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, 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 (864) 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 $1.00 par value common stock as
of November 10, 1996 was 9,338,447.
Consolidated Balance Sheets
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
September 30, December 31,
--------------------------------- -------------
ASSETS 1996 1995 1995
--------------------------------- ------------
Cash and due from banks......................................................... $ 54,668 $ 51,096 $ 75,770
Interest-earning deposits with banks........................................... 14,940 9,138 8,663
Federal funds sold and resale agreements....................................... 24,000 -- --
Securities
Trading...................................................................... 1,261 20,149 5,805
Available for sale........................................................... 226,145 69,102 146,272
Held for investment (market value $28,902, $106,354 and $26,670
respectively)................................................................ 28,695 106,760 26,289
------------- -------------- ------------
Total securities.......................................................... 256,101 196,011 178,366
------------- -------------- ------------
Loans held for sale............................................................ 7,847 3,908 125,000
Loans........................................................................... 1,054,061 1,032,582 944,716
Less unearned income........................................................ (8,674) (6,626) (7,056)
Less allowance for loan losses.............................................. (10,541) (8,845) (8,661)
------------- -------------- ------------
Net loans.................................................................. 1,042,693 1,021,019 1,053,999
------------- -------------- ------------
Premises and equipment......................................................... 38,718 40,002 40,320
Accrued interest receivable.................................................... 12,309 10,287 10,829
Other assets.................................................................... 57,695 58,382 46,975
------------- -------------- ------------
$ 1,501,124 $ 1,385,935 $ 1,414,922
============= ============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing........................................................ $ 165,550 $ 149,582 $ 160,394
Interest-bearing........................................................... 1,067,058 913,368 935,097
------------- -------------- ------------
Total deposits............................................................ 1,232,608 1,062,950 1,095,491
Borrowed funds............................................................... 127,790 193,330 187,899
Subordinated notes........................................................... 25,328 25,204 25,237
Accrued interest payable..................................................... 8,147 6,391 6,737
Other liabilities............................................................ 5,890 5,801 4,591
------------- -------------- ------------
Total liabilities......................................................... 1,399,763 1,293,676 1,319,955
------------- -------------- ------------
Shareholders' Equity
Preferred stock-no par value; authorized 10,000,000 shares; issued and
outstanding Series 1993B 49,141, 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)... 943 34,821 32,909
Common stock-par value $1 per share; authorized 20,000,000
shares; issued and outstanding 9,331,598, 6,131,722, and
6,517,366 shares, respectively............................................. 9,332 6,132 6,517
Surplus....................................................................... 85,189 51,871 54,432
Retained earnings............................................................ 6,992 358 1,778
Nonvested restricted stock.................................................... (915) (829) (745)
Guarantee of ESOP debt....................................................... (76) (126) (76)
Unrealized (loss) gain on securities available for sale, net of tax.......... (104) 32 152
------------- -------------- ------------
Total shareholders' equity................................................ 101,361 92,259 94,967
------------- -------------- ------------
$ 1,501,124 $ 1,385,935 $ 1,414,922
============= ============== ============
Consolidated Statements of Income
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------
Interest income
Interest and fees on loans...................................$ 26,212 $ 23,912 $ 76,811 $ 66,880
Interest on securities
Taxable.................................................... 3,061 1,984 8,049 5,185
Exempt from Federal income taxes........................... 313 299 902 791
------------- ----------- ------------ -----------
Total interest on securities............................. 3,374 2,283 8,951 5,976
Interest on federal funds sold and resale agreements......... 427 156 878 409
------------- ----------- ------------ -----------
Total interest income...................................... 30,013 26,351 86,640 73,265
------------- ----------- ------------ -----------
Interest expense
Interest on deposits......................................... 12,483 11,049 35,614 30,060
Interest on borrowed funds................................... 2,795 2,697 8,951 6,335
------------- ----------- ------------ -----------
Total interest expense..................................... 15,278 13,746 44,565 36,395
------------- ----------- ------------ -----------
Net interest income........................................ 14,735 12,605 42,075 36,870
Provision for loan losses...................................... 4,896 1,000 8,171 5,390
------------- ----------- ------------ -----------
Net interest income after
provision for loan losses................................ 9,839 11,605 33,904 31,480
------------- ----------- ------------ -----------
Noninterest income
Service charges on deposit accounts.......................... 1,663 1,421 4,780 4,086
Mortgage banking income...................................... 955 886 1,970 1,816
Loan securitization income................................... 813 828 1,962 1,995
Fees for trust services...................................... 320 204 964 716
Sundry....................................................... 557 298 2,305 1,597
Gain on sale of credit cards................................. 4,317 -- 4,317 --
Gain on sale of securities................................... 51 129 170 326
(Loss) gain on sale of mortgage servicing rights............. (14) 127 107 2,153
------------- ----------- ------------ -----------
Total noninterest income................................... 8,662 3,893 16,575 12,689
------------- ----------- ------------ -----------
Noninterest expenses
Salaries and wages........................................... 4,967 4,445 15,290 12,928
Employee benefits............................................ 1,013 1,234 3,352 3,364
Occupancy.................................................... 1,103 1,047 3,260 3,153
Furniture and equipment...................................... 932 759 2,678 2,324
SAIF assessment.............................................. 1,184 -- 1,184 --
Sundry....................................................... 5,593 4,339 13,384 11,999
------------- ----------- ------------ -----------
Total noninterest expenses................................. 14,792 11,824 39,148 33,768
------------- ----------- ------------ -----------
Income before income taxes................................. 3,709 3,674 11,331 10,401
Income taxes................................................... 1,374 1,203 4,096 3,500
------------- ----------- ------------ -----------
Net income ................................................ 2,335 2,471 7,235 6,901
Dividends on preferred stock.................................... 16 687 48 2,099
------------- ----------- ------------ -----------
Net income applicable to common shareholders...............$ 2,319 $ 1,784 $ 7,187 $ 4,802
============= =========== ============ ===========
Net income per common share:*
Primary....................................................$ 0.25 $ 0.28 $ 0.81 $ 0.76
Fully diluted.............................................. 0.25 0.27 0.77 0.74
Average common shares outstanding:*
Primary.................................................... 9,378,485 6,436,619 8,897,055 6,343,849
Fully diluted.............................................. 9,477,684 9,340,304 9,456,541 9,315,956
Cash dividends declared per common share*......................$ 0.07 $ 0.06 $ 0.21 $ 0.18
*Share data have been restated to reflect 5% stock dividends.
2
Consolidated Statement of Cash Flows
Carolina First Corporation
(Unaudited)
($ in thousands)
Nine Months Ended
September 30,
- -------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income..................................................$ 7,235 $ 6,901
Adjustments to reconcile net income to net cash
used in operations
Depreciation............................................ 2,439 2,470
Amortization of intangibles............................. 1,351 1,816
Provision for loan losses............................... 8,171 5,390
Gain on sale of credit cards............................ (4,317) --
Gain on sale of securities.............................. (170) (326)
Gain on sale of mortgage servicing rights............... (107) (2,153)
Unrealized loss (gain) on securities.................... 43 (14)
Proceeds from maturity of trading securities............ 55,186 12,334
Proceeds from sale of trading securities................ 383,939 340,317
Purchase of trading securities.......................... (434,457) (371,631)
Originations of mortgage loans held for sale............ (131,199) (56,523)
Sale of mortgage loans held for sale.................... 118,742 52,687
Increase in interest receivable......................... (2,165) (2,613)
Increase in interest payable............................ 1,410 2,250
Increase in other assets................................ (10,489) (12,965)
(Decrease) increase in other liabilities................ (108) 968
----------- ------------
Net cash used in operating activities..................... (4,496) (21,092)
----------- ------------
Cash Flows from Investing Activities
Proceeds from maturity of securities available for sale..... 91,595 44,856
Proceeds from maturity of securities held for investment.... 2,660 4,000
Purchase of securities available for sale................... (172,169) (55,735)
Purchase of securities held for investment.................. (5,066) (37,878)
Net increase in interest-earning deposits with banks........ (6,277) (8,638)
Net (increase) decrease in federal funds sold and
resale agreements........................................ (24,000) 4,420
Proceeds from sale of credit cards.......................... 64,251 --
Securitization and sale of commercial loans................. 95,484 --
Purchase of loans........................................... (30,312) (32,911)
Net increase in loans....................................... (108,418) (72,301)
Proceeds from sale of mortgage servicing rights............. 900 --
Capital expenditures........................................ (1,019) (2,649)
----------- -----------
Net cash used in investing activities .................... (92,371) (156,836)
----------- -----------
Cash Flows from Financing Activities
Net increase in deposits.................................... 137,117 61,202
(Decrease) increase in borrowed funds....................... (60,018) 111,298
Redemption of preferred stock............................... (232) --
Dividends on preferred and common stock..................... (2,451) (3,168)
Other common stock activity................................. 1,349 442
----------- -----------
Net cash provided by financing activities................. 75,765 169,774
----------- -----------
Net change in cash and due from banks......................... (21,102) (8,154)
Cash and due from banks at beginning of period................ 75,770 59,250
----------- -----------
Cash and due from banks at end of period......................$ 54,668 $ 51,096
=========== ===========
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 $459,000 for the three months ended September 30,
1996 and an increase of $256,000 for the nine months ended September
30, 1996.
At September 30, 1996, Blue Ridge Finance Company, Inc. ("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 September 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 was
not reported on the Company's balance sheet as of September 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 $43,155,000
and $34,145,000 for the nine months ended September 30, 1996 and
September 30, 1995, respectively. Income tax payments of $1,528,000 and
$4,590,000 were made for the nine months ended September 30, 1996 and
September 30, 1995, respectively.
(4) COMMON STOCK
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.
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 and warrants 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 and warrants using the
treasury stock method.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
(5) GAIN ON SALE OF CREDIT CARDS
In August 1996, Carolina First Bank sold approximately $55 million in
credit card loans. As a result of this transaction, Carolina First Bank
recorded a gain on the sale of credit cards of $4,317,000.
(6) 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
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 Annual Report on Form 10-K for the year ended 12/31/95 of Carolina First
Corporation (the "Company"). Results of operations for the nine month period
ended September 30, 1996 are not necessarily indicative of results to be
attained for any other period.
OVERVIEW
The Company is a financial institution, which commenced banking
operations in December 1986, and 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, Inc. ("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 September 30, 1996, the Company had
approximately $1.501 billion in assets, $1.053 billion in loans, $1.233 billion
in deposits and $101.4 million in shareholders' equity.
For the third quarter of 1996, net income totaled $2.3 million, or
$0.25 per fully diluted share, compared with $2.5 million or $0.27 per fully
diluted share, in the third quarter of 1995. Third quarter 1996's net income
included an after-tax charge of $746,000, or $0.08 per fully diluted share, to
cover a special Savings Association Insurance Fund ("SAIF") assessment. On
September 30, 1996, the President signed into law legislation requiring a
special assessment to recapitalize the SAIF. Thrift institutions or non-thrift
institutions, such as Carolina First Bank, which have acquired deposits through
acquisitions from thrift institutions over past years will be levied this
one-time charge. Earnings, excluding the impact of a one-time special SAIF
assessment, rose 25% for the third quarter of 1996 to $3.1 million, or $0.33 per
fully diluted share, from $2.5 million, or $0.27 per fully diluted share, for
the third quarter of 1995.
For the first nine months, net income totaled $7.2 million, or $0.77
per fully diluted share, compared with $6.9 million, or $0.74 per fully diluted
share, in the same period of 1995. Excluding the SAIF assessment, earnings for
the first nine months were $8.0 million, or $0.84 per fully diluted share. The
increase in net income, excluding the SAIF assessment, for both the third
quarter and the nine months ended September 30, 1996 compared with the same
periods in 1995, resulted from higher net interest income, higher noninterest
income and a gain on the sale of credit cards, partially offset by an increase
in the provision for loan losses and higher noninterest expenses.
Excluding the SAIF assessment, earnings in the third quarter of 1996
produced a return on average assets of 0.82%, compared with 0.76% for the third
quarter of 1995. Return on average equity, excluding the SAIF assessment, was
12.31% for the third quarter of 1996, compared with 10.90% for the same period
in 1995. Including the SAIF assessment, return on average assets for the third
quarter of 1996 was 0.62%, and return on average equity for the third quarter of
1996 was 9.33%.
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
6
$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
$48,000 for the first nine months of 1996 from $2.1 million for the first nine
months of 1995.
In March 1996, Carolina First Bank sold approximately $116 million in
commercial real 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 interests in the trust were sold to
institutional investors, while Carolina First Bank retained certificates
representing certain subordinated and residual interests in trust assets. In
connection with the sale of such loans, Carolina First Bank received cash
proceeds of approximately $96 million.
In August 1996, Carolina First Bank sold approximately $55 million in
credit card loans. As a result of this transaction, Carolina First Bank recorded
a gain on the sale of credit cards of $4.3 million. The remaining
available-for-sale credit card portfolio was written down to the lower of cost
or market.
In September 1996, the Company announced the divestiture of five
branches located in Barnwell, Blackville, Salley, Springfield, and Williston.
The branches are being sold to the Bank of Barnwell County (in organization),
expected to be a wholly-owned subsidiary of Community Capital Corporation, a
South Carolina corporation headquartered in Greenwood, South Carolina. This
transaction is scheduled to be completed in the first quarter of 1997 and is
subject to regulatory approval among other conditions.
In October 1996, the Company announced the Atlanta Internet Bank's
introduction of "anytime-anywhere" banking in Cyberspace. Atlanta Internet
Bank, which is a product of Carolina First Bank, opened its electronic doors on
AT&T's WorldNet Service and offers banking products primarily by means of a
secured internet web site. The Company has an agreement with certain persons,
which provides for the transfer of the Company's Atlanta Internet Bank operation
to a thrift institution, upon compliance with certain conditions. After such
transfer, Atlanta Internet Bank will be a stand-alone entity in which the
Company is expected to be a lead investor, owning an estimated 40% of the bank.
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 was measured as of the date of grant, January
24, 1996 by an independent third party appraisal. Fair value of the Affinity
stock award, as determined by the independent third party appraisal based on
information known at that time, was $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 offset the gain on disposition of equity investments,
resulting in no impact on the Company's net income.
7
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 September 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 September
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. This lock-up agreement expired on October 22, 1996.
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, 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. The Affinity
Warrant may not be transferred without the approval of the Federal Reserve
Board. The Affinity Warrant has been filed as an exhibit in the Company's
periodic filings with the Securities and Exchange Commission.
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 has reviewed its options with respect to its investment in
Affinity and currently has no plans to distribute or sell at the current price.
The Company's Board of Directors will continue to periodically review the
investment in Affinity and may decide to sell shares as market conditions
change.
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 mortgage servicing rights and
credit cards) in the first nine 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 $5.0 million, or 13%, to $42.2
million for the first nine months of 1996 from $37.2 million for the first nine
months of 1995. The increase resulted principally from a higher level of average
earning assets. The growth in average earning assets, which increased $214.0
million to $1.309 billion in the first nine months of 1996 from $1.095 billion
8
in the first nine months of 1995, resulted primarily from loan growth. Loans
averaged $146.1 million higher in the first nine months of 1996 than in the same
period in 1995.
The net interest margin for the nine months ended September 30, 1996 of
4.32% was lower than the margin of 4.54% for the same period of 1995. 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. For the
third quarters of both 1996 and 1995, the net interest margin was 4.38%.
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 1996, many financial institutions have offered deposit
promotions above the market rates, creating upward pressure on the Company's
cost of funds. Also, 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 nine months of 1996
compared with the same period in 1995. These short-term borrowings are at a
higher rate than the Company's average cost of deposits.
Provision for Loan Losses
The provision for loan losses was $8.2 million for the first nine
months of 1996 and $5.4 million for the first nine months of 1995. For the third
quarter of 1996, the provision for loan losses was $4.9 million, of which $1.3
million was for fraudulent loans associated with certain pending litigation
described below. Furthermore, the Company increased the 1996 provision as a
result of its credit card activities, increased charge-offs and consumer credit
concerns.
Management currently anticipates that loan growth will continue in the
remainder of 1996 and 1997. New market areas are expected to contribute to the
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.
Noninterest Income
Noninterest income increased $3.9 million, or 31%, to $16.6 million for
the nine months ended September 30, 1996 from $12.7 million for the same period
of 1995. Noninterest income in 1996 and 1995 included gains from asset sales and
nonrecurring items which are described below. A gain of $4.3 million from the
sale of approximately $55 million in credit cards was recorded during the third
quarter of 1996. The Company sold mortgage servicing rights for a gain of
$107,000 in the first nine months of 1996 and $2.2 million in the first nine
months of 1995. The large gain in 1995 resulted from the sale of servicing
rights related to approximately $435 million in loans. The Company recognized
gains on the sale of securities of $170,000 and $326,000 in the first nine
months of 1996 and 1995, respectively. A $587,000 gain on the disposition of
equity investments (offset by $587,000 recorded as compensation expense) for the
first quarter of 1996, included in sundry noninterest income, related to the
transfer of Affinity stock to certain officers of
9
the Company. Excluding the items discussed above, noninterest income increased
$1.2 million, or 12%, to $11.4 million in the first nine months of 1996 compared
with $10.2 million in the comparable period of 1995.
Service charges on deposit accounts, the largest contributor to
noninterest income, rose 17% to $4.8 million in the first nine months of 1996
from $4.1 million in the first nine 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 nine months of 1996, the Company received loan
securitization income of $2.0 million from its interests in the credit card and
commercial real estate loan trusts, which was the same as for the comparable
period of 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 the Commercial Loan
Securitization. For the second and third quarters 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 nine months of 1996 increased 8% to $2.0 million compared with $1.8
million in the first nine months of 1995. This increase was attributable to
higher origination volumes partially offset by lower servicing volumes. On
January 1, 1995, the Company adopted Statement of Financial Accounting Standards
122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"), and began
recording assets to reflect the value of servicing for its originated and sold
mortgage loans.
Income from originations and sales of mortgage loans, including sales
of loans originated by Carolina First Bank, totaled $1.4 million in the first
nine months of 1996, compared with $1.2 million in the first nine months of
1995. Income from originations increased as a result of higher internal loan
originations. Mortgage loans totaling approximately $119 million and $53 million
were sold in the first nine months 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 September 30, 1996, CF Mortgage was servicing or subservicing
12,163 loans having an aggregate principal balance of approximately $1.039
billion. During the third quarter of 1996, the Company purchased mortgage
servicing rights to service mortgage loans with balances totaling approximately
$785 million. 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 $285 million. The sale was
completed in early September 1996 at a price approximating the recorded
investment.
Servicing income from non-affiliated companies, net of the related
amortization, was $610,000 for the first nine months of 1996 compared with
$662,000 for the comparable period in 1995. This decrease was primarily
attributable to lower volumes of loans serviced, which decreased to $1.039
billion at September 30, 1996 from $1.318 billion at September 30, 1995, as well
as 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 nine months of 1996 of $964,000
were 35% above the $716,000 earned in the same period of 1995. At September 30,
1996, the trust department had assets under management of approximately $448
million. Fees for trust services increased as a result of the generation of new
trust
10
business and additional assets under management.
Sundry income, excluding the gain on the disposition of equity
investments, was $121,000 higher for the first nine 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.
The increase in 1996 sundry income was primarily attributable to higher customer
service fees and servicing fee income from the commercial loan trust.
Noninterest Expenses
Noninterest expenses totaled $39.1 million and $33.8 million for the
nine months ended 1996 and 1995, respectively. Third quarter 1996 noninterest
expenses included a one-time charge of $1,184,000 for a special SAIF assessment.
In the first quarter of 1996, approximately $587,000 was recorded as
compensation expense related to a non-recurring award 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. Excluding the non-recurring items described above, noninterest
expenses increased $4.1 million, or 12%, to $37.4 million in the first nine
months of 1996 from $33.3 million in the first nine months of 1995. The
increased expenditures primarily reflected the costs of additional personnel
hired to support the Company's current and anticipated growth, professional fees
and the write-off of a property held as other real estate owned.
Salaries, wages and employee benefits totaled $18.6 million in the
first nine months of 1996. Salaries and wages and employee benefits, excluding
$587,000 in non-recurring compensation expense, increased $1.8 million, or 11%,
to $18.1 million in the first nine months of 1996 from $16.3 million in the
first nine months of 1995. Full-time equivalent employees rose to 594 as of
September 30, 1996 from 565 as of September 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 $461,000, or
8%, to $5.9 million for the nine months ended September 30, 1996 from $5.5
million for the nine months ended September 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 third quarter
of 1995. Six new automated teller machines have been added since the beginning
of 1996, with plans to add an additional machine at the new Hilton Head office
in the fourth quarter of 1996.
Sundry noninterest expenses increased $1.4 million to $13.4 million in
the first nine months of 1996 from $12.0 million in the first nine months of
1995. The overall increase in sundry noninterest expenses was principally
attributable to increases in professional fees (including legal fees related to
certain pending litigation), the $586,000 write-off of a property held as other
real estate owned 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, postage and advertising.
FDIC insurance premiums, excluding a one-time special SAIF assessment
explained below, were $469,000 for the first nine months of 1996, approximately
$900,000 lower than the first nine months of 1995. At its August 1995 meeting,
the FDIC approved a reduction in the insurance assessments for Bank Insurance
11
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 applied only to BIF- insured deposits and did not include deposits
insured by the SAIF. In connection with the merger of Carolina First 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. Through September 30, 1996, Carolina First
Bank's SAIF-insured deposits have been assessed at 0.23% of the average
assessment base, excluding the special assessment discussed below.
On September 30, 1996, the President signed into law legislation
requiring a special assessment to recapitalize the SAIF. This assessment was
applied at a rate of 0.657% of SAIF-insured deposits as of March 31, 1995. Banks
that have acquired "Oakar" deposits before March 31, 1995 were allowed a 20%
reduction to the assessment base. The result for Carolina First Bank was a
charge of $1,184,000 pre-tax ($746,000 after-tax) based on approximately $223
million of SAIF deposits. The legislation also changed future annual assessment
rates for both BIF-insured deposits and SAIF-insured deposits. For 1997 through
1999, the annual assessment rates will be 0.0129% for BIF-insured deposits and
0.0644% for SAIF-insured deposits.
Comparison for the Quarters ended September 30, 1996 and September 30, 1995
For the third quarter of 1996, net income totaled $2.3 million, or
$0.25 per fully diluted share, compared with $2.5 million, or $0.27 per fully
diluted shares, in the third quarter of 1995. Third quarter 1996's net income
included an after-tax charge of $746,000, or $0.08 per fully diluted share, to
cover a special SAIF assessment. (See "EARNINGS REVIEW- Noninterest Expenses.")
Excluding the special SAIF assessment, earnings for the third quarter of 1996
increased 25% to $3.1 million from $2.5 million for the third quarter of 1995.
Fully diluted earnings per share for the third quarter of 1996, excluding the
special SAIF assessment, increased 22% to $0.33, compared with $0.27 for the
third quarter of 1995. Return on average assets and return on average equity for
the three months ended September 30, 1996, excluding the one-time SAIF charge,
increased to 0.82% and 12.31%, respectively, from 0.76% and 10.90%,
respectively, for the same period in 1995. Including the SAIF assessment, return
on average assets for the third quarter of 1996 was 0.62%, and return on average
equity for the third quarter of 1996 was 9.33%.
Net interest income increased $2.1 million to $14.7 million for the
three months ended September 30, 1996 from $12.6 million for the comparable
period in 1995. This increase was primarily attributable to a higher level of
earning assets. Earning assets averaged $1.354 billion and $1.164 billion in the
third quarters of 1996 and 1995, respectively. While the average earning asset
balance increased, the yield on earning assets declined with only a slight
corresponding drop in the rate on interest-bearing liabilities. The yield on
earning assets was affected 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 credit cards and gain
on sale of securities, increased 13% to $4.3 million in the third quarter of
1996 from $3.8 million in the third quarter of 1995. This growth resulted from
increases in service charges on deposit accounts, fees for trust services, and
mortgage banking income.
Noninterest expenses increased $3.0 million, or 25%, to $14.8 million
for the three months ended September 30, 1996 from $11.8 million for the three
months ended September 30, 1995. This increase is
12
partially attributable to the one-time, special SAIF assessment of $1,184,000
(pre-tax) recorded during the third quarter of 1996, along with higher salaries,
wages and benefits expense. Sundry noninterest expenses also increased 29% from
the third quarter 1995 to the third quarter 1996, primarily due to the write-off
of a property held as other real estate owned and legal fees related to pending
litigation.
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, 1996, the Company had total loans outstanding of
$1.053 billion which equaled approximately 85% of the Company's total deposits
and approximately 70% of the Company's total assets. The composition of the
Company's loan portfolio at September 30, 1996 follows: commercial and
commercial mortgage 51%, residential mortgage 24%, consumer 13%, lease
receivables 5%, credit cards 4% and construction 3%. The composition changed
during the quarter with credit cards declining to 4% of the portfolio from 8% as
of June 30, 1996. The decline in the credit card percentage was the result of
the August 1996 sale of $55 million in credit card loans.
The Company's loans increased $23.4 million, or 2%, to $1.053 billion
at September 30, 1996 from $1.030 billion at September 30, 1995. This increase
was net of loan sales of approximately $342 and loan purchases of approximately
$30 million completed over the last year. Adjusting for the loan sales and
purchases, internal loan growth was approximately $335 million, or 32%, during
the past year. Loans decreased 1% from $1.063 billion at December 31, 1995. This
decrease was principally the result of the 1996 sales of $97 million in
commercial real estate loans, $119 million of mortgage loans and $55 million of
credit cards.
In June 1996, the Company purchased approximately $30.3 million, net of
related unearned income, in lease receivables from a related 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.
In August 1996, Carolina First Bank sold approximately $55 million in
credit card loans to an unrelated commercial bank. As a result of this
transaction, Carolina First Bank recorded a gain on the sale of credit cards of
$4.3 million. The remaining available-for-sale credit card portfolio was written
down to the lower of cost or market.
The Company had loans to 72 borrowers having principal amounts ranging
from $2 million to $5 million, which loans accounted for $219 million, or 21%,
of the Company's loan portfolio in 1996. The Company had loans to 7 borrowers
having principal amounts in excess of $5 million, which loans accounted for $45
million, or 4%, 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 nine months of 1996, the Company's loans averaged $1.085
billion with a yield of 9.48%, compared with $938.7 million and a yield of 9.53%
for the same period of 1995. The interest rates charged
13
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.
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 sale of
certain credit card receivables into the trust created in connection with the
securitization.
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.
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 $10.5 million, or 1.00% of loans
less unearned income, at the end of September 1996, compared with $8.8 million,
or 0.86% of loans less unearned income, at the end of September 1995. At
December 31, 1995, the allowance for loan losses was $8.7 million, or 0.82% of
loans less unearned income. Net charge-offs for the first nine months of 1996
totaled $6.8 million, or 0.85% of average loans. Excluding $1.3 million in
charge-offs related to fraudulent acquired loans associated with certain pending
litigation, net charge-offs as a percentage of average loans during the first
nine months of 1996 were 0.69%, compared with 0.45% for the first nine months of
1995. Credit card charge-offs account for a significant portion of the
charge-offs. Excluding credit card charge-offs and fraudulent acquired loans,
net charge-offs as a percentage of average loans were 0.26% and 0.18% for the
first nine months of 1996 and 1995, respectively. Credit card charge-offs
remained constant from second to third quarter of 1996 at $1.2 million each
quarter. Non-performing assets as a percentage of loans remained low at 0.37% as
of September 30, 1996. The allowance for loan losses as a percentage of
non-performing loans was 648% and 430% as of September 30, 1996 and 1995,
respectively. Table 1 presents changes in the allowance for loan losses.
14
TABLE 1
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
At and for
At and for the nine months the year ended
ended September 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 592 633 633
Provision for loan losses 8,171 5,390 6,846
Charge-offs
Credit cards 3,024 1,897 2,536
Bank loans, leases & Blue Ridge 3,290 1,563 2,723
Fraudulent acquired loans 1,303 0 0
Recoveries 734 280 311
- --------------------------------------------------------------------------------
Net charge-offs 6,883 3,180 4,948
- --------------------------------------------------------------------------------
Allowance at end of period $ 10,541 $ 8,8451 $ 8,661
- --------------------------------------------------------------------------------
At September 30, 1996, the recorded investment in loans that were
considered to be impaired was $1,626,000. The related allowance for these
impaired loans was $913,000. The average recorded investment and foregone
interest on impaired loans during the nine months ended September 30, 1996 was
approximately $1,706,000 and $367,000, respectively. For the nine months ended
September 30, 1996, the Company recognized interest income on impaired loans of
$35,000.
Securities
At September 30, 1996, the Company's total investment portfolio had a
book value of $257.1 million and a market value of $256.3 million for an
unrealized net loss of $760,000. 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 $212.3 million in
the first nine months of 1996, 43% above the first nine months of 1995 average
of $148.0 million. The securities balance increased due to the investment of a
portion of the funds from the Commercial Loan Securitization in the securities
portfolio to increase liquidity. The average portfolio yield increased to 5.96%
for the first nine months of 1996 from 5.79% for the first nine months of 1995.
The portfolio yield increased due to maturities of lower yielding government
securities which were reinvested at higher rates. At September 30, 1996,
securities totaled $256.1 million, up $60.1 million from the $196.0 million
invested as of the third quarter 1995 and up $77.7 million from the December 31,
1995 balance of $178.4 million.
In December 1995, the Company reclassed approximately $75 million of
its held for investment portfolio to its available for sale portfolio in
accordance with the Financial Accounting Standard Board's Special Report, "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities." This report allowed a one-time reclassification
of investment securities without tainting the investment portfolio.
At September 30, 1996, the Company owned 128,366 shares of common stock
of Affinity and the Affinity Warrant to purchase an additional 5,871,340 shares
of Affinity's common stock at a purchase price
15
of $0.0001 per share. As of September 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
September 30, 1996. See "OVERVIEW - Investment in Affinity Technology Group."
Other Assets
At September 30, 1996, other assets included other real estate owned of
$2.2 million, intangible assets (excluding mortgage servicing rights) of $17.0
million and mortgage servicing rights of $15.1 million. At September 30, 1995,
other assets included other real estate owned of $2.3 million, intangible assets
(excluding mortgage servicing rights) of $18.5 million and mortgage servicing
rights of $14.2 million. The intangible assets balance as of September 30, 1996
was attributable to goodwill of $7.7 million, core deposit balance premiums of
$9.1 million, excess and purchased mortgage servicing rights of $15.1 million
and purchased credit card premiums of $225,000.
Interest-bearing Liabilities
During the first nine months of 1996, interest-bearing liabilities
averaged $1.208 billion, compared with $1.013 billion for the comparable period
of 1995. This increase resulted principally from account promotions and entrance
into new markets. The average interest rates were 4.95% and 4.80% for the first
nine months of 1996 and 1995, respectively. At September 30, 1996,
interest-bearing deposits comprised approximately 87% of total deposits and 77%
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. During 1996, however, the Company decreased
FHLB advances to $40.0 million at September 30, 1996 from $84.4 million at
September 30, 1995 and $90 million at December 31, 1995. While FHLB advances
remain a source of funding, Carolina First Bank has increased its emphasis on
retail banking and raised deposits through market promotions and sales efforts,
thereby decreasing FHLB advances. The Company believes that potential benefits
of cross- selling these customers other products and services would offset any
increase in the cost of funds. For the first nine months of 1996, average
borrowed funds, which include FHLB advances, securities sold to repurchase
agreements and other short-term borrowings, totaled $172.0 million compared with
$118.4 million for the first nine months of 1995.
Carolina First Bank's primary source of funds for loans and investments
is its deposits which are gathered through Carolina First Bank's branch network.
Deposits grew 16% to $1.233 billion at September 30, 1996 from $1.063 billion at
September 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 nine months of 1996, total interest-bearing
deposits averaged $1.009 billion with a rate of 4.73%, compared with $881.3
million with a rate of 4.56% for the same period in 1995. During the first nine
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 does not believe
that it has any brokered deposits.
Average noninterest-bearing deposits, which increased 16% during the
year, increased to 13.1% of average total deposits in the first nine months of
1996 from 12.4% in the first nine months of 1995. This
16
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 86% for the first nine 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 $101.4 million, or 6.75% of
total assets, at September 30, 1996 compared with $92.3 million, or 6.66% of
total assets, at September 30, 1995. At December 31, 1995, shareholders' equity
totaled $95.0 million, or 6.71% of total assets. The $6.4 million increase in
total shareholders' equity since December 31, 1995 resulted principally from
retention of earnings less cash dividends paid.
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 September 30, 1996 and 1995 was $10.76 and
$8.33, respectively. Tangible book value per share at September 30, 1996 and
1995 was $8.96 and $5.82, 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 September 30, 1996, the Company and Carolina First Bank were in
compliance with each of the applicable regulatory capital requirements and met
or exceeded the "well capitalized" regulatory standards. Table 2 sets forth
various capital ratios for the Company and Carolina First Bank.
17
TABLE 2
CAPITAL RATIOS
- -------------------------------------------------------------------------------
As of Well Capitalized Adequately Capitalized
9/30/96 Requirement Requirement
- -------------------------------------------------------------------------------
Company:
Total Risk-based Capital 10.92% 10.0% 8.0%
Tier 1 Risk-based Capital 7.70 6.0 4.0
Leverage Ratio 5.77 5.0 4.0
Carolina First Bank:
Total Risk-based Capital 10.63 10.0 8.0
Tier 1 Risk-based Capital 9.67 6.0 4.0
Leverage Ratio 7.22 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 0.93% and 0.78% of earning assets in the first nine 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 $50 million in mortgage loans for a purchase
price of approximately $1 million. These purchases of mortgage servicing rights
are expected to close during the fourth quarter of 1996. 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.
18
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, 1996,
Carolina First Bank's liquidity ratio was approximately 17%. At September 30,
1996, Carolina First Bank had unused short-term lines of credit totaling
approximately $48 million (which are withdrawable at the lender's option). In
addition, Carolina First Bank has access to borrowing from the FHLB. At
September 30, 1996, unused borrowing capacity from the FHLB totaled
approximately $95 million. Management believes that these sources are adequate
to meet its liquidity needs.
In 1994, the Company modified its funding strategy to rely more on
advances from the FHLB because management determined that, due to increased
competition for deposits, the marginal cost of borrowing from the FHLB is lower
than the marginal cost of raising deposits. At September 30, 1996, FHLB advances
totaled $40 million, compared with $84.4 million at September 30, 1995 and $90.0
million at December 31, 1995. See "BALANCE SHEET REVIEW - Interest-bearing
Liabilities."
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 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 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 totaled $6.9 million for the first nine months of 1996.
Excluding fraudulent acquired loans associated with certain pending litigation,
net loan charge-offs totaled $5.6 million in the first nine months of 1996 and
$3.2 million in the first nine months of
19
1995, or 0.69% and 0.45%, respectively, as a percentage of average loans.
Nonperforming assets as a percentage of loans and other real estate owned were
0.37% and 0.42% as of September 30, 1996 and 1995, respectively.
TABLE 3
NONPERFORMING ASSETS AND PAST DUE LOANS
($ in thousands)
September 30, December 31,
1996 1995 1995
- ------------------------------------------------------------------------------
Nonaccrual loans $ 1,626 $ 970 $ 1,275
Restructured loans -- 1,085 1,085
- ------------------------------------------------------------------------------
Total nonperforming loans 1,626 2,055 2,360
Other real estate 2,227 2,291 2,508
- ------------------------------------------------------------------------------
Total nonperforming assets $ 3,853 $ 4,346 $ 4,868
- ------------------------------------------------------------------------------
Nonperforming assets as a % of loans
and foreclosed property 0.37% 0.42% 0.46%
Accruing loans past due 90 days $ 2,528 $ 3,144 $ 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.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include, but are not limited to, the
following: risks from changes in economic and industry conditions; changes in
interest rates; risks inherent in making loans including repayment risks and
value of collateral; dependence on senior management; and recently-enacted or
proposed legislation.
20
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 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 Filed a related action in federal court in
Greenwood, South Carolina 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, the amount of
liability, if any, or the probability of the Company's success on its
claims brought against the Bowers.
On November 4, 1996, a derivative shareholder action was filed in
Greenville County Court of Common Pleas against the Company,
Mack I. Whittle, Jr., William S. Hummers III, Steve Powell and
Edward J. Sebastian. The named plaintiffs are Carolina First
Corporation, pursuant to Section 33-7-400 of the SC Code of Laws,
by and through its shareholders Emory Lester, Beatrice Hutchinson,
John Wesley Purdie, Jr., John Doe and Jane Doe. Plaintiffs allege
as causes of action the following: conversion of corporate
opportunity; fraud and constructive fraud (against Defendants Whittle
and Hummers); breach of fiduciary duty and constructive fiduciary
fraud; and negligent management. The factual basis upon which these
claims are made generally involves the payment to Messrs. Whittle,
Hummers and Powell of the bonus in connection with the Affinity
transaction (which bonus is described above), statements to former
Midlands shareholders in connection with the acquisition of Midlands,
alleged misstatements in the Company's public filings, transactions
between the Company and entities affiliated with Mr. Sebastian,
alleged mismanagement by Messrs. Whittle, Hummers and Sebastian
involving financial matters and employee matters. The complaint
seeks damages for the benefit of the Company (except as noted below)
as follows: for the first cause of action, an amount that the
Defendants have realized from the sale of Affinity stock,
director's fees from Mr. Sebastian, certain undetermined amounts
arising from conflicts of interest and excessive compensation
(summarized as $16 million, together with $16 million in punitive
damages and the cost of this action). With respect to the second
cause of action (for the benefit of certain former Midlands
shareholders only): damages as much as $1.8 million actual damages
and $1.8 million in punitive damages. With respect to the third
cause of action: damages as much as $4.5 million actual damages
and $4.5 million punitive damages. With respect to the fourth cause
of action: damages as much as $5.5 million actual damages and $5.5
million in punitive damages.
The Company believes that this lawsuit is without merit and expects
to defend it vigorously. The
21
deadline for the Company responding to the complaint has not
passed. The Company believes that it and the other defendants will
prevail in this lawsuit.
ITEM 2 CHANGE IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
21
PART II
(Continued)
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Agreement dated as of July 15, 1996 (regarding the Atlanta Internet
Banking Operation), by and among Carolina First Bank, Internet
Organizing Group, Inc., the Organizers (as set forth on the Signature
Page of the Agreement), and the Kelton Group of Investors.
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.
22
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
(Principal Financial and
Accounting Officer)
23