding 917,200 shares (Series 1994),
533,000 shares (Series 1993) and 53,575
shares (Series 1993B) in 1995 and
920,000 shares (Series 1994), 621,000
shares (Series 1993) and 60,000 shares
(Series 1993B) in 1994; liquidation
preference $25 per share (Series
1994 and 1993) and $20 per share
(Series 1993B)........................ 34,821 37,014
Common stock-par value $1 per share;
authorized 20,000,000 shares; issued
and outstanding 5,831,724 shares in
1995 and 5,618,873 in 1994............ 5,832 5,619
Surplus................................. 48,016 45,543
Retained earnings....................... 2,572 515
Nonvested restricted stock.............. (914) (1,083)
Guarantee of ESOP debt.................. (126) (126)
Unrealized gain (loss) on securities
available for sale.................... (144) (1,000)
Total shareholders' equity........... 90,057 86,482
$1,278,502 1,204,350
1
Consolidated Statements of Income
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
Three Months Ended June 30, Six Months Ended June 30,
1995 1994 1995 1994
Interest income
Interest and fees on loans................................ $ 22,177 $ 16,500 $ 43,404 $ 29,876
Interest on securities
Taxable................................................. 1,683 1,430 3,201 2,871
Exempt from Federal income taxes........................ 239 256 492 449
Total interest on securities.......................... 1,922 1,686 3,693 3,320
Interest on federal funds sold and securities
purchased under resale agreements....................... 105 247 253 441
Total interest income................................... 24,204 18,433 47,350 33,637
Interest expense
Interest on deposits...................................... 9,927 7,126 19,011 13,515
Interest on borrowed funds and subordinated notes......... 2,216 268 3,638 509
Total interest expense.................................. 12,143 7,394 22,649 14,024
Net interest income..................................... 12,061 11,039 24,701 19,613
Provision for loan losses................................... 990 204 4,390 242
Net interest income after
provision for loan losses............................. 11,071 10,835 20,311 19,371
Noninterest income
Service charges on deposit accounts....................... 1,370 881 2,665 1,781
Credit card trust income.................................. 790 -- 1,167 --
Fees for trust services................................... 212 251 512 496
Mortgage banking income................................... 584 550 892 1,050
Gain on sale of securities................................ 92 62 197 135
Sundry.................................................... 519 365 1,243 743
Gain on sale of purchased mortgage servicing rights....... -- -- 2,026 --
Total noninterest income................................ 3,567 2,109 8,702 4,205
Noninterest expenses
Salaries and wages........................................ 4,224 4,088 8,483 7,177
Employee benefits......................................... 1,031 777 2,130 1,935
Occupancy................................................. 1,044 867 2,106 1,669
Furniture and equipment................................... 828 676 1,565 1,200
Acquisition costs......................................... 493 -- 493 --
Sundry.................................................... 3,702 3,725 7,603 6,668
Total noninterest expenses.............................. 11,322 10,133 22,380 18,649
Income before income taxes.............................. 3,316 2,811 6,633 4,927
Income taxes................................................ 1,163 880 2,297 1,420
Net income ............................................. 2,153 1,931 4,336 3,507
Dividends on preferred stock................................ 685 661 1,412 971
Net income applicable to common shareholders............ $ 1,468 $ 1,270 $ 2,924 $ 2,536
Net income per common share:*
Primary................................................. $ 0.24 $ 0.22 $ 0.48 $ 0.44
Fully diluted........................................... 0.24 0.22 0.47 0.44
Average common shares outstanding:*
Primary.................................................6,231,337 5,829,209 6,144,354 5,821,200
Fully diluted...........................................9,160,880 8,652,326 9,149,002 7,912,971
*Per share data have been restated to reflect 5% stock dividends.
2
Consolidated Statements of Cash Flows
Consolidated
(Unaudited)
(All Amounts, Except Per Share Data, in Thousands)
Six Months Ended June 30
1995 1994
Cash Flows from Operating Activities
Net income..................................................... $ 4,336 $ 3,507
Adjustments to reconcile net income to net cash
used for operations
Depreciation............................................... 1,668 1,262
Amortization of intangibles................................ 1,687 731
Provision for loan losses.................................. 4,390 242
Gain on sale of securities................................. (197) (135)
Gain of sale of purchased mortgage servicing rights........ (2,026) --
Unrealized gain on securities.................................. (6) --
Proceeds from sale of trading securities................... 248,497 175,449
Proceeds from maturity of trading securities............... 3,432 16,406
Purchase of trading securities............................. (251,772) (192,771)
Originations of mortgage loans held for sale............... (29,348) (20,816)
Proceeds from sale of mortgage loans held for sale......... 26,245 22,681
Increase in interest receivable............................ (1,192) (2,025)
Increase in interest payable............................... 1,287 579
Increase in other assets................................... (9,551) (12,699)
Decrease in other liabilities.............................. (1,103) (3,761)
FHLB stock dividend........................................ -- (33)
Net cash used for operating activities....................... (3,653) (11,383)
Cash Flows from Investing Activities
Proceeds from maturity of securities available for sale........ 32,533 137,037
Proceeds from maturity of securities held for investment....... 2,817 6,906
Purchase of securities available for sale...................... (49,547) (158,610)
Purchase of securities held for investment..................... (9,842) (14,974)
Proceeds from sale of securities available for sale................ -- 10,099
Net decrease in federal funds sold and securities purchased
under resale agreements...................................... 3,890 49,841
Net increase in loans.......................................... (47,039) (140,331)
Capital expenditures........................................... (745) (7,447)
Net cash used for investing activities ...................... (67,933) (117,479)
Cash Flows from Financing Activities
Acquired deposits (net)............................................ -- 97,735
Net increase (decrease) in deposits............................ 16,625 (498)
Increase in borrowed funds..................................... 28,142 22,386
Issuance of subordinated notes................................. 25,172 --
Issuance of preferred stock........................................ -- 21,442
Dividends on preferred and common stock........................ (2,132) (1,182)
Other common stock activity........................................ 380 267
Net cash provided by financing activities.................... 68,187 140,150
Net change in cash and due from banks............................ (3,399) 11,288
Cash and due from banks at beginning of year..................... 59,750 31,516
Cash and due from banks at end of period......................... $ 56,351 $ 42,804
3
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 1994 Annual
Report to shareholders.
(2) SECURITIES
The change in the net unrealized loss on securities
available for sale was a decrease of $315,000 for the three
months ended June 30, 1995 and $856,000 for the six months
ended June 30, 1995.
(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 approximately $21,362,000 for the six months
ended June 30, 1995. Income tax payments of $4,480,000 were
made for the six months ended June 30, 1995.
In connection with the business combinations described in
Note 5, securities totaling $2,618,000 were reclassified
from Available for Sale to Held for Investments in a non-
cash transaction.
(4) SUBORDINATED NOTES
On May 18, 1995, the Company completed a $26.45 million
public offering of its Notes. The Notes, which are due on
September 1, 2005, pay interest quarterly at an annual rate
of 9.00%.
(5) COMMON STOCK
Primary earnings per share is based on the weighted average
number of common shares outstanding during each period,
including the assumed exercise of dilutive stock options,
using the treasury stock method. Primary earnings per share
also reflects provisions for dividend requirements on all
outstanding shares of Carolina First Corporation (the
"Company") preferred stock.
Fully diluted earnings per share is based on the weighted
average number of common shares outstanding during each
period, including the assumed conversion of convertible
preferred stock into common stock and the assumed exercise
of dilutive stock options using the treasury stock method.
The Board of Directors of the Company declared the issuance
of a 5% common stock dividend to be issued on August 15, 1995
to common shareholders of record as of August 1, 1995. Per share
data of prior periods have been restated to reflect this dividend.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
(continued)
(6) BUSINESS COMBINATIONS
On April 10, 1995, Aiken County National Bank ("ACNB"), a
national bank headquartered in Aiken, South Carolina, was
merged into Carolina First Bank, a wholly-owned subsidiary
of the Company. Each share of ACNB common stock outstanding
on April 10, 1995 was converted into 1.125 shares of the
Company's common stock. The Company issued 452,658 shares
of common stock and cash in lieu of fractional shares for
all of the outstanding shares of ACNB. Immediately prior to
the acquisition, ACNB had assets of $39 million, net loans
of $30 million, deposits of $35 million, and shareholders'
equity of $3.5 million. The consolidated financial
statements of the Company give effect to the merger, which
has been accounted for as a pooling of interests.
On June 30, 1995, Midlands National Bank ("MNB"), a national
bank headquartered in Prosperity, South Carolina, was merged
into Carolina First Bank, a wholly-owned subsidiary of the
Company. Each share of MNB common stock outstanding on June
30, 1995 was converted into 1.65 shares of the Company's
common stock. The Company issued 584,968 shares of common
stock and cash in lieu of fractional shares for all of the
outstanding shares of ACNB. Immediately prior to the
acquisition, MNB had assets of $44 million, net loans of
$26 million, deposits of $40 million, and shareholders'
equity of $3.9 million. The consolidated financial
statements of the Company give effect to the merger, which
has been accounted for as a pooling of interests.
The accounts of ACNB and MNB have been combined with those
of the Company for all periods presented.
(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.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On April 10, 1995, the Company completed its acquisition of Aiken County
National Bank, a national bank headquartered in Aiken, South Carolina
("ACNB"). On June 30, 1995, the Company completed its acquisition of Midlands
National Bank ("MNB"). Both transactions were accounted for as pooling of
interests. All financial information contained in this filing includes the
results of ACNB and MNB for all periods presented.
GENERAL
Carolina First Corporation (the "Company") is a bank holding
company headquartered in Greenville, South Carolina which
operates through two subsidiaries: Carolina First Bank, a state-
chartered bank headquartered in Greenville, South Carolina and
Carolina First Mortgage Company, a South Carolina corporation
headquartered in Columbia, South Carolina ("CF Mortgage").
Through its subsidiaries, the Company provides a full range of
banking services, including mortgage, trust and investment
services, designed to meet substantially all of the financial
needs of its customers. The Company, which commenced banking
operations in December 1986, currently conducts business through
50 locations in South Carolina. At June 30, 1995, the Company
had approximately $1.28 billion in assets, $971.4 million in
loans, $1.06 billion in deposits and $90.1 million in
shareholders' equity.
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's objective is to become the leading South
Carolina-based banking institution. It believes that it can
accomplish this goal by pursuing a "super-community bank"
strategy, offering the personalized service and local decision-
making authority that characterize community banks, as well as
the sophisticated banking products offered by regional and super-
regional institutions. 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). In
April 1994, the Company entered the Charleston market with its
acquisition of Citadel Federal Savings and Loan Association
("Citadel Federal") from the Resolution Trust Corporation. The
Company's principal market areas, together with the Charleston
market, represent the four largest Metropolitan Statistical Areas
in the state.
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. Its more significant acquisitions include (i) the
6
acquisition in August 1990 of First Federal Savings and Loan
Association of Georgetown (subsequently renamed Carolina First
Savings Bank ("CF Savings Bank") and merged into Carolina First
Bank in February 1995), (ii) the acquisitions in March 1993 and
May 1994 of twelve branch locations and six branch locations (the
"6 Republic Branches"), respectively, of Republic National Bank,
(iii) the acquisition of First Sun Mortgage Corporation
(subsequently renamed Carolina First Mortgage Company) in
September 1993, (iv) the merger of ACNB into Carolina First Bank
in April 1995, and (v) the merger of MNB into Carolina First Bank
in June 1995. Approximately half of the Company's total deposits
have been generated through acquisitions.
In the fourth quarter of 1994, the Company initiated a
restructuring which was designed to improve its long-term
competitive position. This restructuring had several unrelated
components and involved (i) the merger of Carolina First Bank and
CF Savings Bank, (ii) the securitization of credit card
receivables, and (iii) the write-off of certain intangible
assets. In connection with these transactions, the Company
incurred in the fourth quarter of 1994 an aggregate, one-time,
after-tax charge of $9.4 million ($12.2 million pre-tax). The
Company believes that on a going-forward basis, the aggregate
effect of the restructuring will be to increase pre-tax income by
approximately $2.8 million a year. Absent the one-time charge
associated with these transactions, the Company would have had
net income of $7.5 million during 1994.
Since 1990, Carolina First Bank acquired or originated
credit card receivables which had outstanding balances of
approximately $104 million as of December 31, 1994. In January
1995, Carolina First Bank contributed approximately $97 million
of its credit card receivables to a master trust (the "Trust") in
connection with a securitization of such credit card receivables
(the "Securitization"). In connection with the Securitization,
certain interests in the Trust were sold to an institutional
investor, while Carolina First Bank retained certain residual
interests in the Trust assets and potential income. In
connection with the sale of such interests, Carolina First Bank
received cash proceeds of approximately $66 million.
In February 1995, the Company completed the merger of CF
Savings Bank into Carolina First Bank. Management believes that
there will be significant economic and managerial benefits from
this combination including the elimination of duplicative
administration, the consolidation of regulators, the reduction of
regulatory burdens and increased management focus.
CF Mortgage's principal activities include the origination
and servicing of one-to-four family residential mortgage loans
through its seven offices in South Carolina. At July 31, 1995,
CF Mortgage was servicing 5,444 loans having an aggregate
principal balance of approximately $395 million. This servicing
excludes approximately $435 million in servicing sold to an
unrelated party as of March 31, 1995. The Company subserviced
these loans until June 1995. This sale resulted in a gain for
the Company of approximately $2 million and was effected because
the Company believed that the terms were favorable. On June 6,
1995, Carolina First Bank entered into an agreement with HomeBanc
Mortgage Corporation ("HomeBanc") to purchase mortgage servicing
rights for 9,995 loans having an aggregate principal balance of
approximately $933 million. The purchase price for the servicing
was approximately $13 million. In connection with the
transaction, Carolina First Bank received a letter of credit
equal to 5% of the purchase price, which can be drawn upon by
Carolina First Bank in certain instances, including for breaches
of warranties by HomeBanc. HomeBanc is subservicing these loans
until August 1995. Following the closing of the purchase of
servicing rights from HomeBanc (which is expected to occur on or
about August 31, 1995), CF Mortgage expects to service over
15,000 loans with an aggregate principal balance of approximately
$1.3 billion.
7
On May 18, 1995, the Company completed a $26.5 million
public offering of its 9.0% Subordinated Notes due 2005 (the
"Notes"). A substantial portion of the proceeds was contributed
to Carolina First Bank to provide additional capital to support
internal growth and acquisitions and for working capital
purposes.
At its June 1995 meeting, the Board of Directors of the
Company declared the issuance of a 5% common stock dividend on
August 15, 1995 to common shareholders of record as of August 1,
1995. Per share data of prior periods have been restated to
reflect this dividend.
RECENT ACQUISITIONS
On April 10, 1995, the Company completed its acquisition of
ACNB, a national bank headquartered in Aiken, South Carolina. At
March 31, 1995, ACNB had two locations and approximately $39
million in assets, $35 million in deposits and $30 million in
loans. In connection with this acquisition, ACNB was merged into
Carolina First Bank, and the Company issued 452,658 shares of the
Company's $1 par value common stock ("Common Stock") and cash in
lieu of fractional shares to the ACNB shareholders. The
transaction was accounted for as a pooling of interests. All
financial information contained in this filing includes the
results of ACNB for all periods presented.
On June 30, 1995, the Company completed its acquisition of
MNB, a national bank headquartered in Prosperity, South Carolina.
At June 30, 1995, MNB operated through three locations and had
approximately $44 million in assets, $40 million in deposits and
$26 million in loans. In connection with this acquisition, MNB
was merged into Carolina First Bank, and the Company issued
584,968 shares of the Company's $1 par value Common Stock and
cash in lieu of fractional shares to the MNB shareholders. The
transaction was accounted for as a pooling of interests. All
financial information contained in this filing includes the
results of MNB for all periods presented.
EARNINGS REVIEW
Net Interest Income
The largest component of the Company's net income is
Carolina First Bank's net interest income. 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 79% and
82% of net revenues (net interest income plus noninterest income
excluding the gain on sale of purchased mortgage servicing
rights) in the first six months of 1995 and 1994, respectively.
Fully tax-equivalent net interest income adjusts the yield
for assets earning tax-exempt income to a comparable yield on a
taxable basis. Fully tax equivalent net interest income
increased $5.3 million, or 25%, to $25.0 million for the first
six months of 1995 from $19.9 million for the first six months of
1994. The increase resulted principally from a higher level of
average earning assets. The growth in average earning assets,
which increased $195.4 million to $1.06 billion in the first half
of 1995 from $865.3 million in the first half of 1994, resulted
primarily from internal loan growth, which more than offset a
decrease in investment securities. Loans averaged $224.5 million
higher in the first six months of 1995
8
than in the same period in 1994.
The net interest margin for the six months ended June 30,
1995 of 4.75% was higher than the margin of 4.60% for the same
period of 1994. For the second quarter, however, the 1995 net
interest margin of 4.50% lagged the second quarter 1994 margin of
4.87%. The decline in the net interest margin is primarily due
to an especially competitive deposit rate environment. During
the second quarter of 1995, many financial institutions were
offering deposit promotions above the market rates, creating
upward pressure on the Company's cost of funds. During the first
six months of 1995, Carolina First Bank did not change the
interest rates paid on transaction accounts and savings deposits,
except for a money market promotion in the Aiken market. Rates
paid on certificates of deposits, however, were increased which
caused the cost of funds to rise. In particular, Carolina First
Bank offered a rolling 5-month certificate of deposit promotion
at a rate above the prevailing market rate. A substantial
portion of the 5-month certificates of deposit will mature in the
early part of the third quarter of 1995 with a renewal rate at
the current lower market rate.
Provision for Loan Losses
The provision for loan losses was $4.4 million for the first
six months of 1995 and $242,000 for the first six months of 1994.
The 1995 provision for loan losses included a $3.4 million
provision for loan losses made in the first quarter of 1995.
This provision was made for several reasons. As a general
matter, management believed that such provision was appropriate
in view of a potential slowdown in the economy (which became
evident in the first quarter) and an increase in the prime
interest rate in February 1995, both of which could make it more
difficult for certain borrowers to repay loans. Furthermore,
management believed that such provision was prudent because the
Company was expanding in new markets and was expecting to
experience continued strong growth in loans. Also, the mix of
its loan portfolio was changing such that a number of small loans
were being replaced by larger credits, particularly in connection
with the Securitization which occurred in January 1995. Finally,
management determined that such provision was warranted because
of the increase in charge-offs, including credit card
receivables, in the first quarter to $1.1 million. Charge-offs
for the second quarter of 1995 were $1.0 million.
At June 30, 1995, the Company's allowance for loan losses as
a percentage of nonperforming assets was 318%, compared to 166% a
year earlier. The allowance for loan losses as percentage of
total loans was 0.85% and 0.86% at June 30, 1995 and 1994,
respectively. Annualized net charge-offs as a percentage of
average loans, including credit card receivables, were 0.46% in
the first six months of 1995, compared with 0.29% in the first
six months of 1994.
Noninterest Income
Noninterest income, excluding the gain on sale of purchased
mortgage servicing rights and securities transactions, increased
59% to $6.5 million for the six months ended June 30, 1995 from
$4.1 million for the same period of 1994, for an increase of $2.4
million. On March 31, 1995, the Company sold purchased mortgage
servicing rights associated with $435 million in loans, which
resulted in a gain of approximately $2 million.
Service charges on deposit accounts, generally the largest
contributor to noninterest income, rose
9
50% to $2.7 million in the first six months of 1995 from $1.8
million in the first six months of 1994. Average deposits for
the same period increased 15%. The increase in service charges
was attributable to the acquisition of branches and new deposit
accounts, increased fee charges and improved collection results.
In addition, effective March 1, 1995, Carolina First Bank implemented
new service charges, including a charge for foreign automated teller
machine transactions.
During the first six months of 1995, the Company received
credit card trust income of $1.2 million from its interests in the
Trust (created in the Securitization). Fees for trust services in
the first six months of 1995 of $512,000 were 3% above the $496,000
earned in the same period of 1994. At June 30, 1995, the trust
department had assets under management of approximately $285 million.
Fees for trust services increased as a result of the generation of new
trust business and additional assets under management, partially
offset by delays in the introduction of new products and the
recognition of income from new business booked.
Mortgage banking income includes origination fees, gains
from the sale of loans and servicing fees. Mortgage banking
income in the first six months of 1995 decreased 15% to $892,000,
as compared to $1.0 million in the first six months of 1994.
This decrease is attributable to lower origination fees resulting
from a slowdown in mortgage loan refinancings and a decline in
servicing fees net of related amortization of purchased mortgage
servicing rights. Origination fees totaled $447,000 in the first
six months of 1995, compared to $573,000 in the first six months
of 1994. The decline in origination fees is attributable to
lower internally originated loan volume and lower average
origination fees per loan. Mortgage loans totaling approximately
$26 million and $23 million were sold in the first half of 1995
and 1994, respectively. Income from this activity totaled
$201,000 in the first six months of 1995 and $48,000 in the first
six months of 1994.
CF Mortgage's mortgage servicing operations consist of
servicing loans that are owned by Carolina First Bank and
subservicing loans, to which the right to service is owned by
Carolina First Bank and other non-affiliated financial
institutions. At June 30, 1995, CF Mortgage was servicing or
subservicing 9,003 loans having an aggregate principal balance
of approximately $697 million. Effective March 31, 1995, the
Company sold servicing rights for 5,257 loans having a principal
balance of approximately $435 million to an unrelated third party.
This sale resulted in a gain for the Company of approximately $2
million and was effected because the Company believed that the
terms were favorable. CF Mortgage continued servicing the loans
sold until June 1995. The June 30, 1995 servicing totals include
approximately $300 million of the servicing which was sold.
Accordingly, the servicing portfolio declined to 5,444 loans with
an aggregate principal balance of approximately $395 million at
July 31, 1995. On June 6, 1995, Carolina First Bank entered into
an agreement with HomeBanc Mortgage Corporation ("HomeBanc") to
purchase mortgage servicing rights for 9,995 loans having an
aggregate principal balance of approximately $933 million. See
"General." Following the completion of the purchase of servicing
rights from HomeBanc, CF Mortgage expects to service over 15,000
loans with an aggregate principal balance of approximately $1.3
billion.
Servicing income from non-affiliated companies, net of the
related amortization, was a loss of $64,000 for the first six
months of 1995. The amortization for the mortgage
servicing rights purchased from HomeBanc and the subservicing
payments to HomeBanc, which will continue until August 1995, more
than offset the servicing income earned. The servicing income
does not include the benefit of interest-free escrow balances
related to mortgage loan servicing activities. For the first six
months of 1994, servicing income from non-affiliated companies,
net of related amortization, was $429,000.
The Company recognized gains on the sale of securities of
$197,000 and $135,000 in the first six
10
months of 1995 and 1994, respectively. Sundry income was $500,000
higher for the first six months of 1995 than the same period of
1994, primarily because of higher customer service fees, insurance
commissions, and appraisal fee income which were primarily related to
increased lending and deposit activities.
On August 18, 1993, Carolina First 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 Carolina First Bank's customers. Under
this affiliate arrangement, Carolina First Bank offers certain
brokerage services to its customers through dual employees (a
Carolina First Bank employee who is also employed by Norris &
Co.). The commissions or mark-up charges on transactions will be
shared between Carolina First Bank and Norris & Co. as set forth
in the investor services agreement. Brokerage services activity
for the first six months of 1995 has been limited.
Noninterest Expenses
Noninterest expenses increased $3.7 million, or 20%, to
$22.4 million in the first six months of 1995 from $18.6 million
in the first six months of 1994. The increased expenditures
primarily reflect the costs of additional personnel to support
the Company's current and anticipated growth. In addition, 1995
noninterest expenses include $493,000 in non-recurring
acquisition costs related to the acquisitions of ACNB and MNB,
both of which closed during the second quarter of 1995. The
acquisition costs included legal fees, shareholder
communications, severance pay and accounting.
Salaries and wages and employee benefits increased $1.5
million, or 16%, to $10.6 million in the first six months of
1995 from $9.1 million in the first six months of 1994.
Full-time equivalent employees rose to 565 as of June 30, 1995
from 554 as of June 30, 1994. The staffing cost increases were
principally attributable to acquisitions (primarily the
acquisition of the 6 Republic Branches in May 1994 and Citadel
Federal in April 1994), the opening of de novo branches
(including Lexington and Myrtle Beach main offices), and
additional personnel hired to support the internal growth in
loans and deposits.
Occupancy and furniture and equipment expenses increased
$802,000, or 28%, to $3.7 million for the six months ended June
30, 1995 from $2.9 million for the six months ended June 30,
1994. This increase resulted principally from the addition of
new banking offices, including new Myrtle Beach and Lexington
main offices.
Sundry noninterest expenses increased $935,000 to $7.6
million in the first six months of 1995 from $6.7 million in the
first six months of 1994. Intangible amortization increased
$956,000, principally as a result of the acquisition of the 6
Republic Branches in May 1994 and the reclassification of loan
premiums as intangible assets. Federal Deposit Insurance
Corporation ("FDIC") insurance premiums also increased, up
$385,000 from 1994, due to higher deposit levels. As discussed
below, the Company anticipates a reduction in the FDIC insurance
premium assessment rate. These expense increases were partially
offset by a $222,000 reduction in credit card service charges
resulting from the Securitization in January 1995.
At its August 1995 meeting, the FDIC approved a reduction in
the insurance assessments for Bank Insurance Fund ("BIF")
deposits. This reduction will decrease Carolina First Bank's
insurance assessment for BIF deposits from 0.26% to 0.04% of the
average assessment base. The implementation date for the
11
reduction has not been set, but is expected to be retroactive to
the second quarter of 1995. The FDIC insurance assessment
reduction applies only to BIF-insured deposits and does not
include deposits insured by the Savings Association Insurance
Fund ("SAIF"). In connection with the merger of CF Savings Bank
into Carolina First Bank and Carolina First Bank's assumption of
other SAIF-insured deposits in connection with various
acquisitions, approximately 23%, or $223 million as of March 31,
1995, of Carolina First Bank's total deposits are subject to SAIF
insurance assessments imposed by the FDIC. The SAIF is
underfunded and various proposals, including a one-time charge
assessed on all SAIF-insured deposits, are being considered by
regulators and lawmakers to recapitalize the SAIF. No final
decision on the future of SAIF has been made at this time. The
Company is not in a position to assess this issue, however, it is
possible that, as a result of regulatory actions, the Company,
like all other SAIF members, could incur material charges with
respect to its SAIF-insured deposits.
BALANCE SHEET REVIEW
Loans
The Company's loan portfolio consists of commercial mortgage
loans, commercial loans, consumer loans and one-to-four family
residential mortgage 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 industry concentrations of credit risk exceeding
10% of the portfolio. At June 30, 1995, the Company had total
loans outstanding of $971.4 million which equaled approximately
95% of the Company's total deposits and approximately 76% of the
Company's total assets. The composition of the Company's loan
portfolio at June 30, 1995 follows: commercial and commercial
mortgage 54%, residential mortgage 29%, consumer 11%, credit card
3% and construction 3%.
The Company's loans increased $166.9 million, or 21%, to
$971.4 million at June 30, 1995 from $804.5 million at June 30,
1994. This increase resulted from internal growth. This
increase was net of $59 million of mortgage loans sold, which
were predominantly current production, fixed rate mortgage loans,
and the credit card Securitization.
The Company has experienced significant growth in its
commercial and commercial mortgage loans over the past several
years. Furthermore, these loans constitute approximately 54% of
the Company's total loans. 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.
The Company had loans to 39 borrowers having principal
amounts ranging from $2 million to $5 million, which loans
accounted for $112.5 million, or 13%, of the Company's loan
portfolio in the first quarter of 1995. The Company had loans to
ten borrowers having principal amounts in excess of $5 million,
which loans accounted for $65.8 million, or 7%, of the Company s
loan portfolio in the first quarter of 1995. Any material
deterioration in the quality of any of these larger loans could
have a significant impact on the Company's earnings.
12
For the first six months of 1995, the Company's loans
averaged $913.9 million with a yield of 9.58%, compared with
$689.4 million and a yield of 8.76% for the same period of 1994.
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 increase in loan
yield was offset by the upward repricing of interest-bearing
deposits.
In June 1995, Carolina First Bank received an "outstanding"
rating, the highest level attainable, for its Community
Reinvestment Act ("CRA") performance from the FDIC. The CRA
examination was conducted in December 1994.
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 loan. 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.
In addition, various regulatory agencies, as a part of their
examination process, periodically review Carolina First Bank's
allowance for loan losses and real estate owned. Such agencies
may require Carolina First Bank to recognize changes to the
allowance based on their judgments about information available to
them at the time of their examination.
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
exceptions to credit policies. A summary of the Company's
approach to managing credit risk is provided below in the "Asset
Quality" section.
At June 30, 1995, the Company had $318,000 in non-accruing
and restructured loans and $2.7 million in loans greater than
ninety days past due on which interest was still being accrued.
This compares with $2.7 million and $1.6 million, respectively,
at June 30, 1994. Nonperforming assets as a percentage of loans
and other real estate owned were 0.27% and 0.52% at June 30, 1995
and 1994, respectively. Charge-offs as a percentage of average
loans during the first six months of 1995 were 0.46%, compared
with 0.29% for the first six months of 1994. The increase
resulted principally from charge-offs associated with credit card
receivables. These asset quality measures compare favorably to
the Company's peer group.
The allowance for loan losses totaled $8.3 million, or 0.85%
of total loans, at the end of June 1995, compared with $6.9
million, or 0.86% of total loans, at the end of June 1994. The
allowance for loan losses as a percentage of non-performing loans
was 2,602% and 257% as of June 30, 1995 and 1994,
13
respectively. The following table presents changes in the allowance
for loan losses:
($ in thousands)
Balance at 12/31/94 $6,002
Provision for loan losses 4,390
Charge-offs (2,263)
Recoveries 146
Balance at 6/30/95 $8,275
Effective January 1, 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards
("SFAS") 114, Accounting by Creditors for Impairment of a Loan .
Under the new standard, the Company must value all specifically-
reviewed loans for which it is probable that the Company will be
unable to collect all amounts due (principal and interest)
according to the terms of the loan agreement on the loan's
discounted cash flows using the loan's initial effective interest
rate or the fair value of the collateral for certain collateral
dependent loans.
At June 30, 1995, the recorded investment in loans that were
considered to be impaired under SFAS 114 was $318,000. The
related allowance for these impaired loans was $129,000. The
average recorded investment and foregone interest on impaired
loans during the six months ended June 30, 1995 was approximately
$423,000 and $26,000, respectively. For the six months ended
June 30, 1995, the Company recognized interest income on impaired
loans of $40,000, none of which was recognized using the cash
method of income recognition.
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 SFAS 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
shareholders' 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 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.
14
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 June 30, 1995, the Company's total investment portfolio
had a book value of $156.1 million and a market value of $155.0
million for an unrealized net loss of $1.1 million. The
investment portfolio has a weighted average maturity of
approximately 1.9 years. Securities (i.e., investment
securities, securities available for sale and trading securities)
averaged $139.0 million in the first six months of 1995, 8% below
the first six month 1994 average of $151.0 million. The average
portfolio yield increased to 5.77% for the first six months of
1995 from 4.78% for the first six months of 1994. The portfolio
yield increased due to a rising interest rate environment. At
June 30, 1995, securities totaled $155.9 million, up $6.7 million
from the $149.2 million invested as of the second quarter end
1994.
Other Assets
At June 30, 1995, other assets included other real estate
owned of $2.3 million and intangible assets of $31.9 million.
The intangible assets balance is attributable to goodwill of $8.5
million, core deposit balance premiums of $10.5 million, excess
and purchased mortgage servicing rights of $12.5 million and
purchased credit card premiums of $311,000.
Deposits
Carolina First Banks' primary source of funds for loans and
investments is its deposits which are gathered through Carolina
First Bank's branch network. 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.
Certificates of deposit in amounts in excess of $100,000 are held
primarily by customers in the Company's market areas. The
Company does not believe that it has any brokered deposits.
During the first six months of 1995, interest-bearing
liabilities averaged $981.4 million, compared with $800.2 million
for the comparable period of 1994. This increase resulted
principally from branch acquisitions. The average interest rates
were 4.65% and 3.58% for the first six months of 1995 and 1994,
respectively. At June 30, 1995, interest-bearing deposits
comprised approximately 87% of total deposits and 85% of
interest-bearing liabilities. Starting in 1994, the Company
modified its funding strategy to rely more on advances from the
Federal Home Loan Bank (the "FHLB") because management determined
that, due to increased competition for deposits, the marginal
cost of borrowing from the FHLB is lower that the marginal cost
of raising deposits. At June 30, 1995, FHLB advances totaled $65
million, compared with $18 million at June 30, 1994.
The Company uses its deposit base as its primary source of
funds. Deposits grew 8% to $1.02 billion at June 30, 1995 from
$945.2 million at June 30, 1994. Internal growth generated the
$73.1 million in new deposits. During the first six months of
1995, total interest-bearing deposits averaged $867.1 million
with a rate of 4.42%, compared with $762.8 million with a rate of
3.57% in 1994. As the level of interest rates continued to rise
in 1994, the Company repriced deposits more slowly than the
increases in
15
the yields on earning assets. During the first half
of 1995, deposit pricing was very competitive in Carolina First
Bank's market areas, resulting in upward pressure on deposit
interest rates.
Average noninterest-bearing deposits, which increased 40%
during the year, increased to 12.1% of average total deposits in
the first six months of 1995 from 11.2% in the first six months
of 1994. This increase was attributable to new accounts from
commercial loan customers and escrow balances related to mortgage
servicing operations.
The Company's core deposit base consists of consumer time
deposits, savings, NOW accounts, money market accounts and
checking 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
87% for the first six months of 1995. 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.
Capital Resources and Dividends
The Company's capital needs have been met principally
through public offerings of common stock, preferred stock and
subordinated notes and through the retention of earnings. In
addition, the Company issued capital stock in connection with the
acquisitions of CF Savings Bank, CF Mortgage, ACNB and MNB.
The Company's initial public offering in 1986 raised $15.3
million 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 $10.3 million, the offering of
the 7.50% Noncumulative Convertible Preferred Stock Series
("Series 1993 Preferred Stock") in March 1993, which raised $14.5
million, and the offering of the 7.32% Noncumulative Convertible
Preferred Stock Series 1994 ("Series 1994 Preferred Stock") in
April 1994, which raised $21.4 million. In December 1993, the
Company redeemed the 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 April 10, 1995, the Company completed its acquisition of
ACNB. In connection with this acquisition, ACNB was merged into
Carolina First Bank, and the Company issued 452,658 shares of the
Company's Common Stock to the ACNB shareholders. On June 30,
1995, the Company completed its acquisition of MNB. In
connection with this acquisition, MNB was merged into Carolina
First Bank, and the Company issued 584,968 shares of the
Company's Common Stock to the MNB shareholders.
On May 18, 1995, the Company completed a $26.5 million
public offering of its Notes. The Notes, which are due on
September 1, 2005, pay interest quarterly at an annual rate of
9.00%. The Notes qualify as Tier 2 capital. A substantial
portion of the proceeds from the sale of the Notes was
contributed to Carolina First Bank to provide additional capital
to support internal growth and acquisitions and for working
capital purposes.
Risk-based capital guidelines for financial institutions
adopted by the regulatory authorities went
16
into effect after December 31, 1991. The risk-based capital rules
are designed to make regulatory capital requirements more sensitive
to differences in asset risk profile among financial institutions,
to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. However, the guidelines
require that intangible assets be deducted when computing risk-
based capital ratios. Acquisitions accounted for using the
purchase method of accounting generally create intangible assets.
Consequently, the Company's ability to make cash acquisitions in
the future using the purchase method of accounting may be
adversely affected. Intangible assets created as a result of the
purchase method of accounting also reduce the Company's tangible
book value. The ability of the Company to make acquisitions
using the pooling of interests method of accounting will not be
affected by the guidelines. Acquisitions using the pooling of
interests method of accounting involve the issuance of equity
securities in exchange for the securities of the acquired
company.
Total shareholders' equity decreased $3.5 million, or 4%, to
$90.1 million at June 30, 1995 from $93.6 million at June 30,
1994. This change primarily reflects the fourth quarter 1994
one-time after-tax restructuring charge of $9.4 million and the
payment of dividends, both of which were partially offset by the
retention of earnings.
Book value per share at June 30, 1995 and 1994 was $8.61 and
$9.23, respectively. The decline in book value was attributable
to the one-time 1994 restructuring charges. Tangible book value
per share at June 30, 1995 and 1994 was $5.51 and $6.39,
respectively. Tangible book value was significantly below book
value as a result of the purchase premiums associated with branch
acquisitions and the purchase of CF Mortgage. Tangible book
value declined during 1994 as a result of the addition of
intangible assets related to the branch acquisitions and
reclassification of loan premiums as intangible assets.
Under the capital guidelines of the Board of Governors of
the Federal Reserve (the "Federal Reserve Board") and the Federal
Deposit Insurance Corporation ("FDIC"), the Company and Carolina
First Bank are currently required to maintain a minimum risk-
based total capital ratio of 8%, with at least 4% being Tier 1
capital. Tier 1 capital consists of common stockholders equity,
qualifying perpetual preferred stock and minority interest in
equity accounts of consolidated subsidiaries, less goodwill.
Banks and bank holding companies must maintain a minimum Tier 1
leverage ratio (Tier 1 capital to total assets less goodwill and
other intangibles) of at least 3%, but this minimum ratio is
increased by 100 to 200 basis points for other than the highest-
rated institutions.
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. See
Earnings Review - Noninterest Expenses for a discussion of a
reduction in the FDIC insurance assessment for BIF-insured
deposits.
At June 30, 1995, the Company and Carolina First Bank were
in compliance with each of the applicable regulatory capital
requirements and exceeded the "well capitalized" regulatory
guidelines. Carolina First Bank's risk-based insurance
assessment has been set at 0.26% of its average assessment
17
base for BIF-insured deposits, with a reduction to 0.04% approved by
the FDIC, and 0.23% of its average assessment base for SAIF-
insured deposits. Approximately 23% of Carolina First Bank s
deposits are insured through the SAIF. See Earnings Review -
Noninterest Expenses. The following table sets forth various
capital ratios for the Company and Carolina First Bank.
Capital Ratios
As of Well Capitalized Adequately Capitalized
6/30/95 Requirement Requirement
Company:
Total Risk-based Capital 10.53% 10.0% 8.0%
Tier 1 Risk-based Capital 7.19 6.0 4.0
Leverage Ratio 5.67 5.0 4.0
Carolina First Bank:
Total Risk-based Capital 10.08 10.0 8.0
Tier 1 Risk-based Capital 9.24 6.0 4.0
Leverage Ratio 7.25 5.0 4.0
The Company and Carolina First Bank remain parties to that
certain Capital Maintenance Commitment and Guaranty Agreement
discussed in the Company's previous filings with the Commission.
The Company and Carolina First Bank are in compliance with the
terms of the agreement.
The Company and its subsidiaries are subject to certain
regulatory restrictions on the amount of dividends they are
permitted to pay.
In each year from 1989 through 1994, the Company issued 5%
common stock dividends to common stockholders. At its June 1995
meeting, the Board of Directors of the Company declared the
issuance of a 5% common stock dividend on August 15, 1995 to
common shareholders of record as of August 1, 1995. The Company
has paid all scheduled cash dividends on the Series 1993
Preferred Stock, Series 1993B Preferred Stock and 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 have been paid on a quarterly basis since the
initiation of the cash dividend. The Board of Directors
increased the quarterly cash dividend to $0.06 beginning in the
first quarter of 1995. 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
18
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 0.74% and 2.00% of earning assets in the first six
months of 1995 and 1994, 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
borrowing from the FHLB. The Company is considering a
sale/leaseback transaction for a portion of its owned properties,
which would provide approximately $12 million in liquidity. This
transaction is merely under consideration and may or may not
occur.
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 June 30, 1995, Carolina First Bank's
liquidity ratio was approximately 15%. At June 30, 1995,
Carolina First Bank had unused short-term lines of credit
totaling approximately $19.7 million. All of these lenders have
reserved the right to withdraw these lines of credit at their
option. In addition, Carolina First Bank has access to borrowing
from the FHLB. At June 30, 1995, unused borrowing capacity from
the FHLB totaled $70 million. Management believes that these
sources are adequate to meet its liquidity needs.
In 1994, the Company modified its funding strategy to rely
more on advances from the FHLB because management determined
that, due to increased competition for deposits, the marginal
cost of borrowing from the FHLB is lower than the marginal cost
of raising deposits. At June 30, 1995, FHLB advances totaled $65
million, compared with $18 million at June 30, 1994.
The Company has certain cash needs, including general
operating expenses and the payment of dividends and interest on
borrowings. The Company generates cash to meet these needs
primarily through management fees and dividends paid to it by its
subsidiaries and secondarily from existing cash reserves, sales
of available for sale securities, interest income on its
investment assets and certain other vehicles.
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. Over the past several
years, the environment in which financial institutions operate
has been characterized by volatile interest rates and greater
reliance on market-sensitive deposits, increasing both the
importance and the difficulty of interest sensitivity management.
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 an
asset/liability simulation model which quantifies balance sheet
and earnings variations under different interest rate
environments to measure and manage interest rate risk.
19
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 analytical measures of
asset quality, management believes the Company has effectively
managed its credit risk. Net loan charge-offs, including credit
card receivables, totaled $2.1 million in the first six months of
1995 and $1.0 million in the first six months of 1994, or 0.46%
and 0.29%, respectively, as a percentage of average loans.
Nonperforming assets as a percentage of loans and other real
estate owned were 0.27% and 0.52% as of June 30, 1995 and 1994,
respectively.
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."
At its August 1995 meeting, the FDIC approved a reduction in
the insurance assessments for BIF deposits. This reduction will
decrease Carolina First Bank's insurance assessment for BIF
deposits from 0.26% to 0.04% of the average assessment base. The
implementation date for the reduction has not been set, but is
expected to be retroactive to the second quarter of 1995. The
FDIC insurance assessment reduction applies only to BIF-insured
deposits and does not include deposits insured by the SAIF. In
connection with the merger of CF Savings Bank into Carolina First
Bank and Carolina First Bank's assumption of other SAIF-insured
deposits in connection with various acquisitions, approximately
23%, or $223 million as of March 31, 1995, of Carolina First
Bank's total deposits are subject to SAIF insurance assessments
imposed by the FDIC. The SAIF is underfunded and various
proposals, including a one-time charge assessed on all SAIF-
insured deposits, are being considered by regulators and
lawmakers to recapitalize the SAIF. No final decision on the
future of SAIF has been made at this time. The Company is not in
a position to assess this issue, however, it is possible that, as
a result of regulatory actions, the Company, like all other SAIF
members, could incur material charges with respect to its SAIF-
insured deposits.
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PART II
ITEM 1 LEGAL PROCEEDINGS
On October 31, 1994, J.W. Charles Clearing Corp. filed
a lawsuit against Carolina First Bank in the Court of
Common Pleas in Lexington County, South Carolina. Such
action, in general, claims that Carolina First 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. Carolina First Bank has
answered the complaint and is vigorously defending such
complaint. Carolina First Bank believes that there are
valid defenses available to it. In connection with the
litigation, Carolina First 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 May 18, 1995, the Company completed a $26.5 million
public offering of its Notes. The Notes, which are due
on September 1, 2005, pay interest quarterly at an
annual rate of 9.00%. The Notes qualify as Tier 2
capital. The terms of the Notes provide that upon an
"event of default" as defined in the indenture entered
into by Carolina First Bank and First American National
Bank, as Trustee, no dividends may be paid on any
outstanding equity securities of the Company until such
"event of default" is remedied. An "event of default"
includes, among other things, the failure to pay
interest and principal on the Notes when due.
Accordingly, the Notes are senior to all outstanding
equity securities of the Company, including with
respect to payment of dividends or interest (as the
case may be) and upon liquidation. References made to
the form of Note and Indenture filed with the
Commission as Exhibits 4.1 and 4.2 to the Company's
Form 10-Q for the quarterly period ended March 31,
1995, the terms of which are incorporated herein by
reference.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
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PART II
(Continued)
ITEM 5 OTHER INFORMATION
Completed Acquisitions
On April 10, 1995, the Company completed its
acquisition of ACNB. At March 31, 1995, ACNB had two
locations and approximately $39 million in assets, $35
million in deposits and $30 million in loans. In
connection with this acquisition, ACNB was merged into
Carolina First Bank, and the Company issued 452,658
shares of the Company's $1 par value common stock
( Common Stock ) to the ACNB shareholders. The
transaction was accounted for as a pooling of
interests. All financial information contained in this
filing includes the results of ACNB for all periods
presented.
On June 30, 1995, the Company completed its acquisition
of MNB. At June 30, 1995, MNB had three locations and
approximately $44 million in assets, $40 million in
deposits and $26 million in loans. In connection with
this acquisition, MNB was merged into Carolina First
Bank, and the Company issued 584,968 shares of the
Company's $1 par value common stock ( Common Stock )
and cash in lieu of fractional shares to the MNB
shareholders. The transaction was accounted for as a
pooling of interests. All financial information
contained in this filing includes the results of MNB
for all periods presented.
Purchase of Mortgage Servicing Rights
On June 6, 1995, Carolina First Bank entered into an
agreement with HomeBanc to purchase mortgage servicing
rights for 9,995 loans having an aggregate principal
balance of approximately $933 million. The purchase
price for the servicing was approximately $13 million.
In connection with the transaction, Carolina First Bank
received a letter of credit equal to 5% of the purchase
price, which can be drawn upon by Carolina First Bank
in certain instances, including for breaches of
warranties by HomeBanc. HomeBanc is subservicing these
loans until August 1995.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Mortgage Servicing Purchase and Sale agreement dated June 6,
1995.
11.1 Computation of Primary and Fully Diluted Earnings Per Share.
27.1 Financial Data Schedules.
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K dated April
10, 1995 and June 30, 1995.
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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)
23