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 September 30, 1999 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 November 5, 1999
---------------------------- --------------------------------
(Common stock, no par value) 8,089,882
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheet - September 30, 1999
and December 31, 1998 1
Consolidated Statement of Income - Three months and
Nine months ended September 30, 1999 and 1998 2
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income - Nine months ended
September 30, 1999 and 1998 3
Consolidated Statement of Cash Flows -
Nine months ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 17
Part II - Other Information
- ---------------------------
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of Security-Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
- -----------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 43,843,427 $ 49,347,029
Interest-bearing balances due from banks 179,980 8,082,081
Federal funds sold 0 5,650,000
Investment securities:
Held-to-maturity, at amortized cost (fair value of $12,291,707
in 1999 and $30,317,309 in 1998) 13,353,395 29,481,031
Available-for-sale, at fair value 262,900,876 238,808,061
- -----------------------------------------------------------------------------------------------------------------
Total investment securities 276,254,271 268,289,092
- -----------------------------------------------------------------------------------------------------------------
Total Loans 862,152,996 810,890,670
Less - allowance for loan losses (10,295,579) (9,546,139)
- -----------------------------------------------------------------------------------------------------------------
Net loans 851,857,417 801,344,531
- -----------------------------------------------------------------------------------------------------------------
Premises and equipment 26,584,140 27,562,951
Other assets 25,058,228 23,399,144
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,223,777,463 $ 1,183,674,828
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits $ 176,256,739 $ 169,219,775
NOW and money market accounts 452,574,419 407,438,748
Time deposits $100,000 and over 72,010,934 89,537,292
Other time and savings deposits 253,290,165 302,144,079
- -----------------------------------------------------------------------------------------------------------------
Total deposits 954,132,257 968,339,894
Federal funds purchased and securities
sold under agreements to repurchase 68,895,760 62,424,543
Other short-term borrowings 1,864,531 1,396,927
Long-term debt 88,687,080 42,187,000
Subordinated notes 11,000,000 11,000,000
Other liabilities 10,739,045 9,324,769
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,135,318,673 1,094,673,133
- -----------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, no par value; 50,000,000 shares
authorized; shares issued and outstanding - 8,065,280
in 1999 and 8,085,793 in 1998 53,450,418 54,653,232
Retained earnings 39,995,263 34,025,512
Accumulated other comprehensive income (loss) (3,941,891) 1,417,951
Unearned ESOP shares (1,045,000) (1,095,000)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 88,458,790 89,001,695
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,223,777,463 $ 1,183,674,828
=================================================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
1
<PAGE>
Anchor Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
----------------------------------- -------------------------------------
1999 1998 1999 1998
----------------------------------- -------------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 55,852,355 $ 56,524,857 $ 19,119,974 $ 18,962,868
Interest on investment securities:
Taxable 11,322,299 11,015,356 3,893,554 4,102,985
Non-taxable 913,623 771,731 283,560 300,917
Other interest income 221,126 1,488,683 55,757 508,900
----------------------------------- -------------------------------------
Total interest income 68,309,403 69,800,627 23,352,845 23,875,670
----------------------------------- -------------------------------------
INTEREST EXPENSE:
Interest on deposits 23,346,869 27,694,982 7,923,228 9,438,683
Interest on short-term borrowings 1,947,269 1,588,876 670,057 560,178
Interest on long-term borrowings 2,545,609 2,299,307 1,041,970 706,472
Interest on subordinated notes 717,660 696,906 254,794 234,041
----------------------------------- -------------------------------------
Total interest expense 28,557,407 32,280,071 9,890,049 10,939,374
----------------------------------- -------------------------------------
Net interest income 39,751,996 37,520,556 13,462,796 12,936,296
Provision for loan losses 1,227,250 2,686,644 375,750 1,513,644
----------------------------------- -------------------------------------
Net interest income after provision for loan
losses 38,524,746 34,833,912 13,087,046 11,422,652
----------------------------------- -------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 3,256,728 3,375,737 1,064,160 1,142,530
Commissions and fees 2,294,645 1,904,452 785,591 752,622
Trust income 1,595,891 1,244,860 576,613 413,500
Gains on sales of mortgage loans 968,550 1,144,980 243,839 410,789
Gains on sales of securities 83,436 183,678 9,404 77,277
Other operating income 722,548 678,923 253,322 130,725
----------------------------------- -------------------------------------
Total noninterest income 8,921,798 8,532,630 2,932,929 2,927,443
----------------------------------- -------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 16,958,796 17,280,183 5,465,774 6,612,939
Net occupancy expense 2,259,459 2,120,126 764,202 565,316
Equipment expense 2,009,705 2,138,404 660,713 993,880
Other operating expense 10,032,715 10,253,964 3,118,960 4,664,324
----------------------------------- -------------------------------------
Total noninterest expense 31,260,675 31,792,677 10,009,649 12,836,459
----------------------------------- -------------------------------------
Income before income taxes 16,185,869 11,573,865 6,010,326 1,513,636
Provision for income taxes 5,853,287 4,524,406 2,078,300 1,040,077
----------------------------------- -------------------------------------
Net income $ 10,332,582 $ 7,049,459 $ 3,932,026 $ 473,559
=================================== =====================================
Net income per share - basic $ 1.29 $ 0.89 $ 0.49 $ 0.06
=================================== =====================================
Net income per share - diluted $ 1.25 $ 0.85 $ 0.48 $ 0.06
=================================== =====================================
Weighted average common shares outstanding -
basic 8,012,583 7,952,105 8,000,480 7,963,715
=================================== =====================================
Weighted average common shares outstanding -
diluted 8,289,293 8,275,792 8,273,768 8,328,509
=================================== =====================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
2
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income
Nine Months ended September 30, 1999 and September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Accumulated
other Unearned Total
Common Stock Retained comprehensive ESOP stockholders'
Shares Amount earnings income shares equity
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 7,983,379 $53,655,224 $26,638,500 $918,405 ($526,625) $80,685,504
Comprehensive Income
Net income 7,049,459 7,049,459
Other comprehensive income, net of tax
Unrealized gains on investment securities 1,058,043 1,058,043
--------------
Total Comprehensive Income 8,107,502
--------------
Common stock issued pursuant to:
Dividend Reinvestment Plan 7,483 295,067 295,067
Stock Option Plan 39,258 294,705 294,705
Fractional shares paid in (427) (15,718) (15,718)
acquisitions
Change in unearned ESOP shares 277,722 20,947 106,625 405,294
Cash dividends ($0.36 per share) (1,399,760) (1,399,760)
Cash dividends from:
Acquired entities (570,130) (570,130)
============================================================================
Balance at September 30, 1998 8,029,693 $54,522,718 $31,723,298 $1,976,448 ($420,000) $87,802,464
============================================================================
Balance at December 31, 1998 8,085,793 $54,653,232 $34,025,512 $1,417,951 ($1,095,000) $89,001,695
Comprehensive Income
Net income 10,332,582 10,332,582
Other comprehensive income, net of tax
Unrealized loss on investment securities (5,359,842) (5,359,842)
--------------
Total Comprehensive Income 4,972,740
--------------
Common stock issued pursuant to:
Stock Option Plan 42,829 315,453 315,453
Tax benefit from exercised stock options 30,250 30,250
Dissenters from Bailey Merger (63,322) (1,726,469) (1,726,469)
Fractional shares paid in (20) (564) (564)
acquisition merger
Change in unearned ESOP shares 177,952 28,407 50,000 256,359
Cash dividends ($0.42 per share) (4,298,388) (4,298,388)
Cash dividends from:
Acquired entities (92,286) (92,286)
============================================================================
Balance at September 30, 1999 8,065,280 $53,450,418 $39,995,263 ($3,941,891) ($1,045,000) $88,458,790
============================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
3
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Nine Months ended September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 10,332,582 $ 7,049,459
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion and amortization of investment securities 131,750 (371,853)
Depreciation and amortization 2,362,086 2,295,853
Provision for loan losses 1,227,250 2,686,644
(Gains)losses on sales of investment securities, net (83,436) 183,678
Gains on sales of mortgage loans (968,550) (2,224,217)
Gains on sales of premises and equipment (548) 8,814
Change in interest receivable 730,327 469,283
Change in other assets 540,350 3,455,470
Change in deferred taxes (3,362,240) 336,792
Change in interest payable (755,867) (338,780)
Change in other liabilities 3,737,880 1,579,530
Origination of mortgage loans held for sale (63,539,875) (81,457,148)
Proceeds from sales of mortgage loans held for sale 65,383,915 83,681,365
Net change in unearned ESOP shares 256,359 405,294
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,991,983 17,760,184
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investment securities held-to-maturity 0 (3,860,000)
Proceeds from maturities of investment securities held-to-maturity 16,126,440 11,153,464
Purchase of investment securities available-for-sale (98,824,832) (135,512,433)
Proceeds from sales of investment securities available-for-sale 52,133,585 43,828,780
Proceeds from maturities of investment securities available-for-sale 14,495,064 55,996,790
Net change in loans (52,615,626) (40,278,211)
Capital expenditures (950,248) (2,134,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (69,635,617) (70,805,610)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits (14,207,637) 58,436,639
Net change in federal funds purchased and securities sold under
agreements to repurchase 6,471,217 (3,769,305)
Net change in other short-term borrowings 467,604 (2,982,488)
Net change in long-term debt 46,500,080 1,007,344
Proceeds from issuance of stock in accordance with:
Stock Option Plan 315,453 294,705
Dividend Reinvestment Plan 0 295,067
Cash dividends paid (3,262,003) (1,969,890)
Other, net (1,696,783) (15,718)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 34,587,931 51,296,354
- ----------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (19,055,703) (1,749,072)
Cash and cash equivalents at January 1 63,079,110 61,140,628
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30 $ 44,023,407 $ 59,391,556
============================================================================================================================
</TABLE>
The accompanying notes to the 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 1998.
The results of operations for the three and nine month periods
ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
NOTE 2: ACQUISITIONS
On August 31, 1998, the Corporation merged with ComSouth
Bankshares Inc. and M&M Financial Corporation. The surviving
entity was Anchor Financial Corporation. The transactions were
accounted for as poolings of interests. The consolidated
financial statements have been restated to present combined
financial information of the Corporation as if the merger had
been in effect for all periods presented.
On April 9, 1999, the Corporation merged with Bailey Financial
Corporation ("Bailey Financial"). The surviving entity was
Anchor Financial Corporation. The transaction was accounted for
as a pooling of interests and provided for a tax-free exchange
of 16.32 shares of Anchor Financial common stock for each
outstanding share of Bailey Financial common stock. The
consolidated financial statements have been restated to present
combined financial information of the Corporation as if the
merger had been in effect for all periods presented.
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 nine months
ended September 30, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
<S> <C> <C>
Balance, beginning of year $9,546,139 $8,366,714
Provision charged to operations 1,227,250 2,686,644
Recoveries of charged off loans 441,301 677,622
Loans charged off (919,111) (2,237,624)
-------------------------------------
Balance, end of period $10,295,579 $9,493,356
=====================================
</TABLE>
NOTE 4: NONPERFORMING ASSETS
The following is a summary of nonperforming assets at September
30,1999 and December 31, 1998. 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>
9/30/99 12/31/98
-------------------------------------
<S> <C> <C>
Nonaccrual loans $2,982,765 $2,987,753
Loans past due ninety days or more 55,434 34,000
Other real estate owned 511,508 212,912
=====================================
Total nonperforming assets $3,549,707 $3,234,665
=====================================
</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 September 30, 1999, impaired loans had a related specific
allowance for loan losses totaling $1,024,113. There were no
material commitments to lend additional funds to customers whose
loans were classified as impaired at September 30, 1999.
6
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: LONG-TERM DEBT AND SUBORDINATED NOTES
The principal maturity of long-term debt and subordinated notes
for the next five years subsequent to September 30, 1999 is
summarized below:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 1,987,080
2001 1,000,000
2002 10,700,000
2003 16,000,000
2004 5,000,000
2005 and thereafter 65,000,000
--------------------------------------------------------------------------------------
Total $99,687,080
--------------------------------------------------------------------------------------
</TABLE>
Subordinated Notes, which qualify for inclusion in the
determination of total capital under the Risk Based Capital
Guidelines, totaled $11,000,000 at September 30, 1999.
NOTE 6: EARNINGS PER SHARE DATA
Earnings per share - basic is computed by dividing net income by
the weighted average number of shares outstanding. Earnings 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, "Earnings Per Share," the
calculation of net income per share - basic and net income per
share - diluted, including the effect of nonrecurring charges,
for the three and nine months ended September 30 is presented
below:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------- ------------------------------------
1999 1998 1999 1998
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Net income per share - basic computation
Net income $3,932,026 $473,559 $10,332,582 $7,049,459
Income available to common shareholders $3,932,026 $473,559 $10,332,582 $7,049,459
===================================== ====================================
Average common shares outstanding 8,060,197 8,026,625 8,072,300 8,015,015
Unallocated ESOP Shares (59,717) (62,910) (59,717) (62,910)
------------------------------------- ------------------------------------
Average common shares outstanding - basic 8,000,480 7,963,715 8,012,583 7,952,105
------------------------------------- ------------------------------------
Net income per share - basic $0.49 $0.06 $1.29 $0.89
===================================== ====================================
Net income per share - diluted computation
Income available to common shareholders $3,932,026 $473,559 $10,332,582 $7,049,459
===================================== ====================================
Average common shares outstanding - basic 8,000,480 7,963,715 8,012,583 7,952,105
Incremental shares from assumed conversions:
Stock Options 273,288 364,794 276,710 323,687
------------------------------------- ------------------------------------
Average common shares outstanding -diluted 8,273,768 8,328,509 8,289,293 8,275,792
------------------------------------- ------------------------------------
Net income per share - diluted $0.48 $0.06 $1.25 $0.85
===================================== ====================================
</TABLE>
NOTE 7: OTHER MATTERS
At September 30, 1999, outstanding standby letters of credit
totaled $3,977,074.
For the nine months ended September 30, 1999 and 1998, the
Corporation paid interest of $29,313,274 and $32,618,851
respectively. The Corporation paid $4,886,004 in income taxes
during the nine months ended September 30, 1999 and $5,361,351
during the same period in 1998.
8
<PAGE>
ITEM 2. Management's Discussion and Analysis
Certain 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 recently completed mergers; the
Corporation's success in assimilating acquired operations in the Corporation's
culture, including its ability to instill the Corporation'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 third quarter of 1999 totaled $3,937,140, or $0.48
per diluted share, before pretax charges of $5,292 ($5,114 after taxes)
associated with the acquisition of Bailey Financial. Excluding these
nonrecurring charges, net income and earnings per diluted share for the quarter
ended September 30, 1999, increased 15.9% and 16.4% respectively, from the third
quarter of 1998. Including the effect of the charges, net income totaled
$3,932,026, or $0.48 per diluted share, for the quarter ended September 30,
1999, compared to net income of $473,559, or $0.06 per diluted share earned in
the same period of 1998.
The primary factors affecting net income, before nonrecurring charges,
for the third quarter of 1999 were increases of $526,500 in net interest income
and $26,382 in noninterest income, and a decrease in the provision for loan
losses of $337,894. These positive factors were partially offset by increases in
noninterest expense of $286,621, and the provision for income taxes of $42,215.
For the quarter ended September 30, 1999, return on average assets and
return on average equity, excluding nonrecurring charges, were 1.28% and 16.86%,
respectively, compared to prior year ratios of 1.12% and 15.35%.
Net income for the nine months ended September 30, 1999 totaled
$11,608,286, or $1.40 per diluted share, before pretax charges of $1,651,282
($1,275,704 after taxes) associated with the acquisition of Bailey Financial.
Excluding these nonrecurring charges, net income and earnings per diluted share
for the nine months ended September 30, 1999, increased 13.5% and 12.9%
respectively, from the same period in 1998. Including the effect of the charges,
net income totaled $10,332,582, or $1.25 per diluted share, for the nine months
ended September 30, 1999, compared to net income of $7,049,459, or $0.85 per
diluted share earned in the same period of 1998.
9
<PAGE>
The primary factors affecting net income, before nonrecurring charges,
for the nine months ended September 30, 1999 were increases of $2,231,440 in net
interest income and $389,168 in noninterest income, and a decrease in the
provision for loan losses of $659,394. These positive factors were partially
offset by increases in noninterest expense of $1,196,145, and the provision for
income taxes of $704,673.
For the nine months ended September 30, 1999, return on average assets
and return on average equity, excluding nonrecurring charges, were 1.30% and
17.04%, respectively, compared to prior year ratios of 1.17% and 15.91%.
During the nine months ended September 30, 1999, the Corporation
incurred $1,043,272, before tax effect, in restructuring charges, $417,284,
before tax effect, in investment banking fees and $166,997, before tax effect,
in legal, accounting, and printed material expenses arising from the merger with
Bailey Financial (See Note 2 to the unaudited interim consolidated financial
statements).
Net Interest Income
Net interest income, the major component of the Corporation's net
income, was $13,462,796 for the third quarter of 1999, an increase of $526,500
or 4.1% from the $12,936,296 reported for the same period in 1998. This increase
was attributed to the increased volume of earning assets and increased volume of
noninterest bearing sources, since the increased tax equivalent net yield on
earning assets decreased during the period. The tax equivalent net yield on
earning assets increased from 4.67% in 1998 to 4.73% in 1999. The net interest
margin widened from 1998 primarily because of a lower cost of funding earning
assets.
Interest income was down $522,825 or 2.2% for the quarter ended
September 30, 1999 compared with the same period in 1998. The decrease was due
to the decline in the yield on earning assets since the volume of interest
earning assets grew from the same period in 1998. The yield on earning assets
decreased from 8.55% in 1998 to 8.18% in 1999. Average interest earning assets
for the third quarter of 1999 increased $22.9 million or 2.1% from the same
period in 1998. Average loans increased $43.8 million or 5.4% and average
investment securities increased $11.2 million or 4.1% for the third quarter of
1999 compared with the same period in 1998. Average interest earning assets
represented 94.0% of average total assets during the third quarter of 1999
compared with 93.1% in 1998. The yield on earning assets decreased primarily
because the yield on loans decreased from 9.19% in 1998 to 8.63% in 1999. The
composition of average interest-earning assets changed as the percentage of
average loans to average interest-earning assets increased from 72.6% in 1998 to
75.0% in 1999.
Interest expense decreased $1,049,325 or 9.6% for the quarter ended
September 30, 1999 compared with the same period in 1998. The decrease in
interest expense was due to a decreased rate paid on average interest-bearing
liabilities since interest-bearing liabilities grew slightly from the second
quarter of 1998. The rate paid on average interest-bearing liabilities decreased
from
10
<PAGE>
4.69% for the quarter ended September 30, 1998 to 4.22% for the same period
in 1999 due to the lower interest rate environment and a more favorable mix of
deposits. Traditionally lower-yielding interest checking, savings, and money
market deposit accounts as a group increased as a percentage of interest-bearing
liabilities from 54.7% for the third quarter of 1998 to 56.0% for the third
quarter of 1999. Average certificates of deposit decreased as a percentage of
interest-bearing liabilities from 36.6% for the quarter ended September 30, 1998
to 27.8% for the third quarter of 1999. Average interest-bearing liabilities
increased slightly for the third quarter of 1999 compared with the same period
in 1998. Average noninterest bearing sources increased $17.7 million or 9.3% for
the third quarter of 1999 compared with the same period in 1998. Average
interest-bearing liabilities represented 81.7% of funding sources during the
third quarter of 1999 compared with 82.9% in 1998.
Net interest income was $39,751,996 for the nine months ended September
30, 1999, an increase of $2,231,440 or 5.9% from the $37,520,556 reported for
the same period in 1998. This increase was attributed to the increased volume of
earning assets and increased volume of noninterest bearing sources, since the
tax equivalent net yield on earning assets decreased during the period. The tax
equivalent net yield on earning assets increased from 4.63% in 1998 to 4.81% in
1999. The net interest margin widened from the first nine months of 1998
primarily because of a lower cost of funding earning assets.
Interest income was down $1,491,224 or 2.1% for the nine months ended
September 30, 1999 compared with the same period in 1998. The decrease was due
to the decline in the yield on earning assets since the volume of interest
earning assets grew from the same period in 1998. The yield on earning assets
decreased from 8.57% in 1998 to 8.21% in 1999. Average interest earning assets
for the nine months ended September 30, 1999 increased $24.8 million or 2.3%
from the same period in 1998. Average loans increased $34.5 million or 4.3% and
average investment securities increased $20.4 million or 8.1% for the nine
months ended September 30, 1999 compared with the same period in 1998. Average
interest earning assets represented 93.8% of average total assets during the
nine months ended September 30, 1999 compared with 93.2% in 1998. The yield on
earning assets decreased primarily because the yield on loans decreased from
9.37% in 1998 to 8.88% in 1999. The composition of average interest-earning
assets changed as the percentage of average loans to average interest-earning
assets increased from 73.7% in 1998 to 75.2% in 1999.
Interest expense decreased $3,722,664 or 11.5% for the nine months
ended September 30, 1999 compared with the same period in 1998. The decrease in
interest expense was due to a decreased rate paid on average interest-bearing
liabilities since interest-bearing liabilities increased from the nine months
ended September 30, 1998. The rate paid on average interest-bearing liabilities
decreased from 4.72% for the nine months ended September 30, 1998 to 4.15% for
the same period in 1999 due to the lower interest rate environment and a more
favorable mix of deposits. Traditionally lower-yielding interest checking,
savings, and money market deposit accounts as a group increased as a percentage
of interest-bearing liabilities from 52.8% for the nine months ended September
30, 1998 to 55.4% for the same period in 1999. Average certificates of deposit
decreased as a percentage of interest-bearing liabilities from 38.0% for the
11
<PAGE>
first nine months of 1998 to 30.0% for the nine months ended September 30, 1999.
Average long-term debt and subordinated notes for the first nine months of 1999
increased 22.7% from 1998. Average interest-bearing liabilities for the nine
months ended September 30, 1999 only increased 0.7% from the same period in
1998. Average noninterest bearing sources increased $18.7 million or 10.4% for
the nine months ended September 30, 1999 compared with the same period in 1998.
Average interest-bearing liabilities represented 82.2% of funding sources during
the nine months ended September 30, 1999 compared with 83.5% in 1998.
Provision for Loan Losses
A $375,750 provision for loan losses was made during the third quarter
of 1999 compared with a provision of $1,513,644 in 1998. A $1,227,250 provision
for loan losses was made during the nine months ended September 30, 1999
compared with a provision of $2,686,644 in 1998. The decrease in the provision
for loan losses in 1999 was primarily due to slowing of loan growth and a
decrease in net charge-offs. The provision of $1,513,644 for the third quarter
of 1998 and $2,686,644 for the nine months ended September 30, 1998 includes
$800,000 necessitated by third quarter charge-offs at acquired banks in a
similar amount. At September 30, 1999 and 1998 the ratio of annualized net
charge-offs to average loans was 0.08% and 0.26% respectively. The Corporation
charged off approximately $800,000 in the third quarter of 1998 as a result of
factors affecting the acquired banks' loan portfolios.
Nonperforming assets at September 30, 1999 totaled $3,549,707 compared
with $2,907,834 reported at the same time last year. 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 0.41% at
September 30, 1999 compared with 0.36% at September 30, 1998.
The reserve for loan losses at September 30, 1999 and September 30,
1998 represented 1.19% and 1.16% respectively of total loans outstanding. Based
on the current evaluation of the loan portfolio, management believes the reserve
at September 30, 1999 is adequate to cover potential losses in the portfolio.
12
<PAGE>
Noninterest Income
Noninterest income for the third quarter of 1999 was up $5,486 or 0.2%
from the same period in 1998. The primary factors contributing to this increase
were increases in commissions and fees of $32,969 or 4.4% and trust income of
$163,113 or 39.5%. These positive factors were offset by decreases in mortgage
banking income of $166,950 or 40.6% and service charges on deposit accounts of
$78,370 or 6.9%.
Noninterest income for the nine months ended September 30, 1999 was up
$389,168 or 4.6% from the same period in 1998. The primary factors contributing
to this increase were increases in commissions and fees of $390,193 or 20.5% and
trust income of $351,031 or 28.2%. These positive factors were offset by
decreases in service charges on deposit accounts of $119,009 or 3.5% and
mortgage banking income of $176,430 or 15.4%.
The growth in commissions and fees for the third quarter and the nine
months ended September 30, 1999 resulted primarily from increases in investment
fee income, ATM network revenue, and credit card-related service fees.
Investment fee income benefited from increased market penetration in existing
markets and expansion into new markets. Trust revenue continues to benefit from
increased sales efforts and favorable conditions in the Corporation's expanding
markets. Mortgage banking income was down due to the Corporation's markets
experiencing a less favorable interest rate environment. Although average
deposits increased, service charges on deposit account revenues for the three
months and nine months ended September 30, 1999 decreased. During the quarter
and the nine months ended September 30, 1999, management continued to focus on
increasing noninterest income with revenue from the sales of new products rather
than increased pricing of existing services.
Noninterest Expense
Noninterest expense, excluding pretax nonrecurring charges, for the
third quarter of 1999 increased $286,621 or 2.9% from the same period in 1998.
The primary factors contributing to this increase were increases in net
occupancy expense of $198,886 or 35.2%, other operating expense of $373,854 or
13.7%, and a slight increase in salaries and employee benefits. These increases
were offset by a 33.5% decrease in equipment expense.
The increase in salaries and employee benefits resulted from normal
merit increases. Net occupancy expense increased largely due to higher rent
expense and building maintenance costs.
Noninterest expense, excluding pretax nonrecurring charges of
$1,651,282 for the nine months ended September 30, 1999 increased $1,196,145 or
4.2% from the same period in 1998. The primary factors contributing to this
increase were increases in salaries and employee benefits of $639,017 or 4.0%,
net occupancy expense of $139,333 or 6.6%, and other operating expense of
$546,494 or 6.4%. These increases were offset by a slight decrease in equipment
expense.
13
<PAGE>
The Corporation's overhead efficiency ratio was 60.4% for the first
nine months of 1999, an improvement from 61.4% for the same period in 1998.
These ratios exclude nonrecurring charges. The more favorable overhead
efficiency ratio resulted from management's focus on controlling costs and the
Corporation beginning to realize efficiencies from its acquisitions in 1998.
Income Taxes
The provision for income taxes, excluding the tax benefits associated
with tax deductible nonrecurring charges, for the third quarter of 1999
increased $42,215 or 2.1% from the same period in 1998. The provision for income
taxes, excluding the tax benefits associated with tax deductible nonrecurring
charges, for the nine months ended September 30, 1999 increased $704,673 or
12.8% from the same period in 1998. The provision for income taxes increased in
1999 primarily due to higher income before taxes and increased tax rates due to
the higher taxable income of the combined entity.
Financial Position
For the nine months ended September 30, 1999, average total assets
increased 1.6% while average loans increased 4.3% and average deposits decreased
3.3% from the same period in 1998. Loan growth slowed considerably during the
second half of 1998 and the first nine months of 1999 in the Corporation's
market areas. Some of this slow down was the result of integrating three
different credit cultures into one. At September 30, 1999, the Corporation's
loan strategies are integrated and better focused for future loan production.
Core deposits continue to grow at a strong pace as previously mentioned. The
Corporation decreased its reliance on higher priced certificates of deposit as
loan growth slowed.
Because the economy of the Corporation's coastal market areas are
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, and a line of credit
with the Federal Home Loan Bank ("FHLB") to meet its liquidity needs.
The Corporation utilizes long-term advances from the FHLB as part of
its funding strategy. FHLB long-term advances totaled $88,687,080 at September
30, 1999 compared with $45,683,511 at September 30, 1998.
14
<PAGE>
The Corporation continues to have a strong capital position by industry
standards with the ratio of average stockholders' equity to average total assets
at September 30, 1999 of 7.63% and September 30, 1998 of 7.34%. At September 30,
1999 and September 30, 1998, the total risk-based capital ratio was 12.30% and
12.05%, respectively, and the leverage ratio was 7.58% and 7.15%, respectively.
Year 2000
The Year 2000 has posed a unique set of challenges to those industries
reliant on information technology. As a result of methods employed by earlier
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable due to the industry's
dependence on electronic data processing systems.
In February 1997, the Corporation developed its Year 2000 Project Plan,
following the guidelines established by the FFIEC. An integral part of the plan
was to establish a Year 2000 Committee comprised of representatives from key
areas throughout the organization. The Committee's mission is to identify issues
related to the Year 2000 and to initiate remedial measures designed to eliminate
any adverse effects on the Corporation's operations. The Committee has developed
a comprehensive, prioritized inventory of all hardware, software, and material
third party providers that may be adversely affected by the Year 2000 date
change, and has contacted vendors requesting their status as it relates to the
Year 2000. This inventory includes both information technology and
non-information technology systems, such as alarms, building access, elevators
and heating and cooling systems, which typically contain embedded technology
such as micro controllers. This inventory is periodically reevaluated to ensure
that previously assigned priorities remain accurate and to track the progress
each vendor is making in resolving the problems associated with the issue. The
Corporation relies on software purchased from third-party vendors rather than
internally-generated software.
The Corporation has completed upgrading systems and testing to validate
Year 2000 compliance. As of September 30, 1999, testing was completed and the
Corporation had renovated and tested all mission critical systems. The
Corporation is currently operating on the Year 2000 compliant release for core
systems supported by its third party software provider.
The Year 2000 Committee has also developed a communication plan that
updates the Board of Directors, management, and employees on the Corporation's
Year 2000 status, and has developed a customer awareness program. The Committee
has developed a separate plan in order to manage the Year 2000 risks posed by
15
<PAGE>
commercial borrowing customers. This plan has identified material loan
customers, assessed their preparedness, evaluated their credit risk to the
Corporation, and implemented appropriate controls to mitigate the risk.
In accordance with regulatory guidelines, the Corporation has developed
a comprehensive contingency plan in the event that Year 2000 related failures
are experienced. The plan lists the various strategies and resources available
to restore core business processes. The contingency plan was completed by June
30, 1999. Testing and validation of the contingency plan was completed in
August, 1999.
As of September 30, 1999, the Corporation incurred Year 2000 related
expenses of approximately $170,000 and does not anticipate any material
additional expenses. Although management feels confident that the Corporation
has identified all necessary upgrades, and budgeted accordingly, no assurance
can be made that Year 2000 compliance can be achieved without additional
unanticipated expenditures. It is not possible at this time to quantify the
estimated future costs due to possible business disruption caused by vendors,
suppliers, customers or even the possible loss of electric power or phone
service; however, such costs could be substantial. As a result of the Year 2000
project, the Corporation has not had any material delay regarding its
information systems projects.
Accounting and Regulatory Matters
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS No. 131"), which establishes
new standards for business segment reporting. Requirements of SFAS No. 131
include reporting of (a) financial and descriptive information about reportable
operating segments, (b) a measure of segment profit or loss, certain specific
revenue and expense items and segment assets with reconciliations of such
amounts to the Corporation's financial statements, and (c) information regarding
revenues derived from the Corporation's products and services, information about
major customers and information related to geographic areas. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997 and was adopted by
the Corporation on January 1, 1998.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133"). SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000 (January 1, 2001 for the
Corporation). SFAS No. 133 requires that all derivative 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 SFAS No. 133 will not have a
significant effect on the Corporation's results of operations or its financial
position.
16
<PAGE>
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgages Held
for Sale by a Mortgage Banking Enterprise," ("SFAS No. 134"). SFAS No. 134
requires that after an entity that is engaged in mortgage banking activities has
securitized mortgage loans that are held for sale, it must classify the
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. SFAS No. 134 is effective for fiscal
years beginning after December 15, 1998, and was adopted by the Corporation on
January 1, 1999. The effects of adoption were not material during the first nine
months of 1999.
Management is not aware of any known trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on the Corporation's liquidity,
capital resources, or other operations.
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.
17
<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 report on Form 8-K dated July 20, 1999 was filed with the Securities
and Exchange Commission on July 20, 1999. The financial statements for
Anchor Financial Corporation for the quarter ended March 31, 1999
were restated to reflect the merger with Bailey Financial Corporation,
which was completed on April 9,1999. The restated financial
information for the first quarter of 1999 was filed as Exhibit 99 to
this report and was provided for informational purposes only.
18
<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, Chairman,
President and Chief Executive
Officer
/s/ Tommy E. Looper
Tommy E. Looper, Executive Vice
President and Chief Financial
Officer
Date: November 5, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 9-MOS
<CASH> 43,843,427
<INT-BEARING-DEPOSITS> 179,980
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 262,900,876
<INVESTMENTS-CARRYING> 13,353,395
<INVESTMENTS-MARKET> 12,291,707
<LOANS> 862,152,996
<ALLOWANCE> 10,295,579
<TOTAL-ASSETS> 1,223,777,463
<DEPOSITS> 954,132,257
<SHORT-TERM> 1,864,531
<LIABILITIES-OTHER> 10,739,045
<LONG-TERM> 88,687,080
<COMMON> 53,450,418
0
0
<OTHER-SE> 35,008,372
<TOTAL-LIABILITIES-AND-EQUITY> 1,223,777,463
<INTEREST-LOAN> 55,852,355
<INTEREST-INVEST> 12,235,922
<INTEREST-OTHER> 221,126
<INTEREST-TOTAL> 68,309,403
<INTEREST-DEPOSIT> 23,346,869
<INTEREST-EXPENSE> 28,557,407
<INTEREST-INCOME-NET> 39,751,996
<LOAN-LOSSES> 1,227,250
<SECURITIES-GAINS> 83,436
<EXPENSE-OTHER> 31,260,675
<INCOME-PRETAX> 16,185,869
<INCOME-PRE-EXTRAORDINARY> 16,185,869
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,332,582
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 4.81
<LOANS-NON> 2,982,765
<LOANS-PAST> 55,434
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,546,139
<CHARGE-OFFS> 919,111
<RECOVERIES> 441,301
<ALLOWANCE-CLOSE> 10,295,579
<ALLOWANCE-DOMESTIC> 9,795,579
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 500,000
</TABLE>
