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, 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 $1.00 par value common stock as
of November 10, 1995 was 6,273,626.
Consolidated Balance Sheets
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
September 30, December 31,
-----------------------------------------------
ASSETS 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks......................................................... $ 60,234 $ 59,750
Federal funds sold and securities
purchased under resale agreements............................................. -- 4,420
Securities
Trading...................................................................... 20,149 1,155
Available for sale........................................................... 69,102 59,078
Held for investment (market value $106,354 in 1995
and $66,820 in 1994)......................................................... 106,760 70,264
------------ -----------
Total securities........................................................... 196,011 130,497
------------ -----------
Loans held for sale............................................................. 3,908 71,695
Loans........................................................................... 1,032,582 852,246
Less unearned income......................................................... (6,626) (873)
Less allowance for loan losses............................................... (8,845) (6,002)
------------ -----------
Net loans.................................................................. 1,021,019 917,066
------------ -----------
Premises and equipment.......................................................... 40,002 39,823
Accrued interest receivable..................................................... 10,287 7,674
Other assets.................................................................... 58,254 45,120
------------ -----------
$ 1,385,807 $ 1,204,350
============ ===========
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Noninterest-bearing......................................................... $ 149,582 $ 126,974
Interest-bearing............................................................ 913,368 874,774
------------ -----------
Total deposits............................................................ 1,062,950 1,001,748
Borrowed funds................................................................ 193,204 107,236
Subordinated notes............................................................ 25,330 --
Accrued interest payable...................................................... 6,391 4,141
Other liabilities............................................................. 5,801 4,743
------------ -----------
Total liabilities.......................................................... 1,293,676 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 6,131,722 shares in 1995
and 5,618,873 in 1994....................................................... 6,132 5,619
Surplus....................................................................... 51,871 45,543
Retained earnings............................................................. 230 515
Nonvested restricted stock.................................................... (829) (1,083)
Guarantee of ESOP debt........................................................ (126) (126)
Unrealized gain (loss) on securities available for sale....................... 32 (1,000)
------------ -----------
Total shareholders' equity................................................. 92,131 86,482
------------ -----------
$ 1,385,807 $ 1,204,350
============= ==========
1
Consolidated Statements of Income
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
Three Months Ended September 30, Nine Months Ended September 30
1995 1994 1995 1994
Interest income
Interest and fees on loans........................... $ 23,912 $ 18,552 $ 66,880 $ 47,230
Interest on securities
Taxable............................................ 1,984 1,374 5,185 4,245
Exempt from Federal income taxes................... 299 291 791 740
Total interest on securities..................... 2,283 1,665 5,976 4,985
Interest on federal funds sold and securities
purchased under resale agreements.................. 156 120 409 561
Total interest income.............................. 26,351 20,337 73,265 52,776
Interest expense
Interest on deposits................................. 11,049 8,104 30,060 21,619
Interest on borrowed funds........................... 2,697 716 6,335 1,225
Total interest expense............................. 13,746 8,820 36,395 22,844
Net interest income................................ 12,605 11,517 36,870 29,932
Provision for loan losses.............................. 1,000 275 5,390 517
Net interest income after
provision for loan losses........................ 11,605 11,242 31,480 29,415
Noninterest income
Service charges on deposit accounts.................. 1,421 1,186 4,086 2,967
Credit card trust income............................. 828 -- 1,995 --
Mortgage banking income.............................. 852 534 1,745 1,584
Fees for trust services.............................. 204 185 716 681
Gain on sale of securities........................... 129 54 326 189
Sundry............................................... 298 440 1,540 1,183
Gain on sale of purchased mortgage
servicing rights................................... 127 -- 2,153 --
Total noninterest income........................... 3,859 2,399 12,561 6,604
Noninterest expenses
Salaries and wages................................... 4,445 4,047 12,928 11,224
Employee benefits.................................... 1,234 1,003 3,364 2,938
Occupancy............................................ 1,047 961 3,153 2,630
Furniture and equipment.............................. 759 700 2,324 1,900
Sundry............................................... 4,339 3,706 11,999 9,176
Total noninterest expenses......................... 11,824 10,417 33,768 27,868
Income before income taxes......................... 3,640 3,224 10,273 8,151
Income taxes........................................... 1,203 1,020 3,500 2,440
Net income ........................................ 2,437 2,204 6,773 5,711
Dividends on preferred stock........................... 687 731 2,099 1,702
Net income applicable to common shareholders....... $ 1,750 $ 1,473 $ 4,674 $ 4,009
Net income per common share:*
Primary............................................ $ 0.28 $ 0.25 $ 0.76 $ 0.69
Fully diluted...................................... 0.27 0.25 0.74 0.69
Average common shares outstanding:*
Primary............................................ 6,280,561 5,834,968 6,189,708 5,825,789
Fully diluted...................................... 9,186,255 8,927,528 9,161,815 8,251,156
*Per share data have been restated to reflect 5% stock dividends.
2
Consolidated Statement of Cash Flows
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands)
Nine Months Ended September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income.................................................................... $ 6,773 $ 5,711
Adjustments to reconcile net income to net cash
used for operations
Depreciation.............................................................. 2,470 2,084
Amortization of intangibles............................................... 1,816 1,215
Provision for loan losses................................................. 5,390 517
Gain on sale of securities................................................ (326) (189)
Gain of sale of mortgage servicing rights................................. (2,153) --
Unrealized gain on securities............................................. (14) --
Proceeds from sale of trading securities.................................. 340,317 291,155
Proceeds from maturity of trading securities.............................. 12,334 24,480
Purchase of trading securities............................................ (371,631) (316,107)
Originations of mortgage loans held for sale.............................. (56,523) (31,663)
Proceeds from sale of mortgage loans held for sale........................ 52,687 38,127
Increase in interest receivable........................................... (2,613) (3,251)
Increase in interest payable.............................................. 2,250 982
Increase in other assets.................................................. (12,837) (14,974)
Increase (decrease) in other liabilities.................................. 968 (3,674)
FHLB stock dividend....................................................... -- (50)
----------- -------------
Net cash used for operating activities...................................... (21,092) (5,637)
----------- -------------
Cash Flows from Investing Activities
Proceeds from maturity of securities available for sale....................... 44,856 156,063
Proceeds from maturity of securities held for investment...................... 4,000 8,069
Purchase of securities available for sale..................................... (55,735) (173,280)
Purchase of securities held for investment.................................... (37,878) (16,373)
Proceeds from sale of securities available for sale........................ -- 24,086
Net decrease in federal funds sold and securities purchased
under resale agreements..................................................... 4,420 45,796
Purchase of loans............................................................. (32,911) --
Net increase in loans......................................................... (72,301) (216,415)
Capital expenditures.......................................................... (2,649) (9,683)
----------- -------------
Net cash used for investing activities ..................................... (148,198) (181,737)
----------- -------------
Cash Flows from Financing Activities
Acquired deposits (net)....................................................... -- 97,735
Net increase in deposits...................................................... 61,202 72,147
Increase in borrowed funds.................................................... 111,298 13,915
Issuance of preferred stock................................................... -- 21,401
Dividends on preferred and common stock....................................... (3,168) (2,068)
Other common stock activity................................................... 442 393
----------- -------------
Net cash provided by financing activities................................... 169,774 203,523
----------- -------------
Net change in cash and due from banks........................................... 484 16,149
Cash and due from banks at beginning of period.................................. 59,750 31,516
----------- -------------
Cash and due from banks at end of period........................................ $ 60,234 $ 47,665
=========== =============
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 net unrealized gain (loss) on securities available for sale
increased $176,000 for the three months ended September 30, 1995 and
$1,032,000 for the nine months ended September 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 $34,145,000
for the nine months ended September 30, 1995. Income tax payments of
$4,590,000 were made for the nine months ended September 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 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 Company issued 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.
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 MNB. 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 54 locations in South Carolina. At September 30, 1995, the Company had
approximately $1.386 billion in assets, $1.030 billion in loans, $1.063 billion
in deposits and $92.1 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 four 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); Georgetown and
Horry counties (located in the Coastal region of South Carolina); and the
Charleston metropolitan area. 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. It further increased
its presence in the Charleston market by opening a main office in September 1995
and two supermarket branches in October 1995. The Company's principal market
areas 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
6
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 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.
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. Additional credit card receivables,
totaling approximately $12 million, have been added to the Trust during 1995.
In February 1995, the Company completed the merger of CF Savings Bank
into Carolina First Bank. The Company has experienced 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 servicing of one-to-four
family residential mortgage loans and the origination of mortgage loans through
its seven offices in South Carolina. At September 30, 1995, CF Mortgage was
servicing 15,259 loans having an aggregate principal balance of approximately
$1.318 billion. As of March 31, 1995, the Company sold approximately $435
million in servicing to an unrelated party. (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 subserviced these loans until
7
August 31, 1995, when the purchase was completed.
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. This dividend resulted in the
issuance of 291,602 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 seventh consecutive year that the Company has issued a 5% common stock
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 its 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 78% and 82% of net revenues (net interest income
plus noninterest income excluding the gain on sale of purchased mortgage
servicing rights) in the first nine 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 $6.7 million, or 22%, to $37.3 million
for the first nine months of 1995 from $30.6 million for the first nine months
of
8
1994. The increase resulted principally from a higher level of average earning
assets. The growth in average earning assets, which increased $186.8 million to
approximately $1.095 billion in the first nine months of 1995 from $908.4
million in the first nine months of 1994, resulted primarily from internal loan
growth. Loans averaged $196.3 million higher in the first nine months of 1995
than in the same period in 1994.
The net interest margin for the nine months ended September 30, 1995 of
4.54% was higher than the margin of 4.49% for the same period of 1994. For the
third quarter, however, the 1995 net interest margin of 4.38% lagged the third
quarter 1994 margin of 4.78%. The decline in the net interest margin is
primarily due to a reduction in the prime interest rate and an especially
competitive deposit rate environment. In July, the prime interest rate was
reduced from 9% to 8.75%. Approximately 65% of the loan portfolio has variable
rates and immediately repriced downward resulting in lower interest income.
While deposit rate were lowered somewhat, the full impact of the reduction in
prime interest rate was not realized in interest expense savings. During the
third quarter of 1995, many financial institutions continued to offer deposit
promotions above the market rates, creating upward pressure on the Company's
cost of funds. During the first half of 1995, the Company offered a 5-month
certificate of deposit promotion at a rate above the prevailing market rate.
This promotion ended in July 1995, and a substantial portion of the 5-month
certificates of deposit matured in the third quarter of 1995. The Company is
also offering money market promotions in new markets, such as Charleston, to
develop new customer relationships. The Company has instituted deposit
promotions and kept its deposit rates competitive in an effort to increase its
liquidity levels, as recommended by the Federal Deposit Insurance Corporation
("FDIC"). See "Liquidity". The Company expects the competitive deposit rate
environment to continue.
Provision for Loan Losses
The provision for loan losses was $5.4 million for the first nine
months of 1995 and $517,000 for the first nine 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 and third quarters of 1995 were $1.0 million
and $1.4 million, respectively.
At September 30, 1995, the Company's allowance for loan losses as a
percentage of nonperforming assets was 204%, compared to 148% a year earlier.
The allowance for loan losses as percentage of total loans was 0.86% and 0.68%
at September 30, 1995 and 1994, respectively. Annualized net charge-offs as a
percentage of average loans, including credit card receivables, were 0.45% in
the first nine months of 1995, compared with 0.40% in the first nine months of
1994.
9
Noninterest Income
Noninterest income, excluding the gain on sale of mortgage servicing
rights and securities transactions, increased 57% to $10.1 million for the nine
months ended September 30, 1995 from $6.4 million for the same period of 1994,
for an increase of $3.7 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, the largest contributor to
noninterest income, rose 38% to $4.1 million in the first nine months of 1995
from $3.0 million in the first nine months of 1994. Average deposits for the
same period increased 12.8%. 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 nine months of 1995, the Company received credit card
trust income of $2.0 million from its interests in the Trust (created in the
Securitization). The credit card trust income is net of charge-offs associated
with the credit cards in the Trust. The majority of the credit cards in the
Trust were solicited 12 to 14 months ago. Net charge-offs rose $258,000 during
the quarter, which is comparable to industry charge-off patterns which peak at
this point in the credit card life cycle. Approximately $10 million in credit
card receivables were added to the Trust in October 1995.
Fees for trust services in the first nine months of 1995 of $716,000
were 5% above the $681,000 earned in the same period of 1994. At September 30,
1995, the trust department had assets under management of approximately $321
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 nine months of
1995 increased 10% to $1.7 million, as compared with $1.6 million in the first
nine months of 1994. The increase is attributable to increased servicing
volumes, partially offset by lower origination fees resulting from a slowdown in
mortgage loan refinancings. Origination fees totaled $745,000 in the first nine
months of 1995, compared with $808,000 in the first nine 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 $53 million and $38 million were sold in the first nine months of
1995 and 1994, respectively. Income from this activity totaled $282,000 in the
first nine months of 1995 and $192,000 in the first nine 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 September 30, 1995, CF Mortgage was servicing or subservicing
15,259 loans having an aggregate principal balance of approximately $1.318
billion. 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. On
June 6, 1995, Carolina First Bank entered into an agreement with HomeBanc
to purchase mortgage
10
servicing rights for 9,995 loans having an aggregate principal balance of
approximately $933 million. See "General." HomeBanc subserviced these loans
until August 31, 1995, when the purchase was completed.
Servicing income from non-affiliated companies, net of the related
amortization, was $718,000, compared with $583,000 for the first nine months of
1994. This increase is primarily attributable to higher volumes of loans
serviced which increased to $1.318 billion at September 30, 1995 from $802
million at September 30, 1994. Servicing income is net of the related
amortization for the mortgage servicing rights and subservicing payments. The
servicing income does not include the benefit of interest-free escrow balances
related to mortgage loan servicing activities.
The Company recognized gains on the sale of securities of $326,000 and
$189,000 in the first nine months of 1995 and 1994, respectively. Sundry income
was $357,000 higher for the first nine 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 nine months of 1995 has been limited.
Noninterest Expenses
Noninterest expenses increased $5.9 million, or 21%, to $33.8 million
in the first nine months of 1995 from $27.9 million in the first nine 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 $595,000 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, auditor fees and overtime.
Salaries and wages and employee benefits increased $2.1
million, or 15%, to $16.3 million in the first nine months of 1995 from
$14.2 million in the first nine months of 1994. Full-time equivalent
employees rose to 575 as of September 30, 1995 from 547 as of September
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, Myrtle Beach, and Charleston main
offices), and additional personnel hired to support the internal growth
in loans and deposits.
Occupancy and furniture and equipment expenses increased $947,000, or
21%, to $5.5 million for the nine months ended September 30, 1995 from $4.5
million for the nine months ended September 30, 1994. This increase resulted
principally from the addition of new banking offices. Twelve new offices,
including Lexington, Myrtle Beach, and Charleston main offices, have been added
since the beginning of 1994.
11
Sundry noninterest expenses increased $2.8 million to $12.0
million in the first nine months of 1995 from $9.2 million in the first
nine months of 1994. The amortization of solicitation fees associated
with direct mail credit card originations increased approximately
$920,000 for the first nine months of 1995, compared with the prior
period. (See "Balance Sheet Review--Loans.") Intangible amortization
increased approximately $601,000, principally as a result of the
acquisition of the 6 Republic Branches in May 1994. Advertising expenses
increased approximately $220,000 over the prior year due to new
advertising campaigns to raise deposit balances and promotions in new
markets. The remaining increase in sundry noninterest expense was
principally attributable to the overhead and operating expenses
associated with higher lending and deposit activities. The large items
of sundry noninterest expense were telephone, postage, supplies, loan
servicing expense, and professional fees.
At its August 1995 meeting, the Federal Deposit Insurance Corporation
("FDIC") approved a reduction in the insurance assessments for Bank Insurance
Fund ("BIF") deposits. This reduction decreased Carolina First Bank's insurance
assessment for BIF deposits from 0.26% to 0.04% of the average assessment base.
This decrease was retroactive to June 1, 1995. FDIC insurance premiums for the
first three quarters of 1995 were $1.4 million, approximately $175,000 lower
than 1994's charges. 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
21%, or $225 million as of September 30, 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 September 30, 1995, the Company had total loans outstanding of
$1.030 billion which equaled approximately 97% of the Company's total deposits
and approximately 74% of the Company's total assets. The composition of the
Company's loan portfolio at September 30, 1995 follows: commercial and
commercial mortgage 50%, residential mortgage 27%, consumer 14%, credit card
6% and construction 3%.
The Company's loans increased $155.5 million, or 18%, to approximately
$1.030 billion at September 30, 1995 from $874.5 million at September 30, 1994.
This increase resulted primarily from internal growth. This increase was net of
approximately $70 million of mortgage loans sold, which were predominantly
current production, fixed rate mortgage loans, and the credit cards receivables
transferred in the Securitization.
In August 1995, the Company purchased approximately $32.9
million, net of related unearned income, in lease receivables from an
12
unrelated third party. The purchase also resulted in an increase to
unearned income of approximately $7 million. The leases are primarily
for general office equipment. The portfolio is diversified by type of
business, geographic location of lessee, and broker. The Company
purchased the leases to earn an attractive yield (after adjusting for
credit risk) and to diversify its existing portfolio.
The Company has experienced significant growth in its commercial and
commercial mortgage loans over the past several years. Furthermore, these loans
constitute approximately 50% 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 62 borrowers having principal amounts
ranging from $2 million to $5 million, which loans accounted for $185.7
million, or 19% of the Company's loan portfolio in the third quarter of
1995. The Company had loans to five borrowers having principal amounts
in excess of $5 million, which loans accounted for $31.1 million, or 3%,
of the Company's loan portfolio in the third 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.
For the first nine months of 1995, the Company's loans averaged
$938.7 million with a yield of 9.53%, compared with $742.3 million and a
yield of 8.51% 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.
The Company has solicited new credit card holders through two direct
mail campaigns in 1995. To date, these campaigns, mailed in June/July 1995 and
September/October 1995, have resulted in the issuance of approximately 53,000
new credit cards with outstanding balances of approximately $32 million.
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 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.
13
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 September 30, 1995, the Company had $1.0 million in non-accruing
loans, $1.1 million in restructured loans and $3.1 million in loans greater than
ninety days past due on which interest was still being accrued. This compares
with $2.5 million in non-accruing loans, no restructured loans and $2.2 million
in loans greater than ninety days past due on which interest was still being
accrued at September 30, 1994. Nonperforming assets as a percentage of loans and
other real estate owned were 0.42% and 0.46% at September 30, 1995 and 1994,
respectively. Charge-offs as a percentage of average loans during the first nine
months of 1995 were 0.45%, compared with 0.40% for the first nine months of
1994. These asset quality measures compare favorably to the Company's peer
group.
The allowance for loan losses totaled $8.8 million, or 0.86% of total
loans, at the end of September 1995, compared with $6.0 million, or 0.68% of
total loans, at the end of September 1994. The allowance for loan losses as a
percentage of nonperforming loans was 430% and 236% as of September 30, 1995 and
1994, respectively. The following table presents changes in the allowance for
loan losses:
($ in thousands)
Balance at 12/31/94 $ 6,002
Provision for loan losses 5,390
Valuation allowance for purchased loans 633
Charge-offs (3,460)
Recoveries 280
Balance at 9/30/95 $ 8,845
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 September 30, 1995, the recorded investment in loans that were
considered to be impaired under SFAS 114 was $970,000. The related allowance for
these impaired loans was $376,000. The average recorded investment and foregone
interest on impaired loans during the nine months ended September 30, 1995 was
approximately $599,000 and $110,000, respectively. For the nine months ended
14
September 30, 1995, the Company recognized interest income on impaired
loans of $91,000, none of which was recognized using the cash method of
income recognition.
During the third quarter of 1995, Carolina First Bank was examined by
the FDIC and the State Board of Financial Institutions in a joint safety and
soundness examination. No significant increases in reserves resulted from these
examinations.
Subsequent to quarter end, a large borrower experienced heightened
financial difficulty resulting in the sale of the borrower's company to an
unrelated party. As payment for the loan, the Company received cash, which
constituted the majority of the payment, and real estate. In connection with the
settlement of this loan, the Company realized a minimal loss, which will be
recognized during the fourth quarter of 1995.
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" ("SFAS 115"). 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.
During the fourth quarter of 1995, the Company plans to review the
classifications of its investment portfolio under SFAS 115 and may reclassify
securities in keeping with the one-time reclassification provision.
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, 1995, the Company's total investment portfolio had a
book value of $193.6 million and a market value of $193.2 million for an
unrealized net loss of $400,000. The investment portfolio has a weighted average
maturity of approximately 2.0 years. Securities (i.e., investment securities,
securities available for sale and trading securities) averaged $148.0 million in
the first nine
15
months of 1995, 1% above the first nine month 1994 average of $146.0 million.
The average portfolio yield increased to 5.79% for the first nine months of 1995
from 4.55% for the first nine months of 1994. The portfolio yield increased due
to a rising interest rate environment. At September 30, 1995, securities totaled
$196.0 million, up $65.3 million from the $130.7 million invested as of the
third quarter end 1994.
Other Assets
At September 30, 1995, other assets included other real estate owned of
$2.3 million and intangible assets of $32.7 million. The intangible assets
balance is attributable to goodwill of $8.3 million, core deposit balance
premiums of $10.2 million, excess and purchased mortgage servicing rights of
$14.2 million and purchased credit card premiums of $294,000.
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 nine months of 1995, interest-bearing liabilities
averaged $1.0 billion, compared with $837.8 million for the comparable period of
1994. This increase resulted principally from branch acquisitions. The average
interest rates were 4.80% and 3.65% for the first nine months of 1995 and 1994,
respectively. At September 30, 1995, interest-bearing deposits comprised
approximately 86% of total deposits and 81% 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
September 30, 1995, FHLB advances totaled $84.4 million, compared with $7.7
million at September 30, 1994.
The Company uses its deposit base as its primary source of funds.
Deposits grew 4% to $1.063 billion at September 30, 1995 from $1.018 billion at
September 30, 1994. Internal growth generated the $45 million in new deposits.
During the first nine months of 1995, total interest-bearing deposits averaged
$881.3 million with a rate of 4.56%, compared with $799.1 million with a rate of
3.62% in 1994. As the level of interest rates continued to rise in 1994, the
Company repriced deposits more slowly than the increases in the yields on
earning assets. During the first nine months 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 32% during the
year, increased to 12.4% of average total deposits in the first nine months of
1995 from 10.5% in the first nine 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,
16
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 88% for the first nine 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 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.
17
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 $2.7 million, or 3%, to $92.1
million at September 30, 1995 from $94.9 million at September 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 September 30, 1995 and 1994 was $8.94 and
$9.44, respectively. The decline in book value was attributable to the one-time
1994 restructuring charges. Tangible book value per share at September 30, 1995
and 1994 was $5.91 and $6.61, 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). 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 September 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, except for total risk-based capital for Carolina First Bank.
Carolina First Bank's total risk-based capital ratio exceeded the
"adequately capitalized" regulatory guideline. Carolina First Bank's
risk-based insurance assessment has been set at 0.04% of its average
assessment base for BIF-insured deposits, which reflects the reduction
approved by the FDIC in August 1995, and 0.23% of its average assessment
base for SAIF-insured deposits. Approximately 21% 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
9/30/95 Requirement Requirement
Company:
18
Total Risk-based Capital 10.26% 10.0% 8.0%
Tier 1 Risk-based Capital 7.01 6.0 4.0
Leverage Ratio 5.38 5.0 4.0
Carolina First Bank:
Total Risk-based Capital 9.87 10.0 8.0
Tier 1 Risk-based Capital 9.03 6.0 4.0
Leverage Ratio 6.92 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 1995, 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, Series 1994 Preferred Stock and Notes 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 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 0.78% and 2.8% of earning assets in the
first nine 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 $14
million in liquidity. The Company is also pursuing the securitization of
approximately $100 million in commercial real estate loans, which would
move these loans off the balance sheet and significantly improve
liquidity. The sale/leaseback and commercial real estate securitization
transactions are merely under consideration and may or may not occur.
19
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, 1995,
Carolina First Bank's liquidity ratio was approximately 11.5%. At September 30,
1995, Carolina First Bank had unused short-term lines of credit totaling
approximately $26.0 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 September 30, 1995, unused borrowing
capacity from the FHLB totaled $41.6 million. Management believes that these
sources are adequate to meet its liquidity needs. Following its third quarter of
1995 examination, the FDIC recommended that Carolina First Bank increase its
liquidity ratio. The Company has adopted a plan which is designed to improve
its liquidity ratio.
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 September 30, 1995, FHLB advances
totaled $84.4 million, compared with $7.7 million at September 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 securities available for sale, 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.
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
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Company has effectively managed its credit risk. Net loan charge-offs, including
credit card receivables, totaled $3.2 million in the first nine months of 1995
and $2.2 million in the first nine months of 1994, or 0.45% and 0.40%,
respectively, as a percentage of average loans. Nonperforming assets as a
percentage of loans and other real estate owned were 0.42% and 0.46% as of
September 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 decreased Carolina First
Bank's insurance assessment for BIF deposits from 0.26% to 0.04% of the average
assessment base. The implementation date was 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 21%, or $225 million as of September 30, 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.
The Company plans to adopt SFAS No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS 122"), during the fourth quarter of 1995. The effect of
this statement will be applied retroactively to the beginning of 1995. Under
SFAS 122, the Company records an asset that reflects the value of the servicing
for its originated mortgage loans.
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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.
On September 26, 1995, David W. Bowers and E. Monte Bowers
filed a lawsuit against the Company and Carolina First Bank in
the Court of Common Pleas in Newberry County, South Carolina.
The complaint alleges breach of contract, breach of contract
accompanied by a fraudulent act and fraud in the inducement.
The allegations arise from Carolina First Bank's alleged
breach of written employment agreements with David Bowers and
Monte Bowers. The Bowers demand judgment against Carolina
First Bank in the amount of $912,000 plus punitive damages,
attorneys' fees and costs. It is the Company's position that
it has not breached the relevant employment contracts and is
vigorously defending this lawsuit. However, at this time which
is early in the litigation process, the Company is not in a
position to assess the likelihood or amount of liability.
ITEM 2 CHANGE IN SECURITIES
None.
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
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 a Current Report on Form 8-K/A dated September 14,
1995 (Event: 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)
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