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, 1996
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 $1.00 par value common stock as
of August 10, 1996 was 9,276,939.
Consolidated Balance Sheets
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
June 30, December 31,
----------------------- --------------
ASSETS 1996 1995 1995
----------------------- --------------
Cash and due from banks.........................................................$ 78,907 $ 56,351 $ 84,433
Federal funds sold and resale agreements........................................ -- 530 --
Securities
Trading....................................................................... 4,515 1,004 5,805
Available for sale........................................................... 202,769 74,947 146,272
Held for investment (market value $26,939, $79,041 and $26,670,
respectively)................................................................ 27,026 79,907 26,289
------------ ---------- ----------
Total securities........................................................... 234,310 155,858 178,366
------------ ---------- ----------
Loans held for sale............................................................. 97,697 3,175 125,000
Loans........................................................................... 1,024,658 968,742 944,716
Less unearned income......................................................... (9,785) (534) (7,056)
Less allowance for loan losses............................................... (9,070) (8,275) (8,661)
------------ ---------- ----------
Net loans.................................................................. 1,103,500 963,108 1,053,999
------------ ---------- ----------
Premises and equipment.......................................................... 40,055 38,900 40,320
Accrued interest receivable..................................................... 13,100 8,866 10,829
Other assets.................................................................... 53,140 54,983 46,975
------------ ---------- ----------
$ 1,523,012 $ 1,278,596 $1,414,922
============ ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing.........................................................$ 157,011 $ 136,798 $ 160,394
Interest-bearing............................................................ 1,009,205 881,575 935,097
------------ ---------- ----------
Total deposits............................................................ 1,166,216 1,018,373 1,095,491
Borrowed funds................................................................ 215,694 135,378 187,899
Subordinated notes............................................................ 25,301 25,172 25,237
Accrued interest payable...................................................... 8,307 5,428 6,737
Other liabilities............................................................. 8,845 4,094 4,591
------------ ---------- ----------
Total liabilities.......................................................... 1,424,363 1,188,445 1,319,955
------------ ---------- ----------
Shareholders' Equity
Preferred stock-no par value; authorized 10,000,000 shares; issued and
outstanding Series 1993B 51,112, 53,575, and 53,575 shares, respectively;
Series 1994 none, 917,200 and 917,200 shares, respectively; Series 1993
none, 533,000 and 456,521 shares, respectively; liquidation preference $20
per share
(Series 1993B) and $25 per share (Series 1994 and Series 1993).............. 983 34,821 32,909
Common stock-par value $1 per share; authorized 20,000,000
shares; issued and outstanding 9,264,199; 5,831,724; and
6,517,366 shares, respectively.............................................. 9,264 5,832 6,517
Surplus....................................................................... 84,734 48,016 54,432
Retained earnings............................................................. 5,331 2,666 1,778
Nonvested restricted stock.................................................... (1,024) (914) (745)
Guarantee of ESOP debt........................................................ (76) (126) (76)
Unrealized gain (loss) on securities available for sale, net of tax........... (563) (144) 152
------------ ---------- ----------
Total shareholders' equity................................................. 98,649 90,151 94,967
------------ ---------- ----------
$ 1,523,012 $1,278,596 $1,414,922
============ ========== ==========
1
Consolidated Statements of Income
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
--------------------------- -------------------------
Interest income
Interest and fees on loans..........................................$ 25,240 $ 21,974 $ 50,599 $ 42,968
Interest on securities
Taxable............................................................ 2,754 1,683 4,988 3,201
Exempt from Federal income taxes................................... 289 239 589 492
----------- ---------- ----------- ----------
Total interest on securities.................................... 3,043 1,922 5,577 3,693
Interest on federal funds sold and resale agreements................ 247 105 451 253
----------- ---------- ----------- ----------
Total interest income.............................................. 28,530 24,001 56,627 46,914
----------- ---------- ----------- ----------
Interest expense
Interest on deposits................................................. 11,775 9,927 23,131 19,011
Interest on borrowed funds........................................... 2,842 2,216 6,156 3,638
----------- ---------- ----------- ----------
Total interest expense............................................. 14,617 12,143 29,287 22,649
----------- ---------- ----------- ----------
Net interest income................................................ 13,913 11,858 27,340 24,265
Provision for loan losses.............................................. 1,775 990 3,275 4,390
----------- ---------- ----------- ----------
Net interest income after
provision for loan losses........................................ 12,138 10,868 24,065 19,875
----------- ---------- ----------- ----------
Noninterest income
Service charges on deposit accounts.................................. 1,641 1,370 3,117 2,665
Loan securitization income........................................... 533 790 1,149 1,167
Mortgage banking income.............................................. 439 660 1,015 930
Fees for trust services.............................................. 308 212 644 512
Gain on sale of securities........................................... 36 92 119 197
Gain on sale of mortgage servicing rights.......................... 121 -- 121 2,026
Sundry............................................................... 545 519 1,748 1,299
----------- ---------- ----------- ----------
Total noninterest income........................................... 3,623 3,643 7,913 8,796
----------- ---------- ----------- ----------
Noninterest expenses
Salaries and wages................................................... 4,909 4,224 10,323 8,483
Employee benefits.................................................... 886 1,031 2,339 2,130
Occupancy............................................................ 1,049 1,044 2,157 2,106
Furniture and equipment.............................................. 913 828 1,746 1,565
Sundry............................................................... 3,920 3,992 7,791 7,660
----------- ---------- ----------- ----------
Total noninterest expenses......................................... 11,677 11,119 24,356 21,944
----------- ---------- ----------- ----------
Income before income taxes......................................... 4,084 3,392 7,622 6,727
Income taxes........................................................... 1,412 1,163 2,722 2,297
----------- ---------- ----------- ----------
Net income ........................................................ 2,672 2,229 4,900 4,430
Dividends on preferred stock........................................... 16 685 32 1,412
----------- ---------- ----------- ----------
Net income applicable to common shareholders......................$ 2,656 $ 1,544 $ 4,868 $ 3,018
=========== ========== =========== ==========
Net income per common share:*
Primary...........................................................$ 0.28 $ 0.24 $ 0.56 $ 0.48
Fully diluted...................................................... 0.28 0.24 0.52 0.48
Average common shares outstanding:*
Primary............................................................ 9,362,081 6,385,478 8,656,340 6,298,495
Fully diluted...................................................... 9,456,000 9,315,021 9,445,970 9,303,143
Cash dividends declared per common share*............................ $ 0.07 $ 0.06 $ 0.14 $ 0.12
*Share data have been restated to reflect 5% stock dividends.
2
Consolidated Statement of Cash Flows
Carolina First Corporation
(Unaudited)
($ in thousands)
Six Months Ended June 30,
-------------------------------
1996 1995
-------------------------------
Cash Flows from Operating Activities
Net income.................................................................... $ 4,900 $ 4,430
Adjustments to reconcile net income to net cash
used for operations
Depreciation.............................................................. 1,631 1,668
Amortization of intangibles............................................... 909 1,687
Provision for loan losses................................................. 3,275 4,390
Gain on sale of securities................................................ (119) (197)
Gain on sale of mortgage servicing rights................................. (121) (2,026)
Unrealized loss (gain) on securities...................................... 95 (6)
Proceeds from maturity of trading securities.............................. 9,568 3,432
Proceeds from sale of trading securities.................................. 285,335 248,497
Purchase of trading securities............................................ (293,592) (251,772)
Originations of mortgage loans held for sale.............................. (93,210) (29,348)
Sale of mortgage loans held for sale...................................... 74,388 26,245
Increase in interest receivable........................................... (2,271) (1,192)
Increase in interest payable.............................................. 1,570 1,287
Increase in other assets.................................................. (5,680) (9,645)
Increase (decrease) in other liabilities.................................. 4,765 (1,103)
--------- ----------
Net cash used for operating activities...................................... (8,557) (3,653)
--------- ----------
Cash Flows from Investing Activities
Proceeds from maturity of securities available for sale....................... 30,366 32,533
Proceeds from maturity of securities held for investment...................... 1,785 2,817
Purchase of securities available for sale..................................... (98,438) (49,547)
Purchase of securities held for investment.................................... (2,522) (9,842)
Proceeds from sale of securities available for sale........................... 10,231 --
Net decrease in federal funds sold and resale agreements...................... -- 3,890
Securitization of commercial loans............................................ 95,528 --
Purchase of loans............................................................. (30,312) --
Net increase in loans......................................................... (100,486) (47,039)
Proceeds from sale of mortgage servicing rights............................... 900 --
Capital expenditures.......................................................... (1,556) (745)
--------- ----------
Net cash used for investing activities ..................................... (94,504) (67,933)
--------- ----------
Cash Flows from Financing Activities
Net increase in deposits...................................................... 70,725 16,625
Increase in borrowed funds.................................................... 27,859 28,142
Issuance of subordinated notes................................................ -- 25,172
Redemption of preferred stock................................................. (204) --
Dividends on preferred and common stock....................................... (1,683) (2,132)
Other common stock activity................................................... 838 380
--------- ----------
Net cash provided by financing activities................................... 97,535 68,187
--------- ----------
Net change in cash and due from banks........................................... (5,526) (3,399)
Cash and due from banks at beginning of period.................................. 84,433 59,750
--------- ----------
Cash and due from banks at end of period........................................ $ 78,907 $ 56,351
========= ==========
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 1995 Annual Report to
shareholders.
(2) SECURITIES
The change in the net unrealized loss on securities available for sale
was a decrease of $430,000 for the three months ended June 30, 1996 and
$715,000 for the six months ended June 30, 1996.
At June 30, 1996, Blue Ridge Finance Company ("Blue Ridge"), a
subsidiary of Carolina First Corporation ("the Company"), owned 128,366
shares of common stock of Affinity Technology Group, Inc. ("Affinity").
This investment, included in securities available for sale, was
recorded at its book value of $12. At June 30, 1996, Blue Ridge owned a
warrant to purchase 5,871,340 shares of Affinity's common stock at a
purchase price of $0.0001 per share. The warrant is not included in
securities at June 30, 1996.
(3) STATEMENTS OF CASH FLOWS
Cash includes currency and coin, cash items in process of collection
and due from banks. Interest paid amounted to approximately $27,717,000
for the six months ended June 30, 1996. Income tax payments of
$1,528,000 were made for the six months ended June 30, 1996.
(4) COMMON STOCK
In February 1996, the Company redeemed its Series 1993 Preferred
Stock and Series 1994 Preferred Stock. In connection with the
redemptions, substantialy all of the outstanding shares of Series
1993 Preferred Stock and Series 1994 Preferred Stock were converted
into approximately 2.6 million shares of 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 the Company's 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.
(5) 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.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND WITH THE
STATISTICAL INFORMATION AND FINANCIAL DATA APPEARING IN THIS REPORT AS WELL AS
THE 1995 ANNUAL REPORT OF CAROLINA FIRST CORPORATION (THE "COMPANY") ON FORM
10-K. RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 ARE NOT
NECESSARILY INDICATIVE OF RESULTS TO BE ATTAINED FOR ANY OTHER PERIOD.
OVERVIEW
The Company, which commenced banking operations in December 1986,
currently conducts business through 55 locations in South Carolina. The Company
operates through three subsidiaries: Carolina First Bank, a state-chartered
commercial bank, Carolina First Mortgage Company ("CF Mortgage"), a mortgage
banking operation, and Blue Ridge Finance Company ("Blue Ridge"), an automobile
finance company. 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. At June 30,
1996, the Company had approximately $1.523 billion in assets, $1.113 billion in
loans, $1.166 billion in deposits and $98.6 million in shareholders' equity.
Net income rose 20% for the second quarter of 1996 to $2.7 million, or
$0.28 per fully diluted share, from $2.2 million, or $0.24 per fully diluted
share, for the second quarter of 1995. The increase in net income for the
current quarter, compared with the first quarter of 1995, resulted from higher
net interest income, partially offset by an increase in the provision for loan
losses and higher noninterest expenses. For the first six months, net income
totaled $4.9 million, or $0.52 per fully diluted share, compared with $4.4
million, or $0.48 per fully diluted share, in the same period of 1995.
Net income in the second quarter of 1996 produced a return on average
assets of 0.73% which was the same as for the second quarter of 1995. Return on
average equity was 10.98% for the second quarter of 1996, compared with 9.96%
for the same period in 1995. For the first six months of 1996, the return on
average assets was 0.68%, compared with 0.74% in 1995, and the return on average
equity was 10.14%, compared with 9.98% in 1995.
In February 1996, the Company redeemed its Series 1993 Preferred Stock
and Series 1994 Preferred Stock. In connection with the redemptions,
substantially all of the outstanding shares of preferred stock were converted
into common stock resulting in the issuance of approximately 2.6 million shares
of the Company's $1.00 par value common stock ("Common Stock"). As a result of
the redemptions of the preferred stock, dividends on preferred stock declined
substantially to $32,000 for the first six months of 1996 from $1.4 million for
the first six months of 1995.
In February 1996, an investment group announced its intention to
establish the Atlanta Internet Bank and the anticipated participation of
Carolina First Bank as lead investor. The Atlanta Internet Bank plans to
provide banking services to customers on the Internet. Carolina First Bank's
affiliation with the Atlanta Internet Bank is subject to receipt of certain
regulatory approval.
In March 1996, Carolina First Bank contributed approximately $116
million in commercial real
5
estate loans to a trust in connection with a securitization of such loans ( the
"Commercial Loan Securitization"). In connection with the Commercial Loan
Securitization, certain interest in the trust were sold to institutional
investors, while Carolina First Bank retained certain interest in trust assets
and potential income. In connection with the sale of such interest, Carolina
First Bank received cash proceeds of approximately $96 million.
INVESTMENT IN AFFINITY TECHNOLOGY GROUP
At December 31, 1995, the Company owned 7,500 shares of common stock of
Affinity Technology Group, Inc. ("Affinity") and a warrant to purchase 55,390
shares of Affinity's common stock at a purchase price of $0.01 per share
("Affinity Warrant"). The Affinity common shares and Affinity Warrant were
acquired in connection with lending arrangements between the Company and
Affinity and services performed by the Company on behalf of Affinity. As of
December 31, 1995, there was no market for this investment which was recorded at
its book value of $75.
On January 24, 1996, the Board awarded 6,289 shares of Affinity stock
to certain officers of the Company deemed most responsible for the Company's
investment. The Company has recorded compensation expense for the estimated fair
value of the Affinity stock awarded to Company officers. In addition, since the
Company had a negligible basis in its Affinity investment, a gain on disposition
of securities was recorded at the same calculated fair value. For tax and
accounting purposes, fair value is measured as of the date of grant, January 24,
1996. This date preceded Affinity's filing of an initial SEC registration
statement and was three months prior to Affinity's completion of its initial
public offering. To determine the estimated fair value as of January 24, 1996,
the Company obtained an independent third party appraisal. The appraisal
considered third party transactions of Affinity prior to this date, the
financial condition and operating results of Affinity, the status of patents and
trademarks, etc. Fair value of the Affinity stock award, as determined by the
independent third party appraisal based on information known at this time, was
estimated at $0.88 per share (after a 106-for-1 stock split) and, accordingly,
approximately $587,000 was recorded as compensation expense and gain on
disposition of equity investments. The impact on compensation expense and gain
on disposition of equity investments offset resulting in no impact on the
Company's net income.
On April 25, 1996, Affinity completed an initial public offering of its
common stock. Immediately prior to the consummation of Affinity's initial public
offering, a 106-for-1 common stock split in the form of a stock dividend was
completed. Following the completion of Affinity's public offering and stock
split, the Company's investment in Affinity (through its subsidiary, Blue Ridge)
consisted of 128,366 shares of common stock and a warrant to purchase an
additional 5,871,340 shares (for an adjusted purchase price of approximately
$0.0001 per share), or approximately 18% of Affinity's outstanding common stock.
As of June 30, 1996, the investment in Affinity's common stock, included in
securities available for sale, was recorded at its book value of $12. The
Affinity Warrant was not reported on the Company's balance sheet as of June 30,
1996.
The Company entered into a lock-up agreement with Affinity which
provides that no shares will be sold for 180 days after the offering unless
Affinity grants permission. The Company's shares in Affinity are, and the shares
issuable upon the exercise of the Affinity Warrant will be, "restricted"
securities as that term is defined in federal securities laws. The shares of
Affinity common stock awarded to Company officers are not subject to the lock-up
agreement.
The Affinity Warrant may be exercised in whole or in part at any time
prior to December 31,
6
2015, subject to certain restrictions. Unless prior written approval of the
Board of Governors of the Federal Reserve Board (the "Federal Reserve Board")
is received, the Affinity Warrant may not be exercised in whole or in part
if, after such exercise, the holder of the Affinity Warrant will beneficially
own 5% or more of Affinity's common stock. Also, as a bank holding company,
the Company and its officers, directors and affiliates may not own, control
or hold power to vote 5% or more of any class of outstanding voting shares
of Affinity. The Affinity Warrant may not be transferred without the approval
of the Federal Reserve Board.
On April 15, 1996, the Company transferred its Affinity common stock
and Affinity Warrant to Blue Ridge, a wholly-owned subsidiary of the Company.
The Company is reviewing its options with respect to its investment in Affinity.
The Company has formed a special committee of the Board of Directors to assess
these options and is seeking professional investment advice with respect to this
matter.
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% 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 both 1996 and 1995.
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 $2.5 million, or 10%, to $27.3
million for the first six months of 1996 from $24.8 million for the first six
months of 1995. The increase resulted principally from a higher level of average
earning assets. The growth in average earning assets, which increased $226.4
million to $1.287 billion in the first half of 1996 from $1.061 billion in the
first half of 1995, resulted primarily from internal loan growth. Loans averaged
$170.3 million higher in the first six months of 1996 than in the same period in
1995.
The net interest margin for the six months ended June 30, 1996 of 4.27%
was lower than the margin of 4.72% for the same period of 1995. For the second
quarter, the 1996 net interest margin of 4.31% lagged the second quarter 1995
margin of 4.54%. The decline in the net interest margin is primarily due to a
decrease in the prime interest rate, an especially competitive deposit rate
environment, and higher funding costs from short-term borrowings and the
subordinated debt.
In February 1996, the prime interest rate was reduced from 8.50% to
8.25%. Approximately half of the loan portfolio has variable rates and
immediately repriced downward. While deposit rates were lowered somewhat, the
full impact of the reduction in prime interest rate was not realized in interest
expense savings. During the first six months of 1996, many financial
institutions were offering deposit promotions above the market rates, creating
upward pressure on the Company's cost of funds. The Company has instituted
deposit promotions and kept its deposit rates competitive in an effort to
increase its liquidity levels. See "Liquidity." The Company expects the
competitive deposit rate environment to continue. In addition, the Company
increased its short-term borrowings, primarily from the Federal Home Loan
Bank, for the first half of 1996 compared with the same period in 1995. These
short-term
7
borrowings are at higher rate than the Company's average cost of deposits
(but not the marginal cost of deposits).
PROVISION FOR LOAN LOSSES
The provision for loan losses was $3.3 million for the first six months
of 1996 and $4.4 million for the first six months of 1995. The 1995 provision
for loan losses was increased principally as a result of the growth in
commercial and commercial real estate loans. Furthermore, the Company increased
the 1995 and 1996 provision as a result of its credit card activities and
overall economic signals and reports that consumer credit quality was
deteriorating.
Management currently anticipates that loan growth will continue in
1996. New market areas are expected to contribute to the 1996 portfolio growth.
Certain forecasts for 1996 indicate a potential slowing of the economy. However,
in a recent banking profile developed by the FDIC, South Carolina was cited as
having the highest commercial loan growth rate in the Southeast and one of the
highest growth rates in the country. Management intends to closely monitor
economic trends and the potential effect on Carolina First Bank's loan
portfolio. These factors could result in an increase in the provision for loan
losses for the remainder of 1996.
NONINTEREST INCOME
Noninterest income, excluding the gain on sale of mortgage servicing
rights, securities transactions and disposition of equity investments, increased
$513,000, or 8%, to $7.1 million for the six months ended June 30, 1996 from
$6.6 million for the same period of 1995. This increase resulted principally
from service charges on deposit accounts, mortgage banking income and trust
fees. The Company had a gain on the sale of mortgage servicing rights in the
first six months of 1996 of $121,000 compared to $2.0 million in the first six
months of 1995. The Company recognized gains on the sale of securities of
$119,000 and $197,000 in the first half of 1996 and 1995, respectively. The
$587,000 gain on the disposition of equity investments for the first quarter of
1996, included in sundry noninterest income, related to the transfer of
Affinity stock to certain officers of the Company.
Service charges on deposit accounts, the largest contributor to
noninterest income, rose 17% to $3.1 million in the first six months of 1996
from $2.7 million in the first six months of 1995. Average deposits for the same
period increased 15%. The increase in service charges was attributable to new
deposit accounts, improved collection results and new service charges for
automated teller machine transactions.
During the first six months of 1996, the Company received loan
securitization income of $1.1 million from its interests in the credit card and
commercial real estate loan trusts, compared to $1.2 million for the same period
in 1995. Loan securitization income is net of charge-offs associated with the
loans in the trusts. On March 14, 1996, the Company completed the securitization
of approximately $116 million in commercial real estate loans. For the second
quarter of 1996, the loan securitization income was negatively impacted by
higher credit card charge-offs associated with the credit card trust.
Mortgage banking income includes origination fees, gains from the sale
of loans and servicing fees (which are net of the related amortization of the
mortgage servicing rights and subservicing payments). Mortgage banking income in
the first six months of 1996 increased 9% to $1.0 million, as
8
compared to $930,000 in the first six months of 1995. This increase is
attributable to higher servicing volumes and higher origination volumes,
partially offset by a $226,000 loss on the sale of mortgage loans. On January 1,
1995, the Company adopted Statement of Financial Accounting Standards 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"), and recorded an asset
to reflect the value of servicing for its originated mortgage loans.
Income from originations and sales of mortgage loans, including sales
of loans originated by Carolina First Bank, totaled $724,000 in the first six
months of 1996, compared with $648,000 in the first six months of 1995. Income
from originations increased as a result of higher internally originated loan
volumes. The increase in income from originations was offset by a $226,000 loss
from the sale of mortgage loans in the second quarter of 1996. Mortgage loans
totaling approximately $74 million and $26 million were sold in the first half
of 1996 and 1995, respectively.
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, 1996, CF Mortgage was servicing or subservicing 11,960
loans having an aggregate principal balance of approximately $985 million.
The Company has signed contracts to purchase mortage servicing rights for
approximately $550 million in mortgage loans. These purchases of mortgage
servicing rights are expected to close in the third quarter of 1996. In
August 1996, the Company entered into an agreement with an unrelated third party
to sell mortgage servicing rights for loans with an aggregate principal balance
of approximately $300 million. The sale is expected to be completed in early
September 1996 at a price approximating the recorded investment. CF Mortgage
is expected to subservice the loans until the middle of October 1996.
Servicing income from non-affiliated companies, net of the related
amortization, was $291,000 for the first six months of 1996 compared with
$281,000 for the comparable period in 1995. This increase is primarily
attributable to higher volumes of loans serviced, which increased to $985
million at June 30, 1996 from $697 million at June 30, 1995, partially offset by
accelerated amortization for mortgage servicing rights due to faster than
expected loan run-offs. 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.
Fees for trust services in the first six months of 1996 of $644,000
were 26% above the $512,000 earned in the same period of 1995. At June 30, 1996,
the trust department had assets under management of approximately $398 million.
Fees for trust services increased as a result of the generation of new trust
business and additional assets under management.
Sundry income, excluding the gain on the disposition of equity
investments, was $138,000 lower for the first six months of 1996 than the same
period of 1995. Sundry income in 1995 included approximately $300,000 in
non-recurring income from programming services provided for an outside company.
NONINTEREST EXPENSES
Noninterest expenses increased $2.4 million, or 11%, to $24.4 million
in the first six months of 1996 from $21.9 million in the first six months of
1995. The increased expenditures primarily reflect the costs of additional
personnel to support the Company's current and anticipated growth. In the
first quarter of 1996, approximately $587,000 was recorded as compensation
expense related to a non-recurring award
9
of Affinity's stock to certain officers of the Company. The 1995 noninterest
expenses included $493,000 in non-recurring acquisition costs related to the
acquisitions of Aiken County National Bank and Midlands National Bank,
both of which closed during the second quarter
of 1995.
Salaries and wages and employee benefits, excluding $587,000 in
non-recurring compensation expense, increased $1.5 million, or 14%, to $12.1
million in the first six months of 1996 from $10.6 million in the first six
months of 1995. Full-time equivalent employees rose to 605 as of June 30, 1996
from 565 as of June 30, 1995. The staffing cost increases were principally
attributable to the opening of the Charleston main office, the opening of three
grocery store branches, the acquisition of Blue Ridge and the additional
personnel hired to support the internal growth in loans and deposits.
Occupancy and furniture and equipment expenses increased $232,000, or
6%, to $3.9 million for the six months ended June 30, 1996 from $3.7 million for
the six months ended June 30, 1995. This increase resulted principally from the
addition of five new banking offices. Five new offices, including a main office
in Charleston, have been added since the second quarter of 1995. Five new
automated teller machines have been added since the beginning of 1996, with an
additional six machines scheduled for installation in the third quarter of 1996.
The Company also plans to add 11 new automated lending machines in the second
half of 1996.
Sundry noninterest expenses increased $131,000 to $7.8 million in the
first six months of 1996 from $7.7 million in the first six months of 1995. The
overall increase in sundry noninterest expenses was principally attributable to
increases in professional fees and costs associated with higher lending and
deposit activities. These increases were partially offset by a reduction in the
Federal Deposit Insurance Corporation ("FDIC") assessment discussed below. The
largest items of sundry noninterest expense were stationery, supplies, printing,
telephone, and advertising.
FDIC insurance premiums for the first six months of 1996 were $321,000,
approximately $960,000 lower than the first six months of 1995. At its August
1995 meeting, the 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. Effective
January 1, 1996, the insurance assessment for Carolina First Bank's BIF deposits
was set at zero (although banks pay a $2,000 annual fee). 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 22% 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. The proposed amount of the special
assessment has been as high as $0.85 per $100 of SAIF deposits. Assuming that
the special assessment were applied at the $0.85 rate using SAIF-insured
deposits as of a proposed assessment date of March 31, 1995 (approximately $223
million), the Company would incur additional deposit insurance premium expense
of approximately $1.9 million which would be charged against current period
income. The timing and amount of such an assessment cannot be accurately
predicted at this time. Carolina First Bank's SAIF-insured deposits are
currently assessed at 0.23% of the average assessment base.
10
COMPARISON FOR THE QUARTERS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Net income increased 20% in the second quarter of 1996 to $2.7 million
from $2.2 million in the second quarter of 1995. Fully diluted earnings per
share increased 17% to $0.28 in the second quarter of 1996, compared with $0.24
in the second quarter of 1995. Return on average assets remained the same for
both quarters at 0.73% and return on average equity increased to 10.98% in
second quarter 1996 from 9.96% in second quarter 1995.
Net interest income increased $2.1 million to $13.9 million for the
three months ended June 30, 1996 from $11.8 million for the comparable period in
1995 . This increase was primarily attributable to a higher level of average
earning assets. Earning assets averaged $1.301 billion and $1.086 billion in the
second quarters of 1996 and 1995, respectively. While the average earning asset
balance increased, the yield on earning assets declined without a corresponding
drop in the rate on interest-bearing liabilities. The yield on earning assets
was effected by a drop in the prime interest rate in February 1996 while deposit
rates remained high as a result of a competitive market.
Noninterest income, excluding the gain on sale of mortgage servicing
rights and gain on the sale of securities, decreased 2% to $3.5 million in the
second quarter of 1996 from $3.6 million in the second quarter of 1995. This
reduction resulted from decreases in loan securitization income, primarily
attributable to higher credit card charge-offs, and mortgage banking income,
primarily the result of a loss on the sale of mortgage loans. These declines
were partially offset by increases in service charges on deposit accounts and
fees for trust services.
Noninterest expenses increased $558,000, or 5%, to $11.7 million for
the three months ended June 30, 1996 from $11.1 million for the three months
ended June 30, 1995. The majority of this change was due to higher salaries,
wages and benefits expense which increased from $5.3 million for the second
quarter 1995 to $5.8 million for the second quarter of 1996. Occupancy expense
remained flat from quarter to quarter while furniture and equipment expense
increased only slightly. Sundry noninterest expenses decreased 2% from second
quarter 1995 to second quarter 1996, largely because of reductions in FDIC
premiums.
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, 1996, the Company had total loans outstanding of $1.113
billion which equaled approximately 95% of the Company's total deposits and
approximately 73% of the Company's total assets. The composition of the
Company's loan portfolio at June 30, 1996 follows: commercial and commercial
mortgage 48%, residential mortgage 24%, consumer 12%, credit card 8%, lease
receivables 5% and construction 3%.
The Company's loans increased $141.2 million, or 15%, to $1.113 billion
at June 30, 1996 from $971.4 million at June 30, 1995 and increased $50.0
million, or 5%, from $1.063 billion at December 31, 1996. This increase resulted
primarily from internal growth and the purchase of approximately $30.3
11
million in lease receivables. This increase since December 31, 1995 was net of
approximately $97 million in commercial real estate loans sold in the Commercial
Loan Securitization and $74 million of mortgage loans sold.
In June 1996, the Company purchased approximately $30.3 million, net of
related unearned income, in lease receivables from an unrelated third party. The
purchase also resulted in an increase to unearned income of approximately $5
million. The leases are primarily for general office equipment. The portfolio is
diversified by type of business, geographic location of leases, 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 had loans to 50 borrowers having principal amounts ranging
from $2 million to $5 million, which loans accounted for $150.5 million, or 14%,
of the Company's loan portfolio in 1996. The Company had loans to four borrowers
having principal amounts in excess of $5 million, which loans accounted for
$25.3 million, or 2%, of the Company's loan portfolio in 1996. 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 six months of 1996, the Company's loans averaged $1.084
billion with a yield of 9.36%, compared with $913.9 million and a yield of 9.58%
for the same period of 1995. 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 decrease in the loan yield reflects the lowering
of the prime interest rate in February 1996.
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.
Securitization and packaging and selling loans are part of the
Company's funding strategy. The Company engages in these transactions because
they fund loan growth by moving loans off-balance sheet while allowing the
Company to retain the related income stream and servicing relationships. In
March 1996, the Company completed the Commercial Loan Securitization and
received cash proceeds of approximately $96 million. Since the securitization of
certain of the Company's credit cards in January 1995, the Company has received
cash proceeds totaling approximately $80 million in connection with the transfer
of certain credit card receivables into a trust created in connection with the
securitization.
As of June 30, 1996, the Company classified its portfolio of credit card
receivables totaling approximately $88 million as loans held for sale.
Subsequent to quarter end, the Company signed an agreement with an unrelated
third party to sell approximatley $50 million of its credit card portfolio. The
remainder of the credit card portfolio is carried at the lower of cost on
market value in anticipation of possible sales.
ALLOWANCE FOR LOAN LOSSES
Management maintains an allowance for loan losses which it believes is
adequate to cover inherent 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.
12
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. The level of this allowance is
dependent upon the total amount of past due loans, general economic
conditions and management's assessment of potential losses.
The allowance for loan losses totaled $9.1 million, or 0.89% of
loans, less unearned income, at the end of June 1996, compared with $8.3
million, or 0.85% of loans less unearned income, at the end of June 1995.
At December 31, 1995, the allowance for loan losses was $8.7 million, or 0.92%
of loans less unearned income. Net charge-offs as a percentage of average
loans during the first six months of 1996 were 0.64%, compared with 0.46% for
the first six months of 1995. Net charge-offs for the first six months of 1996
were $3.4 million of which $1.8 million were credit cards. Credit card
charge-offs increased during the second quarter of 1996 to $1.2 million from
$600,000 for the first quarter of 1996. The allowance for loan losses as a
percentage of non-performing loans was 552% and 2,602% as of June 30, 1996
and 1995, respectively. Table 1 presents changes in the allowance for loan
losses.
TABLE 1
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
At and for
At and for the six months the year ended
ended June 30, December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1995
- -------------------------------------------------------------------------------------------------------------
Balance at beginning of period $8,661 $6,002 $6,002
Blue Ridge merger 0 0 128
Valuation allowance for loans purchased 592 0 633
Provision for loan losses 3,275 4,390 6,846
Charge-offs 4,167 2,263 5,259
Recoveries 709 146 311
- -------------------------------------------------------------------------------------------------------------
Net charge-offs 3,458 2,117 4,948
- -------------------------------------------------------------------------------------------------------------
Allowance at end of period $9,070 $8,275 $8,661
- -------------------------------------------------------------------------------------------------------------
At June 30, 1996, the recorded investment in loans that were considered
to be impaired was $2,012,000. The related allowance for these impaired loans
was $963,000. The average recorded investment and foregone interest on
impaired loans during the six months ended June 30, 1996 was approximately
$1,747,000 and $334,000, respectively. For the six months ended June 30,
1996, the Company recognized interest income on impaired loans of $33,000.
SECURITIES
At June 30, 1996, the Company's total investment portfolio had a book
value of $234.1 million and a market value of $234.2 million for an unrealized
net gain of $45,000. The investment portfolio has a weighted average maturity of
approximately 1.8 years. Securities (i.e., investment securities, securities
available for sale and trading securities) averaged $199.2 million in the first
six months of 1996, 43% above the first six month 1995 average of $139.0
million. The securities balance increased due to the
13
investment of a portion of the funds from the Commercial Loan Securitization in
the securities portfolio. The average portfolio yield increased to 5.95% for
the first six months of 1996 from 5.77% for the first six months of 1995.
The portfolio yield increased due to maturities of lower yielding government
securities which were reinvested at higher rates. At June 30, 1996,
securities totaled $234.3 million, up $78.4 million from the $155.9 million
invested as of the second quarter end 1995 and up $55.9 million from the
December 31, 1995 balance of $178.4 million.
At June 30, 1996, the Company owned 128,366 shares of common stock of
Affinity and a warrant to purchase an additional 5,871,340 shares of Affinity's
common stock at a purchase price of $0.0001 per share ("Affinity Warrant"). As
of June 30, 1996, the investment in Affinity's common stock, included in
securities available for sale, was recorded at its book value of $12. The
Affinity Warrant was not included in securities at June 30, 1996. See "OVERVIEW
- - Investment in Affinity Technology Group."
OTHER ASSETS
At June 30, 1996, other assets included other real estate owned of $2.8
million, intangible assets (excluding mortgage servicing rights) of $17.4
million, and mortgage servicing rights of $8.4 million. At June 30, 1995, other
assets included other real estate owned of $2.3 million, intangible assets
(excluding mortgage servicing rights) of $19.3 million, and mortgage servicing
rights of $12.5 million. The intangible assets balance as of June 30, 1996 is
attributable to goodwill of $7.9 million, core deposit balance premiums of $9.3
million, excess and purchased mortgage servicing rights of $8.4 million and
purchased credit card premiums of $242,000.
INTEREST-BEARING LIABILITIES
During the first six months of 1996, interest-bearing liabilities
averaged $1.194 billion, compared with $981.4 million for the comparable period
of 1995. This increase resulted principally from account promotions and entrance
into new markets. The average interest rates were 4.93% and 4.65% for the first
six months of 1996 and 1995, respectively. At June 30, 1996, interest-bearing
deposits comprised approximately 87% 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. For the first six months of 1996, average borrowed funds,
which include FHLB advances and other short-term borrowings, totaled $180.2
million compared with $120.6 for the first six months of 1995. FHLB advances
increased to $115 million at June 30, 1996 from $65 million at June 30, 1995 and
$90 million at December 31, 1995.
Carolina First Banks' primary source of funds for loans and investments
is its deposits which are gathered through Carolina First Bank's branch network.
Deposits grew 15% to $1.166 billion at June 30, 1996 from $1.018 billion at June
30, 1995. At December 31, 1995, deposits totaled $1.095 billion. Internal
growth, particularly from account promotions and new markets, generated the new
deposits. During the first six months of 1996, total interest-bearing deposits
averaged $987.0 million with a rate of 4.71% , compared with $867.1 million with
a rate of 4.42% for the same period in 1995. During the first six months of
1996, deposit pricing was very competitive in Carolina First Bank's market
areas, resulting in upward pressure on deposit interest rates. In particular,
the interest rates paid on certificates of deposits rose significantly as a
result of customers' rate sensitivity from deposit promotions. Carolina
First Bank has also been running a checking account promotion to attract new
deposit relationships. The Company
14
does not believe that it has any brokered deposits.
Average noninterest-bearing deposits, which increased 23% during the
year, increased to 13.2% of average total deposits in the first six months of
1996 from 12.3% in the first six months of 1995. 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 84% for the first six months of
1996. 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
Total shareholders' equity amounted to $98.6 million, or 6.48% of total
assets, at June 30, 1996 compared with $90.2 million, or 7.05% of total assets,
at June 30, 1995. At December 31, 1995, shareholders' equity totaled $95.0
million, or 6.71% of total assets. The $3.6 million increase in total
shareholders' equity since December 31, 1995 resulted principally from retention
of earnings less cash dividends paid. In addition, the second quarter end 1996
shareholders' equity was decreased by the $715,000 change from an unrealized
gain to an unrealized loss on securities available for sale.
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, Aiken County
National Bank, Midlands National Bank and Blue Ridge.
On May 18, 1995, the Company completed a $26.5 million public offering
of its 9.00% Subordinated Notes due 2005 (the "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.
In February 1996, the Company redeemed its Series 1993 Preferred Stock
and Series 1994 Preferred Stock. In connection with the redemptions,
substantially all of the outstanding shares of Series 1993 Preferred Stock and
Series 1994 Preferred Stock were converted into approximately 2.6 million
shares of Common Stock.
Book value per share at June 30, 1996 and 1995 was $10.54 and $8.41,
respectively. Tangible book value per share at June 30, 1996 and 1995 was $8.68
and $5.39, respectively. At December 31, 1995, book value and tangible book
value were $9.14 and $6.36, respectively. A significant portion of the increase
in book value and tangible book value since December 31, 1995 was attributable
to the conversions of the Series 1993 Preferred Stock and the Series 1994
Preferred Stock into Common Stock. Tangible book value was below book value as a
result of the purchase premiums associated with branch acquisitions and the
purchase of CF Mortgage.
At June 30, 1996, the Company and Carolina First Bank were in
compliance with each of the applicable regulatory
15
capital requirements and met or exceeded the "well capitalized" regulatory
guidelines. Table 2 sets forth various capital ratios for the Company and
Carolina First Bank.
TABLE 2
CAPITAL RATIOS
- ----------------------------------------------------------------------------------------------
As of Well Capitalized Adequately Capitalized
6/30/96 Requirement Requirement
- ----------------------------------------------------------------------------------------------
Company:
Total Risk-based Capital 10.19% 10.0% 8.0%
Tier 1 Risk-based Capital 7.18 6.0 4.0
Leverage Ratio 5.44 5.0 4.0
Carolina First Bank:
Total Risk-based Capital 10.00 10.0 8.0
Tier 1 Risk-based Capital 9.20 6.0 4.0
Leverage Ratio 6.95 5.0 4.0
- ----------------------------------------------------------------------------------------------
The Company and its subsidiaries are subject to certain regulatory
restrictions on the amount of dividends they are permitted to pay. In November
1993, the Board of Directors initiated a regular quarterly cash dividend 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 $0.07
beginning in the first quarter of 1996. 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. In each year from 1989 through 1995, the Company issued 5%
common stock dividends to common shareholders.
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 0.29% and 0.74% of earning assets in the first six months
of 1996 and 1995, 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. In March 1996, the Company completed the Commercial
Loan Securitization and received cash proceeds of approximately $96 million
which improved liquidity. The Company has signed contracts to purchase mortgage
servicing rights for approximately $550 million in mortgage loans for a purchase
price of approximately $8.7 million. These
16
purchases of mortgage servicing rights are expected to close in the third
quarter of 1996. In August 1996, the Company entered into an agreement to sell
mortgage servicing rights for approximately $300 million in mortgage loans for
a sales price of approximately $3.9 million. This sale of mortgage servicing
rights is expected to close in September 1996 at a price approximating the
recorded investment. The Company is also considering sale/leaseback
transactions on certain properties which could provide liquidity. The
sale/leaseback transactions are 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, 1996, Carolina
First Bank's liquidity ratio was approximately 12%. At June 30, 1996, Carolina
First Bank had unused short-term lines of credit totaling approximately $13
million (which are withdrawable at the lender's option). In addition, Carolina
First Bank has access to borrowing from the FHLB. At June 30, 1996, unused
borrowing capacity from the FHLB totaled approximately $20 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 monitor and improve its liquidity.
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, 1996, FHLB advances
totaled $115 million, compared with $65 million at June 30, 1995 and $90.0
million at December 31, 1995. In July 1996, Carolina First Bank raised deposits
by offering a certificate of deposit promotion and reduced its borrowings from
the FHLB.
The Company has certain cash needs, including general operating
expenses and the payment of dividends and interest on borrowing. 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 marketable investment 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.
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
17
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 $3.5 million in the
first six months of 1996 and $2.1 million in the first six months of 1995, or
0.64% and 0.46%, respectively, as a percentage of average loans. Nonperforming
assets as a percentage of loans and other real estate owned were 0.40% and 0.27%
as of June 30, 1996 and 1995, respectively.
TABLE 3
NONPERFORMING ASSETS AND PAST DUE LOANS
($ in thousands)
June 30, December 31,
------------------------ -------------
1996 1995 1995
- ---------------------------------------------------------------------------------------------------
Nonaccrual loans $ 1,642 $ 318 $ 1,275
Restructured loans -- -- 1,085
- ---------------------------------------------------------------------------------------------------
Total nonperforming loans 1,642 318 2,360
Other real estate 2,791 2,286 2,508
- ---------------------------------------------------------------------------------------------------
Total nonperforming assets $ 4,433 $ 2,604 $ 4,868
- ---------------------------------------------------------------------------------------------------
Nonperforming assets as a % of loans
and foreclosed property 0.40% 0.27% 0.46%
Accruing loans past due 90 days $ 2,455 $ 2,726 $ 2,748
- ---------------------------------------------------------------------------------------------------
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
"INCOME STATEMENT REVIEW -- Noninterest Expenses" for summary of potential
assessment on SAIF-insured deposits.
18
PART II
ITEM 1 LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time parties to
various legal actions arising in the normal course of business. Such
items are not expected to have any adverse effect on the business or
financial position of the Company or any of its subsidiaries.
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. During the second quarter of 1996, Carolina
First Bank reached a settlement agreement with the plaintiff in this
matter by which Carolina First Bank was released from all claims in
exchange for payment of approximately $151,000, half of which was
paid by Carolina First Bank and half of which was paid by Carolina
First Bank's insurance company.
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 it is vigorously defending this
lawsuit. The Company has asked the Court for permission to file a
counterclaim which alleges, among other things, securities law
violations. This case is now in discovery. Both parties are taking
depositions and otherwise seeking information in accordance with court
rules. However, the Company is not in a position at this time to assess
the likelihood the Bowers will prevail on their claim, amount of
liability, if any, or the probability of the Company's success on its
counterclaim.
ITEM 2 CHANGE IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
19
PART II
(CONTINUED)
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On April 18, 1996, the Company held its 1996 Annual Meeting of
Stockholders. At the 1996 Annual Meeting, the following individuals
were elected as Directors with the votes indicated.
In Favor Against
Robert E. Hamby, Jr. 7,119,285 1,405
William S. Hummers III 7,115,688 5,002
Charles B. Schooler 7,118,511 2,179
Edward J. Sebastian 7,111,772 8,918
Eugene E. Stone IV 7,108,795 11,895
Judd B. Farr, C. Claymon Grimes, Jr., M. Dexter Hagy, R. Glenn
Hilliard, Richard E. Ingram, Elizabeth P. Stall, William R. Timmons,
Jr., and Mack I. Whittle, Jr. continued in their present terms as
directors.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Carolina First Corporation Amended Common Stock Dividend Reinvestment
Plan: Incorporated by reference to the Prospectus in Carolina First
Corporation's Registration Statement on Form S-3, Commission File No.
333-06975.
11.1 Computation of Primary and Fully Diluted Earnings Per Share.
12.1 Computation of Earnings to Fixed Charges Ratio.
27.1 Financial Data Schedules.
(b) Reports on Form 8-K
None.
20
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)