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, 1997
- --- 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 $1.00 par value common stock as
of November 1, 1997 was 12,158,544.
Consolidated Balance Sheets
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
September 30, December 31,
-------------------------- ------------
ASSETS 1997 1996 1996
----------- ---------- -----------
Cash and due from banks................................................. $ 64,674 $ 54,668 $ 86,322
Interest-earning deposits with banks.................................... 20,602 38,940 26,037
Securities
Trading............................................................. 3,484 1,261 2,005
Available for sale.................................................. 236,869 226,145 213,889
Held for investment (market value $33,524, $28,902 and
$29,861, respectively).............................................. 33,001 28,695 29,465
----------- ---------- -----------
Total securities.................................................. 273,354 256,101 245,359
----------- ---------- -----------
Loans held for sale.................................................... 28,372 7,847 10,449
Loans.................................................................. 1,289,994 1,054,061 1,128,537
Less unearned income................................................ (12,754) (8,674) (14,211)
Less allowance for loan losses...................................... (13,925) (10,541) (11,290)
----------- ---------- -----------
Net loans......................................................... 1,263,315 1,034,846 1,103,036
----------- ---------- -----------
Premises and equipment................................................. 31,501 38,718 32,418
Accrued interest receivable............................................ 12,408 12,309 11,913
Other assets........................................................... 68,448 57,695 58,670
----------- ---------- -----------
$ 1,762,674 $ 1,501,124 $ 1,574,204
----------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing................................................. $ 187,817 $ 165,550 $ 194,067
Interest-bearing.................................................... 1,208,985 1,067,058 1,086,983
----------- ---------- -----------
Total deposits.................................................... 1,396,802 1,232,608 1,281,050
Borrowed funds........................................................ 194,237 127,790 146,270
Subordinated notes.................................................... 25,457 25,328 25,361
Accrued interest payable.............................................. 10,849 8,147 9,672
Other liabilities..................................................... 10,828 5,890 6,887
----------- ---------- -----------
Total liabilities.................................................. 1,638,173 1,399,763 1,469,240
----------- ---------- -----------
Shareholders' Equity
Preferred stock-no par value; authorized 10,000,000 shares;
issued and outstanding Series 1993B (liquidation preference
$20 per share) none, 49,141, and 49,141 shares, respectively......... -- 943 943
Common stock-par value $1 per share; authorized 100,000,000
shares; issued and outstanding 12,150,453, 9,331,598, and
11,225,568 shares, respectively..................................... 12,150 9,332 11,226
Surplus............................................................... 97,846 85,189 83,598
Retained earnings..................................................... 16,989 6,992 9,546
Guarantee of Employee Stock Ownership Plan debt and
nonvested restricted stock........................................ (3,489) (991) (832)
Unrealized gain (loss) on securities available for sale, net of tax... 1,005 (104) 483
----------- ---------- -----------
Total shareholders' equity......................................... 124,501 101,361 104,964
----------- ---------- -----------
$ 1,762,674 $ 1,501,124 $ 1,574,204
=========== ========== ===========
1
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,
------------------ -------------------
1997 1996 1997 1996
Interest Income
Interest and fees on loans............................................ $ 31,054 $ 26,212 $ 86,325 $ 76,811
Interest and dividends on securities.................................. 3,599 3,374 10,224 8,951
Interest on short-term investments.................................... 266 427 712 878
Total interest income............................................... 34,919 30,013 97,261 86,640
Interest Expense
Interest on deposits.................................................. 14,770 12,483 40,076 35,614
Interest on borrowed funds............................................ 3,197 2,795 8,920 8,951
Total interest expense.............................................. 17,967 15,278 48,996 44,565
Net interest income................................................. 16,952 14,735 48,265 42,075
Provision for Loan Losses............................................... 3,610 4,896 9,603 8,171
Net interest income after provision for loan losses................. 13,342 9,839 38,662 33,904
Noninterest Income
Service charges on deposit accounts................................... 1,758 1,663 5,120 4,780
Mortgage banking income............................................... 994 941 2,346 2,077
Fees for trust services............................................... 300 320 1,058 964
Loan securitization income............................................ (146) 813 (310) 1,962
Gain on sale of branches.............................................. -- -- 2,250 --
Gain on sale of credit cards.......................................... -- 4,317 -- 4,317
Gain on sale of securities............................................ 1,571 51 2,453 757
Sundry................................................................ 1,049 557 2,305 1,718
Total noninterest income............................................ 5,526 8,662 15,222 16,575
Noninterest Expenses
Personnel expense..................................................... 6,734 5,980 19,436 18,642
Occupancy............................................................. 1,337 1,103 3,809 3,260
Furniture and equipment............................................... 982 932 2,853 2,678
SAIF assessment....................................................... -- 1,184 -- 1,184
Sundry................................................................ 4,120 5,593 12,180 13,384
Total noninterest expenses.......................................... 13,173 14,792 38,278 39,148
Income before income taxes.......................................... 5,695 3,709 15,606 11,331
Income taxes............................................................ 2,057 1,374 5,590 4,096
Net income ......................................................... 3,638 2,335 10,016 7,235
Dividends on preferred stock............................................ -- 16 -- 48
Net income applicable to common shareholders........................ $ 3,638 $ 2,319 $ 10,016 $ 7,187
Net Income per Common Share:*
Primary............................................................. $ 0.30 $ 0.21 $ 0.86 $ 0.68
Fully diluted....................................................... 0.30 0.20 0.86 0.64
Average Common Shares Outstanding:*
Primary............................................................. 12,054,736 11,254,182 11,662,194 10,676,466
Fully diluted....................................................... 12,118,310 11,373,221 11,693,326 11,347,849
Cash Dividends Declared per Common Share*............................... $ 0.07 $ 0.06 $ 0.21 $ 0.18
*Share data have been restated to reflect the six-for-five stock split declared
12/18/96.
2
Consolidated Statements of Cash Flows
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
Nine Months Ended September 30,
-------------------------------
1997 1996
Cash Flows From Operating Activities
Net income ........................................................... $ 10,016 $ 7,235
Adjustments to reconcile net income to net cash
used for operations
Depreciation...................................................... 2,061 2,439
Amortization of intangibles....................................... 1,533 1,351
Provision for loan losses......................................... 9,603 8,171
Gain on sale of mortgage servicing rights......................... (222) (107)
Gain on sale of branches.......................................... (2,250) --
Gain on sale of credit cards...................................... -- (4,317)
Gain on sale of securities........................................ (2,453) (170)
Unrealized (gain) loss on trading securities...................... (13) 43
Originations of mortgage loans held for sale...................... (210,193) (131,199)
Sale of mortgage loans held for sale.............................. 138,223 118,742
Sale of consumer loans............................................ 15,798 --
Proceeds from sale of trading securities.......................... 659,113 383,939
Proceeds from maturity of trading securities...................... 10,165 55,186
Purchase of trading securities.................................... (670,529) (434,457)
Decrease (increase) in accrued interest receivable................ 95 (2,165)
Increase in accrued interest payable.............................. 985 1,410
Increase in other assets.......................................... (2,978) (10,489)
Increase (decrease) in other liabilities.......................... 1,594 (108)
---------------------------
Net cash used for operating activities.............................. (39,452) (4,496)
---------------------------
Cash Flows From Investing Activities
Net decrease (increase) in interest-earning deposits with banks....... 5,435 (30,277)
Proceeds from sale of securities available for sale................... 21,203 --
Proceeds from maturity of securities available for sale............... 130,422 91,595
Proceeds from maturity of securities held for investment.............. 1,596 2,660
Purchase of securities available for sale............................. (171,332) (172,169)
Purchase of securities held for investment............................ (5,132) (5,066)
Purchase of loans..................................................... (20,182) (30,312)
Net increase in loans................................................. (54,614) (108,418)
Securitization and sale of commercial loans........................... -- 95,484
Proceeds from sale of credit cards.................................... -- 64,251
Capital expenditures.................................................. (1,511) (1,019)
Proceeds from sale of mortgage servicing rights....................... 277 900
Net cash acquired in transactions accounted for under the
purchase method of accounting..................................... 4,259 --
Net cash outflow from sale of branches................................ (35,656) --
---------------------------
Net cash used for investing activities ............................. (125,235) (92,371)
---------------------------
Cash Flows From Financing Activities
Net increase in deposits.............................................. 106,838 137,117
Increase (decrease) in borrowed funds................................. 39,967 (60,018)
Redemption of preferred stock......................................... -- (232)
Cash dividends paid................................................... (2,378) (2,451)
Other common stock activity........................................... (1,388) 1,349
---------------------------
Net cash provided by financing activities........................... 143,039 75,765
---------------------------
Net change in cash and due from banks................................... (21,648) (21,102)
Cash and due from banks at beginning of period.......................... 86,322 75,770
---------------------------
Cash and due from banks at end of period................................$ 64,674 $ 54,668
===========================
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 1996 Annual Report to
Shareholders.
(2) STATEMENTS OF CASH FLOWS
Cash includes currency and coin, cash items in process of collection
and due from banks. Interest paid amounted to approximately $48,011,000
and $43,155,000 for the nine months ended September 30, 1997 and
September 30, 1996, respectively. Income tax payments of $5,049,000 and
$1,528,000 were made for the nine months ended September 30, 1997 and
September 30, 1996, respectively.
(3) BUSINESS COMBINATIONS
On April 6, 1997, the Company completed the sale of five branches
located in Barnwell, Blackville, Salley, Springfield and Williston to
The Bank of Barnwell County, a wholly-owned subsidiary of Community
Capital Corporation, headquartered in Greenwood, South Carolina. In
connection with this transaction, Carolina First Bank recorded a gain
of $2,250,000 and sold loans of approximately $15 million and
transferred deposits of approximately $55 million.
On July 1, 1997, the Company signed a definitive agreement to acquire
First Southeast Financial Corporation ("First Southeast"), the holding
company for First Federal Savings and Loan Association of Anderson
("First Federal") based in Anderson, South Carolina. Under the terms of
the agreement, holders of First Southeast's common stock will receive
the Company's common stock using an exchange ratio calculated based on
the average closing prices for the 10 days preceding closing.
Accordingly, the number of the Company's shares expected to be issued
in the merger fluctuates based on the Company's stock price and is not
known at this time. In addition, if the Company's average closing stock
price for the 10 days preceding closing exceeds $19.0156, either party
can terminate the transaction. At September 30, 1997, First Southeast
had approximately $349 million in assets, $274 million in loans and
$285 million in deposits. The Company will record the acquisition using
the purchase method of accounting. The closing of this transaction,
which is subject to receipt of shareholder approvals and waiver of
termination rights if the Company's stock price exceeds $19.0156 for
the 10 days preceding closing, is scheduled for late November 1997.
On July 18, 1997, the Company acquired Lowcountry Savings Bank, Inc., a
South Carolina-chartered savings bank headquartered in Mt. Pleasant,
South Carolina ("Lowcountry"), through the merger of Lowcountry into
Carolina First Bank. The Lowcountry transaction was accounted for as a
purchase and resulted in the payment of approximately $13 million for
the outstanding shares of Lowcountry common stock. Of this amount,
approximately $4.8 million was paid in cash, and approximately $8.2
million was paid in the form of approximately 508,435 shares of the
Company's common stock. A core deposit premium of approximately
$600,000 was recorded and
4
is being amortized based on the sum-of-the-year's digits method over
ten years. The excess of the purchase price over the fair market value
of the net identifiable assets acquired (including the core deposit
premium) of approximately $7.2 million has been recorded as goodwill
and is being amortized on a straight-line basis over 25 years.
Lowcountry operated through five locations in the Charleston area and
had approximately $80 million in assets at June 30, 1997. In connection
with the Lowcountry transaction, Carolina First Bank received
approximately $73 million in loans and approximately $64 million in
deposits.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Lowcountry as if the
merger had occurred as of the beginning of 1997 and 1996, after giving
effect to certain adjustments, including amortization of intangible
assets and reduced earnings related to the lost interest on the cash
portion of the purchase price. The pro forma financial information does
not necessarily reflect the results of operations that would have
occurred had the Company and Lowcountry constituted a single entity
during such periods. In addition, the pro forma financial information
does not reflect any potential cost savings or synergies expected to be
achieved following the merger.
Nine months ended September 30,
1997 1996
($ in thousands, except share data)
Total revenue....................$115,847 $107,828
Net income..........................9,929 6,842
Earnings per share..................$0.82 $0.58
(4) SECURITIES
The net unrealized gain on securities available for sale increased
$522,000 for the nine months ended September 30, 1997.
(5) COMMON STOCK
Primary earnings per share is based on the weighted average number of
common shares outstanding during each period, including the assumed
exercise of dilutive stock options, using the treasury stock method.
Primary earnings per share also reflect provisions for dividend
requirements on all outstanding shares of preferred stock.
Fully diluted earnings per share is based on the weighted average
number of common shares outstanding during each period, including the
assumed conversion of convertible preferred stock into common stock and
the assumed exercise of dilutive stock options using the treasury stock
method.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute the earnings per share and
to
5
restate all prior periods. Under the new requirements for calculating
primary earnings per share (to be called "basic earnings per share"),
the dilutive effect of stock options will be excluded. Fully diluted
earnings per share (to be called "diluted earnings per share") will
continue to be calculated using the treasury stock method with one
difference. Instead of using the higher of the quarter end stock price
or the average stock price for the quarter in calculating the dilutive
effect, the average stock price for the quarter will always be used.
The new requirements are not expected to have a material impact on the
Company's earnings per share.
(6) COMMITMENTS AND CONTINGENT LIABILITIES
In March 1997, the federal court dismissed counterclaims (described in
earlier public filings) filed by David and Monte Bowers (the "Bowers"),
former officers and shareholders of Midlands, who contended that the
Company has misstated earnings and made fraudulent representations in
connection with the merger of Midlands National Bank ("Midlands") into
Carolina First Bank (the"Merger") in June 1995. In April 1997, the
Company announced the settlement of two lawsuits involving the Bowers.
One of the lawsuits had been brought by the Bowers against Carolina
First Bank in state court, alleging breach of employment contracts as
officers of Carolina First Bank following the Merger. The other lawsuit
was brought in federal court by Carolina First Bank against the Bowers,
alleging that the Bowers had committed bank fraud and securities fraud
in connection with the Merger. The Company is prohibited from
disclosing the specific terms of the settlement agreement. Both suits
have been dismissed in connection with the settlement.
(7) MANAGEMENT'S OPINION
The financial statements in this report are unaudited. In the opinion
of management, all adjustments necessary to present a fair statement of
the results for the interim periods have been made. All such
adjustments are of a normal, recurring nature.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 1996 Annual Report of Carolina First Corporation (the "Company") on Form
10-K. Results of operations for the nine month period ended September 30, 1997
are not necessarily indicative of results to be attained for any other period.
OVERVIEW
The Company, a South Carolina corporation headquartered in Greenville,
South Carolina, is a financial institution, which commenced banking operations
in December 1986, and currently conducts business through 54 locations in South
Carolina. The Company operates through four subsidiaries: Carolina First Bank, a
state-chartered commercial bank; Carolina First Mortgage Company ("CF
Mortgage"), a mortgage banking operation; Blue Ridge Finance Company, Inc.
("Blue Ridge"), an automobile finance company; and CF Investment Company, a
small business investment company. During the quarter, CF Investment Company
received a license from the Small Business Administration to operate as a Small
Business Investment 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, 1997, the Company had approximately $1.8 billion in
assets, $1.3 billion in loans, $1.4 billion in deposits and $124.5 million in
shareholders' equity.
Net income for the third quarter of 1997 rose 18% to $3.638 million, or
$0.30 per fully diluted share, up from $3.081 million, or $0.27 per fully
diluted share, for the same time period of 1996 excluding a special Savings
Insurance Fund ("SAIF") assessment. The SAIF assessment resulted from
legislation that required a special one-time assessment on thrift institutions
or non-thrift institutions which have acquired deposits through acquisitions
from thrift institutions over past years for the purpose of recapitalizing the
SAIF. This assessment resulted in an after-tax charge of $746,000, or $0.07 per
fully diluted share. Including the impact of the one-time SAIF assessment, net
income in the third quarter of 1996 was $2.335 million, or $0.20 per fully
diluted share. The increase in net income during the third quarter of 1997 was a
result of an increase in net interest income and a decrease in both the
provision for loan losses and noninterest expenses. The increase in net interest
income was attributable to higher average earning assets which increased 16%.
These increases were partially offset by lower loan securitization income,
primarily from higher credit card charge-offs than those historically
experienced. Net income for the first nine months of 1997 totaled $10.016
million, or $0.86 per fully diluted share, compared with net income of $7.981
million, or $0.70 per fully diluted share, for the same period of 1996,
excluding the SAIF assessment. Including the SAIF assessment, net income for the
nine months ended Spetember 30, 1996 was $7.235 million, or $0.64 per fully
diluted share.
On January 30, 1997, the Company issued a six-for-five stock split
effected in the form of a 20% common stock dividend to shareholders of record as
of January 15, 1997. Share and per share data for all periods presented have
been retroactively restated to reflect the additional shares outstanding
resulting from the stock dividend. On February 1, 1997, all outstanding shares
of the Series 1993B Cumulative Convertible Preferred Stock ("Series 1993B
Preferred Stock") were converted into the Company's $1.00 par value common stock
("Common Stock").
7
On April 6, 1997, the Company completed the sale of five branches
located in Barnwell, Blackville, Salley, Springfield and Williston to The Bank
of Barnwell County, a wholly-owned subsidiary of Community Capital Corporation,
headquartered in Greenwood, South Carolina. In connection with this transaction,
Carolina First Bank recorded a gain of $2,250,000 and sold loans of
approximately $15 million and transferred deposits of approximately $55 million.
On July 1, 1997, the Company signed a definitive agreement to acquire
First Southeast Financial Corporation ("First Southeast"), the holding company
for First Federal Savings and Loan Association of Anderson ("First Federal")
based in Anderson, South Carolina. Assuming consummation, First Federal will be
merged into Carolina First Bank, a wholly-owned subsidiary of Carolina First
Corporation, and its operations will become part of the operations of Carolina
First Bank. Under the terms of the agreement, holders of First Southeast's
common stock will receive the Company's common stock using an exchange ratio
calculated based on the average closing prices for the 10 days preceding
closing. Accordingly, the number of the Company's shares expected to be issued
in the merger fluctuates based on the Company's stock price and is not known at
this time. In addition, if the Company's average closing stock price for the 10
days preceding closing exceeds $19.0156, either party can terminate the
transaction. Additional information regarding the terms of the merger,
calculation of the exchage ratio and pro forma financial information is included
in the Company's registration statement on Form S-4 filed with the Securities
and Exchange Commission. At September 30, 1997, First Southeast had
approximately $350 million in assets, $275 million in loans and $285 million in
deposits. The Company will record the acquisition using the purchase method of
accounting. The closing of this transaction, which is subject to receipt of
shareholder approvals and waiver of termination rights if the Company's stock
price exceeds $19.0156 for the 10 days preceding closing, is scheduled for late
November 1997.
On July 18, 1997, the Company acquired Lowcountry Savings Bank, Inc., a
South Carolina-chartered savings bank headquartered in Mt. Pleasant, South
Carolina ("Lowcountry"), through the merger of Lowcountry into Carolina First
Bank. The Lowcountry transaction was accounted for as a purchase and resulted in
the payment of approximately $13 million for the outstanding shares of
Lowcountry common stock. Of this amount, approximately $4.8 million was paid in
cash, and approximately $8.2 million was paid in the form of approximately
508,436 shares of the Company's common stock. Lowcountry operated through five
locations in the Charleston area and had approximately $80 million in assets at
June 30, 1997. In connection with the Lowcountry transaction, Carolina First
Bank received approximately $73 million in loans and approximately $64 million
in deposits.
EQUITY INVESTMENTS
Investment in Net.B@nk, Inc.
On July 31, 1997, Net.B@nk, Inc. ("Net.B@nk") completed its initial
public offering of common stock in which it sold 3,450,000 shares of its common
stock (including underwriters' over-allotment option). Net.B@nk owns and
operates the Atlanta Internet Bank, FSB ("Atlanta Internet Bank"), a
FDIC-insured federal savings bank that provides banking services to consumers
utilizing the Internet for their commercial and financial services. Carolina
First Bank assisted with the development of Atlanta Internet Bank, including
offering of Atlanta Internet Bank as a service of Carolina First Bank prior to
the completion of Net.B@nk's initial public offering. Upon consummation of the
offering, the internet
8
banking deposits of Carolina First Bank were transferred to Net.B@nk's
subsidiary, Atlanta Internet Bank. In connection with such agreement, the
Company was issued 1,325,000 shares of Net.B@nk's common stock and sold 150,000
of them in the initial public offering as a selling shareholder. The sale of
150,000 shares of Net.B@nk's stock resulted in a third quarter 1997 gain of
approximately $1.5 million. Approximately $250,000 of one-time expenses related
to Net.B@nk were also recorded in the third quarter of 1997.
The Company currently owns 1,175,000 shares of Net.B@nk's common stock,
or approximately 18% of the outstanding shares. These shares are carried on the
Company's books (as securities available for sale) at a basis of approximately
$976,000. In connection with these transactions, the Company also received
approximately $2.1 million as reimbursement for funds invested for the start-up
of Net.B@nk. Under the terms of the Office of Thrift Supervision's approval of
Atlanta Internet Bank, certain affiliates of Net.B@nk, including the Company,
may not sell their shares in Net.B@nk until July 31, 2000.
Investment in Affinity Technology Group, Inc.
At September 30, 1997, the Company (through its subsidiary Blue Ridge)
owned 128,366 shares of common stock of Affinity Technology Group, Inc.
("Affinity") and a warrant to purchase an additional 5,871,340 shares for
approximately $0.0001 per share ("Affinity Warrant"), or approximately 17% of
Affinity's outstanding common stock. At September 30, 1997, the investment in
Affinity's common stock, included in securities available for sale, was recorded
at its market value of $497,000. The Affinity Warrant was not reported on the
Company's balance sheet as of September 30, 1997.
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 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. The Company has an
application pending with the Federal Reserve Board which, if approved, would
permit the Company to exercise the Affinity Warrant for up to 15% of Affinity's
total common stock outstanding and own the resulting shares outright.
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 change the policy with respect to its
Affinity ownership position in the future.
Investments in Community Banks
The Company has also made equity investments in five community banks in
South Carolina and North Carolina. In each case, the Company owns less than 5%
of the community bank's outstanding common stock. The Company has made these
investments to develop correspondent banking relationships
9
and to promote community banking in the Carolinas.
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. Fully tax-equivalent net interest income adjusts the yield
for assets earning tax-exempt income to a comparable yield on a taxable basis.
Fully tax equivalent net interest income increased $6.7 million, or 16%, to
$48.9 million for the first nine months of 1997 from $42.2 million for the first
nine months of 1996. The increase resulted principally from a higher level of
average earning assets and a higher net interest margin. The growth in average
earning assets, which increased $174.8 million, or 13%, to approximately $1.5
billion in the first nine months of 1997 from $1.3 billion in the first nine
months of 1996, resulted from an increase in both loans and investment
securities. Average loans and average investment securities increased $148.4
million and $21.9 million, respectively, in the first nine months of 1997
compared with the first nine months of 1996.
The net interest margin for the nine months ended September 30, 1997 of
4.40% was higher than the margin of 4.32% for the same period of 1996. The
increase in the net interest margin in the first nine months of 1997 resulted
partially from the benefit of leverage from higher levels of noninterest-bearing
deposits. A significant portion of the increase in average noninterest-bearing
deposits was associated with Carolina First Bank's agreement with Net.B@nk to
offer Atlanta Internet Bank as a service of Carolina First Bank.
The net interest margin for the three months ended September 30, 1997
of 4.32% was slightly lower than the prior year's margin of 4.38% and the
previous quarter's margin of 4.38%. Atlanta Internet Bank deposits were
transferred to Net.B@nk on July 31, 1997 resulting in a reduction in Carolina
First Bank's total noninterest-bearing deposits of approximately $43 million.
This transfer of deposits placed downward pressure on the Company's net interest
margin in the last two months of the third quarter from losing the leverage
benefit from the Atlanta Internet Bank deposits. This decrease was partially
offset by an increase in the earning asset yield for the third quarter of 1997
to 8.85% from 8.73% for the second quarter 1997. This increase in earning asset
yield reflected the benefit from the removal of the teaser rate on credit cards
in August 1997 and slightly higher commercial loan rates.
Provision for Loan Losses
The provision for loan losses was $9.6 million for the first nine
months of 1997 and $8.2 million for the first nine months of 1996. The 1997
provision for loan losses was increased principally as a result of Carolina
First Bank's credit card activities and consumer credit concerns. During the
first nine months of 1997, credit card charge-offs totaled $4.3 million, which
was considerably higher than the level of charge-offs historically experienced.
Credit card charge-offs in the third quarter of 1997 showed significant
improvement compared with the first half of 1997; however, past due trends
indicate that credit card charge-offs will most likely increase in the fourth
quarter of 1997 from third quarter 1997 levels.
Management currently anticipates that loan growth will continue for the
remainder of 1997 and into 1998. New market areas are expected to contribute to
1997 and 1998 portfolio growth. Management
10
intends to closely monitor economic trends and the potential effect on Carolina
First Bank's loan portfolio.
Noninterest Income
Noninterest income decreased to $15.2 million for the nine months ended
September 30, 1997 from $16.6 million for the same period of 1996. During the
second quarter of 1997, the Company recorded a gain on the sale of branches of
$2,250,000. The Company recognized gains on the sale of securities of $2.5
million and $757,000 in the first nine months of 1997 and 1996, respectively.
The securities gain in 1997 included $745,000 from the sale of ComSouth
Bankshares, Inc. stock and approximately $1.5 million from the sale of NetB@nk
stock. See "EQUITY INVESTMENTS - Investment in NetB@nk, Inc." The securities
gain in 1996 included $587,000 from the disposition of equity investments
(offset by $587,000 recorded as compensation expense) related to the award of
Affinity stock to certain officers of the Company deemed most responsible for
the Company's investment in Affinity. During the third quarter of 1996, a gain
of $4.3 million was recorded on the sale of approximately $55 million in credit
cards. Excluding the asset sales and securities transactions discussed above,
noninterest income decreased $1.0 million to $10.5 million for the nine months
ended September 30, 1997 from $11.5 million for the same period of 1996. This
decrease was attributable to lower loan securitization income, which declined
$2.3 million for the first nine months of 1997 compared with the year earlier
period, resulting from higher credit card charge-offs associated with the
Company's securitized credit cards.
Service charges on deposit accounts, the largest contributor to
noninterest income, rose 7% to $5.1 million in the first nine months of 1997
from $4.8 million in the first nine months of 1996. The increase in service
charges was attributable to attracting new transaction accounts and improved
collection results. In addition, effective March 1, 1997, Carolina First Bank
implemented increases in some of its existing service charges.
During the first nine months of 1997, the Company had a net loss of
$310,000 from its interests in the credit card and commercial real estate loan
trusts, compared to income of $2.0 million for the same period in 1996. Loan
securitization income is net of charge-offs associated with the loans in the
trusts. Loan securitization income related to credit cards declined
significantly to a loss of $696,000 for the nine months ended September 30,
1997, compared with income of $1.6 million for the same time period in 1996. The
loan securitization income was negatively impacted by greater than expected
charge-offs in the credit card securitization. The Company completed the
securitization of approximately $116 million in commercial real estate loans on
March 14, 1996. Securitization income for the commercial real estate loan trust,
which has not experienced charge-off problems, totaled $386,000 for the first
nine months of 1997, compared with $396,000 for the same period of 1996. Total
balances in the commercial real estate loan trust decline as loans are paid off
resulting in lower income.
Mortgage banking income includes origination fees, gains from the sale
of loans and servicing fees (which are net of the related amortization for the
mortgage servicing rights and subservicing payments). Mortgage banking income in
the first nine months of 1997 increased 13% to $2.3 million, compared with $2.1
million in the first nine months of 1996. The increase is attributable to higher
gains on the sale of loans and higher origination income partially offset by
lower servicing income.
Income from originations and sales of mortgage loans, including sales
of loans originated by Carolina First Bank, totaled $1.8 million in the first
nine months of 1997, up from $1.4 million for the first nine months of 1996.
This increase resulted from selling mortgage loans at a greater gain in 1997
11
than in 1996 as well as increased origination volume resulting from the positive
mortgage rate environment in third quarter 1997. Loans totaling approximately
$138 million and $119 million were sold in the first nine months of 1997 and
1996, respectively.
CF Mortgage's mortgage servicing operations consist of servicing loans
that are owned by Carolina First Bank and subservicing loans, to which the
rights to service are owned by Carolina First Bank or other non-affiliated
financial institutions. At September 30, 1997, CF Mortgage was servicing or
subservicing 16,096 loans having an aggregate principal balance of approximately
$1.5 billion.
Servicing income from non-affiliated companies, net of the related
amortization for the mortgage servicing rights and subservicing payments, was
$505,000, compared with $717,000 for the first nine months of 1996. Although the
volume of loans serviced increased to $1.5 billion at September 30, 1997 from
$1.0 billion at September 30, 1996, the related amortization for the mortgage
servicing rights increased due to accelerated prepayments leading to a decline
in servicing income. 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 1997 of $1.1
million were 10% above the $964,000 earned in the same period of 1996. At
September 30, 1997, Carolina First Bank's trust department had assets under
management of approximately $387 million. Fees for trust services increased as a
result of the generation of new trust business and improved collection results.
Sundry income in 1997 included a $463,000 gain on the sale of
approximately $16 million of installment and home equity loans to NetB@nk, Inc.
The Company will service these loans, as well as approximately $10 million in
mortgage loans sold, in exchange for a servicing fee. Excluding this gain,
sundry noninterest income increased 7% to $1.8 million for the first nine months
of 1997 compared with $1.7 million for the comparable period in 1996. The
increase in 1997 was primarily attributable to higher customer service fees.
Noninterest Expenses
Noninterest expenses decreased $870,000, or 2%, to $38.3 million in the
first nine months of 1997 from $39.1 million in the first nine months of 1996.
In the third quarter of 1997, approximately $254,000 of one-time payroll
expenses and fees related to the Company's agreement with Net.B@nk were
recorded. In the first quarter of 1996, approximately $587,000 was recorded as
compensation expense related to a non-recurring award of Affinity stock to
certain officers of the Company. In the third quarter of 1996, noninterest
expenses included $1,184,000 for the one-time special SAIF assessment. Excluding
these non-recurring expense items, noninterest expenses increased $647,000, or
2%, to $38.0 million for the first nine months of 1997 from $37.4 million for
the prior year period. The increase in expenditures reflects the cost of
operating in new markets, the costs associated with the purchase of additional
automated teller machines ("ATMs") to better service existing customers, and
higher advertising expense related to campaigns to attract new deposit balances.
Salaries and wages and employee benefits, excluding the approximately
$200,000 in one-time expenses associated with Net.B@nk in third quarter 1997 and
$587,000 in non-recurring compensation expense in 1996, increased $1.2 million,
or 7%, to $19.2 million in the first nine months of 1997. Full-time equivalent
employees increased to 621 at September 30, 1997 from 594 at September 30, 1996.
The staffing cost increases were primarily due to the costs of doing business in
new markets, back office support functions to support growth, costs to support
new retail banking initiatives and the expansion of international product
offerings.
12
Occupancy and furniture and equipment expenses increased $724,000, or
12%, to $6.7 million for the nine months ended September 30, 1997 from $5.9
million for the nine months ended September 30, 1996. This increase resulted
principally from the opening of a new Hilton Head office in fourth quarter 1996,
additional costs associated with the Lowcountry branches and the addition of
fourteen new ATMs since the beginning of 1996, increasing the total number of
ATMs to 32.
Sundry noninterest expenses decreased $1.2 million, or 9%, to $12.2
million in the first nine months of 1997 from $13.4 million in the first nine
months of 1996. The overall decrease in sundry noninterest expenses was
principally attributable to a reduction in legal fees and sundry item losses. In
the third quarter of 1996, the Company wrote off approximately $586,000 of a
property held as other real estate owned resulting in higher sundry item losses
for that quarter. The largest items of sundry noninterest expense were
stationery, supplies, printing, professional fees and advertising. In connection
with the acquisition of Lowcountry, which closed July 31, 1997, the Company
recorded approximately $7.8 million in intangible assets ($7.2 million in
goodwill and $0.6 million in core deposit intangibles). Intangible amortization
for Lowcountry for the quarter was apporximately $100,000. During the remainder
of 1997, the Company expects to incur increased amortization of intangibles
related to the planned acquisition of First Southeast in the fourth quarter of
1997, which will be accounted for using the purchase method of accounting.
Comparison for the Quarters Ended September 30, 1997 and September 30, 1996
Net income increased in the third quarter of 1997 to $3.7 million from
$2.3 million in the third quarter of 1996. Fully diluted earnings per share
increased to $0.30 in the third quarter of 1997, compared with $0.20 in the
third quarter of 1996. Third quarter 1996 earnings included an after-tax charge
of $746,000, or $0.07 per full diluted share, to cover the special SAIF
assessment. (See "OVERVIEW.") Excluding the impact of the SAIF assessment, net
income for the third quarter of 1996 was $3.1 million, or $0.27 per fully
diluted share.
Net interest income increased $2.2 million to $16.9 million for the
three months ended September 30, 1997 from $14.7 million for the comparable
period in 1996. This increase was primarily attributable to a higher level of
average earning assets. Earning assets averaged $1.6 billion and $1.4 billion in
the third quarters of 1997 and 1996, respectively. The net interest margin was
slightly lower in 1997 at 4.32% for the third quarter, compared with 4.38% for
the third quarter of 1996. The margin was lower in 1997 primarily as a result of
higher rates being paid on deposits in order to be competitive in the market and
lower yields on consumer and credit card loans.
Noninterest income, excluding the gains on the sale of credit cards and
securities, decreased 8% to $4.0 million in the third quarter of 1997 from $4.3
million in the third quarter of 1996. Loan securitization income decreased
significantly to a loss of $146,000 for the third quarter of 1997 from income of
$813,000 for the third quarter of 1996. This decrease was attributable to higher
credit card charge-offs for credit card loans in the securitized credit card
trust. This decline was partially offset by increases in service charges on
deposit accounts, customer service fees and mortgage banking income.
Noninterest expenses decreased $435,000, or 3%, to $13.2 million for
the three months ended September 30, 1997 from $13.6 million for the three
months ended September 30, 1996, excluding the SAIF assessment. The majority of
this change was due to lower legal fees and sundry item losses which included a
$586,000 write-off of other real estate owned in 1996 (included in sundry
noninterest expenses). Total sundry noninterest expenses decreased 26% from
third quarter 1996 to third quarter 1997. This
13
decrease was partially offset by higher salaries, wages and benefits expense
which increased from $6.0 million for the third quarter of 1996 to $6.7 million
for the third quarter of 1997. The third quarter 1997 salaries, wages and
benefits included approximately $200,000 in one-time expenses related to the
agreement with Net.B@nk. Occupancy and furniture and equipment expense increased
slightly to $2.3 million during third quarter 1997 from $2.0 million during
third quarter 1996. This increase was due primarily to the new costs associated
with the opening of the Lowcountry branches.
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 majority 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, 1997, the Company had total loans outstanding of
$1.3 billion which equaled approximately 93% of the Company's total deposits and
approximately 74% of the Company's total assets. The composition of the
Company's loan portfolio at September 30, 1997 follows: commercial and
commercial mortgage 67%, consumer 10%, residential mortgage 9%, lease
receivables 6%, credit card 5% and construction 3%.
The Company's loans increased $252.4 million, or 24%, to approximately
$1.3 billion at September 30, 1997 from $1.1 billion at September 30, 1996 and
increased $180.8 million from approximately $1.1 billion at December 31, 1996.
This increase was net of 1997 loan sales of approximately $15 million from the
sale of branches to The Bank of Barnwell County, $138 million from mortgage
loans sold, and approximately $26 million sold to NetB@nk. Loan balances as of
September 30, 1997 included $20 million of lease receivables purchased during
1997 and $73 million in loans associated with the acquisition of Lowcountry
Savings Bank. Adjusting for the 1997 loan sales and purchases, internal loan
growth was approximately $221.0 million, or an annualized rate of 23%, during
the first nine months of 1997.
The Company had loans to 60 borrowers having principal amounts ranging
from $2 million to $5 million, which loans accounted for $177.4 million, or 13%,
of the Company's loan portfolio in 1997. The Company had loans to 13 borrowers
having principal amounts in excess of $5 million, which loans accounted for
$86.1 million, or 7%, of the Company's loan portfolio in 1997. For the same time
period in 1996, the Company had loans to 72 borrowers with principal amounts
ranging from $2 million to $5 million, which accounted for $219.0 million, or
21%, of the Company's loan portfolio. The Company had loans to 7 borrowers
having principal amounts in excess of $5 million, which loans accounted for
$45.0 million, or 4%, of the Company's loan portfolio in 1996. In dealing with
these larger loans, the Company has attempted to limit its risk exposure through
securitization and participations. 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 1997, the Company's loans averaged $1.2
billion with a yield of 9.36%, compared with $1.1 billion and a yield of 9.48%
for the same period of 1996. The decline in loan yield was partially
attributable to the funding of credit card loans from a first quarter 1997
credit card solicitation at a teaser rate. The teaser rate from the 1997
solicitation expired in August 1997 which
14
should result in a higher yield on this portion of the credit card portfolio
going forward. 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.
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.
Allowance for Loan Losses
Management maintains an allowance for loan losses which it believes is
adequate to cover possible losses in the loan portfolio. However, management's
judgment is based upon a number of assumptions about future events which are
believed to be reasonable, but which may or may not prove valid. Thus, there can
be no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the allowance for loan losses
will not be required.
The allowance for loan losses is established through charges in the
form of a provision for loan losses. Loan losses and recoveries are charged or
credited directly to the allowance. The amount charged to the provision for loan
losses by the Company is based on management's judgment as to the amount
required to maintain an allowance adequate to provide for potential losses in
the Company's loan portfolio. 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 $13.9 million, or 1.09% of loans
net of unearned income excluding loans held for sale, at the end of September
1997, compared with $10.5 million, or 1.01% of loans net of unearned income
excluding loans held for sale, at the end of September 1996. At December 31,
1996, the allowance for loan losses was $11.3 million, or 1.01% of loans net of
unearned income excluding loans held for sale. The allowance for loan losses as
a percentage of nonperforming loans was 499% and 648% as of September 30, 1997
and 1996, respectively.
Annualized net charge-offs as a percentage of average loans during the
first nine months of 1997 were 0.88%, compared with 0.69% for the first nine
months of 1996. Excluding credit cards, annualized net charge-offs as a
percentage of average loans were 0.44% for the first nine months of 1997
compared with 0.34% for the first nine months of 1996. During the first nine
months of 1997, net charge-offs for credit cards totaled $4.3 million, a higher
level than those historically experienced. The level of credit card charge-offs
declined for the third quarter of 1997 compared with the first half of 1997.
Based on review of past due trends, however, the Company expects the level of
charge-offs to increase in the fourth quarter of 1997. The Company continues to
examine various options for the credit card portfolio, including selling part of
the portfolio, and has not made a decision regrding its credit card holdings.
The Company's credit card servicer has made some changes regarding collection
procedures including linking servicing fees to collection results, staffing
changes and incentives for collectors.
15
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 nine months the year ended
ended September 30, December 31,
------------------------- ---------------
1997 1996 1996
- --------------------------------------------------------------------------------------
Balance at beginning of period $ 11,290 $ 8,661 $ 8,661
Valuation allowance for loans purchased 1,243 592 1,261
Provision for loan losses 9,603 8,171 10,263
Charge-offs:
Credit cards 4,267 3,024 4,072
Bank loans, leases & Blue Ridge 4,939 3,290 4,085
Fraudulent acquired loans 0 1,303 1,303
Recoveries 995 734 565
- ---------------------------------------------------------------------------------------
Net charge-offs 8,211 6,883 8,895
- --------------------------------------------------------------------------------------
Allowance at end of period $ 13,925 $ 10,541 $ 11,290
=======================================================================================
At September 30, 1997, the recorded investment in loans that were
considered to be impaired under Statement of Financial Accounting Standards 114,
"Accounting by Creditors for Impairment of a Loan", was $1.2 million. The
related allowance for these impaired loans was $844,000. The average recorded
investment and foregone interest on impaired loans during the nine months ended
September 30, 1997 was approximately $905,000 and $56,000, respectively. For the
nine months ended September 30, 1997, the Company recognized interest income on
impaired loans of $85,000.
Securities
At September 30, 1997, the Company's total investment portfolio had a
book value of $271.5 million and a market value of $273.9 million for an
unrealized net gain of approximately $2.4 million. This unrealized net gain
excludes the Company's investment in Net.B@nk and the Affinity Warrant, both of
which are discussed below. The investment portfolio had a weighted average
maturity of approximately 2.0 years. Securities (i.e., securities held for
investment, securities available for sale and trading securities) averaged
$234.2 million in the first nine months of 1997, 10% above the first nine month
1996 average of $212.3 million. The increase in the securities balance was due
to increasing the Company's investment in short-term government securities to
increase the Company's liquidity. The average portfolio yield increased to 6.16%
for the first nine months of 1997 from 5.96% for the first nine months of 1996.
The portfolio yield increased due to maturities of lower yielding government
securities which were reinvested at higher rates. At September 30, 1997,
securities totaled $273.4 million, up $17.3 million from the $256.1 million
invested as of the third quarter end 1996 and up $28.0 million from the December
31, 1996 balance of $245.4 million.
At September 30, 1997, 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. As of
September 30, 1997, the investment in Affinity's common stock, included in
securities available for sale, was recorded at its market value of $497,000. The
Affinity Warrant was not
16
included in securities at September 30, 1997.
At September 30, 1997, the Company owned 1,175,000 shares of common
stock of Net.B@nk. As of September 30, 1997, the investment in Net.B@nk's common
stock, included in securities available for sale, was recorded at its basis of
approximately $976,000. The Net.B@nk investment is not marked to market value
since certain regulators have required certain affiliates of Net.B@nk, including
the Company, not to sell their shares until July 31, 2000.
Other Assets
At September 30, 1997, other assets included other real estate owned of
$2.1 million, intangible assets (excluding mortgage servicing rights) of $23.1
million and mortgage servicing rights of $19.3 million. 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. The intangible assets balance at September 30, 1997 was
attributable to goodwill of $14.3 million, core deposit balance premiums of $8.6
million and purchased credit card premiums of $156,000. During the third quarter
of 1997, goodwill and core deposit balance premiums increased $7.2 million and
$600,000, respectively, related to the Company's acquisiiton of Lowcountry. The
Company expects the goodwill and core deposit premium balances to increase
significantly during the fourth quarter of 1997 in connection with the Company's
planned acquisition of First Southeast. This acquisition will be recorded using
the purchase method of accounting.
Interest-Bearing Liabilities
During the first nine months of 1997, interest-bearing liabilities
averaged $1.3 billion, compared with $1.2 billion for the comparable period of
1996. This increase resulted principally from internal deposit growth related to
account promotions, sales efforts and entrance into new markets. The average
interest rates were 5.01% and 4.95% for the first nine months of 1997 and 1996,
respectively. At September 30, 1997, interest-bearing deposits comprised
approximately 87% of total deposits and 85% of interest-bearing liabilities. For
the first nine months of 1997, average borrowed funds, which included Federal
Home Loan Bank ("FHLB") advances and other short-term borrowings, totaled $167.8
million, compared with $172.0 million for the first nine months of 1996. The
Company increased its FHLB advances to $72.0 million at September 30, 1997 from
$40.0 million at December 31, 1996. FHLB advances are a source of funding which
the Company uses depending on the current level of deposits and management's
willingness to raise deposits through market promotions given the
competitiveness of the deposit market and the Company's cost of funds. The
Company has increased its emphasis on retail banking and raises deposits through
market promotions and sales efforts. In general, the Company believes that
potential benefits of cross-selling these customers other products and services
would offset any increase in the cost of funds over the rate paid for FHLB
advances.
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 13% to $1.4 billion at September 30, 1997 from $1.2 billion at
September 30, 1996. At December 31, 1996, deposits totaled $1.3 billion. During
the second quarter of 1997, approximately $55 million in deposits were sold as
part of the sale of five branch offices. On July 18, 1997, in connection with
the acquisition of Lowcountry, the Company acquired approximately $64 million in
deposits. Internal growth, particularly from account promotions and new markets,
generated the remainder of the new deposits. During the first nine months of
1997, total interest-bearing deposits averaged $1.1 billion with a rate of
4.81%, compared with $1.0 billion with a rate
17
of 4.73% in 1996. During the first nine months of 1997, deposit pricing was very
competitive in Carolina First Bank's market areas, resulting in upward pressure
on deposit interest rates. The Company expects this competitive deposit
environment to continue. The Company does not believe that it has any brokered
deposits.
Average noninterest-bearing deposits, which increased 32% during the
year, increased to 15.2% of average total deposits in the first nine months of
1997 from 13.1% in the first nine months of 1996. This increase was primarily
attributable to new accounts from offering the Atlanta Internet Bank service
during the first seven months of the year, commercial loan customers and escrow
balances related to mortgage servicing operations. Atlanta Internet Bank
deposits were transferred to Net.B@nk on July 31, 1997 resulting in a reduction
in Carolina First Bank's total deposits of approximately $43 million, which
decreased Carolina First Bank's noninterest-bearing deposit balances. For the
third quarter of 1997, average noninterest-bearing deposits as a percentage of
average total deposits decreased to 14.1% from 16.7% for the second quarter of
1997.
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, these 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 1997. 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 $124.5 million, or 7.06%, of
total assets at September 30, 1997, compared with $101.4 million, or 6.75% of
total assets, at September 30, 1996. At December 31, 1996, shareholders' equity
totaled $105.0 million, or 6.67% of total assets. The $19.5 million increase in
total shareholders' equity since December 31, 1996 resulted principally from the
issuance of Common Stock related to the Lowcountry acquisition, retention of
earnings, and an increase in the unrealized gain on securities available for
sale 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 Carolina First Savings Bank, CF Mortgage,
Aiken County National Bank, Midlands National Bank, Blue Ridge and Lowcountry.
On February 1, 1997, all outstanding shares of the Series 1993B
Cumulative Convertible Preferred Stock ("Series 1993B Preferred Stock") were
converted into the Company's Common Stock. In connection with such conversion,
the Company issued 108,341 shares of its Common Stock.
Book value per share at September 30, 1997 and 1996 was $10.25 and
$8.97, respectively. Tangible book value per share at September 30, 1997 and
1996 was $8.33 and $7.47, respectively. At December 31, 1996, book value and
tangible book value were $9.26 and $7.80, respectively. Tangible book value was
below book value as a result of the purchase premiums associated with branch
acquisitions, the acquisition of Lowcountry and the purchase of CF Mortgage.
At September 30, 1997, the Company and Carolina First Bank were in
compliance with each of
18
the applicable regulatory capital requirements. Table 2 sets forth various
capital ratios for the Company and Carolina First Bank.
TABLE 2
CAPITAL RATIOS
As of Well Capitalized Adequately Capitalized
9/30/97 Requirement Requirement
Company:
Total Risk-based Capital 10.28% 10.0% 8.0%
Tier 1 Risk-based Capital 7.39 6.0 4.0
Leverage Ratio 5.78 5.0 4.0
Carolina First Bank:
Total Risk-based Capital 9.83 10.0 8.0
Tier 1 Risk-based Capital 8.88 6.0 4.0
Leverage Ratio 6.92 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 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.
At the December 18, 1996 meeting, the Board of Directors declared a
six-for-five stock split effected in the form of a 20% common stock dividend
which was issued on January 30, 1997 to shareholders of record as of January 15,
1997. Share and per share data for all periods presented have been retroactively
restated to reflect the additional shares outstanding resulting from the stock
split.
INTEREST RATE SENSITIVITY
Achieving consistent growth in net interest income is the primary goal
of the Company's asset/liability function. The Company attempts to control the
mix and maturities of assets and liabilities to achieve consistent growth in net
interest income despite changes in market interest rates. The Company seeks to
accomplish this goal while maintaining adequate liquidity and capital. The
Company's asset/liability mix is sufficiently balanced so that the effect of
interest rates moving in either direction is not expected to be significant over
time.
The Company's Asset/Liability Committee uses a simulation model to
assist in achieving consistent growth in net interest income while managing
interest rate risk. The model takes into account interest rate changes as well
as changes in the mix and volume of assets and liabilities. The model simulates
the Company's balance sheet and income statement under several different rate
scenarios. The model's inputs
19
(such as interest rates and levels of loans and deposits) are updated on a
monthly basis in order to obtain the most accurate forecast possible. The
forecast presents information over a twelve month period. It reports a base case
in which interest rates remain flat and reports variations that occur when rates
increase and decrease 200 basis points. According to the model, the Company is
presently positioned so that net interest income will increase slightly if
interest rates rise in the near term and will decrease slightly if interest
rates decline in the near term.
The static interest sensitivity gap position, while not a complete
measure of interest sensitivity, is also reviewed periodically to provide
insights related to the static repricing structure of assets and liabilities. At
September 30, 1997, on a cumulative basis through twelve months, rate-sensitive
liabilities exceeded rate-sensitive assets, resulting in a liability sensitive
position of $206.6 million.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company both at the holding company level as well as at the subsidiary level.
The holding company and non-banking subsidiaries of the Company require cash for
various operating needs including general operating expenses, payment of
dividends to shareholders, interest on borrowing, extensions of credit at Blue
Ridge, business combinations and capital infusions into subsidiaries. Sources of
liquidity for the Company's holding company and non-banking subsidiaries include
dividends from Carolina First Bank and non-banking subsidiaries to the holding
company, sale of the Company's commercial paper, existing cash reserves and
earnings.
Carolina First Bank's cash flow requirements involve withdrawals of
deposits, extensions of credit and payment of operating expenses. Carolina First
Bank's principal sources of funds for liquidity purposes are customers'
deposits, principal and interest payments on loans, loan sales or
securitizations, securities available for sale, maturities of securities,
temporary investments and earnings. Carolina First Bank's liquidity is also
enhanced by the ability to acquire new deposits through its established branch
network of 51 branches in South Carolina. Carolina First Bank's liquidity needs
are a factor in developing its deposit pricing structure; deposit pricing may be
altered to retain or grow deposits if deemed necessary. Carolina First Bank has
access to borrowing from FHLB and maintains unused short-term lines of credit
from unrelated banks.
The liquidity ratio is an indication of a company's ability to meet its
short-term funding obligations. At September 30, 1997, Carolina First Bank's
liquidity ratio was approximately 12%. At September 30, 1997, Carolina First
Bank had unused short-term lines of credit totaling approximately $27 million
(which are withdrawable at the lender's option). In addition, Carolina First
Bank has access to borrowing from the FHLB. At September 30, 1997, unused
borrowing capacity from the FHLB totaled approximately $79 million with an
outstanding balance of $72 million. Management believes that these sources are
adequate to meet its liquidity needs.
Blue Ridge is currently being funded principally using the proceeds
from the sale of the Company's commercial paper in the retail market. The
Company is actively exploring alternative methods to fund Blue Ridge as the
Federal Reserve Board considers the funding of Blue Ridge to be an inappropriate
use of commercial paper proceeds. The Company expects alternate funding for Blue
Ridge would be at a higher cost.
20
In connection with the acquisition of Lowcountry, Carolina First Bank
paid approximately $4.8 million in cash as consideration for 40% of Lowcountry's
outstanding common shares.
In July 1997, the Carolina First Employee Stock Ownership Plan ("ESOP")
borrowed $3 million from an unaffiliated financial institution to acquire shares
of stock of the Company. Such stock is pledged as collateral for the loan. The
Company has used the $3 million loan proceeds to fund its subsidiary, CF
Investment Company. CF Investment Company received its Small Business Investment
Company license from the Small Business in September. CF Investment Company will
principally focus on bank technology investments that have products or services
that can be used in banking.
ASSET QUALITY
Prudent risk management involves assessing risk and managing it
effectively. Certain credit risks are inherent in making loans, particularly
commercial, real estate and consumer loans. The Company attempts to manage
credit risks by adhering to internal credit policies and procedures. These
policies and procedures include a multi-layered loan approval process, officer
and customer limits, periodic documentation examination and follow-up procedures
for any exceptions to credit policies. Loans are assigned a grade and those that
are determined to involve more than normal credit risk are placed in a special
review status. Loans that are placed in special review status are required to
have a plan under which they will be either repaid or restructured in a way that
reduces credit risk. Loans in this special review status are reviewed monthly by
the loan committee of the Board of Directors.
As demonstrated by the following analytical measures of asset quality,
management believes the Company has effectively managed its credit risk. Net
loan charge-offs, including credit card receivables, totaled $8.1 million and
$6.9 million in the first nine months of 1997 and 1996, respectively, or 0.88%
and 0.69%, respectively, as an annualized percentage of average loans. Excluding
credit card receivables, annualized net loan charge-offs as a percentage of
average loans were 0.44% and 0.34% during the first nine months of 1997 and
1996, respectively.
TABLE 3
NONPERFORMING ASSETS AND PAST DUE LOANS
($ in thousands)
September 30, December 31,
---------------- ------------
1997 1996 1996
------- ------- ------------
Nonaccrual loans $ 1,508 $ 1,626 $ 960
Restructured loans 1,283 0 1,909
- -------------------------------------------------------------------
Total nonperforming loans 2,791 1,626 2,869
Other real estate 2,130 2,227 3,011
- -------------------------------------------------------------------
Total nonperforming assets $ 4,921 $ 3,853 $ 5,880
==================================================================
Nonperforming assets as a % of loans
and foreclosed property 0.38% 0.37% 0.52%
Accruing loans past due 90 days $4,033 $ 2,528 $ 2,371
===================================================================
21
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. Statements contained in this filing regarding expected
levels of past due credit cards may be forward-looking statements and are
subject to uncertainties and risks, including, but not limited to, the demand
for Carolina First's products and services, changing economic conditions,
interest rates, consumer spending and numerous other factors.
22
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 material adverse effect on the
business or financial position of the Company or any of its
subsidiaries.
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 complaint, as most recently amended, names as additional
defendents the majority of the directors of the Company and Carolina
First Bank and certain other officers. The named plaintiffs in the
amended complaints are Carolina First Corporation by and through
certain minority shareholders, Emory Lester, Beatrice Hutchinson and
John Wesley Purdie, Jr. Plaintiffs allege as causes of action the
following: conversion of corporate opportunity; breach of fiduciary
duty and "constructive fiduciary fraud"; civil conspiracy; and mutual
mistake. The factual basis upon which these claims are made generally
involves the payment to Messrs. Whittle, Hummers and Powell of a bonus
in stock held by the Company in Affinity (as reward for their efforts
in connection with the Affinity investment), allegedly excessive
compensation to the Company's executive officers, transactions between
the Company and entities affiliated with Mr. Sebastian, alleged
concealment of financial problems, alleged mismanagement by Messrs.
Whittle and Hummers involving financial matters and employee matters.
The complaint seeks damages for the benefit of the Company aggregating
$41 million and rescission of the Affinity bonuses. A motion to dismiss
this action is pending.
In an action instituted by the same attorneys bringing the
above-described derivative action, on December 31, 1996, Dan Beckman,
Onida Beckman and Dale Epting filed a class action lawsuit against the
Company, Carolina First Bank, a number of their officers and the
majority of the directors of the Company and Carolina First Bank. In
this action, plaintiffs allege that they are former shareholders of
Midlands National Bank and seek to represent a class of all Midlands
shareholders involved in the merger of Midlands into Carolina First
Bank, asserting that the defendants committed fraud, constructive fraud
and breach of fiduciary duty against the defendants by overstating
earnings and thereby adversely affecting the consideration received by
the Midlands shareholders in connection with the merger of Midlands
National Bank into Carolina First Bank. The complaint seeks
compensatory damages of approximately $1.8 million and punitive damages
in an amount to be determined by a jury, attorneys' fees and other
costs. The Company and other named defendants have filed a motion to
dismiss all claims asserted in the lawsuit, which is pending.
The Company and Carolina First Bank (and related parties) are
contesting the foregoing litigation vigorously and believe that they
will prevail. However, should such not be the case, any damages awarded
in such litigation could have a material adverse effect on the Company.
ITEM 2 CHANGE IN SECURITIES
None.
23
PART II
(Continued)
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5 OTHER INFORMATION
Pending Acquisitions
On July 1, 1997, the Company signed a definitive agreement to acquire
First Southeast Financial Corporation ("First Southeast"), the holding
company for First Federal Savings and Loan Association of Anderson
("First Federal") based in Anderson, South Carolina. Assuming
consummation, First Federal will be merged into Carolina First Bank, a
wholly-owned subsidiary of Carolina First Corporation, and its
operations will become part of the operations of Carolina First Bank.
Under the terms of the agreement, holders of First Southeast's common
stock will receive the Company's common stock using an exchange ratio
calculated based on the average closing prices for the 10 days
preceding closing. Accordingly, the number of the Company's shares
expected to be issued in the merger fluctuates based on the Company's
stock price and is not known at this time. In addition, if the
Company's average closing stock price for the 10 days preceding closing
exceeds $19.0156, either party can terminate the transaction.
Additional information regarding the terms of the merger, calculation
of the exchange ratio and pro forma financial information is included
in the Company's registration statement on Form S-4 filed with the
Securities and Exchange Commission. At September 30, 1997, First
Southeast had approximately $350 million in assets, $275 million in
loans and $285 million in deposits. The Company will record the
acquisition using the purchase method of accounting. The closing of
this transaction, which is subject to receipt of shareholder approvals
and waiver of termination rights if the Company's stock price exceeds
$19.0156 for the 10 days preceding closing, is scheduled for late
November 1997.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Noncompetition and Severance Agreement dated September 17, 1997 between
Carolina First Corporation and Jospeh C. Reynolds
24
PART II
(Continued)
10.2 Office of Thrift Supervision Modification of Approval of Holding
Company Acquisition and Purchase of Assets and Assumption of
Liabilities date July 25, 1997 between Net, B@nk,Inc. and the Office of
Thrift Supervision Regarding Restrictions on Net.B@nk, Inc. Stock
10.3 Agreement and Plan of Reorganization entered into as of July 1, 1997
between and among Carolina First Bank, Carolina First Corporation,
First Federal and First Southeast: Incorporated by reference to Exhibit
2.1 of Carolina First Corporation's Registration Statement on Form S-4,
Commission File No. 333-32459.
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.
25
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
26