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, 2001
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
-------
THE SOUTH FINANCIAL GROUP, INC.
-------------------------------
(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
--------------
Carolina First Corporation
- --------------------------
(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, 2001 was 42,562,034.
THE SOUTH FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
March 31,
-----------------------------
2001 2000 December 31,
(Unaudited) (Unaudited) 2000
------------ ----------- -------------
Assets
Cash and due from banks $ 133,884 $ 152,673 $ 156,711
Interest-bearing bank balances 31,248 16,242 26,721
Federal funds sold - 18,247 475
Securities
Trading 1,439 3,097 5,004
Available for sale 891,626 860,542 816,773
Held for investment (market value $65,609, $67,391 and
$78,376, respectively) 71,473 67,972 77,767
---------- ----------- ----------
Total securities 964,538 931,611 899,544
---------- ----------- ----------
Loans
Loans held for sale 17,974 39,502 12,630
Loans held for investment 3,717,522 3,372,660 3,724,088
Less unearned income 1,072 4,391 1,536
Less allowance for loan losses 43,741 35,862 43,024
---------- ----------- ----------
Net loans 3,690,683 3,371,909 3,692,158
---------- ----------- ----------
Premises and equipment, net 109,968 94,763 112,863
Accrued interest receivable 36,938 33,867 36,879
Intangible assets 105,501 112,337 107,254
Other assets 204,992 137,283 187,949
---------- ----------- ----------
$5,277,752 $ 4,868,932 $5,220,554
========== =========== ==========
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing $ 469,272 $ 514,126 $ 491,109
Interest-bearing 3,347,108 3,093,627 3,403,553
---------- ---------- ----------
Total deposits 3,816,380 3,607,753 3,894,662
Borrowed funds 845,911 682,328 748,715
Subordinated notes 36,767 36,711 36,728
Accrued interest payable 41,945 26,064 35,168
Other liabilities 46,084 29,867 36,628
---------- ---------- ----------
Total liabilities 4,787,087 4,382,723 4,751,901
---------- ---------- ----------
Minority Interest in Consolidated Subsidiary 12,673 - -
---------- ---------- ----------
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 42,526,005, 42,999,809
and 42,460,358 shares, respectively 42,526 43,000 42,460
Surplus 330,882 339,577 332,095
Retained earnings 94,087 106,871 90,131
Guarantee of employee stock ownership plan debt and nonvested
restricted stock (2,281) (5,086) (2,593)
Accumulated other comprehensive income, net of tax 12,778 1,847 6,560
---------- ---------- ----------
Total shareholders' equity 477,992 486,209 468,653
---------- ---------- ----------
$5,277,752 $4,868,932 $5,220,554
========== ========== ==========
See accompanying notes to consolidated financial statements.
1
THE SOUTH FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except share data) (Unaudited)
Three Months Ended
March 31,
-------------------------
2001 2000
-------- --------
Interest Income
Interest and fees on loans $ 85,406 $ 75,634
Interest and dividends on securities:
Taxable 13,497 13,603
Exempt from Federal income taxes 1,010 966
-------- --------
Total interest and dividends on securities 14,507 14,569
Interest on short-term investments 608 508
-------- --------
Total interest income 100,521 90,711
-------- --------
Interest Expense
Interest on deposits 44,906 35,624
Interest on borrowed funds 12,669 10,667
-------- --------
Total interest expense 57,575 46,291
-------- --------
Net interest income 42,946 44,420
Provision for Loan Losses 4,508 3,945
-------- --------
Net interest income after provision for loan losses 38,438 40,475
-------- --------
Noninterest Income
Service charges on deposit accounts 4,368 4,261
Mortgage banking income 2,419 1,344
Fees for investment services 1,243 1,358
Gain on equity investments 821 2,278
Gain on sale of securities 482 71
Loss on disposition of assets and liabilities (262) -
Other 3,844 3,402
------- --------
Total noninterest income 12,915 12,714
------- --------
Noninterest Expenses
Personnel expense 18,694 19,058
Occupancy 3,663 3,638
Furniture and equipment 3,398 2,681
Amortization of intangibles 1,570 1,608
Restructuring and merger-related recoveries (413) -
Impairment loss from write-down of assets 215 -
System conversion costs - 380
Other 11,031 10,304
------- --------
Total noninterest expenses 38,158 37,669
------- --------
Income before income taxes, minority interest and
cumulative effect of change in accounting principle 13,195 15,520
Income taxes 4,750 5,117
------- --------
Income before minority interest and cumulative effect
of change in accounting principle 8,445 10,403
Minority interest in consolidated subsidiary, net of tax (95) -
------- --------
Income before cumulative effect of change in accounting principle 8,350 10,403
Cumulative effect of change in accounting principle, net of tax 282 -
------- --------
Net income $ 8,632 $ 10,403
======= ========
Average Common Shares Outstanding, Basic 42,424,190 42,944,844
Average Common Shares Outstanding, Diluted 43,117,270 43,629,026
Per Common Share - Basic and Diluted:
Net income before cumulative effect of change in accounting principle $ 0.19 $ 0.24
Cumulative effect of change in accounting principle 0.01 -
------- --------
Net income $ 0.20 $ 0.24
======= ========
Cash dividends declared per common share $ 0.11 $ 0.10
======= ========
See accompanying notes to consolidated financial statements.
2
THE SOUTH FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
Retained Accumulated
Shares of Earnings Other
Common Common and Comprehensive
Stock Stock Surplus Other* Income Total
-------------- ---------- ------------- ------------- ---------------- ------------
Balance, December 31, 1999 43,326,754 $ 43,327 $ 345,309 $ 95,853 $ 16,101 $ 500,590
Net income - - - 10,403 - 10,403
Other comprehensive loss,
net of tax of $7,557 - - - - (14,254) (14,254)
------------
Comprehensive loss - - - - - (3,851)
------------
Cash dividends declared
($0.10 per common share) - - - (3,838) - (3,838)
Common stock activity:
Repurchase of stock (524,600) (525) (7,783) - - (8,308)
Dividend reinvestment plan 28,816 29 422 - - 451
Employee stock purchase plan 4,238 4 61 - - 65
Restricted stock plan 89,793 90 1,269 (726) - 633
Exercise of stock options
and stock warrants 74,808 75 246 - - 321
Miscellaneous - - 53 93 - 146
-------------- ----------- ----------- ----------- -------------- -----------
Balance, March 31, 2000 42,999,809 $ 43,000 $ 339,577 $ 101,785 $ 1,847 $ 486,209
============== =========== =========== =========== ============== ===========
Balance, December 31, 2000 42,460,358 $ 42,460 $ 332,095 $ 87,538 $ 6,560 $ 468,653
Net income - - - 8,632 - 8,632
Other comprehensive income,
net of tax of $3,018 - - - - 6,218 6,218
------------
Comprehensive income - - - - 14,850
------------
Cash dividends declared
($0.11 per common share) - - - (4,677) - (4,677)
Common stock activity:
Repurchase of stock (60,000) (60) (1,872) - - (1,932)
Dividend reinvestment plan 55,144 55 681 - - 736
Employee stock purchase plan 4,432 5 54 - - 59
Restricted stock plan (2,711) (3) (38) 230 - 189
Exercise of stock options
and stock warrants 68,782 69 (25) - - 44
Miscellaneous - - (13) 83 - 70
-------------- ----------- ----------- ----------- -------------- -----------
Balance, March 31, 2001 42,526,005 $ 42,526 $ 330,882 $ 91,806 $ 12,778 $ 477,992
============== =========== =========== =========== ============== ===========
* Other includes guarantee of employee stock ownership plan debt and nonvested restricted stock.
See accompanying notes to consolidated financial statements.
3
THE SOUTH FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, (UNAUDITED)
Three Months Ended
March 31,
---------------------------
2001 2000
------------- -------------
Cash Flows From Operating Activities
Net income $ 8,632 $ 10,403
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Depreciation 2,365 2,124
Amortization of intangibles 1,570 1,608
Amortization of debt issuance costs 39 39
Provision for loan losses 4,508 3,945
Impairment loss from write-down of assets 215 -
Loss on changes in fair value of hedges 97 -
Loss on disposition of assets and liabilities 262 -
Gain on sale of securities (482) (71)
Gain on equity investments (821) (2,278)
Gain on sale of mortgage loans (1,303) (233)
Minority interest in consolidated subsidiary 95 -
Cumulative effect of change in accounting principle (282) -
Trading account assets, net 3,643 1,646
Originations of mortgage loans held for sale (79,510) (69,599)
Sale of mortgage loans held for sale 74,278 38,270
Other assets, net (14,778) 2,482
Other liabilities, net 12,466 8,510
------------- -------------
Net cash provided by (used for) operating activities 10,994 (3,154)
------------- -------------
Cash Flow From Investing Activities
Increase (decrease) in cash realized from
Sale of securities available for sale 136,732 3,498
Maturity or call of securities available for sale 129,049 13,285
Maturity or call of securities held for investment 6,294 6,351
Purchase of securities available for sale (217,281) (11,156)
Purchase of securities held for investment - (2,863)
Origination of loans, net (111,011) (86,635)
Disposition of equity investments 85 2,327
Capital expenditures, net 248 (7,516)
------------- -------------
Net cash used for investing activities (55,884) (82,709)
------------- -------------
Cash Flow From Financing Activities
Increase (decrease) in cash realized from
Deposits, net (78,550) 126,102
Borrowed funds, net 97,196 (13,940)
Net proceeds from issuance of minority interest stock 12,673 -
Cash dividends paid (4,671) (3,871)
Cash dividends received (paid) on minority interest 301 -
Repurchase of common stock (1,932) (8,308)
Other common stock activity 1,098 1,616
------------- -------------
Net cash provided by financing activities 26,115 101,599
------------- -------------
Net change in cash and due from banks (18,775) 15,736
Cash and cash equivalents at beginning of year 183,907 171,426
------------- -------------
Cash and cash equivalents at end of period $ 165,132 $ 187,162
============= =============
See accompanying notes to consolidated financial statements.
4
THE SOUTH FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The foregoing unaudited consolidated financial statements include the accounts
of The South Financial Group, Inc. ("The South Group") and all of its
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation, and all adjustments considered necessary for a fair
presentation of the results for interim periods presented have been included
(such adjustments are normal and recurring in nature). All prior period
financial information has been restated to include historical information for
companies acquired in transactions accounted for as pooling-of-interests.
Certain prior year amounts have been reclassified to conform with 2001
presentations.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
The South Group's annual report to shareholders on Form 10-K for the year ended
December 31, 2000.
(2) COMPREHENSIVE INCOME
Comprehensive income is the change in The South Group's equity during the period
from transactions and other events and circumstances from non-owner sources.
Total comprehensive income consists of net income and other comprehensive
income. The South Group's other comprehensive income and accumulated other
comprehensive income are comprised of unrealized gains and losses on certain
investments in debt, equity securities, and derivatives that qualify as cash
flow hedges to the extent that the hedge is effective.
The following summarizes other comprehensive income (loss), net of tax (in
thousands) for the three months ended March 31:
2001 2000
---- ----
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the year $ 10,163 $ (19,538)
Income tax (expense) benefit (3,356) 6,838
Less: reclassification adjustment for gains included in
net income (467) (2,273)
Income tax benefit 168 719
Unrealized losses on cash flow hedges:
Cumulative effect of change in accounting principle (70) -
Income tax benefit 26 -
Unrealized loss on change in fair values (390) -
Income tax benefit 144 -
-------- ---------
$ 6,218 $ (14,254)
======== ==========
5
(3) STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash equivalents include due from banks,
interest-bearing bank balances and Federal funds sold.
The following summarizes supplemental cash flow data (in thousands) for the
three months ended March 31:
2001 2000
---- ----
Interest paid $ 50,798 $ 43,081
Income taxes paid (refunded) (5,826) 495
Significant non-cash transactions are summarized as follows:
Securitization of mortgage loans 112,174 -
Loans transferred to other real estate owned 2,129 460
(4) EQUITY INVESTMENTS
At March 31, 2001, securities available for sale included the following equity
investments recorded at the estimated fair value indicated: 1,175,000 shares of
common stock of Net.Bank, Inc. recorded at approximately $10.3 million,
4,876,340 shares of common stock of Affinity Technology Group, Inc. recorded at
approximately $439,000, investments in community banks recorded at approximately
$12.4 million, and 24,103 shares of common stock of Concord EFS Inc. recorded at
approximately $785,000.
At March 31, 2001, The South Group owned 24,103 shares of Concord EFS Inc., a
transaction processing company, following its February 2001 acquisition of Star
Systems, Inc., an electronic payment network. During the first quarter 2001, The
South Group recognized a $758,000 gain associated with marking its investment to
estimated fair value as of the Concord EFS Inc. acquisition date.
(5) MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
On February 22, 2001, Carolina First Bank, a subsidiary of The South Group, sold
132 shares of the Carolina First Mortgage Loan Trust Series 2000A Cumulative
Fixed Rate Preferred Shares (the "Series A Trust Preferred Stock") to an
institutional buyer. The Series A Preferred Stock has a stated value of $100,000
per share. The South Group received proceeds of $12.7 million, net of issuance
costs. This net amount is reported as minority interest in consolidated
subsidiary on the balance sheet.
Dividends on the Series A Trust Preferred Stock are cumulative, and will accrue
whether or not the Carolina First Mortgage Loan Trust has earnings, whether or
not there are funds legally available for the payment of such dividends and
whether or not such dividends are declared. The dividends are computed at a rate
per annum equal to 11.125% of the stated value and are payable quarterly.
6
The dividends earned by the minority interest shareholder from February 22, 2001
to March 31, 2001 amounted to $95,000 (net of related income taxes of $56,000)
and have been expensed on The South Group's income statement.
(6) COMMITMENTS AND CONTINGENT LIABILITIES
The South Group is subject to various legal proceedings and claims which arise
in the ordinary course of its business. Any litigation is vigorously defended by
The South Group and, in the opinion of management based on consultation with
external legal counsel, any outcome of such current litigation would not
materially affect The South Group's consolidated financial position or results
of operations.
On February 28, 2000, plaintiff John W. Dickens filed a breach of contract
lawsuit against Anchor Financial, subsequently acquired by The South Group, in
the Court of Common Pleas for the Fifth Judicial Circuit. The plaintiff's
complaint based on an employment agreement sought compensation, other benefits,
and actual and punitive damages for defamation in excess of $5 million. The
plaintiff was an employee of Bailey Financial Corporation, which merged with
Anchor Financial on April 9, 1999. Following the merger, the plaintiff worked
for Anchor Financial until the termination of his employment on December 16,
1999. The South Group has filed counterclaims denying the allegations and citing
parachute payment limitations as specified in Section 280G of the Internal
Revenue Code. On October 3, 2000, the court ordered mandatory mediation. The
parties participated in mediation on December 22, 2000. At the mediation, The
South Group's position was that The South Group's exposure should be limited to
the largest severance payment permitted under Internal Revenue Code Section
280G. The mediation did not produce an agreement among parties. The South Group
does not expect any settlement to be material.
On November 4, 1996, a derivative shareholder action was filed in the South
Carolina Circuit Court for Greenville County against The South Group and several
of its officers. The complaint was subsequently amended several times. The
amended complaint names as additional defendants the majority of the directors
of The South Group and Carolina First Bank. The named plaintiffs in the amended
complaints are The South Group, pursuant to Section 33-7-400 of the South
Carolina Code of Laws, by and through several named minority shareholders.
Plaintiffs allege four causes of action based generally on the payment to the
defendant officers of a bonus in stock held by the Company in Affinity
Technology Group, Inc. ("Affinity") as a reward for their efforts in connection
with the Affinity investment, and other matters. The complaint seeks damages for
the benefit of The South Group in the amount of $32 million. The South Group
believes that this lawsuit is without merit and has defended it vigorously. The
trial court granted the Company's motion to dismiss the lawsuit on November 26,
1997. The plaintiffs appealed. On November 1, 2000, the South Carolina Court of
Appeals affirmed the dismissal of the lawsuit. The plaintiffs have sought
further review by the South Carolina Supreme Court.
On March 2, 1998, plaintiff Charlesetta Crockett filed a lawsuit in the South
Carolina Circuit Court for Saluda County, alleging that her son and two former
officers of Midlands National Bank, prior to its merger with Carolina First
Bank, placed mortgages on her property without her knowledge or consent. The
plaintiff complains that Carolina First Bank later learned that the mortgages
7
were forged but did not cancel the mortgages, and instead conveyed them to the
two former Midlands National Bank officers. The plaintiff seeks to have the
mortgages set aside and to quiet her title to the property; she also seeks
actual and punitive damages and statutory penalties in unspecified amounts.
Carolina First Bank filed its Answer on October 30, 1998, denying any liability
to the plaintiff, and has defended the suit vigorously. The case is still in the
discovery phase and has not been set for trial.
(7) IMPAIRMENT OF ASSETS
Based on The South Group's acquisition activity, internal growth, and
realignment plans, certain properties will not be used for future growth.
Accordingly, The South Group reviewed for impairment long-lived assets related
to abandoned properties at Carolina First Bank. As a result of this review, in
the third quarter of 2000, the Company recorded a pre-tax impairment loss from
the write-down of assets totaling $3,869,000. The impaired assets, which were
not sold as of March 31, 2001, were written down to their net realizable value
and classified as assets held for disposal. During the first quarter of 2001,
The South Group recorded an additional impairment loss of $215,000 to update the
estimated net realizable value for the impaired assets. The impairment loss
included $82,000 for the write-down of land to fair value and $133,000 for
adjustments related to lease termination fees for four abandoned locations. As
of March 31, 2001, assets held for disposal totaled $1,270,000.
(8) PER SHARE INFORMATION
Basic and diluted earnings per share have been computed based upon net income in
the accompanying consolidated statements of income divided by the weighted
average common shares outstanding or assumed to be outstanding as summarized
below for the three months ended March 31.
2001 2000
---- ----
Basic:
Average common shares outstanding (denominator) 42,424,190 42,944,844
========== ==========
Diluted:
Average common shares outstanding (denominator) 42,424,190 42,944,844
Dilutive common stock options and warrants 693,080 684,182
---------- ----------
Average diluted shares outstanding 43,117,270 43,629,026
========== ==========
(9) ACCOUNTING FOR DERIVATIVE AND HEDGING ACTIVITIES
Effective January 1, 2001, The South Group adopted the provisions of Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS No. 137 and
138, which establishes accounting and reporting standards for derivatives and
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the balance sheet, and measure those instruments at
fair value. Changes in the fair value of those derivatives are reported in
current earnings or other comprehensive income depending on the purpose for
which the derivative is held and whether the derivative qualifies for hedge
accounting.
8
The South Group has the following derivative instruments which were recorded on
The South Group's consolidated balance sheet at January 1, 2001: interest rate
swap agreements, a warrant to purchase shares of common stock of Affinity
Technology Group, Inc. ("Affinity Warrant"), fixed rate conforming residential
mortgage loan commitments, and commitments to sell fixed rate conforming
residential loans. The interest rate swap agreements and loan sale commitments
are used for asset/liability and interest rate risk management purposes. The
South Group has identified no embedded derivative instruments requiring separate
accounting treatment.
The South Group has interest rate swap agreements that qualify as cash flow
hedges and those that qualify as fair value hedges. Fair value adjustments for
interest rate swap agreements that qualify as fair value hedges are recorded
through the income statement. Fair value adjustments for interest rate swap
agreements that qualify as cash flow hedges are recorded through other
comprehensive income in shareholders' equity to the extent that the hedge is
effective. Any ineffective portion of the cash flow hedges will be recorded
through the income statement.
The South Group enters into interest rate swap agreements, classified as fair
value hedges or cash flow hedges, to manage interest rate risk. Fair value
hedges are used to increase funding sources with variable interest rates. When
demand for variable rate loans increases, The South Group attempts to increase
its use of variable rate funding sources to reduce interest rate risk. The South
Group uses cash flow hedges to hedge interest rate risk associated with variable
rate borrowings.
The Affinity Warrant, fixed rate conforming residential mortgage loan
commitments and commitments to sell fixed rate conforming residential loans do
not qualify for hedge accounting so their fair value adjustments are recorded
through the income statement.
The cumulative effect of adopting SFAS No. 133 resulted in a gain of $282,000
(net of related income taxes of $152,000) reported in the statement of income.
This gain was associated with recording the Affinity Warrant on the balance
sheet at its fair value of $434,000 on January 1, 2001. The fair value of
interest rate swap agreements that qualify as cash flow hedges, which amounted
to a loss of $70,000 as of January 1, 2001, was recorded on the balance sheet as
a charge of $44,000 (net of related taxes of $26,000) to other comprehensive
income. The fair value of interest rate swap agreements that qualify as fair
value hedges, which totaled $101,000 as of January 1, 2001, was recorded on the
balance sheet as a derivative asset, included in other assets, with a
corresponding adjustment to deposits. The fair value of loan commitments was
immaterial at January 1, 2001.
On February 27, 2001, The South Group exercised the Affinity Warrant and
reclassified the derivative asset as securities available for sale based on the
fair value as of the exercise date. A $90,000 loss for the change in the fair
value from January 1, 2001 to the exercise date was recorded in other
noninterest expenses.
During the first quarter 2001, The South Group entered into a cross currency
exchange agreement to convert the loan interest payments from a foreign currency
into U.S. dollars. This agreement is considered to be a basis swap that does not
qualify for hedge accounting so fair value adjustments are recorded through the
income statement. For the three months ended March 31, 2001, a loss of $7,000
was recognized in noninterest expenses for the change in fair value.
9
For the three months ended March 31, 2001, changes in the fair value for
interest rate swaps that qualify as cash flow hedges totaled a loss of $246,000
(net of related income tax benefit of $144,000), which was recorded through
other comprehensive income. The ineffective portion was immaterial for the three
months ended March 31, 2001.
At March 31, 2001, the net fair value of derivative assets, which included
interest rate swap agreements and a cross currency exchange agreement, totaled
$11,000 and was included in other assets on the balance sheet. At March 31,
2001, loan commitments included commitments to originate fixed rate conforming
loans, which totaled $59.2 million, and commitments to sell fixed rate
conforming loans, which totaled $51.8 million. The fair value of these
commitments was immaterial at March 31, 2001.
(10) BUSINESS SEGMENTS
The South Group has four wholly-owned operating subsidiaries which are evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and assess performance. Two of these subsidiaries, by virtue of
exceeding certain quantitative thresholds, are reportable segments. The
reportable segments, Carolina First Bank and Citrus Bank, engage in general
banking business focusing on commercial, consumer and mortgage lending to small
and middle market businesses and consumers in their market areas. The reportable
segments also provide demand transaction accounts and time deposit accounts to
businesses and individuals. Carolina First Bank offers products and services
primarily to customers in South Carolina and coastal North Carolina. Citrus Bank
offers products and services primarily to customers in its market areas in
northern and central Florida. Revenues for Carolina First Bank and Citrus Bank
are derived primarily from interest and fees on loans, interest on investment
securities and service charges on deposits. No single customer accounts for a
significant amount of the revenues of either reportable segment.
The South Group evaluates performance based on budget to actual comparisons and
segment profits. The accounting policies of the reportable segments are the same
as those described in The South Group's Annual Report on Form 10-K for the year
ended December 31, 2000.
Segment information for the three months ended March 31, 2001 and 2000 is shown
in the table below (in thousands). The "Other" column includes all other
business activities that did not meet the quantitative thresholds and therefore
are not shown as a reportable segment.
10
Carolina Citrus Eliminating
First Bank Bank Other Entries Total
March 31, 2001
Income statement data
Interest income $ 88,782 $ 12,160 $ 660 $ (1,081) $ 100,521
Interest expense 50,434 6,754 1,468 (1,081) 57,575
Net interest income 38,348 5,406 (808) - 42,946
Provision for loan losses 3,436 960 112 - 4,508
Noninterest income 9,490 534 16,743 (13,852) 12,915
Noninterest expense 32,844 4,647 14,501 (13,834) 38,158
Amortization 1,517 - 53 - 1,570
Net income 7,431 214 1,005 (18) 8,632
Balance sheet data
Total assets $ 4,693,994 $ 620,223 $ 584,270 $(620,735) $ 5,277,752
Loans - net of unearned income 3,242,411 485,214 6,799 - 3,734,424
Allowance for loan losses 37,025 6,187 529 - 43,741
Intangibles 103,933 - 1,568 - 105,501
Deposits 3,343,133 485,704 - (12,457) 3,816,380
March 31, 2000
Income statement data
Interest income $ 81,969 $ 8,353 $ 1,261 $ (872) $ 90,711
Interest expense 42,873 3,299 991 (872) 46,291
Net interest income 39,096 5,054 270 - 44,420
Provision for loan losses 2,980 530 435 - 3,945
Noninterest income 8,372 500 12,975 (9,133) 12,714
Noninterest expense 31,662 4,335 10,733 (9,061) 37,669
Amortization 1,555 - 53 - 1,608
Net income 7,979 446 2,050 (72) 10,403
Balance sheet data
Total assets $ 4,449,646 $ 385,601 $ 489,285 $(455,600) $ 4,868,932
Loans - net of unearned income 3,067,053 324,808 15,910 - 3,407,771
Allowance for loan losses 31,016 4,136 710 - 35,862
Intangibles 110,559 - 1,778 - 112,337
Deposits 3,266,461 347,828 - (6,536) 3,607,753
(11) 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL 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 The South Financial Group, Inc. ("The South Group") on Form 10-K for
the year ended December 31, 2000. Results of operations for the three month
period ended March 31, 2001 are not necessarily indicative of results that may
be attained for any other period.
The South Group, a South Carolina corporation headquartered in Greenville, South
Carolina, is a financial institution holding company, which commenced banking
operations in December 1986, and currently conducts business through 74
locations in South Carolina, 5 locations in North Carolina and 15 locations in
northern and central Florida. The South Group operates through the following
principal subsidiaries: Carolina First Bank, a South Carolina state-chartered
commercial bank; Citrus Bank, a Florida state-chartered commercial bank; and
Carolina First Mortgage Company ("CF Mortgage"), a mortgage banking company.
Through its subsidiaries, The South Group 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.
Prior year amounts, except cash dividends declared per common share, have been
restated to reflect the June 6, 2000 merger with Anchor Financial Corporation
("Anchor Financial"), the largest merger in The South Group's history. The
merger was accounted for as a pooling-of-interests. Percentage calculations
contained herein have been calculated based upon actual, not rounded, results.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995) to assist in the understanding
of anticipated future operating and financial performance, growth opportunities,
growth rates, and other similar forecasts and statements of expectations. These
forward-looking statements reflect current views, but are based on assumptions
and are subject to risks, uncertainties and other factors, which may cause
actual results to differ materially from those in such statements. These factors
include, but are not limited to, the following: risks from changes in economic,
monetary policy and industry conditions; changes in interest rates, deposit
rates, and the net interest margin; market risk; inflation; risks inherent in
making loans including repayment risks and value of collateral; loan growth;
adequacy of the allowance for loan losses and the assessment of problem loans;
fluctuations in consumer spending; the demand for The South Group's products and
services; dependence on senior management; technological changes; ability to
increase market share; expense projections; estimates of impairment loss;
acquisitions; risks, realization of costs savings, and total financial
performance associated with The South Group's merger with Anchor Financial
Corporation ("Anchor Financial"); changes in accounting policies and practices;
costs and effects of litigation; and recently-enacted or proposed legislation.
Such forward-looking statements speak only as of the date on which such
statements are made. The South Group 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.
12
In addition, certain statements in future filings by The South Group with the
Securities and Exchange Commission, in press releases and in oral and written
statements made by or with the approval of The South Group which are not
statements of historical fact constitute forward-looking statements.
EARNINGS REVIEW
OVERVIEW
Net income for the three months ended March 31, 2001 was $8.6 million, or $0.20
per diluted share. For the three months ended March 31, 2000, net income totaled
$10.4 million, or $0.24 per diluted share.
Net income for the three months ended March 31, 2001 included the following
pre-tax other items: $821,000 gain on equity investments, $482,000 gain on sale
of securities, $262,000 loss on disposition of assets and liabilities, $413,000
recovery of merger-related costs related to the sale of real estate, and
$215,000 impairment loss from write-down of assets. For the first three months
of 2000, net income included the following pre-tax other items: $2.3 million
gain associated with the sale of equity investments, $71,000 gain on sale of
securities, and $380,000 for system conversion costs. Other key factors
responsible for The South Group's results of operations are discussed throughout
Management's Discussion and Analysis below.
At March 31, 2001, The South Group had approximately $5.3 billion in assets,
$3.7 billion in loans, $3.8 billion in deposits and $478.0 million in
shareholders' equity. At March 31, 2001, The South Group's ratio of
nonperforming assets to loans and other real estate owned was 0.66%.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on assets and
the interest paid for the liabilities to support such assets as well as such
items as loan fees and dividend income. The net interest margin measures how
effectively a company manages the difference between the yield on earning assets
and the rate paid on funds to support those assets. Fully tax-equivalent net
interest income adjusts the yield for assets earning tax-exempt income to a
comparable yield on a taxable basis. Table 1 presents average balance sheets and
a net interest income analysis on a tax equivalent basis for the first quarters
of 2001 and 2000.
13
TABLE 1
- ----------------------------------------------------------------------------------------------------------------------------------
COMPARATIVE AVERAGE BALANCES - YIELDS AND COSTS
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------------
2001 2000
---------------------------------------- ---------------------------------------
AVERAGE/ INCOME/ YIELD/ AVERAGE/ INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ---- ------- ------- ----
ASSETS
Earning assets
Loans (net of unearned income) (1) $ 3,749,320 $85,406 9.24 % $ 3,336,302 $75,634 9.12 %
Investment securities (taxable) 822,469 13,497 6.66 811,234 13,603 6.74
Investment securities (nontaxable) (2) 84,483 1,497 7.18 93,778 1,293 5.55
Federal funds sold 370 5 5.28 13,324 209 6.31
Interest-bearing bank balances 39,381 603 6.21 20,641 299 5.83
--------------- ----------- -------------- -----------
Total earning assets 4,696,024 101,008 8.72 4,275,279 91,038 8.56
--------------- ----------- -------------- -----------
Non-earning assets 521,458 538,193
--------------- --------------
Total assets $ 5,217,482 $ 4,813,472
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities
Interest-bearing deposits
Interest checking $ 571,283 4,383 3.11 $ 596,695 4,311 2.91
Savings 115,214 688 2.42 146,462 954 2.62
Money market 735,069 8,421 4.65 639,099 7,586 4.77
Time deposits 1,944,586 31,414 6.55 1,642,435 22,773 5.58
--------------- ----------- -------------- -----------
Total interest-bearing deposits 3,366,152 44,906 5.41 3,024,691 35,624 4.74
Borrowings 858,764 12,669 5.98 727,732 10,667 5.90
--------------- ----------- -------------- -----------
Total interest-bearing liabilities 4,224,916 57,575 5.53 3,752,423 46,291 4.96
--------------- ----------- -------------- -----------
Noninterest-bearing liabilities
Noninterest bearing deposits 438,251 521,051
Other noninterest liabilities 72,988 58,418
--------------- --------------
Total liabilities 4,736,155 4,331,892
--------------- --------------
Shareholders' equity 481,327 481,580
--------------- --------------
Total liabilities and shareholders' equity $ 5,217,482 $ 4,813,472
=============== ==============
Net interest margin $43,433 3.75 % $44,747 4.21 %
=========== ===========
Tax equivalent adjustment (2) $ 487 $ 327
=========== ===========
(1) Nonaccrual loans are included in average balances for yield computations.
(2) The tax equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a
comparable yield on a taxable basis.
Note: Average balances are derived from daily balances.
14
Tax equivalent net interest income decreased $1.3 million, or 2.9%, to $43.4
million in the first three months of 2001 from $44.7 million in the first three
months of 2000. This decrease was due to increased interest expense related to
higher deposit and borrowing costs. This decrease was partially offset by a
higher level of average earning assets and higher loan fees in the first quarter
of 2001. The growth in average earning assets, which increased $420.7 million,
or 9.8%, to $4.7 billion in the first three months of 2001 from $4.3 billion in
the first three months of 2000, resulted from an increase in loans from internal
loan growth. Average loans, net of unearned income, were $3.7 billion in the
first three months of 2001 compared with $3.3 billion in the first three months
of 2000. Average investment securities were $907.0 million and $905.0 million in
the first three months of 2001 and 2000, respectively.
The net interest margin of 3.75% for the first quarter of 2001 was lower than
the margin of 4.21% for the first quarter of 2000. The first quarter 2001 net
interest margin declined from the prior year period largely due to more
expensive funding sources. The deposit markets were very competitive and are
expected to remain so going forward. Pressures on the net interest margin
largely resulted from lower noninterest-bearing deposit balances, increased
reliance on borrowings to fund earning asset growth, and targeted deposit
promotions to attract and retain customers.
During 2000, Carolina First Bank and Citrus Bank held certificate of deposit
promotions designed to build customer loyalty and expand their customer base. In
the fall of 2000, Carolina First Bank held a deposit promotion in its coastal
markets to ensure retention of customers following the Anchor Financial merger.
This promotion generated approximately $235 million of one-year certificates of
deposit with an annualized percentage yield of 7.50%. Citrus Bank's promotions
generated approximately $80 million in certificates of deposit with an average
annualized percentage yield of 7.44%. The majority of these certificates of
deposit will remain on the books throughout the first three quarters of 2001 and
will continue to impact the net interest margin.
Deposits generated through Bank CaroLine, an Internet bank, generally pay higher
rates than those offered by The South Group's other subsidiary banks. During the
first quarter of 2001, The South Group priced its Bank CaroLine deposits less
aggressively than it did in 2000 in an effort to lower the overall cost of
funds. Bank CaroLine deposits totaled approximately $191.8 million as of March
31, 2001 compared with $221.2 million and $99.6 million as of December 31, 2000
and March 31, 2000, respectively.
The first quarter 2001 net interest margin of 3.75% improved from the fourth
quarter 2000 margin of 3.55%. The net interest margin improvement reflected
prompt downward pricing of interest-bearing deposits as the Federal Reserve
decreased rates during the quarter. Borrowings with short-term maturities also
repriced downward with the Federal Reserve's actions. In addition, higher
commercial loan fees partially offset the decline in loan yields. The prime
interest rate was lowered 150 basis points in the first quarter of 2001. With
these declines, the majority of The South Group's variable rate loans, which
constitute approximately 44% of the loan portfolio, repriced downward
immediately. Continued declines in interest rates would put pressure on The
South Group's net interest margin due to the competitive deposit markets and
deposit pricing levels.
15
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $4.5 million for the first three
months of 2001 compared with $3.9 million for the first three months of 2000.
The increases were attributable to continued loan growth, an increase in
nonperforming loans, higher loan losses, and uncertain economic conditions.
Based on management's analysis of reserve adequacy, the allowance for loan and
lease losses (the "Allowance") increased twelve basis points, from 1.06% as of
March 31, 2000 to 1.18% as of March 31, 2001. During this period, loans held for
investment, net of unearned income increased 10.3%, and nonperforming loans
increased by $5.2 million. Net charge-offs for the first quarter of 2001, which
totaled $3.7 million, were $1.9 million higher than the $1.8 million charged off
during the first quarter of 2000. As a percentage of average loans, the net
charge-off ratio was 0.39% for the first three months of 2001 compared with
0.22% for the same period last year.
NONINTEREST INCOME
Noninterest income increased to $12.9 million in the first quarter of 2001 from
$12.7 million in the first quarter of 2000. Noninterest income included net
gains on asset sales in the first quarters of 2001 and 2000. During the three
months ended March 31, 2001, noninterest income included a $821,000 gain on
equity investments, $482,000 gain on sale of securities, and $262,000 loss on
disposition of assets and liabilities. The gain on equity investments included
$758,000 associated with marking to estimated fair value The South Group's
investment in Star Systems, Inc., following its acquisition by Concord EFS Inc.
In addition, The South Group sold approximately 348,000 shares of Affinity
Technology Group, Inc. ("Affinity") common stock for a $63,000 gain. During the
first quarter of 2001, The South Group also realized a $262,000 loss associated
with a sale-leaseback of a branch office. In the first quarter of 2000, The
South Group sold 775,000 shares of Affinity stock for a $2.3 million gain and
realized $71,000 in gains for sales of securities. Excluding these net gains on
asset sales from both periods, noninterest income increased $1.5 million, or
15%, to $11.9 million for the first three months of 2001 from $10.4 million for
the first three months of 2000.
Service charges on deposit accounts, the largest contributor to noninterest
income, rose 2.5% to $4.4 million in the first three months of 2001 from $4.3
million for the same period in 2000. Average deposits for the same period
increased 7.2%. The increase in service charges was attributable to attracting
new transaction accounts and improved collection of fees. In addition, effective
July 1, 2000, certain deposit service charges were increased to reflect
competitive pricing.
Mortgage banking income includes origination fees, gains from the sale of loans,
losses from the sale and valuation of mortgage servicing rights, and servicing
fees (net of the related amortization for the mortgage servicing rights and
subservicing payments). Mortgage banking income in the first three months of
2001 increased $1.1 million to $2.4 million from $1.3 million in the first three
months of 2000. The increase in the first three months of 2001 was primarily
related to a gain from the securitization of mortgage loans, which was partially
offset by a loss from the sale of mortgage servicing rights and a write-down in
the value of servicing rights.
16
In the first quarter of 2001, The South Group continued its efforts to realign
its mortgage banking strategy to place more emphasis on mortgage originations.
In connection with these on-going efforts, The South Group securitized mortgage
loans and sold mortgage servicing rights. The South Group expects to continue
such sales. In March 2001, The South Group securitized approximately $112.2
million of mortgage portfolio loans and subsequently sold $80.4 million of these
mortgage-backed securities. This transaction resulted in a $1.6 million gain,
which included $634,000 associated with recording the related mortgage servicing
asset. In March 2001, The South Group recorded a $352,000 loss on the sale of
mortgage servicing rights for approximately $949 million in mortgage loans. The
South Group will continue to subservice these loans until July 2001 and is
subject to adjustments related to prepayment risk, which were factored into the
estimated loss calculation. The South Group also recorded a $280,000 charge for
the write-down in the value of capitalized mortgage servicing rights due to
falling interest rates.
Mortgage originations totaled approximately $145 million and $70 million in the
first three months of 2001 and 2000, respectively. Mortgage originations are net
of mortgage loans acquired through acquisition. Mortgage origination volumes
increased in the first quarter of 2001 due to lower mortgage loan rates and the
hiring of additional mortgage originators.
The servicing operations of CF Mortgage consist of servicing mortgage 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, 2001, CF Mortgage was servicing or subservicing
20,263 loans having an aggregate principal balance of approximately $1.9
billion. This balance included approximately $949 million for which the related
mortgage servicing rights were sold in March 2001, which CF Mortgage will
continue to subservice until July 2001. Fees related to the servicing portfolio
from non-affiliated companies are offset by the related amortization for the
mortgage servicing rights and subservicing payments. Servicing income does not
include the benefit of interest-free escrow balances related to mortgage
loan-servicing activities.
Fees for investment services, which include trust and brokerage income, in the
first three months of 2001 and 2000 were $1.2 million and $1.4 million,
respectively. Trust income declined, partially due to the decline in the market
value of assets administered, which was related to the stock market decline. At
March 31, 2001 and 2000, the market value of assets administered by Carolina
First Bank's trust department totaled approximately $718 million and $742
million, respectively. For the three months ended March 31, 2001, trust income
and brokerage income totaled $769,000 and $474,000, respectively.
Other noninterest income totaled $3.8 million in the first three months of 2001,
compared with $3.4 million in the first three months of 2000. Other noninterest
income included income related to credit and debit cards, merchant banking,
insurance commissions, increases in cash value of company owned life insurance
policies, international banking services, and other fee based services. The
increase in other noninterest income was largely due to increases in merchant
processing fees and the cash value of company owned life insurance.
17
In the first quarter 2001, Carolina First Bank entered into an agreement to sell
branch offices in Bennettsville, Lugoff, Liberty, and McColl, South Carolina.
This transaction, which is subject to receipt of regulatory approval, is
expected to close in July 2001 at an immaterial gain. The sale of branch offices
in less populated and slower-growing markets is part of The South Group's goal
to increase the average deposits per branch to $40 million.
NONINTEREST EXPENSES
Noninterest expenses increased to $38.2 million in the first three months of
2001 from $37.7 million in the first three months of 2000. Noninterest expenses
in the first quarter of 2001 included $413,000 in restructuring and
merger-related recoveries, which related to the sale of real estate at prices
higher than estimated, and a $215,000 impairment loss from the write-down of
assets, which was primarily related to lease termination fees for abandoned
locations. Noninterest expenses in the first quarter of 2000 included $380,000
for system conversion costs. Excluding these other items, noninterest expenses
increased $1.1 million to $38.4 million for the first three months of 2001 from
$37.3 million for the first three months of 2000.
Personnel expense decreased to $18.7 million in the first three months of 2001
from $19.1 million in the first three months of 2000. Full-time equivalent
employees decreased to 1,361 at March 31, 2001 from 1,539 at March 31, 2000. The
number of full-time equivalent employees declined 178 primarily from the
elimination of redundant positions associated with the Anchor Financial merger.
Occupancy and furniture and equipment expenses increased $742,000 to $7.1
million in the first three months of 2001 from $6.3 million in the first three
months of 2000. This increase resulted principally from higher computer
equipment fees and capitalized software amortization associated with the new
core operating system. The South Group continues to dispose of real estate
associated with the branches closed in connection with the Anchor Financial
merger. Occupancy and furniture and equipment expenses declined from $7.7
million for the fourth quarter 2000 largely from lower rent, maintenance
agreements, and depreciation associated with disposed properties.
Other noninterest expenses increased $727,000 to $11.0 million in the first
quarter of 2001 from $10.3 million in the first quarter of 2000. The overall
increase in other noninterest expenses was principally attributable to the
overhead and operating expenses associated with increased lending and deposit
activities. The largest items of other noninterest expense were
telecommunications, advertising, professional and outside servicing fees,
stationery, supplies and printing. For the first quarter of 2001, other
noninterest expenses included approximately $430,000 of miscellaneous non-credit
losses, which are not expected to continue, and a $97,000 loss associated with
the change in fair value of derivative assets.
SYSTEM CONVERSION COSTS
From March 2000 to July 2000, The South Group and its subsidiaries converted
their operating systems to the Fiserv Comprehensive Banking System.
During 2000, as a result of the system conversion process, and the related
training involved with learning a new system, certain outstanding items on the
general ledger, including loan funding and demand deposit account
reconciliations, were not resolved in a timely manner. While the majority of the
18
outstanding items have been resolved, The South Group has a $401,000 accrual as
of March 31, 2001 to cover estimated potential charge-offs associated with the
remaining outstanding items. At this time, The South Group does not anticipate
any further material changes to The South Group's consolidated financial
position or results of operations related to these reconciliations.
During the first three months of 2001, The South Group charged-off $299,000
related to reconciliations associated with the system conversion. The South
Group expects the remaining accrual to be sufficient to cover any additional
charge-offs in 2001.
BALANCE SHEET REVIEW
LOANS
At March 31, 2001, The South Group had total loans outstanding of $3.7 billion
that equaled 97% of The South Group's total deposits and 70% of The South
Group's total assets. Loans are the largest category of earning assets and
produce the highest yields. The loan portfolio consists principally of
commercial real estate loans, commercial loans, consumer loans (including both
direct and indirect loans) and one-to-four family residential mortgage loans.
Substantially all loans are to borrowers domiciled in The South Group's market
areas in South Carolina, Florida and North Carolina. The portfolio does not
contain any foreign loans or any Highly Leveraged Transactions, as defined by
regulatory authorities.
Table 2 summarizes loans outstanding and percentage of loans in each category,
showing the composition sorted by collateral type. Effective with the system
conversion in June 2000, The South Group reclassified certain loans due to the
enhanced capability of analyzing loans by purpose and by collateral.
Accordingly, the March 31, 2000 composition presented below may not be
comparable with the subsequent periods presented. For example, the construction
category as of March 31, 2001 and December 31, 2000, included commercial
construction, which was included in commercial and industrial secured by real
estate as of March 31, 2000.
19
TABLE 2
- ------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION
- ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
March 31, December 31,
------------------------------------ ------------
2001 2000 2000
---- ---- ----
Commercial, financial and agricultural $ 610,618 $ 511,296 $ 561,360
Real estate - construction 445,952 231,677 458,577
Real estate - residential mortgages
(1-4 family) 804,398 669,466 890,693
Commercial secured by real estate (1) 1,355,124 1,557,587 1,348,604
Consumer 498,819 391,113 460,668
Lease financing receivables 2,611 11,521 4,186
----------- ----------- ------------
Loans held for investment 3,717,522 3,372,660 3,724,088
Loans held for sale 17,974 39,502 12,630
----------- ----------- ------------
Total gross loans 3,735,496 3,412,162 3,736,718
Unearned income 1,072 4,391 1,536
Allowance for loan losses 43,741 35,862 43,024
----------- ----------- ------------
Total net loans $3,690,683 $3,371,909 $ 3,692,158
=========== =========== ============
- ------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF LOANS IN CATEGORY
- ------------------------------------------------------------------------------------------------------------------
March 31, December 31,
---------------------------------------- -----------------
2001 2000 2000
---- ---- ----
Loans Held for Investment
Commercial, financial and agricultural 16.43 % 15.16 % 15.07 %
Real estate - construction 12.00 6.87 12.31
Real estate - residential mortgages
(1-4 family) 21.64 19.85 23.92
Commercial secured by real estate (1) 36.44 46.18 36.22
Consumer 13.42 11.60 12.37
Lease financing receivables 0.07 0.34 0.11
-------- -------- --------
Total 100.00 % 100.00 % 100.00 %
======== ======== ========
(1) This category includes loans to business other than real estate companies where
owner-occupied real estate is pledged on loans to finance operations, equipment
and facilities. At March 31, 2001, such loans were approximately half of the
category total.
In March 2001, The South Group securitized approximately $112.2 million of
residential mortgage loans from the held for investment portfolio and
subsequently sold $80.4 million of these mortgage-backed securities. The
remaining $31.8 million of mortgage-backed securities was included in The South
Group's securities available for sale. In connection with this transaction, The
South Group recorded a $1.6 million gain, which was included in mortgage banking
income.
20
The South Group's loans held for investment, net of unearned income increased
$348.2 million, or 10.3%, to approximately $3.7 billion at March 31, 2001 from
$3.4 billion at March 31, 2000. Loans held for investment, net of unearned
income declined slightly from December 31, 2000 due to the March 2001
securitization of approximately $112.2 million of residential mortgage loans.
Adjusting for the mortgage loan securitization, loans held for investment, net
of unearned income increased approximately $106.1 million, or an annualized rate
of 11.7% for the first three months of 2001. Approximately 40% of the quarter's
loan growth was from The South Group's Florida markets.
For the first quarter of 2001, The South Group's loans averaged $3.7 billion
with a yield of 9.24% compared with $3.3 billion and a yield of 9.12% for the
same period in 2000. The interest rates charged on loans vary with the degree of
risk, maturity and amount of the loan. Competitive pressures, money market
rates, availability of funds and government regulations also influence interest
rates.
ALLOWANCE FOR LOAN LOSSES
The adequacy of the Allowance is analyzed on a quarterly basis. For purposes of
this analysis, adequacy is defined as a level sufficient to absorb probable
losses in the portfolio. The methodology employed for this analysis is as
follows.
The portfolio is segregated into risk-similar segments for which historical loss
ratios are calculated and adjusted for identified changes in current portfolio
characteristics. Loss ratios are calculated by product type for consumer loans
and by risk grade for commercial loans. Large problem commercial loans are
individually assessed and assigned specific loss estimates. To allow for
modeling error, a range of probable loss ratios is then derived for each segment
at plus and minus five percent of the adjusted historical loss ratio. The
resulting percentages are then applied to the dollar amounts of loans in each
segment to arrive at each segment's range of probable loss levels.
The Allowance for each portfolio segment is set at an amount within its range
that reflects management's best judgement of the extent to which historical loss
levels are more or less accurate indicators of current losses in the portfolio.
Management's judgments evolve from an assessment of various issues, including
but not limited to the pace of loan growth, emerging portfolio concentrations,
risk management system changes, entry into new markets, new product offerings,
loan portfolio quality trends, and uncertainty in current economic and business
conditions.
Assessing the adequacy of the Allowance is a process that requires considerable
judgment. Management's judgments are based on numerous assumptions about current
events which it believes to be reasonable, but which may or may not be valid.
Thus there can be no assurance that loan losses in future periods will not
exceed the Allowance or that future increases in the Allowance will not be
required. No assurance can be given that management's ongoing evaluation of the
loan portfolio in light of changing economic conditions and other relevant
circumstances will not require significant future additions to the Allowance,
thus adversely affecting the operating results of The South Group.
21
The Allowance is also subject to examination and adequacy testing by regulatory
agencies, which may consider such factors as the methodology used to determine
the adequacy and the size of the Allowance relative to that of peer
institutions, and other adequacy tests. In addition, such regulatory agencies
could require The South Group to adjust its Allowance based on information
available to them at the time of their examination.
As of March 31, 2001 and December 31, 2000, the Allowance totaled $43.7 million
and $43.0 million, respectively, or 1.18% and 1.16%, respectively, of loans held
for investment net of unearned income. During the first quarter of 2001, the
Allowance was reduced $101,000 as a consequence of the sale of residential
mortgage loans. The Allowance continues to adequately cover nonperforming loans,
providing coverage at 2.17 times and 2.34 times the nonperforming loan balance
at March 31, 2001 and December 31, 2000, respectively. Nonperforming loans
increased to $20.2 million as of March 31, 2001 from $18.4 million as of
December 31, 2000. See "Credit Quality."
Table 3 summarizes the changes in the Allowance.
22
TABLE 3
- -----------------------------------------------------------------------------------------------------------------
SUMMARY OF LOAN LOSS EXPERIENCE
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
At and for At and for
the three months the year ended
ended March 31, December 31,
--------------- ------------
2001 2000 2000
---- ---- ----
Loan loss reserve at beginning of year $ 43,024 $ 33,756 $ 33,756
Allowance adjustment for loans sold (101) - (252)
Net charge-offs:
Loans charged-off (4,177) (2,404) (16,073)
Loans recovered 487 565 2,215
------------ ------------ ------------
(3,690) (1,839) (13,858)
Additions to reserve through provision
expense 4,508 3,945 23,378
------------ ------------ ------------
Loan loss reserve at end of period $ 43,741 $ 35,862 $ 43,024
============ ============ ============
Average loans $ 3,749,320 $ 3,336,302 $ 3,545,336
Loans held for investment, net of
unearned income (period end) 3,716,450 3,368,269 3,722,552
Net charge-offs as a percentage of
average loans (annualized) 0.39 % 0.22 % 0.39 %
Allowance for loan losses as a percentage
of loans excluding loans held for sale 1.18 1.06 1.16
The following summarizes impaired loan information (in thousands) at and for the
three months ended March 31:
2001 2000
---- ----
Impaired loans $ 18,452 $13,365
Average investment in impaired loans 17,135 13,660
Related allowance 5,111 3,862
Recognized interest income 16 78
Foregone interest 228 247
Nonaccrual loans were $20.2 million and $14.9 million as of March 31, 2001 and
2000, respectively. Interest income recognized on nonaccrual loans totaled
approximately $22,000 and $85,000 for the three months ended March 31, 2001 and
2000, respectively.
23
SECURITIES
At March 31, 2001, The South Group's investment portfolio totaled $964.5
million, up $32.9 million from the $931.6 million invested as of March 31, 2000
and up $65.0 million from the $899.5 million invested as of December 31, 2000.
Securities (i.e., securities held for investment, securities available for sale,
and trading securities) averaged $907.0 million in the first quarter of 2001,
comparable to the $905.0 million average in the first quarter of 2000.
The average portfolio yield increased in the first three months of 2001 to 6.70%
from 6.62% in the first three months of 2000. The securities yield increased due
to the portfolio restructuring in the third quarter of 2000, partially offset by
a lower level of general interest rates. During the first quarter 2001, due to
the declining interest rate environment, U.S. government agencies were called
prior to the stated maturities, and prepayments associated with mortgage-backed
securities accelerated. The agency securities, which were called during the
quarter, were replaced primarily with mortgage-backed securities to further
enhance portfolio yields. The composition of the investment portfolio as of
March 31, 2001 follows: mortgage-backed securities 72%, treasuries and agencies
9%, state and municipalities 8%, and other securities 11% (which included equity
investments).
EQUITY INVESTMENTS
Investment in Net.B@nk, Inc. At March 31, 2001, The South Group owned 1,175,000
shares of Net.B@nk, Inc. ("Net.B@nk") common stock, or approximately 4% of the
outstanding shares. Net.B@nk owns and operates Net.B@nk, F.S.B., an FDIC-insured
federal savings bank that provides banking services to consumers utilizing the
Internet. The South Group's investment in Net.B@nk, which is included in
securities available for sale and has a basis of approximately $326,000, had a
pre-tax market value of approximately $10.3 million as of March 31, 2001. The
South Group's shares of Net.B@nk common stock are "restricted" securities, as
that term is defined in federal securities law.
Investment in Affinity Technology Group, Inc. At March 31, 2001, The South
Group, through its subsidiary Blue Ridge Finance Company, Inc. ("Blue Ridge"),
owned 4,876,340 shares of common stock of Affinity, or approximately 13% of the
outstanding shares. The South Group's investment in Affinity, which is included
in securities available for sale and has a basis of approximately $433,000, had
a pre-tax market value of approximately $439,000 as of March 31, 2001. During
the first quarter 2001, The South Group sold approximately 348,000 shares of
Affinity common stock for a pre-tax gain of $63,000. The South Group's shares in
Affinity are "restricted" securities, as that term is defined in federal
securities law.
At December 31, 2000, The South Group owned a warrant to purchase 3,471,340
shares of Affinity common stock for approximately $0.0001 per share ("Affinity
Warrant"). On January 1, 2001, effective with the adoption of SFAS 133 for
derivative activities, The South Group recorded the Affinity Warrant on the
balance sheet at its fair value of $434,000. Under accounting principles as of
December 31, 2000, the Affinity Warrant was not recorded on the consolidated
balance sheet. On February 27, 2001, The South Group exercised the Affinity
Warrant and reclassified the asset as securities available for sale based on the
fair value as of the exercise date.
24
Investments in Banks and Transaction Processing Company. As of March 31, 2001,
The South Group had equity investments in fifteen community banks located in the
Southeast. In each case, The South Group owns less than 5% of the community
bank's outstanding common stock. The South Group has made these investments to
develop correspondent banking relationships and to promote community banking in
the Southeast. As of March 31, 2001, equity investments in the community banks,
included in securities available for sale with a basis of approximately $9.2
million, were recorded at their pre-tax market value of approximately $8.1
million.
As a result of The South Group's merger with Anchor Financial, The South Group
has an investment in Rock Hill Bank & Trust. The investment, which is included
in securities available for sale and has a basis of approximately $3.1 million,
had a pre-tax market value of approximately $4.3 million as of March 31, 2001.
The South Group also has an investment in Nexity Financial Corporation, an
Internet bank, which is recorded at its basis of $500,000.
At March 31, 2001, The South Group owned 24,103 shares of Concord EFS Inc., a
transaction processing company, following its February 2001 acquisition of Star
Systems, Inc., an electronic payment network. During the first quarter 2001, The
South Group recognized a $758,000 gain associated with marking its investment to
estimated fair value as of the Concord EFS Inc. acquisition date.
CF Investment Company. CF Investment Company is a Small Business Investment
Company, licensed through the Small Business Administration. Its principal focus
is to invest in companies that have a bank-related technology or service The
South Group and its subsidiaries can use. As of March 31, 2001, CF Investment
Company had invested approximately $1.7 million (principally in the form of
loans) in companies specializing in electronic document management and Internet-
related services. CF Investment Company's loans represent a higher credit risk
to The South Group due to the start-up nature of these companies.
INTANGIBLE ASSETS AND OTHER ASSETS
The intangible assets balance at March 31, 2001 of $105.5 million consisted of
goodwill of $98.7 million and core deposit balance premiums of $6.8 million. The
intangible assets balance at March 31, 2000 of $112.3 million consisted of
goodwill of $104.0 million and core deposit balance premiums of $8.3 million.
The decline in the intangible assets balances was attributable to the
amortization of intangibles.
At March 31, 2001, other assets included other real estate owned of $4.5 million
and mortgage servicing rights of $9.9 million. At March 31, 2000, other assets
included other real estate owned of $3.4 million and mortgage servicing rights
of $25.7 million. The balance for mortgage servicing rights declined primarily
due to the fourth quarter 2000 and first quarter 2001 sales of rights.
Capitalized software net of related amortization, which is included in other
assets, was approximately $7.4 million and $5.1 million as of March 31, 2001 and
2000, respectively.
25
DEPOSITS
The South Group's primary source of funds for loans and investments is its
deposits that are gathered through the branch networks of Carolina First Bank
and Citrus Bank and on the Internet through Bank CaroLine. Deposits provided
funding for 81% and 83% of average earning assets for the three months ended
March 31, 2001 and 2000, respectively. Carolina First Bank and Citrus Bank face
stiff competition from other banking and financial services companies in
gathering deposits. The percentage of funding provided by deposits has declined,
and accordingly, The South Group has developed other sources, such as FHLB
advances, to fund loan demand.
Deposits grew 5.8% to $3.8 billion at March 31, 2001 from $3.6 billion at March
31, 2000. The increase in deposits resulted principally from internal deposit
growth related to account promotions, sales efforts, and Internet banking.
Deposits have remained relatively constant since December 31, 2000.
During the three months ended March 31, 2001, total interest-bearing deposits
averaged $3.4 billion with a rate of 5.41%, compared with $3.0 billion with a
rate of 4.74% for the corresponding period in 2000. Deposit pricing remains very
competitive, a pricing environment which The South Group expects to continue. In
addition, The South Group has experienced higher deposit costs associated with
targeted deposit promotions to attract and retain customers in connection with
mergers, new markets, and new products.
Table 1 in "EARNINGS REVIEW--Net Interest Income" details average balances for
the deposit portfolio for the three months ended March 31, 2001 and 2000. On
average, time deposits grew $302.2 million, or 18%, and money market accounts
increased $96.0 million, or 15%. This growth was due to certificates of deposit
and money market promotions in select markets and increases in Internet banking
deposits and brokered certificates of deposit. The growth in time deposits and
money market accounts was partially offset by declines in interest checking
accounts of $25.4 million, savings accounts of $31.2 million, and
noninterest-bearing deposits of $82.8 million.
At March 31, 2001, total deposits for Bank CaroLine totaled $191.8 million, up
from $99.6 million as of March 31, 2000. At March 31, 2001, The South Group had
$109.2 million in brokered certificates of deposit under $100,000, compared with
$25.0 million at March 31, 2000. The South Group considers these funds as an
alternative funding source available to use while continuing to maintain and
grow its local deposit base.
Time deposits of $100,000 or more represented 15% and 14% of total deposits at
March 31, 2001 and 2000, respectively. The South Group's large denomination time
deposits are generally from customers within the local market areas of its banks
and, therefore, have a greater degree of stability than is typically associated
with this source of funds.
BORROWED FUNDS
The South Group's short-term borrowings consist of federal funds purchased and
repurchase agreements, FHLB advances, commercial paper and other short-term
borrowings. The long-term borrowings consist primarily of subordinated notes,
FHLB borrowings, an employee stock ownership plan note payable, and a mortgage
note payable. In the first three months of 2001, average borrowings totaled
$858.8 million compared with $727.7 million for the same period in 2000. This
increase was primarily attributable to an increased reliance on short-term
borrowings, including FHLB advances to support earning asset growth.
26
Federal funds purchased and repurchase agreements are used to satisfy daily
funding needs and, when advantageous, for rate arbitrage. Federal funds
purchased and repurchase agreements totaled $358.2 million and $200.3 million at
March 31, 2001 and 2000, respectively. At December 31, 2000, Federal funds
purchased and repurchase agreements totaled $232.1 million. Balances in these
accounts can fluctuate on a day-to-day basis. At March 31, 2001 and 2000, FHLB
advances totaled $461.4 million and $285.2 million, respectively. At December
31, 2000, FHLB advances totaled $481.6 million. FHLB advances are a source of
funding which The South Group uses depending on the current level of deposits
and management's willingness to raise deposits through market promotions.
CAPITAL RESOURCES AND DIVIDENDS
Total shareholders' equity amounted to $478.0 million, or 9.1% of total assets,
at March 31, 2001, compared with $486.2 million, or 10.0% of total assets, at
March 31, 2000. At December 31, 2000, total shareholders' equity totaled $468.7
million, or 9.0% of total assets. The increase in total shareholders' equity
since December 31, 2000 resulted principally from the retention of earnings and
an increase in the net unrealized gain on securities. Cash dividends paid and
the stock repurchase program partially offset these increases.
In December 2000, The South Group initiated a stock repurchase program for up to
two million shares, or approximately 5% of its outstanding shares. In connection
with the program, The South Group has repurchased 907,376 shares, including
60,000 shares purchased during the first quarter 2001. The South Group may
continue to repurchase shares depending upon current market conditions and
available cash.
Book value per share at March 31, 2001 and 2000 was $11.24 and $11.31,
respectively. Tangible book value per share at March 31, 2001 and 2000 was $8.76
and $8.69, respectively. Tangible book value was below book value as a result of
the purchase premiums associated with branch purchases and acquisitions
accounted for as purchases.
The South Group and its banking subsidiaries exceeded the well capitalized
requirements at March 31, 2001. Table 4 sets forth various capital ratios for
The South Group and its banking subsidiaries.
27
TABLE 4
- ------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
- ------------------------------------------------------------------------------------------------------------------
Well Adequately
March 31, Capitalized Capitalized
2001 Requirement Requirement
---- ----------- -----------
The South Group:
Total risk-based capital 10.61 % n/a n/a
Tier 1 risk-based capital 8.58 n/a n/a
Leverage ratio 6.96 n/a n/a
Carolina First Bank:
Total risk-based capital 10.63 % 10.00 % 8.00 %
Tier 1 risk-based capital 9.12 6.00 4.00
Leverage ratio 7.30 5.00 4.00
Citrus Bank:
Total risk-based capital 10.00 % 10.00 % 8.00 %
Tier 1 risk-based capital 8.84 6.00 4.00
Leverage ratio 8.21 5.00 4.00
The South Group and its subsidiaries are subject to certain regulatory
restrictions on the amount of dividends they are permitted to pay. The South
Group has paid a cash dividend each quarter since the initiation of cash
dividends on February 1, 1994. At the December 2000 meeting, the Board of
Directors approved a $0.11 per share cash divided on the common stock, which
represents an effective annual increase of approximately 10%. The South Group
presently intends to pay a quarterly cash dividend on the Common Stock; however,
future dividends will depend upon The South Group's financial performance and
capital requirements.
In January 2001, Carolina First Bank commenced an offering of real estate
investment trust preferred shares available only to "accredited investors" and
"qualified institutional buyers." The issuer of the securities is Carolina First
Mortgage Loan Trust, a South Carolina business trust that has been qualified as
a "real estate investment trust" (the "REIT"). On February 22, 2001, Carolina
First Bank sold 132 shares of the Carolina First Mortgage Loan Trust Series
2000A Cumulative Fixed Rate Preferred shares to a qualified institutional buyer.
The South Group received net proceeds of $12.7 million, which is reported as
minority interest in consolidated subsidiary on the balance sheet.
MARKET RISK AND ASSET/LIABILITY MANAGEMENT
Market risk is the risk of loss from adverse changes in market prices and rates.
The South Group'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 South Group
manages other risks, such as credit quality and liquidity risk, in the normal
28
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 South Group's financial condition and results of operations. Other types
of market risks, such as commodity price risk, do not arise in the normal course
of The South Group's business activities.
As of March 31, 2001, there have been no material changes from the market risk
sensitivity analysis presented as of December 31, 2000 in The South Group's
annual report on Form 10-K. The disclosures related to the market risk of The
South Group should be read in conjunction with The South Group'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, 2000 included in The South Group's Annual Report on Form 10-K.
Achieving consistent growth in net interest income while managing interest rate
risk is the primary goal of The South Group's asset/liability function. The
South Group 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 South Group seeks to accomplish this goal while maintaining
adequate liquidity and capital. The South Group's asset/liability mix is
sufficiently balanced so that the effect of interest rates moving in either
direction is not expected to have a significant impact on net interest income
over time.
The South Group's Asset/Liability Committee ("ALCO") uses several tools to
monitor and manage interest rate risk. One of the primary tools is a simulation
model which is used to analyze earnings at risk and interest sensitivity gap
(the difference between the amount of rate sensitive assets maturing or
repricing within a specific time period and the amount of rate sensitive
liabilities maturing or repricing within the same time period). The model takes
into account interest rate changes as well as changes in the mix and volume of
assets and liabilities. The model's inputs (such as interest rates and levels of
loans and deposits) are updated on a regular basis.
The forecast used for earnings at risk analysis simulates The South Group's
balance sheet and income statement under several different rate scenarios over a
twelve-month period. It reports a case in which interest rates remain flat and
reports variations that occur when rates gradually increase and decrease 200
basis points over the next twelve-month period. 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 South Group could undertake in
response to changes in interest rates.
Beginning in the first quarter of 2001, The South Group began modeling a gradual
increase/decrease in rates rather than an immediate change. This change was made
because rates typically change gradually over time rather than abruptly, and
thus, the information provided is more meaningful. According to the model as of
March 31, 2001, The South Group is positioned so that net interest income will
increase $739,000 in the next twelve months if interest rates rise 200 basis
points and will decrease $2.6 million in the next twelve months if interest
rates decline 200 basis points. The smaller increase in net interest income when
interest rates are increased is due to the assumptions related to deposit
repricings. In both the increasing and decreasing rate scenarios, The South
Group assumes that deposit rates will not change by the full 200 basis points.
29
However, deposit rates are modeled so that they will change a greater percentage
in the increasing rate environment than in the declining rate environment. Due
to the interest rate cuts that occurred during the first quarter of 2001 and the
prompt repricing of interest-bearing deposits, some of The South Group's deposit
rates are nearing what management considers to be an acceptable lower limit.
Accordingly, in the declining rate scenario, the model assumes that certificate
of deposit rates will not decline below 2.00% thus limiting the interest expense
reduction from repricing certificates of deposit by the entire 200 basis points.
In addition to the standard scenarios used to analyze earnings at risk, The
South Group's ALCO analyzes the potential impact of other scenarios. The
starting point for these "what-if" scenarios is The South Group's base forecast.
This base forecast consolidates all balance sheet information that The South
Group is presently aware of with its "most likely" interest rate projections.
The "what-if" scenarios are then used to gauge the impact of changes in interest
rates and/or balance sheet items on the earnings of The South Group compared to
the base forecast. Strategies can be formulated based on the information
provided by the earnings simulation if a scenario either seems likely to occur
or The South Group chooses to undertake the proposed transaction. The South
Group updates its base forecast quarterly based on economic changes that
occurred during the past quarter as well as changes in the economic outlook for
the coming year.
The South Group uses interest sensitivity gap ("GAP position") analysis to
monitor the relationship between the maturity and repricing of rate sensitive
assets and rate sensitive liabilities during a given time frame. The South
Group's GAP position, while not a complete measure of interest sensitivity, is
reviewed periodically to provide insights related to the static repricing
structure of assets and liabilities. At March 31, 2001, on a cumulative basis
through twelve months, rate-sensitive liabilities exceeded rate-sensitive
assets, resulting in a liability sensitive position of $186.0 million. The GAP
position is based on The South Group's forecast which holds interest rates at
their current levels for the entire twelve-month period.
Derivatives and Hedging Activities. The South Group uses derivatives, such as
interest rate swap agreements and loan commitments, for asset/liability and
interest rate risk management purposes. Effective January 1, 2000, with the
adoption of SFAS 133, The South Group began recognizing all derivatives as
either assets or liabilities on the balance sheet and reporting these
instruments at fair value.
The South Group has interest rate swap agreements that qualify as cash flow
hedges and those that qualify as fair value hedges. Fair value hedges are used
to increase funding sources with variable interest rates. These hedges are used
when the demand for variable rate loans increases. The South Group uses cash
flow hedges to turn FHLB daily credit rate borrowings into fixed rate funding to
assist lending officers in competitively pricing fixed rate loans.
The South Group also uses derivative instruments to reduce risks associated with
its lending activities. CF Mortgage uses loan commitments in connection with its
mortgage banking business to hedge commitments to lend funds in a secured
mortgage transaction. During the first quarter 2001, The South Group entered
into a cross currency exchange agreement to convert the loan payments from a
foreign currency into U.S. dollars.
30
At March 31, 2001, the net fair value of derivative assets totaled approximately
$11,000 and was included in other assets on the balance sheet. The South Group's
derivative and hedging activities are discussed in further detail in Note 9 of
the Consolidated Financial Statements.
LIQUIDITY
Liquidity management ensures that adequate funds are available to meet deposit
withdrawals, fund loan and capital expenditure commitments, maintain reserve
requirements, pay operating expenses, provide funds for dividends and debt
service, and manage operations on an ongoing basis. Funds are primarily provided
by Carolina First Bank and Citrus Bank through customers' deposits, principal
and interest payments on loans, loan sales or securitizations, securities
available for sale, maturities of securities, temporary investments and
earnings. Proper liquidity management is crucial to ensure that The South Group
is able to take advantage of new business opportunities as well as meet the
demands of its customers.
Investment securities are an important tool to The South Group's liquidity
management. Securities classified as available for sale may be sold in response
to changes in interest rates, liquidity needs and/or significant prepayment
risk.
Net cash provided by operations and deposits from customers have been the
primary sources of liquidity for The South Group. Liquidity is also enhanced by
the ability to acquire new deposits through Carolina First Bank's and Citrus
Bank's established branch network of more than 90 branches in South Carolina,
North Carolina, and Florida. In addition, The South Group can raise deposits on
the Internet through Bank CaroLine. The liquidity needs of Carolina First Bank
and Citrus Bank 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 has access to borrowing from the FHLB and maintains
short-term lines of credit from unrelated banks. At March 31, 2001, unused
borrowing capacity from the FHLB totaled approximately $28 million with an
outstanding balance of $461.4 million. The unused borrowing capacity from the
FHLB could increase due to the ability to borrow against commercial real estate
loans. In addition, Citrus Bank is in the process of obtaining borrowing
capacity from the FHLB. At March 31, 2001, Carolina First Bank had unused
short-term lines of credit totaling approximately $221 million (which are
withdrawable at the lender's option). Management believes that these sources are
adequate to meet its liquidity needs.
Liquidity at the parent company level is provided through cash dividends from
the subsidiary banks and the capacity of the parent company to raise additional
borrowed funds as needed. If the Company elects to repurchase additional shares
through its share repurchase program, such purchases will reduce liquidity at
the parent company level.
CREDIT QUALITY
A willingness to take credit risk is inherent in the decision to grant credit.
Prudent risk-taking requires a credit risk management system based on sound
policies and control processes that ensure compliance with those policies. The
Company's credit risk management system is defined by policies approved by the
Board of Directors that govern the risk underwriting, portfolio monitoring, and
problem loan administration processes. Adherence to underwriting standards is
31
managed through a multi-layered credit approval process and immediate
after-the-fact review by credit risk management of loans approved by lenders.
Compliance with loan monitoring policies is managed through daily review by
credit risk managers, monthly reviews of exception reports, and ongoing analysis
of asset quality trends. The administration of problem loans is driven by
policies that require written plans for resolution and quarterly meetings with
credit risk management to review progress. Credit risk management activities,
including specific reviews of new large credits, are reviewed by the Directors'
Credit Committee of each banking subsidiary, which meet monthly.
Table 5 presents information pertaining to nonperforming assets.
TABLE 5
- -----------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
- -----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
March 31, December 31,
------------------------------ -------------
2001 2000 2000
Nonaccrual loans $ 20,156 $ 14,914 $ 18,413
Restructured loans - - -
--------- --------- ---------
Total nonperforming loans 20,156 14,914 18,413
Other real estate owned 4,455 3,372 3,101
--------- --------- ---------
Total nonperforming assets $ 24,611 $ 18,286 $ 21,514
========= ========= =========
Nonperforming assets as a percentage
of loans and other real estate owned (1) 0.66 % 0.54 % 0.58 %
========= ========= =========
Net loan charge-offs as a percentage
of average loans (annualized) 0.39 0.22 0.42
========= ========= =========
Loans past due 90 days still accruing
interest (2) $ 11,780 $ 7,008 $ 10,682
========= ========= =========
Allowance for loan losses as a
percentage of nonperforming loans 2.17 x 2.40 x 2.34 x
========= ========= =========
(1) Calculated using loans held for investment, net of unearned income.
(2) Substantially all of these loans are consumer and residential mortgage loans.
As a percentage of loans and other real estate owned, nonperforming assets were
0.66% at March 31, 2001, compared with 0.58% as of December 31, 2000 and 0.54%
as of March 31, 2000. Nonaccrual loans grew to $20.2 million as of March 31,
2001 from $18.4 million as of December 31, 2000. Nonaccrual loans increased $1.7
million during the first quarter of 2001, as reductions of $6.7 million were
more than offset by additions of $8.4 million. The quarter's increase included
two loans, totaling $3.7 million, which are secured and have limited loss
exposure. Other real estate owned totaled $4.5 million as of March 31, 2001, an
increase of $1.4 million from December 31, 2000. This increase included two
properties, totaling $1.2 million, for which a loss is not expected.
32
Net loan charge-offs totaled $3.7 million and $1.8 million in the first three
months of 2001 and 2000, respectively, or 0.39% and 0.22%, respectively, as an
annualized percentage of average loans. Uncertainty in the economic outlook has
increased, making charge-off levels in future periods less predictable. In
addition, as the economic climate softens, the flow of loans into nonaccrual
loans and other real estate loans increases. However, loss exposure in the
portfolio is identified, reserved, and closely monitored to ensure that changes
are promptly addressed in the analysis of reserve adequacy.
CURRENT ACCOUNTING ISSUES
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
replacement of FASB No. 125," was issued in September 2000. It revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures but will carry over most
of SFAS No. 125's provisions without reconsideration. SFAS 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001. This statement is effective for recognition and
reclassification of collateral and for disclosures related to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
South Group adopted the provisions of SFAS No. 140 effective April 1, 2001 with
no material impact.
33
PART II
ITEM 1 LEGAL PROCEEDINGS
See Note 6 to the Consolidated Financial Statements for a discussion of
legal proceedings.
ITEM 2 CHANGE IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Annual Meeting of Shareholders
------------------------------
On April 18, 2001, the Company held its 2001 Annual Meeting of
Shareholders. The results of the 2001 Annual Meeting of Shareholders
follow.
PROPOSAL #1 - ELECTION OF DIRECTORS
The shareholders approved setting the number of Company directors at 18
persons. The following persons were elected as Directors with the votes
indicated.
Voting shares in favor Withheld
# % Authority
- - ---------
William P. Brant 32,625,631 97.6% 811,187
Mason A. Chrisman 33,099,282 99.0% 337,536
Stephen L. Chryst 33,068,934 98.9% 367,884
Judd B. Farr 33,065,230 98.9% 371,587
C. Claymon Grimes, Jr. 33,065,230 98.9% 371,587
W. Gairy Nichols, III 33,099,837 99.0% 336,981
Thomas J. Rogers 33,099,265 99.0% 337,553
John C.B. Smith, Jr. 33,096,571 99.0% 340,247
Albert A. Springs, III 33,099,282 99.0% 337,536
David C. Wakefield, III 32,559,978 97.4% 876,839
M. Dexter Hagy, William S. Hummers III, H. Earle Russell, Jr., Charles
B. Schooler, Eugene E. Stone IV, William R. Timmons, Jr., Samuel H.
Vickers, and Mack I. Whittle, Jr. continued in their present terms as
directors.
ITEM 5 OTHER INFORMATION
None.
34
PART II
(CONTINUED)
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Common Stock Dividend Reinvestment Plan for The
South Financial Group, Inc.: Incorporated by reference to Exhibit 4.1
of The South Group's Current Report on Form 8-K dated May 11, 2001.
(b) Reports on Form 8-K
The South Group filed Current Reports on Form 8-K dated January 8, 2001
and May 11, 2001.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The South
Group has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
The South Financial Group, Inc.
/s/ William S. Hummers III
----------------------------------
William S. Hummers III
Executive Vice President
36