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 June 30, 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 August 6, 1998
- ----------------------------------------- -----------------------------
(Common stock, no par value) 3,899,709
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheet - June 30, 1998
and December 31, 1997 1
Consolidated Statement of Income - Three months and
Six months ended June 30, 1998 and 1997 2
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income - Six months ended
June 30, 1998 and 1997 3
Consolidated Statement of Cash Flows -
Six months ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 16
Part II - Other Information
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote
of Security-Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited) *
ASSETS
<S> <C> <C>
Cash and due from banks $ 26,994,119 $ 25,313,707
Interest-bearing balances due from banks 13,509,057 664,228
Federal funds sold 10,000,000 0
Investment securities:
Held-to-maturity, at amortized cost (fair value of $7,154,081
in 1998 and $10,474,569 in 1997) 7,100,634 10,428,605
Available-for-sale, at fair value (amortized cost of $130,973,846
in 1998 and $108,707,284 in 1997) 134,017,047 111,033,032
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 141,117,681 121,461,637
- ---------------------------------------------------------------------------------------------------------------------------------
Loans 428,854,987 415,737,360
Less - unearned income (33,786) (38,120)
- allowance for loan losses (5,020,784) (4,588,996)
- ---------------------------------------------------------------------------------------------------------------------------------
Net loans 423,800,417 411,110,244
- ---------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 16,904,061 16,875,259
Other assets 10,898,501 9,971,550
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 643,223,836 $ 585,396,625
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits $ 109,808,007 $ 83,393,250
NOW and money market accounts 282,409,498 237,839,188
Time deposits $100,000 and over 49,812,169 69,102,035
Other time and savings deposits 108,191,331 103,373,032
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 550,221,005 493,707,505
Federal funds purchased and securities
sold under agreements to repurchase 4,441,281 11,912,314
Other short-term borrowings 1,982,828 2,187,366
Long-term debt 28,000,000 23,000,000
Subordinated notes 11,000,000 11,000,000
Other liabilities 4,447,400 4,061,001
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 600,092,514 545,868,186
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, no par value; 10,000,000 shares
authorized; shares issued and outstanding - 3,896,118
in 1998 and 3,876,047 in 1997 25,445,790 24,872,889
Retained earnings 16,196,712 13,691,474
Accumulated other comprehensive income, net of tax 1,950,945 1,490,701
Unearned ESOP shares (462,125) (526,625)
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 43,131,322 39,528,439
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 643,223,836 $ 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>
Six months ended Three months ended
June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 19,891,164 $ 17,182,068 $ 10,060,234 $ 8,916,763
Interest on investment securities:
Taxable 3,698,924 3,164,637 1,898,042 1,621,307
Non-taxable 159,174 129,780 79,783 64,390
Other interest income 276,160 96,646 229,090 58,045
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 24,025,422 20,573,131 12,267,149 10,660,505
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 9,653,509 8,171,795 4,935,798 4,247,782
Interest on short-term borrowings 167,934 113,647 71,015 54,971
Interest on long-term borrowings 860,173 552,620 433,293 277,836
Interest on subordinated notes 462,865 462,865 232,541 232,541
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 11,144,481 9,300,927 5,672,647 4,813,130
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 12,880,941 11,272,204 6,594,502 5,847,375
Provision for loan losses 310,000 440,000 100,000 240,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,570,941 10,832,204 6,494,502 5,607,375
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 1,039,605 967,811 523,702 487,377
Commissions and fees 675,584 602,717 363,440 336,129
Trust income 212,321 145,348 134,190 91,487
Gains on sales of mortgage loans 277,313 119,072 183,389 42,372
Other operating income 321,525 268,035 218,233 96,884
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,526,348 2,102,983 1,422,954 1,054,249
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 5,422,181 4,675,955 2,765,462 2,374,104
Net occupancy expense 710,489 652,524 362,166 330,990
Equipment expense 701,955 649,088 355,721 327,012
Other operating expense 2,821,555 2,544,915 1,573,644 1,310,381
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,656,180 8,522,482 5,056,993 4,342,487
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,441,109 4,412,705 2,860,463 2,319,137
Provision for income taxes 2,017,800 1,563,589 1,079,800 804,680
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,423,309 $ 2,849,116 $ 1,780,663 $ 1,514,457
====================================================================================================================================
Net income per share - basic $ 0.89 $ 0.75 $ 0.46 $ 0.40
====================================================================================================================================
Net income per share - diluted $ 0.84 $ 0.71 $ 0.44 $ 0.38
====================================================================================================================================
Weighted average common shares outstanding - basic 3,836,012 3,776,135 3,841,328 3,776,135
====================================================================================================================================
Weighted average common shares outstanding - diluted 4,084,304 4,025,444 4,091,534 4,023,471
====================================================================================================================================
</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
Six Months ended June 30, 1998 and June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
other Unearned Total
Common Stock Retained comprehensive ESOP stockholders'
-----------------------------
Shares Amount earnings income (loss) shares equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,839,010 $24,104,386 $9,006,968 $497,301 ($633,250) $32,975,405
Comprehensive Income
Net income 2,849,116 2,849,116
Other comprehensive income, net of tax
Unrealized gains on investment securities 13,344 13,344
----------------
Comprehensive Income 2,862,460
----------------
Change in unearned ESOP shares 54,382 13,244 (23,625) 44,001
Cash dividends ($0.187 per share) (716,614) (716,614)
---------------------------------------------------------------------------------------------
Balance at June 30, 1997 3,839,010 $24,158,768 $11,152,714 $510,645 ($656,875) $35,165,252
=============================================================================================
Balance at December 31, 1997 3,876,047 $24,872,889 $13,691,474 $1,490,701 ($526,625) $39,528,439
Comprehensive Income
Net income 3,423,309 3,423,309
Other comprehensive income, net of tax
Unrealized gains on investment securities 460,244 460,244
----------------
Comprehensive Income 3,883,553
----------------
Common stock issued pursuant to:
Dividend Reinvestment Plan 7,483 295,067 295,067
Stock Option Plan 12,588 94,995 94,995
Change in unearned ESOP shares 182,839 13,965 64,500 261,304
Cash dividends ($0.24 per share) (932,036) (932,036)
---------------------------------------------------------------------------------------------
Balance at June 30, 1998 3,896,118 $25,445,790 $16,196,712 $1,950,945 ($462,125) $43,131,322
=============================================================================================
</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>
- ----------------------------------------------------------------------------------------------------------------------
Six Months ended June 30,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 3,423,309 $ 2,849,116
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion and amortization of investment securities (103,083) (27,382)
Depreciation of premises and equipment 674,872 621,706
Amortization of intangible assets 221,379 205,437
Provision for loan losses 310,000 440,000
Gains on sales of mortgage loans (277,313) (119,072)
Gains on sales of premises and equipment (12,570) (13,873)
Change in interest receivable (899,707) (833,289)
Change in prepaid expenses (190,510) 94,081
Change in income taxes payable 386,289 163,352
Change in deferred taxes 60,523 (35,164)
Change in interest payable (226,860) 285,362
Change in accrued expenses 678,414 45,032
Origination of mortgage loans held for sale (18,139,425) (5,216,644)
Proceeds from sales of mortgage loans held for sale 17,355,456 5,712,000
Net change in unearned ESOP shares 261,304 44,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,522,078 4,214,662
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to maturity 3,330,783 5,197,828
Purchase of investment securities available-for-sale (35,783,036) (26,976,320)
Proceeds from sales of investment securities available-for-sale 1,563,100 984,600
Proceeds from maturities of investment securities available-for-sale 12,053,646 9,119,355
Net change in loans (11,938,891) (38,047,588)
Capital expenditures (717,353) (709,700)
Proceeds from the sale of premises and equipment 26,250 15,200
Other, net (827,291) 247,630
- ----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (32,292,792) (50,168,995)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 56,513,501 46,447,681
Net change in federal funds purchased and securities sold under agreements
to repurchase (7,471,034) 1,587,714
Net change in other short-term borrowings (204,538) 279,764
Proceeds from issuance of long-term debt 5,000,000 0
Proceeds from issuance of stock in accordance with:
Stock Option Plan 94,995 0
Dividend Reinvestment Plan 295,067 0
Cash dividends paid (932,036) (716,614)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 53,295,955 47,598,545
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 24,525,241 1,644,212
Cash and cash equivalents at January 1 25,977,935 25,663,652
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30 $ 50,503,176 $ 27,307,864
======================================================================================================================
</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 and six month periods
ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
NOTE 2: PENDING ACQUISITIONS
On May 15, 1998, the Corporation entered into a definitive
agreement to acquire M&M Financial Corporation ("M&M
Financial"), parent company of First National South and
headquartered in Marion, South Carolina. 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 acquisition
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 acquisition is subject to approval of shareholders of both
companies and regulatory approvals. The acquisition is expected
to be completed in the third quarter of 1998. M&M Financial had
total assets of $171,007,976 and $156,270,694 at June 30, 1998
and December 31, 1997, respectively. M&M Financial reported net
income for the second quarter of 1998 of $525,378, compared with
$232,278 for the same period in 1997. M&M Financial reported net
income for the first six months of 1998 of $819,672, compared
with $595,108 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 would have a value of $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
5
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of both companies and regulatory approvals. The transaction is
expected to be completed in the third quarter of 1998.
ComSouth had total assets of $221,088,487 and $205,571,538 at
June 30, 1998 and December 31, 1997, respectively. ComSouth
reported net income for the second quarter of 1998 of $747,351,
compared with $524,992 for the same period in 1997. ComSouth
reported net income for the first six months of 1998 of
$1,422,723, compared with $1,045,152 for the same period in
1997.
NOTE 3: RESERVE FOR LOAN LOSSES
Activity in the reserve for loan losses for the six months ended
June 30, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Balance, beginning of year $4,588,996 $3,801,201
Provision charged to operations 310,000 440,000
Recoveries of charged off loans 305,935 85,996
Loans charged off (184,147) (137,834)
-------------------------------------
Balance, end of period $5,020,784 $4,189,363
=====================================
</TABLE>
NOTE 4: NONPERFORMING ASSETS
The following is a summary of nonperforming assets at June 30,
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>
6/30/98 12/31/97
-------------------------------------
<S> <C> <C>
Nonaccrual loans $835,220 $228,674
Loans past due ninety days or more 19,961 0
Other real estate owned 202,000 187,000
-------------------------------------
Total nonperforming assets $1,057,181 $415,674
=====================================
</TABLE>
6
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 1998, impaired loans had a related specific allowance
for loan losses totaling $56,000. Non-accrual loans at June 30,
1998 include a loan for $272,068, which is expected to be paid in
full by December 31, 1998 from an estate settlement. There were
no material commitments to lend additional funds to customers
whose loans were classified as impaired at June 30, 1998.
NOTE 5: LONG-TERM DEBT AND SUBORDINATED NOTES
Long-term debt and subordinated notes are summarized as follows:
<TABLE>
<CAPTION>
6/30/98 12/31/97
-------------------------------------
Parent Company:
<S> <C> <C>
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
5.51% Federal Home Loan Bank advance due in 2008 5,000,000 0
-------------------------------------
Total 28,000,000 23,000,000
-------------------------------------
Total long-term debt and subordinated notes $39,000,000 $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 June 30, 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 $16,000,000 there after.
7
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
In accordance with SFAS No. 128, the calculation of net income
per share - basic and net income per share - diluted at June 30
is presented below:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
Net income per share - basic computation
<S> <C> <C>
Net income $3,423,309 $2,849,116
Income available to common shareholders $3,423,309 $2,849,116
=======================================
Average common shares outstanding 3,887,347 3,839,010
Unallocated ESOP Shares (51,335) (62,875)
---------------------------------------
Average common shares outstanding - basic 3,836,012 3,776,135
=======================================
Net income per share - basic $0.89 $0.75
=======================================
Net income per share - diluted computation
Income available to common shareholders $3,423,309 $2,849,116
=======================================
Average common shares outstanding - basic 3,836,012 3,776,135
Incremental shares from assumed conversions:
Stock Options 248,292 249,309
---------------------------------------
Average common shares outstanding - diluted 4,084,304 4,025,444
---------------------------------------
Net income per share - diluted $0.84 $0.71
=======================================
</TABLE>
8
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7: OTHER MATTERS
At June 30, 1998, outstanding standby letters of credit totaled
$5,779,258.
For the six months ended June 30, 1998 and 1997, the Corporation
paid interest of $11,371,341 and $9,015,565 respectively. The
Corporation paid $1,828,018 in income taxes during the six months
ended June 30, 1998 and $1,426,027 during the same period in
1997.
9
<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
operations; 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 second quarter of 1998 totaled $1,948,716, or $0.48
per diluted share, before pretax charges of $171,652 ($168,053 after taxes)
associated with the acquisition of ComSouth and M&M Financial. Excluding
nonrecurring merger expenses, net income and earnings per diluted share for the
quarter ended June 30, 1998, increased 28.7% and 26.5%, respectively, from the
second quarter of 1997. Including the effect of the merger expenses, net income
totaled $1,780,663, or $0.44 per diluted share, for the quarter ended June 30,
1998, compared to $1,514,457, or $0.38 per diluted share earned in the same
period of 1997. Remaining integration charges of $3.8 million, pretax, are
expected to be taken later in 1998, primarily in the third quarter of the year.
The primary factors affecting the increase in net income for the second
quarter of 1998 were an increase of $747,127 in net interest income, an increase
in noninterest income of $368,705, and a decrease in the provision for loan
losses of $140,000. These positive factors were partially offset by increases in
noninterest expense of $542,854 and the provision for income taxes of $278,719,
excluding nonrecurring merger related expenses and tax effect.
Net income for the six months ended June 30, 1998 was $3,591,362 or
$0.88 per diluted share, before pretax merger charges of $171,652. Excluding
nonrecurring merger expenses, net income and earnings per diluted share for the
first six months of 1998, increased 26.1% and 24.2%, respectively, from the same
period in 1997. Including the effect of the merger expenses, net income totaled
$3,423,309, or $0.84 per diluted share, for the first six months of 1998,
compared to $2,849,116, or $0.71 per diluted share earned in the same period of
1997.
10
<PAGE>
The primary factors affecting the increase in net income for the first
six months of 1998 were increases of $1,608,737 in net interest income, $423,365
in noninterest income, and a decrease in the provision for loan losses of
$130,000. These positive factors were partially offset by increases in
noninterest expense of $962,046 and the provision for income taxes of $457,810,
excluding nonrecurring merger related expenses and tax effect.
For the quarter ended June 30, 1998, return on average assets and
return on average equity, excluding nonrecurring merger expenses, were 1.26% and
19.12%, respectively, compared to prior year ratios of 1.15% and 17.49%. For the
six months ended June 30, 1998, return on average assets and return on average
equity, excluding nonrecurring merger expenses, were 1.20% and 18.06%,
respectively, compared to prior year ratios of 1.11% and 16.80%.
The Corporation will continue to 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 $6,594,502 for the second quarter of 1998, an increase of $747,127
or 12.8% from the $5,847,375 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 4.86% in 1997 to
4.62% in 1998. The increased volume of earning assets was primarily the result
of continued quality loan demand and strong deposit growth during the period.
Interest income was up $1,606,644 or 15.1% for the quarter ended June
30, 1998 compared with the same period in 1997. The increase was due to growth
in the volume of earning assets since the yield on earning assets decreased from
8.83% in 1997 to 8.57% in 1998. Average interest earning assets for the second
quarter of 1998 increased $90.1 million or 18.6% from the second quarter of
1997. Average loans increased $59.2 million or 15.8% and average investment
securities increased $19.5 million or 18.0% for the second quarter of 1998
compared with the same period in 1997. Average interest earning assets
represented 92.6% of average total assets during the second 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 decreased from 76.9% in 1997 to 75.2% in 1998.
11
<PAGE>
Interest expense increased $859,517 or 17.9% for the quarter ended June
30, 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
a higher rate paid on average interest-bearing liabilities, which increased from
4.74% for the three months ended June 30, 1997 to 4.80% for the same period in
1998. Average interest-bearing liabilities increased $66.6 million or 16.4% for
the second quarter of 1998 compared with the same period in 1997. Average
interest-bearing liabilities represented 82.3% of funding sources during the
second quarter of 1998 compared with 83.8% in 1997.
For the six months ended June 30, 1998, net interest income increased
$1,608,737 or 14.3% from the same period in 1997. The primary reason for this
increase was the increased volume of earning assets during the period since the
tax equivalent net yield on earning assets decreased from 4.83% for the first
six months of 1997 to 4.66% for the same period in 1998. The increased volume of
earning assets was primarily the result of quality loan demand during the
period.
Interest income increased $3,452,291 or 16.8% for the six months ended
June 30, 1998 compared with the same period in 1997. Higher volume of average
interest-earning assets, offset by a decrease in the yield of earning assets
accounted for this increase. Average interest-earning assets for the first six
months of 1998 increased $87.5 million or 18.5% compared with the same period in
1997. The yield of earning assets for the first six months of the year decreased
from 8.79% in 1997 to 8.66% in 1998. The yield on average investment securities
improved 15 basis points from a year earlier, but was offset by a 19 basis point
decline in average loan yield, which accounted for most of the decrease in the
yield of earning assets. Average loans increased $65.8 million or 18.1% and
average investment securities increased $16.0 million or 15.1% for the six
months ended June 30, 1998 compared with the same period in 1997. Average
interest-earning assets represented 92.6% of average total assets during the six
months ended June 30, 1998 versus 91.6% in 1997. The composition of average
interest-earning assets changed slightly as the percentage of average loans to
average interest-earning assets decreased from 76.9% in 1997 to 76.6% in 1998.
Interest expense increased $1,843,554 or 19.8% for the six months ended
June 30, 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 a higher rate paid on these funds during the period. Average
interest-bearing liabilities increased $67.7 million or 17.0% for the six months
ended June 30, 1998 compared with the same period in 1997. Growth in average
prime money market deposits and average time deposits accounted for most of this
increase. The rate paid on average interest-bearing liabilities increased from
4.70% for the six months ended June 30, 1997 to 4.82% in 1998. Average
interest-bearing liabilities represented 83.2% of funding sources during the six
months ended June 30, 1998 compared with 84.3% in 1997.
12
<PAGE>
Provision for Loan Losses
A $100,000 provision for loan losses was made during the second quarter
of 1998 compared with a provision of $240,000 in 1997. The provision for loan
losses for the six months ended June 30, 1998 was $310,000 versus $440,000 for
the same period in 1997. The decrease in the provision for loan losses for the
second quarter and the six months ended June 30, 1998 was primarily due to the
recovery of a debt previously charged off of $409,902 and softening of loan
demand during the second quarter.
Nonperforming assets at June 30, 1998 totaled $1,057,181, compared with
$378,570 reported at the same time last year. Although nonperforming loans rose,
management believes the Corporation remains adequately secured in these loans
and does not anticipate any significant losses from them. 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 0.25% at
June 30, 1998 compared with 0.10% at June 30, 1997. At June 30, 1998 and 1997
the ratio of annualized net charge-offs (recoveries) to average loans was
(0.06)% and 0.03% respectively.
The reserve for loan losses at June 30, 1998 and December 31, 1997
represented 1.18% and 1.10% respectively of total loans outstanding. Based on
the current evaluation of the loan portfolio, management believes the reserve at
June 30, 1998 is adequate to cover potential losses in the portfolio.
Noninterest Income
Noninterest income for the second quarter of 1998 was up $368,705 or
35.0% from the same period in 1997. The primary factors attributing to this
increase were increases in mortgage banking income of $141,017 or 332.8%, other
operating income of $121,349 or 125.3%, trust income of $42,703 or 46.7%,
service charges on deposit accounts of $36,325 or 7.5%, and commissions and fees
of $27,311 or 8.1%.
Noninterest income for the six months ended June 30, 1998 increased
$423,365 or 20.1% from the same period in 1997. The primary factors attributing
to this increase were increases in mortgage banking income of $158,241 or
132.9%, trust income of $66,973 or 46.1%, other operating income of $53,490 or
20.0%, commissions and fees of $72,867 or 12.1%, and service charges on deposit
accounts of $71,794 or 7.4%.
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. Trust revenue
continues to benefit from increased sales efforts and favorable conditions in
the Corporation's expanding markets. Other operating income rose primarily due
to the recovery of fees associated with a troubled loan that was
13
<PAGE>
recovered. The growth in commissions and fees resulted primarily from credit
card-related revenues and investment fee income. Service charges on deposit
account revenues increased primarily due to growth in insufficient funds
charges.
Noninterest Expense
Noninterest expense, excluding pretax merger costs of $171,652, for the
second quarter of 1998 increased $542,854 or 12.5% from the same period in 1997.
The primary factors contributing to this increase were increases in salaries and
employee benefits of $391,358 or 16.5%, net occupancy expense of $31,176 or
9.4%, equipment expense of $28,709 or 8.8%, and a slight increase in other
operating expense.
For the six months ended June 30, 1998, noninterest expense, excluding
pretax merger costs of $171,652, increased $962,046 or 11.3% from the same
period in 1997. The primary factors contributing to this increase were increases
in salaries and employee benefits of $746,226 or 16.0%, net occupancy expense of
$57,965 or 8.9%, equipment expense of $52,867 or 8.1%, and a slight increase in
other operating expense.
New personnel and growth in retirement savings benefits expense
accounted for most of the growth in salaries and employee benefits. 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 increased largely due to higher building
depreciation and rent expense. The Corporation purchased a new operations center
in Conway, South Carolina during the third quarter of 1997. The lease on the
branch office opened in Charleston, South Carolina accounted for most of the
growth in rent expense. Equipment expense increased primarily due to higher
maintenance costs and furniture and equipment depreciation.
Income Taxes
The provision for income taxes, excluding the tax expense of $3,599
associated with nonrecurring merger-related costs, for the second quarter of
1998 increased $278,719 or 34.6% from the same period in 1997. For the six
months ended June 30, 1998, the provision, excluding the aforementioned tax
effect, increased $457,810 or 29.3% 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.
14
<PAGE>
Financial Position
For the six months ended June 30, 1998, average total assets increased
17.2% while average loans increased 18.1% and average deposits increased 15.0%
from the same period in 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 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 $28,000,000 at June 30,
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 June 30, 1998 and December 31, 1997 being 6.6%. At June 30, 1998 and December
31, 1997, the total risk-based capital ratio was 12.4%, and the leverage ratio
was 6.6%.
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.
On June 15, 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999
(January 1, 2000 for the Corporation). FAS 133 requires that all derivative
15
<PAGE>
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Corporation anticipates that, due to its limited use of derivative
instruments, the adoption of FAS 133 will not have a significant effect on the
Corporation's results of operations or its financial position.
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.
16
<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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule (for SEC purposes only)
(b) 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.
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 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.
17
<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: August 6, 1998
18
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 26,994,119
<INT-BEARING-DEPOSITS> 13,509,057
<FED-FUNDS-SOLD> 10,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,017,047
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<LOANS> 428,821,201
<ALLOWANCE> 5,020,784
<TOTAL-ASSETS> 643,223,836
<DEPOSITS> 550,221,005
<SHORT-TERM> 6,424,109
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0
0
<COMMON> 25,445,790
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<INTEREST-TOTAL> 24,025,422
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<INCOME-PRETAX> 5,441,109
<INCOME-PRE-EXTRAORDINARY> 5,441,109
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<NET-INCOME> 3,423,309
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<LOANS-NON> 835,220
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