FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998 Commission file number 0-13759
-------------- -------
ANCHOR FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 57-0778015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
2002 Oak St., Myrtle Beach, S. C. 29577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (843) 448-1411
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 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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 6, 1998
- --------------------------------------------- --------------------------
(Common stock, no par value) 3,890,948
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheet - March 31, 1998
and December 31, 1997 1
Consolidated Statement of Income - Three months
ended March 31, 1998 and 1997 2
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income - Three months ended
March 31, 1998 and 1997 3
Consolidated Statement of Cash Flows -
Three months ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 12
Part II - Other Information
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote
of Security-Holders 13-14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*
(Unaudited)
ASSETS
Cash and due from banks $ 24,066,796 $ 25,313,707
Interest-bearing balances due from banks 3,493,834 664,228
Federal funds sold 18,600,000 0
Investment securities:
Held-to-maturity, at amortized cost (fair value of $8,735,944
in 1998 and $10,474,569 in 1997) 8,680,913 10,428,605
Available-for-sale, at fair value (amortized cost of $105,967,552
in 1998 and $108,707,284 in 1997) 108,998,268 111,033,032
- -------------------------------------------------------------------------------------------------------------------
Total investment securities 117,679,181 121,461,637
- -------------------------------------------------------------------------------------------------------------------
Loans 438,080,258 415,737,360
Less - unearned income (35,746) (38,120)
- allowance for loan losses (4,774,879) (4,588,996)
- -------------------------------------------------------------------------------------------------------------------
Net loans 433,269,633 411,110,244
- -------------------------------------------------------------------------------------------------------------------
Premises and equipment 17,061,994 16,875,259
Other assets 10,500,487 9,971,550
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 624,671,925 $ 585,396,625
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits $ 98,761,598 $ 83,393,250
NOW and money market accounts 260,205,317 237,839,188
Time deposits $100,000 and over 56,436,562 69,102,035
Other time and savings deposits 108,593,255 103,373,032
- -------------------------------------------------------------------------------------------------------------------
Total deposits 523,996,732 493,707,505
Federal funds purchased and securities
sold under agreements to repurchase 4,818,110 11,912,314
Other short-term borrowings 1,580,915 2,187,366
Long-term debt 36,000,000 23,000,000
Subordinated notes 11,000,000 11,000,000
Other liabilities 5,781,183 4,061,001
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 583,176,940 545,868,186
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, $6.00 par value; 7,000,000 shares
authorized; shares issued and outstanding -
3,890,323 in 1998 and 3,876,047 in 1997 23,341,938 23,256,282
Surplus 1,837,875 1,616,607
Retained earnings 14,875,978 13,691,474
Accumulated other comprehensive income, net of tax 1,938,819 1,490,701
Unearned ESOP shares (499,625) (526,625)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 41,494,985 39,528,439
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 624,671,925 $ 585,396,625
===================================================================================================================
<FN>
* Obtained from audited financial statements.
</FN>
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
1
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 9,830,930 $ 8,265,305
Interest on investment securities:
Taxable 1,800,882 1,543,330
Non-taxable 79,391 65,390
Other interest income 47,070 38,601
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 11,758,273 9,912,626
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 4,717,711 3,924,013
Interest on short-term borrowings 96,919 58,676
Interest on long-term borrowings 426,880 274,784
Interest on subordinated notes 230,324 230,324
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,471,834 4,487,797
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 6,286,439 5,424,829
Provision for loan losses 210,000 200,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,076,439 5,224,829
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 515,903 480,434
Commissions and fees 312,144 266,588
Trust income 78,131 53,861
Gains on sales of mortgage loans 93,924 76,700
Other operating income 103,292 171,151
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,103,394 1,048,734
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,656,719 2,301,851
Net occupancy expense 348,323 321,534
Equipment expense 346,234 322,076
Other operating expense 1,247,911 1,234,534
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 4,599,187 4,179,995
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,580,646 2,093,568
Provision for income taxes 938,000 758,909
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 1,642,646 $ 1,334,659
===========================================================================================================================
Net income per share - basic $ 0.43 $ 0.35
===========================================================================================================================
Net income per share - diluted $ 0.40 $ 0.33
===========================================================================================================================
Weighted average common shares outstanding - basic 3,830,637 3,776,135
===========================================================================================================================
Weighted average common shares outstanding - diluted 4,076,268 4,027,302
===========================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
2
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income
Three Months ended March 31, 1998 and March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
other Unearned Total
Common Stock Retained comprehensive ESOP stockholders'
-----------------------------
Shares Amount Surplus earnings income(loss) shares equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,839,010 $23,034,060 $1,070,326 $ 9,006,968 $ 497,301 ($633,250) $32,975,405
Comprehensive Income
Net income 1,334,659 1,334,659
Other comprehensive income,
net of tax
Unrealized losses on investment
securities (442,390) (442,390)
------------
Comprehensive Income 892,269
------------
Change in unearned 30,197 6,377 27,000 63,574
ESOP shares
Cash dividends ($0.09 per share) (358,307) (358,307)
--------------------------------------------------------------------------------------------
Balance at March 31, 1997 3,839,010 $23,034,060 $1,100,523 $ 9,989,697 $ 54,911 ($606,250) $33,572,941
============================================================================================
Balance at December 31, 1997 3,876,047 $23,256,282 $1,616,607 $13,691,474 $1,490,701 ($526,625) $39,528,439
Comprehensive Income
Net income 1,642,646 1,642,646
Other comprehensive income,
net of tax
Unrealized gains on investment
securities
448,118 448,118
------------
Comprehensive Income 2,090,764
------------
Common stock issued pursuant to:
Dividend Reinvestment Plan 4,313 25,878 134,464 160,342
Stock Option Plan 9,963 59,778 2,133 61,911
Change in unearned ESOP shares 84,671 6,982 27,000 118,653
Cash dividends ($0.12 per share) (465,124) (465,124)
--------------------------------------------------------------------------------------------
Balance at March 31, 1998 3,890,323 $23,341,938 $1,837,875 $14,875,978 $1,938,819 ($499,625) $41,494,985
============================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
3
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Three Months ended March 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,642,646 $ 1,334,659
Adjustments to reconcile net income to net cash provided by operating
activities:
Accretion and amortization of investment securities (84,203) (28,783)
Depreciation of premises and equipment 334,770 305,122
Amortization of intangible assets 109,981 100,891
Provision for loan losses 210,000 200,000
Gains on sales of mortgage loans (93,924) (76,700)
Gains on sales of premises and equipment 192 (13,873)
Change in interest receivable (368,447) (673,481)
Change in prepaid expenses (268,370) 25,801
Change in income taxes payable 1,236,411 771,739
Change in deferred taxes (41,740) (253,765)
Change in interest payable 522,052 524,953
Change in accrued expenses (38,281) (1,038,902)
Origination of mortgage loans held for sale (6,234,825) (2,305,094)
Proceeds from sales of mortgage loans held for sale 5,399,839 3,248,144
Net change in unearned ESOP shares 118,653 63,573
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,444,754 2,184,284
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to maturity 1,748,871 3,526,948
Purchase of investment securities available-for-sale (8,379,295) (17,365,250)
Proceeds from sales of investment securities available-for-sale 1,563,100 984,600
Proceeds from maturities of investment securities available-for-sale 9,638,950 5,384,724
Net change in loans (21,440,479) (21,496,213)
Capital expenditures (521,947) (349,029)
Proceeds from the sale of premises and equipment 250 15,200
Other, net (217,211) 1,358,508
- -------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (17,607,761) (27,940,512)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 30,289,227 29,133,969
Net change in federal funds purchased and securities sold under agreements
to repurchase (7,094,204) (4,441,765)
Net change in other short-term borrowings (606,450) 381,069
Proceeds from issuance of long-term debt 13,000,000 0
Proceeds from issuance of stock in accordance with:
Stock Option Plan 61,911 0
Dividend Reinvestment Plan 160,342 0
Cash dividends paid (465,124) (358,307)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 35,345,702 24,714,966
- -------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 20,182,695 (1,041,262)
Cash and cash equivalents at January 1 25,977,935 25,663,652
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31 $ 46,160,630 $ 24,622,390
=========================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
4
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying consolidated financial statements are
unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair statement of
the financial position and operating results of Anchor Financial
Corporation (the "Corporation") and its subsidiaries for the
periods presented. A summary of the Corporation's significant
accounting policies is set forth in Note 1 to the Consolidated
Financial Statements in the Corporation's Annual Report on Form
10-K for 1997.
The results of operations for the three-month period ended March
31, 1998 are not necessarily indicative of the results to be
expected for the full year.
NOTE 2: PENDING ACQUISITIONS
On May 1, 1998, the Corporation and M&M Financial Corporation
("M&M Financial"), parent company of First National South and
headquartered in Marion, South Carolina, announced the signing
of a letter of intent to merge. Based on Anchor's closing stock
price of $40.50 on April 28, 1998, the proposed transaction
would have a value of $35.5 million. The proposed merger is
expected to be accounted for as a pooling of interests and
provides for a tax-free exchange of 0.87 shares of Anchor common
stock for each outstanding share of M&M Financial common stock.
The proposed transaction is subject to due diligence, execution
of a definitive agreement by May 15, 1998, and approval of such
agreement by the boards of directors and shareholders of both
companies and approval by appropriate regulatory agencies. The
proposed merger is expected to be completed in the third quarter
of 1998. M&M Financial had total assets of $167,878,860 and
$156,270,694 at March 31, 1998 and December 31, 1997,
respectively. M&M Financial reported net income for the first
quarter of 1998 of $294,294, compared with $362,830 for the same
period in 1997.
On April 14, 1998, the Corporation entered into a definitive
agreement to acquire ComSouth Bankshares, Inc. with operations
in Charleston and Columbia, South Carolina ("ComSouth"). Based
on Anchor's closing stock price of $41.00 on April 9, 1998, the
proposed transaction is valued at $71.3 million. ComSouth
shareholders will receive .75 shares of Anchor common stock for
each share of ComSouth common stock held. The acquisition, which
is to be accounted for as a pooling of interests, is subject to
approval of shareholders of both companies and regulatory
approvals. The transaction is expected to be completed in the
third quarter of 1998. ComSouth had total assets of $217,375,427
and $205,571,538 at March 31, 1998 and December 31, 1997,
respectively. ComSouth reported net income for the first
quarter of 1998 of $675,372, compared with $520,160 for the
same period in 1997.
5
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3: RESERVE FOR LOAN LOSSES
Activity in the reserve for loan losses for the three months
ended March 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Balance, beginning of year $4,588,996 $3,801,201
Provision charged to operations 210,000 200,000
Recoveries of charged off loans 11,067 61,781
Loans charged off (35,184) (26,449)
-------------------------------------
Balance, end of period $4,774,879 $4,036,533
=====================================
</TABLE>
NOTE 4: NONPERFORMING ASSETS
The following is a summary of nonperforming assets at March 31,
1998 and December 31, 1997. The income effect of interest
foregone on these assets is not material. The Corporation did not
have any loans with reduced interest rates because of troubled
debt restructuring, foreign loans, or loans for highly leveraged
transactions. Management is not aware of any situation, other
than those included in the summary below, where known information
about a borrower would require disclosure as a potential problem
loan.
<TABLE>
<CAPTION>
3/31/98 12/31/97
------------------------------
<S> <C> <C>
Nonaccrual loans $269,308 $228,674
Loans past due ninety days or more 1,229 0
Other real estate owned 187,100 187,000
==============================
Total nonperforming assets $457,637 $415,674
===============================
</TABLE>
Impaired loans are loans for which it is probable that all
amounts, including principal and interest, will not be collected
in accordance with the contractual terms of the loan agreement.
At March 31, 1998, impaired loans had a related specific
allowance for loan losses totaling $27,000. There were no
material commitments to lend additional funds to customers whose
loans were classified as impaired at March 31, 1998.
6
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: LONG-TERM DEBT AND SUBORDINATED NOTES
Long-term debt and subordinated notes are summarized as follows:
<TABLE>
<CAPTION>
3/31/98 12/31/97
-----------------------------------
<S> <C> <C>
Parent Company:
8.60% subordinated notes due in 2003 (a) $ 5,000,000 $ 5,000,000
7.89% subordinated notes due in 2006 (a) 6,000,000 6,000,000
-----------------------------------
Total $11,000,000 $11,000,000
-----------------------------------
Subsidiaries:
5.71% Federal Home Loan Bank advance due in 1998 5,000,000 5,000,000
5.48% Federal Home Loan Bank advance due in 1999 3,000,000 3,000,000
6.08% Federal Home Loan Bank advance due in 2000 5,000,000 5,000,000
5.66% Federal Home Loan Bank advance due in 2002 5,000,000 5,000,000
7.21% Federal Home Loan Bank advance due in 2005 5,000,000 5,000,000
4.59% Federal Home Loan Bank advance due in 2008 8,000,000 0
5.51% Federal Home Loan Bank advance due in 2008 5,000,000 0
-----------------------------------
Total 36,000,000 23,000,000
-----------------------------------
Total long-term debt and subordinated notes $47,000,000 $34,000,000
===================================
<FN>
(a) Debt qualifies for inclusion in the determination of total
capital under the Risk- Based Capital Guidelines.
</FN>
</TABLE>
The principal maturity of long-term debt and subordinated notes
for the next five years subsequent to March 31, 1998 is
$5,000,000 in 1998, $3,000,000 in 1999, $5,000,000 in 2000,
$5,000,000 in 2002, $5,000,000 in 2003, and $24,000,000 there
after.
NOTE 6: PER SHARE DATA
Net income per share - basic is computed by dividing net income
by the weighted average number of shares outstanding. Net income
per share - diluted is computed by dividing net income by the
weighted average number of common shares outstanding and dilutive
common share equivalents using the treasury stock method.
Dilutive common share equivalents include common shares issuable
upon exercise of outstanding stock options. Unallocated common
shares held by the Employee Stock Ownership Plan are excluded
from the weighted average shares outstanding.
7
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In accordance with SFAS No. 128, the calculation of net income
per share - basic and net income per share - diluted at March 31
is presented below:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
<S> <C> <C>
Net income per share - basic computation
Net income $1,642,646 $1,334,659
Income available to common shareholders $1,642,646 $1,334,659
=======================================
Average common shares outstanding 3,881,972 3,839,010
Unallocated ESOP Shares (51,335) (62,876)
---------------------------------------
Average common shares outstanding - basic 3,830,637 3,776,135
---------------------------------------
Net income per share - basic $0.43 $0.35
=======================================
Net income per share - diluted computation
Income available to common shareholders $1,642,646 $1,334,659
=======================================
Average common shares outstanding - basic 3,830,637 3,776,135
Incremental shares from assumed conversions:
Stock Options 245,631 251,168
---------------------------------------
Average common shares outstanding - diluted 4,076,268 4,027,302
---------------------------------------
Net income per share - diluted $0.40 $0.33
=======================================
</TABLE>
NOTE 7: OTHER MATTERS
At March 31, 1998, outstanding standby letters of credit totaled
$2,514,362.
For the three months ended March 31, 1998 and 1997, the
Corporation paid interest of $4,949,782 and $3,962,844
respectively. The Corporation paid no income taxes during the
three months ended March 31, 1998 and $37,500 during the same
period in 1997.
8
<PAGE>
ITEM 2. Management's Discussion and Analysis
Certain of the information included in this discussion contains
forward-looking statements with respect to the financial condition, results of
operations and business of the Corporation, based on management's belief and
information currently available to management. Such forward-looking statements
are subject to risks, uncertainties and assumptions. Actual results may vary
materially from those anticipated, estimated, projected, or expected. Among the
factors that may cause variations from such forward-looking statements are
fluctuations in the economy, especially in the Corporation's market areas;
changes in the interest rate environment; the Corporation's ability to realize
anticipated cost savings relating to pending acquisitions; the Corporation's
success in assimilating acquired operations in the Corporation's culture,
including its ability to instill Anchor's credit culture into acquired
operation; the continued growth of the markets in which the Corporation
operates; and the enactment of legislation impacting the Corporation.
Net Income
Net income for the first quarter of 1998 was $1,642,646, an increase of
$307,987 or 23.1% from the $1,334,659 for the same period in 1997. Net income
per share - diluted for the first quarter increased 21.6% from $0.33 in 1997 to
$0.40 in 1998.
The primary factors affecting this increase were an increase of
$861,610 in net interest income and an increase in noninterest income of
$54,660. These positive factors were partially offset by increases in
noninterest expense of $419,192, the provision for income taxes of $179,091, and
the provision for loan losses of $10,000.
Annualized return on average total assets for the first quarter of 1998
was 1.13% compared with 1.08% in 1997. Annualized return on average
stockholders' equity for the first quarter of 1998 was 16.94% compared with
16.08% in 1997.
The Corporation will incur charges arising from merger transactions
(Note 2 to the unaudited interim consolidated financial statements), and the
Corporation will incur costs related to the integration of the acquired entities
into the Corporation. Anticipated charges would normally include, but not be
limited to, legal and accounting fees, financial advisory fees, early retirement
and involuntary separation benefits, cancellation of vendor contracts, system
conversions and other software costs, training, and other similar costs.
Net Interest Income
Net interest income, the major component of the Corporation's net
income, was $6,286,439 for the first quarter of 1998, an increase of $861,610 or
15.9% from the $5,424,829 reported for the same period in 1997. This increase
was attributed to the increased volume of earning assets during the period since
the tax equivalent net yield on earning assets decreased from 4.80% in 1997 to
4.69% in 1998. The increased volume of earning assets was primarily the result
of quality loan demand and strong deposit growth during the period.
9
<PAGE>
Interest income increased $1,845,647 or 18.6% for the three months
ended March 31, 1998 compared with the same period in 1997. The increase was due
to an increase in the volume of earning assets since the yield on earning assets
remained the same. The yield on earning assets was 8.76% for the first quarter
of 1997 and 1998. Average loans increased $72.5 million or 20.5% and average
investment securities increased $11.8 million or 11.4% for the first quarter of
1998 compared with the same period in 1997. Average interest earning assets
represented 92.5% of average total assets during the first quarter of 1998
compared with 91.6% in 1997. The composition of average interest-earning assets
changed slightly as the percentage of average loans to average interest-earning
assets increased from 76.9% in 1997 to 78.2% in 1998.
Interest expense increased $984,037 or 21.9% for the three months ended
March 31, 1998 compared with the same period in 1997. The increase in interest
expense was due to an increase in the volume of average interest-bearing
liabilities and the rate paid on average interest-bearing liabilities, which
increased from 4.66% for the three months ended March 31, 1997 to 4.83% for the
same period in 1998. Average interest-bearing liabilities increased $68.8
million or 17.6% for the first quarter of 1998 compared with the same period in
1997. Average interest-bearing liabilities represented 84.3% of funding sources
during the first quarter of 1998 compared with 84.9% in 1997.
Provision for Loan Losses
A $210,000 provision for loan losses was made during the first quarter
of 1998 compared with a provision of $200,000 in 1997. The provision for loan
losses increased during the first quarter of 1998 primarily due to loan growth
resulting from quality loan demand and expansion into new market areas.
Nonperforming assets at March 31, 1998 totaled $457,637, compared with
$127,339 reported at the same time last year. Although nonperforming assets
rose, the increase and balance remain nominal relative to the size of the
Corporation and its portfolio. The Corporation's nonperforming assets have
historically remained relatively low as the result of conservative underwriting
policies and favorable market conditions. The ratio of nonperforming assets to
total loans and other real estate owned was 0.10% at March 31, 1998 compared
with 0.03% at March 31, 1997. At March 31, 1998 and 1997 the ratio of annualized
net charge-offs (recoveries) to average loans was 0.02% and (0.04)%
respectively.
The reserve for loan losses at March 31, 1998 and December 31, 1997
represented 1.09% and 1.10% respectively of total loans outstanding. Based on
the current evaluation of the loan portfolio, management believes the reserve at
March 31, 1998 is adequate to cover potential losses in the portfolio.
Noninterest Income
Noninterest income for the first quarter of 1998 increased $54,660 or
5.2% from the same period in 1997. The primary factors attributing to this
increase were increases in commissions and fees of $45,556 or 17.1%, service
charges on deposit accounts of $35,469 or 7.4%, trust income of $24,270 or
45.1%, and mortgage banking income of $17,224 or 22.5%. These positive
changes were offset by a 39.7% decrease in other operating income.
10
<PAGE>
The growth in commissions and fees resulted primarily from increased
revenue generated by credit card-related services and safe deposit box rentals.
Trust revenue rose largely due to increased sales efforts primarily in Hilton
Head Island, South Carolina and favorable market conditions overall. The
increase in mortgage banking income resulted from increased volume of loan
originations due to the favorable interest rate environment and the
Corporation's expansion of its mortgage origination program. The decrease in
other operating income was primarily due to non-recurring recoveries of
previously charged-off assets during the first quarter of 1997.
Noninterest Expense
Noninterest expense for the first quarter of 1997 increased $419,192 or
10.0% from the same period in 1997. The primary factors contributing to this
increase were increases in salaries and employee benefits, and slight increases
in net occupancy expense, equipment expense, and other operating expense due to
the Corporation's continued strong growth.
Salaries and employee benefits for the first quarter of 1998 increased
$354,868 or 15.4% from the same period in 1997, primarily due to the
Corporation's investment in new personnel. The staffing cost increases were
largely due to the opening of a new branch office in Charleston, South Carolina
during the second quarter of 1997, and expansion of sales-related positions in
growing market areas.
Net occupancy expense for the first quarter of 1998 increased $26,789
or 8.3% from the same period in 1997, largely due to higher building
depreciation. The Corporation purchased a new operations center in Conway, South
Carolina during the third quarter of 1997. Equipment expense increased 7.5%,
primarily due to higher maintenance costs and furniture and equipment
depreciation.
Income Taxes
The provision for income taxes for the first quarter of 1998 increased
$179,091 or 23.6% from the same period in 1997. The provision for income taxes
increased in 1998 primarily due to higher income before taxes since tax rates
remained approximately the same as 1997.
Financial Position
For the first quarter of 1998, average total assets increased 9.1%
while average loans increased 11.3% and average deposits increased 6.7% from
December 31, 1997.
Because the economy of the Corporation's primary market area is
seasonal in nature, deposit growth is strong during the summer months and loan
demand usually reaches its peak during the winter months. This seasonality is
caused by the economic impact of a large number of tourists visiting coastal
South Carolina and North Carolina during the summer months. Thus, the
Corporation historically has a more favorable liquidity position during the
summer. To meet loan demand and liquidity needs during the winter months, the
Corporation typically invests sizable amounts of its deposit growth during the
summer months in temporary investments and short-term securities maturing in the
winter months. Additionally, the Corporation has access to other funding sources
including federal funds purchased from correspondent banks, a line of credit
with the Federal Home Loan Bank ("FHLB"), as well as a
11
<PAGE>
seasonal borrowing privilege from the Federal Reserve Bank to meet its
liquidity needs during the winter months.
The Corporation utilizes long-term advances from the FHLB as part of
its funding strategy. FHLB long-term advances totaled $36,000,000 at March 31,
1998 compared with $23,000,000 at December 31, 1997.
The Corporation continues to have a strong capital position by industry
standards with the ratio of average stockholders' equity to average total assets
at March 31, 1998 being 6.7% compared with 6.6% at December 31, 1997. At March
31, 1998, the total risk-based capital ratio was 12.3% compared with 12.4% at
December 31, 1997. The leverage ratio at March 31, 1998 was 6.7% compared with
6.6% at December 31, 1997.
Accounting and Regulatory Matters
On January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting the components of comprehensive income and
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be included in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income includes net income as well as certain items
that are reported directly within a separate component of stockholders' equity
and bypass net income. The adoption of SFAS No. 130 did not have a material
impact on the Corporation's financial condition or results of operations. All of
the Corporation's other comprehensive income relates to net unrealized gains on
investment securities available for sale.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk exposures that
affect the quantitative or qualitative disclosures presented as of the preceding
fiscal year end in the Corporation's Annual Report on Form 10-K.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On April 30, 1998, the Corporation held its 1998 Annual Meeting of
Shareholders. At the 1998 Annual Meeting, the following individuals
were elected as Directors with the votes indicated.
<TABLE>
<CAPTION>
Director For Withheld
-------------------------------------- ----------------- ----------
<S> <C> <C>
James E. Burroughs 2,699,979 109,604
Stephen L. Chryst 2,780,813 28,770
J. Bryan Floyd 2,780,913 28,670
Ruppert L. Piver 2,746,131 63,452
Albert A. Springs, III 2,780,857 28,726
</TABLE>
C. Jason Ammons, Jr., Howell V. Bellamy, Jr., W. Cecil Brandon, Jr., C.
Donald Cameron, Admah Lanier, Jr., Tommy E. Looper, W. Gairy Nichols,
III, Thomas J. Rogers, J. Roddy Swaim, Harry A. Thomas, and Zeb M.
Thomas, Sr. continued in their terms of office as directors of the
Corporation.
The following is a brief description of other matters voted upon at the
1998 Annual Meeting and the number of votes cast for and withheld, as
well as, the number of abstentions.
Proposal to consider and vote upon amendments to the Corporation's
Articles of Incorporation:
(i) to increase the authorized shares of common stock to 10,000,000
shares:
For - 2,754,967 Withheld - 25,283 Abstain - 29,333
(ii) to change the par value of the common stock to no par:
For - 2,696,960 Withheld - 48,529 Abstain - 64,094
13
<PAGE>
Proposal to ratify the selection of Price Waterhouse LLP as independent
public accountants for the Corporation for the year ending December 31,
1998.
For - 2,798,940 Withheld - 1,342 Abstain - 9,301
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule (for SEC purposes only)
(b) No reports on Form 8-K have been filed during the quarter ended March
31, 1998.
A report on Form 8-K dated May 1, 1998 was filed with the Securities
and Exchange Commission on May 5, 1998. On May 1, 1998 Anchor
Financial Corporation (the "Corporation") and M&M Financial
Corporation ("M&M Financial"), parent company of First National South
and headquartered in Marion, South Carolina, announced the signing of
a letter of intent to merge. The proposed merger is expected to be
accounted for as a pooling of interests and provides for a tax-free
exchange of 0.87 shares of Anchor Financial Corporation common stock
for each outstanding share of M&M Financial common stock. The proposed
merger is subject to due diligence, execution of a definitive
agreement by May 15, 1998, and approval of such agreement by the
boards of directors and shareholders of both companies and approval by
appropriate regulatory agencies. The proposed merger is expected to be
completed in the third quarter of 1998.
A report on Form 8-K dated April 14, 1998 was filed with the
Securities and Exchange Commission on April 17, 1998. On April 14,
1998, Anchor Financial Corporation (the "Corporation") announced that
it executed a definitive Agreement and Plan of Merger with ComSouth
Bankshares, Inc. ("ComSouth"), Columbia, South Carolina, dated April
14, 1998 (the "Agreement"). The Agreement was unanimously approved by
the boards of directors of both companies. The Agreement provides that
the proposed transaction is to be accounted for as a pooling of
interests and is to be a tax-free exchange of 0.75 shares of Anchor
Financial Corporation common stock for each outstanding share of
ComSouth common stock. The transaction is expected to be completed in
the third quarter of 1998 subject to the approval of shareholders of
both companies and appropriate regulatory agencies.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Stephen L. Chryst
Stephen L. Chryst, President and
Chief Executive Officer
/s/ Tommy E. Looper
Tommy E. Looper, Executive Vice
President and Chief Financial
Officer
/s/ John J. Moran
John J. Moran, Senior Vice President
and Comptroller
Date: May 6, 1998
15
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 24,066,796
<INT-BEARING-DEPOSITS> 3,493,834
<FED-FUNDS-SOLD> 18,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,998,268
<INVESTMENTS-CARRYING> 8,680,913
<INVESTMENTS-MARKET> 8,735,944
<LOANS> 438,044,512
<ALLOWANCE> 4,774,879
<TOTAL-ASSETS> 624,671,925
<DEPOSITS> 523,996,732
<SHORT-TERM> 6,399,025
<LIABILITIES-OTHER> 5,781,183
<LONG-TERM> 47,000,000
0
0
<COMMON> 23,341,938
<OTHER-SE> 18,153,047
<TOTAL-LIABILITIES-AND-EQUITY> 624,671,925
<INTEREST-LOAN> 9,830,930
<INTEREST-INVEST> 1,880,273
<INTEREST-OTHER> 47,070
<INTEREST-TOTAL> 11,758,273
<INTEREST-DEPOSIT> 4,717,711
<INTEREST-EXPENSE> 5,471,834
<INTEREST-INCOME-NET> 6,286,439
<LOAN-LOSSES> 210,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,599,187
<INCOME-PRETAX> 2,580,646
<INCOME-PRE-EXTRAORDINARY> 2,580,646
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,642,646
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
<YIELD-ACTUAL> 4.69
<LOANS-NON> 269,308
<LOANS-PAST> 1,299
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,588,996
<CHARGE-OFFS> 35,184
<RECOVERIES> 11,067
<ALLOWANCE-CLOSE> 4,774,879
<ALLOWANCE-DOMESTIC> 4,274,879
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 500,000
</TABLE>
