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 MARCH 31, 1999
[ ] 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 (IRS 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 $1.00 par value common stock as
of May 10, 1999 was 22,496,905.
CONSOLIDATED BALANCE SHEETS
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
($ in thousands, except share data)
(Unaudited)
March 31, December 31,
-------------------------------------- ---------------------
ASSETS 1999 1998 1998
----------------- ----------------- ---------------------
Cash and due from banks...................................... $ 127,745 $ 67,095 $ 102,516
Interest-bearing bank balances............................... 28,558 47,229 54,988
Federal funds sold and resale agreements..................... 12,000 105,000 5,000
Securities
Trading................................................... 2,134 3,991 3,543
Available for sale........................................ 323,527 353,083 395,140
Held for investment (market value $48,760, $33,468 and
$50,192, respectively).................................... 48,107 32,877 49,347
----------------- ----------------- ---------------------
Total securities........................................ 373,768 389,951 448,030
----------------- ----------------- ---------------------
Loans
Loans held for sale....................................... 84,820 139,033 112,918
Loans held for investment................................. 1,824,369 1,366,018 1,753,778
Less unearned income................................... (7,415) (10,461) (7,558)
Less allowance for loan losses......................... (18,102) (15,349) (17,509)
----------------- ----------------- ---------------------
Net loans............................................ 1,883,672 1,479,241 1,841,629
----------------- ----------------- ---------------------
Premises and equipment, net.................................. 46,841 38,774 46,953
Accrued interest receivable.................................. 18,348 15,657 19,702
Intangible assets............................................ 128,760 56,885 130,402
Other assets................................................. 78,545 50,915 76,714
----------------- ----------------- ---------------------
$ 2,698,237 $ 2,250,747 $ 2,725,934
================= ================= =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing...................................... $ 264,375 $ 228,866 $ 286,831
Interest-bearing......................................... 1,829,066 1,597,163 1,838,405
----------------- ----------------- ---------------------
Total deposits......................................... 2,093,441 1,826,029 2,125,236
Borrowed funds............................................. 194,310 124,263 193,286
Subordinated notes......................................... 25,650 25,522 25,618
Accrued interest payable................................... 14,393 16,192 16,373
Other liabilities.......................................... 21,517 15,358 21,058
----------------- ----------------- ---------------------
Total liabilities....................................... 2,349,311 2,007,364. 2,381,571
----------------- ----------------- ---------------------
Shareholders' Equity
Preferred stock-no par value; authorized 10,000,000 shares;
issued and outstanding none.............................. -- -- --
Common stock-par value $1 per share; authorized 100,000,000
shares; issued and outstanding 21,985,026, 17,709,935
and 22,005,391 shares, respectively...................... 21,985 17,710 22,005
Surplus.................................................... 288,185 201,967 288,577
Retained earnings.......................................... 40,254 23,337 35,914
Guarantee of employee stock ownership plan debt and
nonvested restricted stock............................... (2,746) (3,617) (2,963)
Accumulated other comprehensive income, net of tax........ 1,248 3,986 830
----------------- ----------------- ---------------------
Total shareholders' equity.............................. 348,926 243,383 344,363
----------------- ----------------- ---------------------
$ 2,698,237 $ 2,250,747 $ 2,725,934
================= ================= =====================
1
CONSOLIDATED STATEMENTS OF INCOME
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
($ in thousands, except share data)
(Unaudited)
Three Months Ended March 31,
----------------------------------------
1999 1998
----------------------------------------
Interest Income
Interest and fees on loans................................. $ 42,599 $ 36,229
Interest and dividends on securities 5,671 4,815
Interest on short-term investments......................... 592 1,083
---------------- ----------------
Total interest income.................................... 48,862 42,127
---------------- ----------------
Interest Expense
Interest on deposits....................................... 20,409 19,275
Interest on borrowed funds................................. 2,767 2,625
---------------- ----------------
Total interest expense................................... 23,176 21,900
---------------- ----------------
Net interest income...................................... 25,686 20,227
Provision for Loan Losses.................................... 3,411 2,136
---------------- ----------------
Net interest income after provision for loan losses...... 22,275 18,091
---------------- ----------------
Noninterest Income
Service charges on deposit accounts........................ 2,246 1,876
Mortgage banking income.................................... 848 1,493
Loan securitization income................................. 597 (81)
Fees for trust services.................................... 396 352
Gain on sale of securities................................. 163 140
Gain on disposition of equity investments.................. 15,471 --
Other...................................................... 1,398 833
---------------- ----------------
Total noninterest income................................. 21,119 4,613
---------------- ----------------
Noninterest Expenses
Personel expense........................................... 11,248 7,493
Occupancy.................................................. 1,682 1,469
Furniture and equipment.................................... 1,365 1,095
Amortization of intangibles................................ 1,918 874
Charitable contribution to foundation...................... 11,890 --
Other...................................................... 6,267 4,328
---------------- ----------------
Total noninterest expenses............................... 34,370 15,259
---------------- ----------------
Income before income taxes............................... 9,024 7,445
Income taxes................................................. 2,700 2,751
---------------- ----------------
Net income .............................................. $ 6,324 $ 4,694
================ ================
Net Income per Common Share:
Basic.................................................... $ 0.29 $ 0.28
Diluted.................................................. 0.29 0.28
Average Common Shares Outstanding:
Basic.................................................... 21,843,485 16,588,163
Diluted.................................................. 22,173,378 16,922,202
Cash Dividends Declared per Common Share..................... $ 0.09 $ 0.08
2
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
($ in thousands, except share data)
(Unaudited)
Shares of
Common Preferred Common
Stock Stock Stock Surplus
--------------------------------------------------
BALANCE, DECEMBER 31, 1997 ............................. 15,659,338 -- $ 15,659 $ 164,517
Net income ........................................... -- -- -- --
Other comprehensive income (loss), net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during
period, net of taxes of $260 ................. -- -- -- --
Less: reclassification adjustment for gains
included in net income, net of taxes of $14 .. -- -- -- --
Other comprehensive loss .......................... -- -- -- --
Comprehensive income ................................. -- -- -- --
Cash dividends declared ($0.08 per common share) ..... -- -- -- --
Common stock issued pursuant to:
Stock offering ..................................... 2,000,000 -- 2,000 36,381
Dividend reinvestment plan ......................... 18,216 -- 19 374
Employee stock purchase plan ....................... 2,244 -- 2 44
Restricted stock plan .............................. 28,945 -- 29 593
Exercise of stock options and stock warrants ....... 1,192 -- 1 24
Miscellaneous ........................................ -- -- -- 34
--------------------------------------------------
BALANCE, MARCH 31, 1998 ................................ 17,709,935 -- $ 17,710 $ 201,967
==================================================
BALANCE, DECEMBER 31, 1998 ............................. 22,005,391 -- $ 22,005 $ 288,577
Net income ........................................... -- -- -- --
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during
period, net of taxes of $3,905 ............... -- -- -- --
Less: reclassification adjustment for gains
included in net income, net of taxes of $4,139 -- -- -- --
Other comprehensive income ......................... -- -- -- --
Comprehensive income ................................. -- -- -- --
Cash dividends declared ($0.09 per common share) ..... -- -- -- --
Common stock issued pursuant to:
Repurchase of stock ................................ (40,000) -- (40) (816)
Dividend reinvestment plan ......................... 16,554 -- 17 335
Employee stock purchase plan ....................... 2,991 -- 3 60
Exercise of stock options and stock warrants ....... 90 -- -- 2
Miscellaneous ........................................ -- -- -- 27
--------------------------------------------------
BALANCE, MARCH 31, 1999 ................................ 21,985,026 -- $ 21,985 $ 288,185
==================================================
Retained Accumulated
Earnings Other
and Comprehensive
Other* Income Total
-------------------------------------
BALANCE, DECEMBER 31, 1997 ............................. $ 16,930 $ 4,553 $ 201,659
Net income ........................................... 4,694 -- 4,694
Other comprehensive income (loss), net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during
period, net of taxes of $260 ................. -- (516) --
Less: reclassification adjustment for gains
included in net income, net of taxes of $14 .. -- (51) --
------- ---------
Other comprehensive loss .......................... -- (567) (567)
------- ---------
Comprehensive income ................................. -- 4,127
---------
Cash dividends declared ($0.08 per common share) ..... (1,417) -- (1,417)
Common stock issued pursuant to:
Stock offering ..................................... -- -- 38,381
Dividend reinvestment plan ......................... -- -- 393
Employee stock purchase plan ....................... -- -- 46
Restricted stock plan .............................. -- -- 622
Exercise of stock options and stock warrants ....... -- -- 25
Miscellaneous ........................................ (487) -- (453)
-------------------------------------
BALANCE, MARCH 31, 1998 ................................ $ 19,720 $ 3,986 $ 243,383
=====================================
BALANCE, DECEMBER 31, 1998 ............................. $ 32,951 $ 830 $ 344,363
Net income ........................................... 6,324 -- 6,324
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during
period, net of taxes of $3,905 ............... -- 1,022 --
Less: reclassification adjustment for gains
included in net income, net of taxes of $4,139 -- (604) --
-------
Other comprehensive income ......................... -- 418 418
------- ---------
Comprehensive income ................................. -- 6,742
---------
Cash dividends declared ($0.09 per common share) ..... (1,982) -- (1,982)
Common stock issued pursuant to:
Repurchase of stock ................................ -- -- (856)
Dividend reinvestment plan ......................... -- -- 352
Employee stock purchase plan ....................... -- -- 63
Exercise of stock options and stock warrants ....... -- -- 2
Miscellaneous ........................................ 215 -- 242
-------------------------------------
BALANCE, MARCH 31, 1999 ................................ $ 37,508 $ 1,248 $ 348,926
=====================================
* Other includes guarantee of employee stock ownership plan debt and nonvested
restricted stock.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
($ in thousands, except share data)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 6,324 $ 4,694
Adjustments to reconcile net income to net cash (used for)
provided by operations
Depreciation ............................................ 1,034 936
Amortization of intangibles .......................... 1,918 874
Charitable contribution to foundation ................ 11,890 --
Provision for loan losses ............................ 3,411 2,136
Gain on sale of securities ........................... (163) (140)
Gain on disposition of equity investments ............ (15,471) --
Trading account assets, net .......................... 1,519 (1,539)
Originations of mortgage loans held for sale ......... (119,222) (118,867)
Sale of mortgage loans held for sale ................. 105,030 248,298
Other assets, net .................................... (418) (310)
Other liabilities, net ............................... (1,907) 2,659
----------------------------
Net cash (used for) provided by operating activities .... (6,055) 138,741
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Interest-bearing bank balances ....................... 26,430 (12,526)
Federal funds sold and resale agreements ............. (7,000) (105,000)
Sale of securities available for sale ................ 67,852 1,180
Maturity of securities available for sale ............ 109,761 122,379
Maturity of securities held for investment ........... 2,576 3,030
Purchase of securities available for sale ............ (105,953) (215,089)
Purchase of securities held for investment ........... (1,336) (2,052)
Origination of loans, net ............................ (31,497) (24,709)
Capital expenditures ................................. (922) (28)
Proceeds from disposition of equity investments ...... 4,389 --
----------------------------
Net cash provided by (used for) investing activities ..... 64,300 (232,815)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Change in deposits, net .............................. (31,795) 79,487
Borrowed funds, net .................................. 1,024 (29,106)
Cash dividends paid .................................. (1,980) (1,567)
Issuance of common stock ............................. -- 38,381
Other common and preferred stock activity ............ (265) 648
----------------------------
Net cash (used for) provided by financing activities ...... (33,016) 87,843
----------------------------
Net change in cash and due from banks ...................... 25,229 (6,231)
Cash and due from banks at beginning of period ............. 102,516 73,326
----------------------------
Cash and due from banks at end of period ................... $ 127,745 $ 67,095
============================
4
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 1998 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, net of interest capitalized as a
part of the cost of construction, amounted to approximately $25,156,000
for the three months ended March 31, 1999. Income tax payments of $2.2
million and $1.1 million were made for the three months ended March 31,
1999 and March 31, 1998, respectively.
(3) BUSINESS COMBINATIONS
In March 1999, the Company signed a definitive merger agreement with
Citrus Bank, a Florida state-chartered bank headquartered in Orlando,
Florida. At March 31, 1999, Citrus Bank had total assets of
approximately $248 million and operated through eight locations. Under
the terms of the agreement, the Company will issue approximately 3.1
million shares of the Company's common stock, which is subject to
change based upon the average closing price of the Company's common
stock for the 30 trading days preceding the closing date. The
transaction is subject to regulatory and shareholder approval and is
expected to close in the third quarter. It will be accounted for using
the pooling-of-interests method of accounting.
In March 1999, Carolina First Bank signed a definitive agreement to
sell three branch offices located in Ridgeland, Hardeeville and
Abbeville, South Carolina to First National Bank, a subsidiary of First
National Corporation. The branches have approximately $45 million in
deposits and approximately $13 million in loans. The transaction is
expected to close in the third quarter and is subject to regulatory
approval, among other conditions.
On April 23, 1999, the Company acquired all the outstanding shares of
Citizens First National Bank ("Citizens"), a national bank
headquartered in Crescent City, Florida in exchange for 507,931 shares
of the Company's common stock. This transaction was accounted for using
the pooling-of-interests method of accounting and was valued, as of the
date of closing, at approximately $14.1 million. At March 31, 1999,
Citizens had total assets, loans and deposits of approximately $59
million, $37 million and $53 million, respectively, and operated
through four branch locations. Citizens will operate as a wholly-owned
subsidiary of the Company.
(4) SECURITIES
The net unrealized gain on securities available for sale increased
$418,000 for the three months ended March 31, 1999. The majority of the
increase was attributable to an increase in the market value of the
Affinity Technology Group, Inc. shares.
5
(5) COMMON STOCK
Basic earnings per share are based on the weighted average number of
common shares outstanding during each period. Basic earnings per share
also reflect provisions for dividend requirements on all outstanding
shares of preferred stock.
Diluted earnings per share are 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.
(6) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is subject to various legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of
management based on consultation with legal counsel, any outcome of
such pending litigation would not materially affect the Company's
consolidated financial position or results of operations.
On November 4, 1996, a derivative shareholder action was filed in
Greenville County Court of Common Pleas against the Company, the
majority of the Company's and Carolina First Bank's directors, and
certain executive and other officers. The named plaintiffs are the
Company by and through certain minority shareholders. The Company filed
a motion to dismiss with respect to all claims in this complaint, which
was granted in December 1997. Plaintiffs have appealed the grant of the
motion to dismiss. Plaintiffs allege as causes of action the following:
conversion of corporate opportunity; breach of fiduciary duty and
constructive fraud; civil conspiracy; and mutual mistake. The factual
basis upon which these claims are made generally involves the payment
to Company officers and other individuals of a bonus in stock held by
the Company in Affinity Technology Group, Inc. (as reward for their
efforts in connection with the Company's procurement of stock in
Affinity Technology Group, Inc.), statements to former shareholders of
Midlands National Bank in connection with the Company's acquisition of
that bank, and alleged mismanagement by certain executive officers
involving financial matters. The complaint seeks damages for the
benefit of the Company aggregating $41 million and rescission of the
Affinity Technology Group, Inc. bonus.
In an action brought by the same attorneys who brought the
above-mentioned derivative action, on December 31, 1996, certain
individuals filed a class action lawsuit against the Company, Carolina
First Bank, and a number of officers and directors of the Company and
Carolina First Bank. In connection with the judge's granting the motion
to dismiss in the above-referenced derivative action, the plaintiffs'
attorneys withdrew this lawsuit, without prejudice.
(7) BUSINESS SEGMENTS
Carolina First has six wholly-owned subsidiaries which are evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. Two of these subsidiaries
qualify as separately reportable operating segments, Carolina First
Bank, and CF Mortgage. These operating segments offer products and
services primarily to customers in South Carolina and the surrounding
areas. Carolina First Bank's
6
revenues are derived primarily from interest and fees on loans,
interest on investment securities and service charges on deposits,
while CF Mortgage's revenue is from mortgage banking income.
The following table summarizes certain financial information concerning
the Company's reportable operating segments for the three months ended:
CAROLINA FIRST CF ELIMINATING
BANK MORTGAGE OTHER* ENTRIES TOTAL
- --------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999
Income Statement Data
Total revenue $ 49,761 $ 2,274 $ 19,941 $ (1,995) $ 69,981
Net interest income 24,630 -- 1,056 -- 25,686
Provision for loan losses 2,787 -- 624 -- 3,411
Noninterest income 3,262 2,274 17,096 (1,513) 21,119
Mortgage banking income (1,360) 2,230 (22) -- 848
Noninterest expenses 19,347 1,371 15,165 (1,513) 34,370
Amortization 1,431 -- 487 -- 1,918
Net income 3,399 585 2,340 -- 6,324
Balance Sheet Data
Total assets $ 2,557,515 $ 7,424 $ 524,838 $ (391,540) $ 2,698,237
Loans - net of
unearned income 1,841,743 -- 60,031 -- 1,901,774
Allowance for
loan losses 15,095 -- 3,007 -- 18,102
Intangibles 105,539 -- 23,221 -- 128,760
Deposits 2,033,347 -- 77,306 (17,212) 2,093,441
MARCH 31, 1998
Income Statement Data
Total revenue $ 44,190 $ 1,960 $ 1,526 $ (936) $ 46,740
Net interest income 20,031 -- 195 1 20,227
Provision for loan losses 1,777 -- 359 -- 2,136
Noninterest income 2,948 1,960 182 (477) 4,613
Mortgage banking income (439) 1,932 -- -- 1,493
Noninterest expenses 13,686 1,171 877 (475) 15,259
Amortization 822 -- 52 -- 874
Net income 4,740 508 (554) -- 4,694
Balance Sheet Data
Total assets $ 2,217,672 $5,418 $ 299,296 $ (271,639) $ 2,250,747
Loans - net of
unearned income 1,481,385 -- 13,205 -- 1,494,590
Allowance for
loan losses 14,189 -- 1,160 -- 15,349
Intangibles 54,699 -- 2,186 -- 56,885
Deposits 1,857,538 -- -- (31,509) 1,826,029
- --------------------------------------------------------------------------------------------------------------------
*Other includes corporate related items and results of subsidiaries not
meeting the criteria for reportable operating segments, including the
Parent Company, Blue Ridge, Carolina First Bank, F.S.B., RPGI and CF
Guaranty Reinsurance, Ltd.
7
(8) 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.
8
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 OF CAROLINA FIRST CORPORATION (THE "COMPANY") ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1998. RESULTS OF OPERATIONS FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 1999 ARE NOT NECESSARILY INDICATIVE OF RESULTS TO BE
ATTAINED FOR ANY OTHER PERIOD.
FORWARD-LOOKING STATEMENTS
Statements included in this report which are not historical in nature
are intended to be, and are hereby identified as, "forward-looking statements"
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended (the "Act"). In addition, certain statements in
future filings by the Company with the Securities and Exchange Commission, in
press releases and in oral and written statements made by or with the approval
of the Company which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. The Company cautions
readers that forward-looking statements, including without limitation, those
relating to the Company's future business prospects, plans, objectives, future
economic performance, revenues, working capital, liquidity, capital needs,
interest costs, income or loss, income or loss per share, dividends and other
financial items are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements due to several important factors herein identified, among others, and
other risks and factors identified from time to time in the Company's reports
filed with the Securities and Exchange Commission.
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: projections regarding the estimated annualized
financial impact from the sale of the credit cards; risks from changes in
economic, monetary policy and industry conditions; changes in interest rates;
inflation; risks inherent in making loans including repayment risks and value of
collateral; fluctuations in consumer spending; the demand for the Company's
products and services; dependence on senior management; technological changes;
ability to increase market share and control expenses; acquisitions; changes in
accounting policies and practices; costs and effects of litigation;
recently-enacted or proposed legislation; and year 2000 readiness.
Such forward-looking statements speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
OVERVIEW
The Company, a South Carolina corporation headquartered in Greenville, South
Carolina, is a financial institutions holding company, which commenced banking
operations in December 1986, and currently conducts business through 73
locations in South Carolina and 4 locations in northern Florida. The Company
operates through the following subsidiaries: Carolina First Bank,
9
a state-chartered commercial bank; Carolina First Mortgage Company ("CF
Mortgage"), a mortgage banking company; Carolina First Bank, F.S.B., a Federal
savings bank; Citizens First National Bank ("Citizens"), a national banking
association; Blue Ridge Finance Company, Inc. ("Blue Ridge"), a consumer finance
company; and Resource Processing Group, Inc. ("RPGI"), a credit card servicing
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.
Net income for the first quarter of 1999 increased $1.6 million to $6.3
million, or $0.29 per diluted share, compared with $4.7 million, or $0.28 per
diluted share, recorded in the first quarter of 1998. Net income increased 35%
from year to year while earnings per diluted share increased 4%. The smaller
increase in earnings per diluted share was a result of a 31% increase in average
common shares outstanding, principally from the completion of bank mergers and a
secondary stock offering. During the quarter, the Company, realized a $15.5
million gain related to selling and transferring shares of Net.B@nk, Inc.
("Net.B@nk") stock in Net.B@nk's secondary public offering and the disposition
of a bank technology investment. The gain from the sale of Net.B@nk stock was
largely offset by the funding of a charitable foundation. At March 31, 1999, the
Company had approximately $2.7 billion in assets, $1.9 billion in loans, $2.1
billion in deposits and $348.9 million in shareholders' equity. At March 31,
1999, the Company's ratio of nonperforming assets to loans and other real estate
owned was 0.26%.
An important part of the Company's growth strategy is to target markets
where banking relationships are in a state of flux due to bank mergers. The
Company is expanding into northern and central Florida. This represents an
extension of the Company's existing strategy, which has proven to be successful
in South Carolina, to another southeastern market with similar conditions. On
April 23, 1999, the Company acquired all the outstanding shares of Citizens, a
national bank headquartered in Crescent City, Florida in exchange for 507,931
shares of the Company's common stock. This transaction was accounted for using
the pooling-of-interests method of accounting and was valued, as of the date of
closing, at approximately $14.1 million. At March 31, 1999, Citizens had total
assets, loans and deposits of approximately $59 million, $37 million and $53
million, respectively, and operated through four branch locations. Citizens has
filed an application to open a de novo branch location in Jacksonville, Florida.
In March 1999, the Company signed a definitive merger agreement with
Citrus Bank, a Florida state-chartered bank headquartered in Orlando, Florida.
At March 31, 1999, Citrus Bank had total assets of approximately $248 million
and operated through eight locations. Under the terms of the agreement, the
Company will issue approximately 3.1 million shares of the Company's common
stock, which is subject to change based upon the average closing price of the
Company's common stock for the 30 trading days preceding the closing date. The
transaction is subject to regulatory and shareholder approval and is expected to
close in the third quarter. It will be accounted for using the
pooling-of-interests method of accounting.
In March 1999, Carolina First Bank signed a definitive agreement to
sell three branch offices located in Ridgeland, Hardeeville and Abbeville, South
Carolina to First National Bank, a subsidiary of First National Corporation. The
branches have approximately $45 million in deposits and approximately $13
million in loans. The transaction is expected to close in the third quarter and
is subject to regulatory approval, among other conditions.
On April 30, 1999, the Company entered into an agreement with First
USA, N.A. pursuant to which it sold credit card receivables totaling
approximately $112 million. The credit cards sold include approximately $58
million in the Company's off-balance sheet credit card trust. Any gain
10
or loss recorded in connection with this transaction is not expected to be
material. The Company will continue to service these credit cards until the end
of August 1999. In connection with the sale, the Company's credit card trust
will be terminated effective May 17, 1999. In addition, the Company entered into
a partnership agreement with an affiliate of the purchaser to offer credit card
products to its retail customers. The Company will continue to originate
business credit cards in its market areas and has retained its business credit
card receivables which total approximately $2.5 million. The estimated net
annual savings related to the sale of credit cards total approximately $1.7
million. The second quarter 1999 earnings impact will be lower than the
pro-rated annualized estimated savings. The credit card sale is forecasted to
increase second quarter 1999 earnings by approximately $300,000. The foregoing
estimates are based on what are believed to be reasonable assumptions, however,
no assurance can be given that such assumptions and estimates will be accurate.
EQUITY INVESTMENTS
INVESTMENT IN NET.B@NK, INC.
At December 31, 1998, the Company owned 1,175,000 shares of Net.B@nk
common stock, or approximately 19% of the outstanding shares. These shares were
carried on the Company's books at a basis of approximately $979,000. Net.B@nk
owns and operates Net.B@nk, FSB, an FDIC-insured federal savings bank that
provides banking services to consumers utilizing the Internet. Under the terms
of the OTS's regulatory ruling on Net.B@nk in 1997, certain affiliates of
Net.B@nk, including the Company, may not sell their shares in Net.B@nk until
July 31, 2000. On January 8, 1999, the OTS granted the Company permission to
sell or transfer 370,000 shares in order to reduce its ownership to less than
10%.
In January 1999, the Company contributed 290,000 shares of Net.B@nk
common stock to Carolina First Foundation, a non-profit corporation organized
for charitable purposes which establishes an endowment to fund future charitable
contributions. In February 1999, the Company contributed capital in the form of
30,000 shares of Net.B@nk common stock to its wholly-owned subsidiary, Carolina
First Guaranty Reinsurance, Ltd., a company which will be engaged in the
reinsurance of credit insurance to customers of the Company's banking
subsidiaries. On February 10, 1999, the Company and Carolina First Guaranty
Reinsurance, Ltd. sold 50,000 shares and 30,000 shares, respectively, of
Net.B@nk's common stock at a net price of $43.37 per share in connection with
Net.B@nk's secondary public offering. In addition, Carolina First Foundation
sold 290,000 shares of Net.B@nk common stock at a net price of $43.37 per share.
At March 31, 1999, the Company owned 805,000 shares, or 9.4% of
Net.B@nk's outstanding common stock, and was the largest shareholder. At March
31, 1999, these shares were carried on the Company's books at a basis of
approximately $671,000 due to the restriction on selling the shares which
expires on July 31, 2000.
INVESTMENT IN AFFINITY TECHNOLOGY GROUP, INC.
At March 31, 1999, the Company (through its subsidiary CF Investment
Company) owned 2,528,366 shares of common stock of Affinity Technology Group,
Inc. ("Affinity") and a warrant to purchase an additional 3,471,340 shares for
approximately $0.0001 per share ("Affinity Warrant"). These Affinity shares and
the shares represented by the Affinity Warrant constitute approximately 17% of
Affinity's outstanding common stock. The investment in Affinity's common stock,
which is
11
included in securities available for sale and has a basis of approximately of
$160,000, was recorded at its market value of approximately $2.3 million. The
Affinity Warrant was not reported on the Company's balance sheet as of
March 31, 1999.
The Company's shares in Affinity and the shares issuable upon the
exercise of the Affinity Warrant are "restricted" securities, as that term is
defined in federal securities laws.
INVESTMENTS IN COMMUNITY BANKS
As of March 31, 1999, the Company had equity investments in the
following community banks located in the Southeast: Capital Bank in Raleigh,
North Carolina; Carolina Bank in Greensboro, North Carolina ; Carolina Savings
Bank, Incorporated, S.S.B. in Greensboro, North Carolina; CNB, Inc. in Lake
City, Florida; Community Capital Corporation in Greenwood, South Carolina;
FirstSpartan Financial Corporation in Spartanburg, South Carolina; Florida
Banks, Incorporated in Jacksonville, Florida; Heritage Bancorp, Incorporated in
Laurens, South Carolina; People's Community Capital Corporation in Aiken, South
Carolina; and Trinity Bank in Monroe, 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 and to
promote community banking in the Southeast.
CF INVESTMENT COMPANY
In September 1997, the Company's subsidiary, CF Investment Company,
became licensed through the Small Business Administration to operate as a Small
Business Investment Company. CF Investment Company is a wholly-owned subsidiary
of Blue Ridge. CF Investment Company's principal focus is investing in companies
that have a bank-related technology or service the Company and its subsidiaries
can use. As of March 31, 1999, CF Investment Company has invested approximately
$2 million (principally in the form of loans) in companies specializing in
electronic document management and Internet-related services. In March 1999, CF
Investment Company sold its investment in Corporate Solutions International, a
company that develops automated credit decision systems, for a pre-tax gain of
approximately $412,000.
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 $5.5 million, or 27%, to
$25.9 million in the first quarter of 1999 from $20.4 million in the first
quarter of 1998. The increase resulted from a higher level of average earning
assets and a higher net interest margin. The growth in average earning assets,
which increased $375.1 million, or 19%, to approximately $2.4 billion in the
first quarter of 1999 from $2.0 billion in the first quarter of 1998 resulted
from acquisitions completed in the second half of 1998 and internal loan growth.
Average loans, net of unearned income, were $1.9 billion in the first quarter of
1999, compared with $1.6 billion in the first quarter of 1998. Average
12
investment securities were $398.9 million and $316.0 million in the first
quarters of 1999 and 1998, respectively.
The net interest margin of 4.45% for the first quarter of 1999 was
higher than the margin of 4.17% for the first quarter of 1998 and 4.21% for the
fourth quarter of 1998. The higher net interest margin in 1999 resulted from
lower deposit costs partially offset by lower earning asset yields. The lower
deposit costs resulted from shifting the deposit mix from certificates of
deposit into lower-yielding transaction accounts. Also contributing to the
Company's lower cost of deposits was the declining interest rate environment and
the Company's rate reductions. The yield on earning assets was lower in 1999 as
a result of a 0.75% reduction in the prime interest rate, which occurred during
the fourth quarter of 1998. Approximately 54% of the commercial loan portfolio
is variable and immediately repriced downward with the decrease in the prime
interest rate. The earning asset yield was enhanced somewhat by the
restructuring of the loan portfolio. Approximately $246 million, or 89%, of the
loans acquired in the acquisition of First Southeast Financial Corporation
("First Southeast"), which closed in November 1997, were mortgage loans.
Mortgage loans typically have a lower yield than commercial or consumer loans.
During the first quarter of 1998, the Company sold approximately $153 million of
First Southeast mortgage loans and deployed the proceeds into higher-yielding
commercial and consumer loans during the remainder of 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $3.4 million for the first
quarter of 1999 compared with $2.1 million for the first quarter of 1998. The
higher 1999 provision for loan losses reflected the higher level of outstanding
loans, which increased 34%. As a percentage of average loans, the net charge-off
ratio was 0.61% for the first quarter of 1999, compared with 0.76% for the first
quarter of 1998. The nonperforming asset ratio remained low at 0.26% as of March
31, 1999, compared with 0.23% as of March 31, 1998.
Management currently anticipates that significant loan growth will
continue in 1999. New market areas, such as northern Florida, are expected to
contribute to 1999 portfolio growth. Management intends to closely monitor
economic trends and the potential effect on the banking subsidiaries' loan
portfolios. In addition, management is discussing Year 2000 readiness with loan
customers to assess the related loan collection risk.
NONINTEREST INCOME
Noninterest income increased to $21.1 million in the first quarter of
1999 from $4.6 million in the first quarter of 1998. Noninterest income in 1999
included non-recurring income from the disposition of equity investments. A
non-recurring pre-tax gain of approximately $15.1 million (primarily offset by a
contribution to the Carolina First Foundation) was recorded which related to the
sale of Net.B@nk stock (see "EQUITY INVESTMENTS-Investment in Net.B@nk, Inc.").
In addition, a pre-tax gain of approximately $412,000 was recorded relating to
the sale of Corporate Solutions International stock (see "EQUITY INVESTMENTS-CF
Investment Company). Excluding these equity dispositions, noninterest income
increased $1.0 million to $5.6 million in the first quarter of 1999 from $4.6
million in the first quarter of 1998. This increase was primarily attributable
to higher service charges on deposit accounts, loan securitization income and
other income.
13
Service charges on deposit accounts, the largest contributor to
noninterest income, rose 20% to $2.2 million in the first quarter of 1999 from
$1.9 million for the same time period in 1998. Average deposits for the same
period increased 18%. The increase in service charges was attributable to
attracting new transaction accounts and improved collection of fees.
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 quarter of 1999 decreased to $848,000 compared with $1.5 million in
the first quarter of 1998. The decrease was attributable to a $123,000 loss from
selling mortgage servicing rights, lower servicing income and lower gains on the
sale of loans.
Income from originations and sales of mortgage loans, including sales
of loans originated by Carolina First Bank, totaled $1.1 million in the first
quarter of 1999 compared with $1.3 million in 1998. The decrease in 1999
resulted from lower gains on the sale of loans, primarily due to a lower volume
of sales. Mortgage loans totaling approximately $105 million and $248 million
were sold in the first quarter of 1999 and 1998, respectively. Mortgage
originations totaled approximately $119 million in the first quarter of both
1999 and 1998.
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 March 31, 1999, CF Mortgage was servicing or
subservicing 22,676 loans having an aggregate principal balance of approximately
$1.9 billion. The decrease in both the number of loans serviced and the
aggregate principal balance since December 31, 1998 was the result of the sale
of mortgage servicing rights associated with approximately 1,000 loans with an
aggregate principal balance of $70 million during the first quarter of 1999. The
servicing rights sold, which resulted in a pre-tax loss of $123,000, were
related to loans with a high likelihood of accelerated prepayments. In the first
quarter of 1999, fees related to the servicing portfolio from non-affiliated
companies were offset by the related amortization for the mortgage servicing
rights and subservicing payments for a loss of $256,000 compared with income of
$174,000 in the first quarter of 1998. 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 three months of 1999 of $396,000
were 13% above the $352,000 earned in the same period of 1998. At March 31, 1999
and 1998, the market value of assets administered by Carolina First Bank's trust
department totaled approximately $347 million and $310 million, respectively.
The increase in fees and the market value of administered assets resulted from
the trust department generating new business in personal trust and employee
benefits.
During the first quarter of 1999, the Company had income of $597,000
from its interests in the credit card and commercial real estate loan trusts,
compared to a loss of $81,000 in the first quarter of 1998. Loan securitization
income is net of charge-offs associated with the loans in the trusts. Loan
securitization income related to credit cards increased to $691,000 (which
included $420,000 in RPGI fees for servicing trust credit cards) in the first
three months of 1999 compared with a loss of $35,000 in the first three months
of 1998. With the sale of the Company's credit cards and the expected May 17,
1999 termination of the credit card trust, loan securitization income related to
credit cards will cease during the second quarter of 1999. The commercial real
estate loan trust showed a loss of $94,000 during the first quarter of 1999
compared with a loss of $46,000 in the first quarter of 1998. Income associated
with the commercial real estate loan trust
14
has declined, and will continue to decline, as loan balances are paid off and
the amortization of expenses related to the formation of the trust continues.
Other noninterest income was $1.4 million in the first quarter of 1999
compared with $833,000 in the first quarter of 1998. The increase was due to
higher customer service fees, fees received by RPGI, lease fee income due to
higher terminations from a more aged portfolio and merchant processing fees.
During the second quarter of 1998, the Company expanded its brokerage
service offerings through Carolina First Securities, Inc. ("CF Securities"), a
subsidiary of Carolina First Bank. CF Securities offers a complete line of
investment products and services, including mutual funds, stocks, bonds and
annuities.
NONINTEREST EXPENSES
Noninterest expenses increased $19.1 million to $34.4 million in the
first quarter of 1999 from $15.3 million in the first quarter of 1998.
Noninterest expenses in the first quarter of 1999 included a non-recurring
charitable contribution in the form of Net.B@nk common stock, valued at
approximately $12 million, which was made to the Carolina First Foundation (see
"EQUITY INVESTMENTS-Investment in Net.B@nk, Inc."). In addition, intangible
amortization increased in the first quarter of 1999 as a result of the three
mergers completed in the last half of 1998. The remaining increase in
expenditures includes operational costs associated with acquired branches, new
markets and additional automated teller machines ("ATMs").
Salaries and wages and employee benefits increased to $11.2 million in
the first quarter of 1999 from $7.5 million in the first quarter of 1998.
Full-time equivalent employees increased to 861 at March 31, 1999 from 697 at
March 31, 1998. The staffing cost increases were primarily due to the costs of
expanding in existing and new markets (including the 1998 mergers) and back
office support functions to support growth.
Occupancy and furniture and equipment expenses increased $483,000, or
19%, to $3.0 million in the first three months of 1999 from $2.6 million in the
first three months of 1998. This increase resulted principally from additional
costs associated with the branches acquired through acquisitions in 1998 and the
operating costs associated with additional ATMs.
Amortization of intangibles increased to $1.9 million in the first
quarter of 1999 from $874,000 in the first quarter of 1998. The increase is due
to the acquisitions completed in 1998. This level of amortization is expected to
continue.
Other noninterest expenses increased $2.0 million to $6.3 million in
the first quarter of 1999 from $4.3 million in the first quarter of 1998. The
overall increase in other noninterest expenses was principally attributable to
the overhead and operating expenses associated with higher lending and deposit
activities. The largest items of other noninterest expense were telephone,
servicing fees, stationery, supplies, printing and postage.
YEAR 2000
The Company recognizes a business risk in computerized systems when the
calendar rolls over into the new century. Some computer programs, particularly
older ones, use two digits rather
15
than four digits for dates. Such programs may recognize "00" as the year 1900
rather than the year 2000 causing interest calculations to be incorrect or
possibly causing the program or computer system on which it runs to cease
functioning altogether. This problem will occur in any system containing a
computer chip, even a telephone system. This problem is commonly called the
"Year 2000 Problem." All computer systems used by the Company in its day-to-day
operations could be affected.
Management has established a committee (the "Y2K Project Team") which
has identified affected systems and is currently working to ensure that this
event will not disrupt operations. A full-time staff member has been assigned to
the Y2K Project Team to assist in record keeping and disseminating information.
The Y2K Project Team reports regularly to the Audit Committee of the Company's
Board of Directors who report to the entire Board of Directors each quarter on
Year 2000 compliance. At its June 1998 meeting, the Company's Board of Directors
approved a Year 2000 Project Plan and the membership of the Y2K Project Team.
The Y2K Project Team is working closely with outside vendors to obtain Year 2000
software corrections and warranty commitments and to arrange mock conversion
testing.
The Company's Year 2000 efforts include comprehensive testing of all
hardware and software to ensure that computer systems do not negatively affect
operations. Software applications testing began during the second quarter of
1998. The Company's current core banking software, mortgage software and
operating systems have been vendor-certified as Year 2000 compliant and have
been tested extensively in a User Group environment. The results of User Group
testing have been provided for the Company to review. In-house testing of
mission critical software and hardware was conducted in the first quarter of
1999 and substantially completed on March 31, 1999 in accordance with FDIC
guidelines. These applications include core banking; mortgage servicing,
origination and secondary marketing software; ACH software; and core operating
system software and hardware. In addition, a professional third party accounting
firm has conducted an independent review of core banking software proxy testing
results. All third-party providers of non-information technology systems,
including elevators, alarm systems and utilities, have been contacted. The
Company continues to perform due diligence in seeking information from all
vendors regarding their Year 2000 initiatives. The current scheduled completion
date for all testing and certification for remaining non-mission critical
applications is June 30, 1999.
The current estimated cost to the Company for all Year 2000 activities
is $3.4 million, the majority of which will be capitalized. Incomplete or
untimely compliance would have a material adverse effect on the Company, the
dollar amount of which cannot be accurately quantified because of the inherent
variables and uncertainties involved.
The Company has included contingency and business resumption plans in
its Year 2000 compliance efforts. The Company has identified several potential
replacements in the unlikely event that current software is not functional in
the year 2000. All internal testing and review of mission critical software has
shown to be Year 2000 compliant. Quality assurance review of testing results is
ongoing. In the event the Company encounters operational difficulty (due to
telecommunications or electrical failures) and cannot process data at the
Columbia Operations Center on January 1, 2000, the Company has an agreement with
an outside provider to use its off-site facilities to operate core banking
systems for the purpose of business resumption.
Year 2000 surveys have been sent to all commercial loan customers with
relationships greater than $1 million to assist in assessing their Year 2000
compliance. In addition, an analysis has been performed on the entire loan
portfolio based on Standard Industry Codes to determine if
16
the Company has any concentrations of loans in industries that are considered
high risk due to Year 2000 exposure. In the fourth quarter of 1998, the Company
hosted customer seminars to educate customers in the Company's major markets.
Ongoing branch employee training and customer awareness initiatives will
continue throughout the remainder of the year. In addition, a cash availability
plan has been developed to gauge customer demand for extra cash toward the close
of the year. This plan will undergo regular reviews to adapt to changing
demands.
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 March 31, 1999, the Company had total loans outstanding of $1.9
billion that equaled approximately 91% of the Company's total deposits and
approximately 70% of the Company's total assets. The composition of the
Company's loan portfolio at March 31, 1999 follows: commercial and commercial
mortgage 65%, residential mortgage 19%, consumer 10%, credit card 3%,
construction 2% and lease receivables 1%.
The Company's loans increased $407.2 million, or 27%, to approximately
$1.9 billion at March 31, 1999 from $1.49 billion at March 31, 1998 and
increased $42.6 million from approximately $1.86 billion at December 31, 1998.
Approximately $49 million of residential mortgage loans were sold in the first
quarter of 1999 excluding loans originated by correspondents. Adjusting for the
1999 loan sales, internal loan growth was approximately $91.6 million, or an
annualized rate of 19.7%, during the first quarter of 1999.
The Company had loans to 88 borrowers having principal amounts ranging
from $2 million to $5 million, which loans accounted for $269.8 million, or 14%,
of the Company's loan portfolio at March 31, 1999. The Company had loans to 29
borrowers having principal amounts in excess of $5 million, which loans
accounted for $203.1 million, or 11%, of the Company's loan portfolio at March
31, 1999. At March 31, 1998, the Company had loans to 65 borrowers with
principal amounts ranging from $2 million to $5 million, which accounted for
$201.2 million, or 13%, of the Company's loan portfolio. The Company had loans
to 18 borrowers having principal amounts in excess of $5 million, which loans
accounted for $116.7 million, or 8%, of the Company's loan portfolio at March
31, 1998. 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 three months of 1999, the Company's loans averaged $1.9
billion with a yield of 9.10%, compared with $1.6 billion and a yield of 9.28%
for the same period in 1998. The decline in loan yield was attributable to a
decrease in the prime interest rate of 0.75% in the fourth quarter of 1998
partially offset by an increase in the credit card yield and in loan fee income.
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.
17
ALLOWANCE FOR LOAN LOSSES
Management maintains an allowance for loan losses that 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 inherent 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 probable losses.
The allowance for loan losses totaled $18.1 million, or 1.00% of loans
held for investment net of unearned income at March 31, 1999, compared with
$15.3 million, or 1.13% of loans held for investment net of unearned income at
March 31, 1998. At December 31, 1998, the allowance for loan losses was $17.5
million, or 1.00% of loans held for investment net of unearned income. The
allowance for loan losses as a percentage of nonperforming loans was 891% and
694% as of March 31, 1999 and 1998, respectively. Table 1 presents changes in
the allowance for loan losses.
TABLE 1
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
At and for
At and for the three months the year ended
ended March 31, December 31,
--------------- ------------
1999 1998 1998
- -------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 17,509 $ 16,211 $ 16,211
Purchase accounting acquisitions 0 0 1,822
Valuation allowance for loans purchased 0 0 0
Provision for loan losses 3,411 2,136 11,129
Charge-offs:
Credit cards 1,079 1,109 4,309
Bank loans, leases & Blue Ridge 2,099 2,290 8,466
Recoveries 360 401 1,122
- -------------------------------------------------------------------------------------------------------------
Net charge-offs 2,818 2,998 11,653
- -------------------------------------------------------------------------------------------------------------
Allowance at end of period $ 18,102 $ 15,349 $ 17,509
=============================================================================================================
At March 31, 1999, 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 $749,000. The related
allowance for these impaired loans was $324,000. The average recorded investment
and foregone interest on impaired loans during the three months ended March 31,
1999 was approximately $845,000 and $23,000, respectively. For the three months
ended March 31, 1999, the Company recognized interest income on impaired loans
of $18,000.
18
SECURITIES
At March 31, 1999, the Company's total investment portfolio had a book
value of $371.4 million and a market value of $374.4 million for an unrealized
net gain of approximately $3.0 million. The investment portfolio had a weighted
average maturity of approximately 3.8 years. Securities (i.e., securities held
for investment, securities available for sale and trading securities) averaged
$398.9 million in the first three months of 1999, 26% above the average of
$316.0 million in the first three months of 1998. The increase in the securities
balance was primarily attributable to proceeds from the sale of First Southeast
mortgage loans that were sold in the first quarter of 1998. The average
portfolio yield decreased to 6.05% in the first three months of 1999 from 6.44%
in the first three months of 1998. The portfolio yield decreased as a result of
the decrease in the prime rate in the fourth quarter of 1998. This decline was
slightly offset by a change in the mix of securities. As securities matured,
they were reinvested in higher yielding agencies and mortgage-backed securities.
At March 31, 1999, securities totaled $373.8 million, down $16.2 million from
the $390.0 million invested as of the first quarter end 1998 and down $74.2
million from the December 31, 1998 balance of $448.0 million.
At March 31, 1999, securities available for sale included equity
investments, including 2,528,366 shares of common stock of Affinity (recorded at
its market value of approximately $1.6 million) and 805,000 shares of common
stock of Net.B@nk (recorded at its basis of approximately $671,000). See "EQUITY
INVESTMENTS." The Affinity Warrant, which entitles the Company to purchase an
additional 3,471,340 shares of common stock at a purchase price of $0.0001 per
share, was not included in securities at March 31, 1999.
INTANGIBLE ASSETS AND OTHER ASSETS
The intangible assets balance at March 31, 1999 of $128.8 million was
attributable to goodwill of $115.3 million, core deposit balance premiums of
$10.2 million and credit card intangibles of $3.3 million. In connection with
the Company's credit card sale, which closed on April 30, 1999, the Company
wrote off approximately $6.5 million of intangible assets. The intangible assets
balance at March 31, 1998 of $56.9 million was attributable to goodwill of $48.0
million, core deposit balance premiums of $8.8 million and credit card
intangibles of $121,000. In the last half of 1998, the Company recorded
approximately $45.4 million, $11.7 million and $10.4 million in intangible
assets related to the acquisitions of First National Bank of Pickens County
("First National"), Poinsett Financial Corporation ("Poinsett") and Colonial
Bank of South Carolina, Inc. ("Colonial Bank"), respectively.
At March 31, 1999, other assets included other real estate owned of
$2.7 million and mortgage servicing rights of $23.5 million. At March 31, 1998,
other assets included other real estate owned of $951,000 and mortgage servicing
rights of $22.7 million. The increase is other real estate owned is largely
attributable to one-to-four family residential mortgages associated with the
acquisition of Poinsett.
INTEREST-BEARING LIABILITIES
During the first quarter of 1999, interest-bearing liabilities averaged
$2.0 billion, compared with $1.7 billion in the first quarter of 1998. This
increase resulted principally from acquisitions and internal deposit growth
related to account promotions and sales efforts. The average interest rates were
4.66% and 5.10% in the first three months of 1999 and 1998, respectively. At
March 31,
19
1999, interest-bearing deposits comprised approximately 87% of total deposits
and 89% of interest-bearing liabilities. In the first three months of 1999,
average borrowed funds which includes repurchase agreements and a portion of
Federal Home Loan Bank ("FHLB") advances, totaled $150.8 million compared with
$140.1 million for the same period in 1998. This increase was attributable to an
increase in repurchase agreements from an average of $115.1 million in the first
quarter of 1998 to $136.4 million in 1999. This increase was partially offset by
a decrease in average commercial paper balances. In 1998, the Company stopped
offering commercial paper resulting in a decline in the average balance from
$11.7 million in the first three months of 1998 to zero in the first three
months of 1999. Advances from the FHLB increased to $59.9 million as of March
31, 1999 from $10.0 million at March 31, 1998. At December 31, 1998, FHLB
advances totaled $35.1 million. This increase was primarily due to additional
borrowings from FHLB for the purpose of funding fixed rate commercial loans.
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.
The Company's primary source of funds for loans and investments is its
deposits, which are gathered through the banking subsidiaries' branch network.
Deposits grew 15% to $2.1 billion at March 31, 1999 from $1.8 billion at March
31, 1998. The 1998 acquisitions of First National, Poinsett and Colonial Bank
added approximately $220 million in deposits. Internal growth, particularly from
account and sales promotions, generated the remaining new deposits. During the
first quarter of 1999, total interest-bearing deposits averaged $1.8 billion
with a rate of 4.55%, compared with $1.6 billion with a rate of 4.97% in the
first quarter of 1998. The decline in the rate reflects the Company's efforts to
shift the deposit mix from CDs into lower-yielding transaction accounts. When
the prime interest rate was reduced in the fourth quarter of 1998, the Company
reduced the rate paid on some CDs, which assisted in lowering the overall cost
of deposits. During the first three months of 1999, deposit pricing remained
very competitive, a pricing environment which the Company expects to continue.
During the quarter, the Company opened a branch in the Cayman Islands.
The branch is a "shell" branch of Carolina First Bank, and accordingly, involved
minimal start-up costs. The primary function of the branch is to obtain deposits
from the Eurocurrency interbank markets, which will be utilized in funding
Carolina First Bank's domestic loan portfolio. The bank views this branch
primarily as a vehicle for entrance into a funds market in which it is not
currently active.
Average noninterest-bearing deposits, which increased 30% during the
year, increased to 12.7% of average total deposits in the first three months of
1999 from 11.5% in the first three months of 1998. This increase reflects the
Company's progress in attracting transaction accounts and improving the mix of
acquired deposits.
Time deposits of $100,000 or more represented 13% of total deposits at
both March 31, 1999 and 1998. The Company's large denomination time deposits are
generally from customers within the local market areas of its banks and,
therefore, provide a greater degree of stability than is typically associated
with this source of funds. The Company does not pursue brokered deposits;
however, the Company acquired an immaterial amount of brokered deposits through
its Colonial Bank acquisition.
CAPITAL RESOURCES AND DIVIDENDS
Total shareholders' equity amounted to $348.9 million, or 12.93% of
total assets, at
20
March 31, 1999, compared with $243.4 million, or 10.81% of total assets, at
March 31, 1998. At December 31, 1998, total shareholders' equity totaled $344.4
million, or 12.63% of total assets. The $105.5 million increase in total
shareholders' equity since March 31, 1998 resulted principally from the issuance
of $99.2 million in capital related to acquisitions and the retention of
earnings less cash dividends paid and stock repurchased. In the fourth quarter
of 1998, the Company repurchased 394,874 shares of common stock, which decreased
shareholders' equity $9.8 million, in connection with the acquisition of First
National. In the first quarter of 1999, the Company repurchased 40,000 shares of
common stock. In March 1999, the Company rescinded its share repurchase program
due to the planned purchase of Citizens and Citrus Bank.
Book value per share at March 31, 1999 and 1998 was $15.87 and $13.74,
respectively. Tangible book value per share at March 31, 1999 and 1998 was
$10.01 and $10.53, respectively. Tangible book value was below book value as a
result of the purchase premiums associated with branch acquisitions and the
acquisitions of CF Mortgage, RPGI and five banks (all of which were accounted
for as purchases).
At March 31, 1999, the Company, Carolina First Bank and Carolina First
Bank, F.S.B. were in compliance with each of the applicable regulatory capital
requirements and exceeded the well capitalized requirements. The table below
sets forth various capital ratios for the Company, Carolina First Bank and
Carolina First Bank, F.S.B.
TABLE 2
CAPITAL RATIOS
- ------------------------------------------------------------------------------------------------------
As of Well Capitalized Adequately Capitalized
3/31/99 Requirement Requirement
- ------------------------------------------------------------------------------------------------------
The Company:
Total Risk-based Capital 12.83% n/a n/a
Tier 1 Risk-based Capital 10.71 n/a n/a
Leverage Ratio 8.58 n/a n/a
Carolina First Bank:
Total Risk-based Capital 10.52% 10.0% 8.0%
Tier 1 Risk-based Capital 9.75 6.0 4.0
Leverage Ratio 7.84 5.0 4.0
Carolina First Bank, F.S.B.:
Total Risk-based Capital 13.46 10.0 8.0
Tier 1 Risk-based Capital 12.63 6.0 4.0
Leverage Ratio 7.23 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. The Company
has paid a cash dividend each quarter since the initiation of cash dividends on
February 1, 1994. At the December 16, 1998 meeting, the Board of Directors
approved a $0.09 per share cash dividend on the common stock, which represents
an effective annual increase of approximately 11%. The Company presently intends
to pay a quarterly cash dividend on the Common Stock; however, future dividends
will depend upon the Company's financial performance and capital requirements.
21
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, such as credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and could potentially have the largest material effect
on the Company's financial condition and results of operations. Other types of
market risks, such as foreign currency exchange risk and commodity price risk,
do not arise in the normal course of the Company's business activities.
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 (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 as of March 31, 1999, the Company is positioned so that
net interest income will increase $5.4 million if interest rates rise in the
next twelve months and will decrease $5.8 million if interest rates decline in
the next twelve months. Computation of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates and loan prepayments, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the Company could undertake in response to changes in
interest rates.
As of March 31, 1999, there was no substantial change from the interest
rate risk sensitivity analysis for various changes in interest rates calculated
as of December 31, 1998. The foregoing disclosures related to the market risk of
the Company should be read in conjunction with the Company's audited
consolidated financial statements, related notes and management's discussion and
analysis of financial condition and results of operations for the year ended
December 31, 1998 included in the Company's 1998 Annual Report on Form 10-K.
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
March 31, 1999, on a cumulative basis through twelve months, rate-sensitive
liabilities exceeded rate-sensitive assets, resulting in a liability sensitive
position of $550.4 million. This liability sensitive position is largely
attributable to assuming that the Company's deposit transaction accounts, which
totaled $787 million at March 31, 1999, will reprice within one year. This
assumption may or may not hold true as the Company believes its transaction
accounts are generally not price sensitive.
22
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. The
primary source of liquidity for the Company's holding company is dividends from
the banking and non-banking subsidiaries.
The Company's banking subsidiaries have cash flow requirements
involving withdrawals of deposits, extensions of credit and payment of operating
expenses. The principal sources of funds for liquidity purposes for the banking
subsidiaries are customers' deposits, principal and interest payments on loans,
loan sales or securitizations, securities available for sale, maturities of
securities, temporary investments and earnings. The subsidiary banks' liquidity
is also enhanced by the ability to acquire new deposits through the established
branch network of 70 branches in South Carolina and 4 branches in Florida. The
liquidity ratio is an indication of a company's ability to meet its short term
funding obligations. At March 31, 1999, Carolina First Bank's liquidity ratio
was approximately 18% and Carolina First Bank, F.S.B.'s liquidity ratio was
approximately 34%. The liquidity needs of the banking subsidiaries are a factor
in developing their deposit pricing structure; deposit pricing may be altered to
retain or grow deposits if deemed necessary. Carolina First Bank and Carolina
First Bank, F.S.B. have access to borrowing from the FHLB and maintain unused
short-term lines of credit from unrelated banks. At March 31, 1999, the banking
subsidiaries had unused short-term lines of credit totaling approximately $55
million (which are withdrawable at the lender's option). At March 31, 1999,
unused borrowing capacity from the FHLB totaled approximately $161 million with
an outstanding balance of $60 million. Management believes that these sources
are adequate to meet its liquidity needs.
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. The Loan Committee of the Board of Directors reviews loans
in this special review status monthly.
As demonstrated by the following analytical measures of asset quality,
management believes the Company has effectively managed its credit risk. Net
loan charge-offs, including credit card receivables, totaled $2.8 million and
$3.0 million in the first three months of 1999 and 1998, respectively, or 0.61%
and 0.76%, respectively, as an annualized percentage of average loans. Excluding
credit card receivables, annualized net loan charge-offs as a percentage of
average loans were 0.39% and 0.50% during the first three months of 1999 and
1998, respectively. In the first three months of both 1999 and 1998, net
charge-offs for credit cards totaled $1.1 million.
23
The majority of the increase in accruing loans past due 90 days is attributable
to one-to-four family residential loans acquired through mergers.
TABLE 3
NONPERFORMING ASSETS AND PAST DUE LOANS
($ in thousands)
March 31, December 31,
--------- ------------
1999 1998 1998
- ----------------------------------------------------------------------------------------------
Nonaccrual loans $ 749 $ 930 $ 753
Restructured loans 1,283 1,283 1,283
- ----------------------------------------------------------------------------------------------
Total nonperforming loans 2,032 2,213 2,036
Other real estate 2,691 951 3,168
- ----------------------------------------------------------------------------------------------
Total nonperforming assets 4,723 3,164 5,204
==============================================================================================
Nonperforming assets as a % of
loans and foreclosed property 0.26% 0.23% 0.30%
Net loan charge-offs as a % of
average loans (annualized) 0.61 0.76 0.71
Acccruing loans past due 90 days 5,615 4,608 7,023
Allowance for loan losses to
nonperforming loans 8.91x 6.94x 8.60x
==============================================================================================
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.
24
PART II
ITEM 1 LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of its business. In the opinion of
management based on consultation with legal counsel, any outcome of
such pending litigation would not materially affect the Company's
consolidated financial position or results of operations.
On November 4, 1996, a derivative shareholder action was filed in
Greenville County Court of Common Pleas against the Company, the
majority of the Company's and Carolina First Bank's directors and
certain executive and other officers. The named plaintiffs are the
Company by and through certain minority shareholders. The Company filed
a motion to dismiss with respect to all claims in this complaint, which
was granted in December 1997. Plaintiffs have appealed the grant of the
motion to dismiss. Plaintiffs allege as causes of action the following:
conversion of corporate opportunity; breach of fiduciary duty and
constructive fraud; civil conspiracy; and mutual mistake. The factual
basis upon which these claims are made generally involves the payment
to Company officers and other individuals of a bonus in stock held by
the Company in Affinity Technology Group, Inc. (as reward for their
efforts in connection with the Company's procurement of stock in
Affinity Technology Group, Inc.), statements to former shareholders of
Midlands National Bank in connection with the Company's acquisition of
that bank, and alleged mismanagement by certain executive officers
involving financial matters. The complaint seeks damages for the
benefit of the Company aggregating $41 million and rescission of the
Affinity Technology Group, Inc. bonus.
In an action brought by the same attorneys who brought the
above-mentioned derivative action, on December 31, 1996, certain
individuals filed a class action lawsuit against the Company, Carolina
First Bank, and a number of officers and directors of the Company and
Carolina First Bank. In connection with the judge's granting the motion
to dismiss in the above-referenced derivative action, the plaintiffs'
attorneys withdrew this lawsuit, without prejudice.
ITEM 2 CHANGE IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On April 21, 1999, the Company held its 1999 Annual Meeting of
Shareholders. The results of the 1999 Annual Meeting of Shareholders
follow.
25
PART II
(CONTINUED)
PROPOSAL #1 - ELECTION OF DIRECTORS
The shareholders approved setting the number of Company directors at
12. The following persons were elected as Directors with the votes
indicated.
Voting shares in favor
---------------------- Withheld
# % Authority
--- --- ---------
William S. Hummers III 16,522,997 99.61% 64,362
Charles B. Schooler 16,528,543 99.65% 58,816
Eugene E. Stone IV 16,524,984 99.62% 62,375
Mack I. Whittle, Jr. 16,514,195 99.56% 73,164
Judd B. Farr, C. Claymon Grimes, Jr., M. Dexter Hagy, Vernon E.
Merchant, Jr., H. Earle Russell, Jr., Elizabeth P. Stall, William R.
Timmons, Jr. and David C. Wakefield III continued in their present
terms as directors.
ITEM 5 OTHER INFORMATION
Pending Acquisition
-------------------
In March 1999, the Company signed a definitive merger agreement with
Citrus Bank, a Florida state-chartered bank headquartered in Orlando,
Florida. At March 31, 1999, Citrus Bank had total assets of
approximately $248 million and operated through eight locations. Under
the terms of the agreement, the Company will issue approximately 3.1
million shares of the Company's common stock, which is subject to
change based upon the average closing price of the Company's common
stock for the 30 trading days preceding the closing date. The
transaction is subject to regulatory and shareholder approval and is
expected to close in the third quarter. It will be accounted for using
the pooling-of-interests method of accounting.
Pending Sale of Branches
------------------------
In March 1999, Carolina First Bank signed a definitive agreement to
sell three branch offices located in Ridgeland, Hardeeville and
Abbeville, South Carolina to First National Bank, a subsidiary of First
National Corporation. The branches have approximately $45 million in
deposits and approximately $13 million in loans. The transaction is
expected to close in the third quarter and is subject to regulatory
approval, among other conditions.
Completed Acquisition
---------------------
On April 23, 1999, the Company acquired all the outstanding shares of
Citizens, a national bank headquartered in Crescent City, Florida in
exchange for 507,931 shares of the Company's common stock. This
transaction was accounted for using the pooling-of-interests method of
accounting and was valued, as of the date of closing, at approximately
$14.1 million. At March 31, 1999, Citizens had total assets, loans and
deposits of
26
PART II
(CONTINUED)
approximately $59 million, $37 million and $53 million, respectively,
and operated through four branch locations. Citizens operates as a
wholly-owned subsidiary of the Company.
On April 30, 1999, the Company entered into an agreement with First
USA, N.A. pursuant to which it sold credit card receivables totaling
approximately $112 million. The credit cards sold include approximately
$58 million in the Company's off-balance sheet credit card trust. Any
gain or loss recorded in connection with this transaction is not
expected to be material. The Company will continue to service these
credit cards until the end of August 1999. In connection with the sale,
the Company's credit card trust will be terminated effective May 17,
1999. In addition, the Company entered into a partnership agreement
with an affiliate of the purchaser to offer credit card products to its
retail customers. The Company will continue to originate business
credit cards in its market areas and retained its business credit card
receivables which total approximately $2.5 million.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Reorganization entered into as of March 18,
1999 by and between Carolina First Corporation and Citrus Bank:
Incorporated by reference to Exhibit 2.1 of the Company's
Registration Statement on Form S-4, Commission File No. 333-77492.
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
The Company filed Current Reports on Form 8-K dated February 17,
1999 and March 18, 1999.
27
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
----------------------------
William S. Hummers III
Executive Vice President