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, 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 July 31, 1999
---------------------------- ----------------------------
(Common stock, no par value) 8,056,936
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheet - June 30, 1999
and December 31, 1998 1
Consolidated Statement of Income - Three months and
Six months ended June 30, 1999 and 1998 2
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income - Six months ended
June 30, 1999 and 1998 3
Consolidated Statement of Cash Flows -
Six months ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 18
Part II - Other Information
- ---------------------------
Item 1 - Legal Proceedings 19
Item 2 - Changes in Securities 19
Item 3 - Defaults Upon Senior Securities 19
Item 4 - Submission of Matters to a Vote of Security-Holders 19
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 46,437,823 $ 49,347,029
Interest-bearing balances due from banks 3,442,110 8,082,081
Federal funds sold 0 5,650,000
Investment securities:
Held-to-maturity, at amortized cost (fair value of $12,190,176
in 1999 and $30,317,309 in 1998) 12,286,772 29,481,031
Available-for-sale, at fair value 264,270,643 238,808,061
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities 276,557,415 268,289,092
- ----------------------------------------------------------------------------------------------------------------------------
Total Loans 843,634,573 810,890,670
Less - allowance for loan losses (10,304,253) (9,546,139)
----------------------------------------------------------------------------------------------------------------------------
Net loans 833,330,320 801,344,531
- ----------------------------------------------------------------------------------------------------------------------------
Premises and equipment 26,553,408 27,562,951
Other assets 26,154,532 23,399,144
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,212,475,608 $ 1,183,674,828
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits $ 184,050,051 $ 169,219,775
NOW and money market accounts 446,631,550 407,438,748
Time deposits $100,000 and over 79,657,208 89,537,292
Other time and savings deposits 251,567,116 302,144,079
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 961,905,925 968,339,894
Federal funds purchased and securities
sold under agreements to repurchase 65,550,947 62,424,543
Other short-term borrowings 7,158,812 1,396,927
Long-term debt 70,387,080 42,187,000
Subordinated notes 11,000,000 11,000,000
Other liabilities 8,865,686 9,324,769
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,124,868,450 1,094,673,133
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, no par value; 50,000,000 shares
authorized; shares issued and outstanding - 8,056,936
in 1999 and 8,085,793 in 1998 53,294,651 54,653,232
Retained earnings 38,310,570 34,025,512
Accumulated other comprehensive income (loss) (2,953,063) 1,417,951
Unearned ESOP shares (1,045,000) (1,095,000)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 87,607,158 89,001,695
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,212,475,608 $ 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>
Six months ended June 30, Three months ended June 30,
----------------------------------- ------------------------------------
1999 1998 1999 1998
------------------------------------ ------------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 36,732,381 $ 37,561,989 $ 18,585,228 $ 19,089,744
Interest on investment securities:
Taxable 7,428,745 6,912,371 3,768,935 3,429,842
Non-taxable 630,063 470,814 301,618 345,815
Other interest income 165,369 939,851 85,381 582,618
------------------------------------ ------------------------------------
Total interest income 44,956,558 45,885,025 22,741,162 23,448,019
------------------------------------ ------------------------------------
INTEREST EXPENSE:
Interest on deposits 15,423,641 18,743,551 7,619,298 9,532,399
Interest on short-term borrowings 1,277,212 541,446 650,140 235,198
Interest on long-term borrowings 1,503,639 1,592,835 887,855 845,137
Interest on subordinated notes 462,866 462,865 232,542 232,541
------------------------------------ ------------------------------------
Total interest expense 18,667,358 21,340,697 9,389,835 10,845,275
------------------------------------ ------------------------------------
Net interest income 26,289,200 24,544,328 13,351,327 12,602,744
Provision for loan losses 851,500 1,173,000 425,750 534,000
------------------------------------ ------------------------------------
Net interest income after provision for loan losses 25,437,700 23,371,328 12,925,577 12,068,744
------------------------------------ ------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 2,192,568 2,258,975 1,091,773 1,117,557
Commissions and fees 1,509,054 1,028,580 853,902 599,970
Trust income 1,019,278 831,360 510,136 447,229
Gains on sales of mortgage loans 724,711 734,191 342,596 387,257
Gains on sales of securities 74,032 106,401 10,883 84,875
Other operating income 469,226 619,818 197,753 313,716
------------------------------------ ------------------------------------
Total noninterest income 5,988,869 5,579,325 3,007,043 2,950,604
------------------------------------ ------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 11,493,022 10,618,679 5,990,602 5,357,142
Net occupancy expense 1,640,082 1,554,810 783,218 699,601
Equipment expense 1,204,167 1,227,682 624,140 702,955
Other operating expense 6,913,755 5,489,253 4,027,682 2,896,899
------------------------------------ ------------------------------------
Total noninterest expense 21,251,026 18,890,424 11,425,642 9,656,597
------------------------------------ ------------------------------------
Income before income taxes 10,175,543 10,060,229 4,506,978 5,362,751
Provision for income taxes 3,774,987 3,484,329 1,772,210 1,894,300
------------------------------------ ------------------------------------
Net income $ 6,400,556 $ 6,575,900 $ 2,734,768 $ 3,468,451
==================================== ====================================
Net income per share - basic $ 0.80 $ 0.83 $ 0.34 $ 0.44
==================================== ====================================
Net income per share - diluted $ 0.77 $ 0.80 $ 0.33 $ 0.42
==================================== ====================================
Weighted average common shares outstanding - basic 8,018,735 7,946,204 7,998,401 7,953,895
==================================== ====================================
Weighted average common shares outstanding - diluted 8,297,107 8,248,996 8,274,948 8,257,600
==================================== ====================================
</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
Six Months ended June 30, 1999 and June 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 6,575,900 6,575,900
Other comprehensive income, net of tax
Unrealized gains on investment securities 150,715 150,715
---------------
Total Comprehensive Income 6,726,615
---------------
Common stock issued pursuant to:
Dividend Reinvestment Plan 7,483 295,067 295,067
Stock Option Plan 31,400 225,143 225,143
Change in unearned ESOP shares 182,839 13,965 64,500 261,304
Cash dividends ($0.24 per share) (932,035) (932,035)
Cash dividends from:
Acquired entities (377,232) (377,232)
==================================================================================
Balance at June 30, 1998 8,022,262 $54,358,273 $31,919,098 $1,069,120 ($462,125) $86,884,366
==================================================================================
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 6,400,556 6,400,556
Other comprehensive income, net of tax
Unrealized loss on investment securities (4,371,014) (4,371,014)
---------------
Total Comprehensive Income 2,029,542
---------------
Common stock issued pursuant to:
Stock Option Plan 34,479 223,733 223,733
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 acquisition (14) (402) (402)
Change in unearned ESOP shares 113,905 18,938 50,000 182,843
Cash dividends ($0.28 per share) (2,041,748) (2,041,748)
Cash dividends from:
Acquired entities (92,286) (92,286)
==================================================================================
Balance at June 30, 1999 8,056,936 $53,294,651 $38,310,570 ($2,953,063) ($1,045,000) $87,607,158
==================================================================================
</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>
- ---------------------------------------------------------------------------------------------------------------------------
Six Months ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 6,400,556 $ 6,575,900
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion and amortization of investment securities 106,705 (171,798)
Depreciation and amortization 1,307,353 1,308,758
Provision for loan losses 851,500 1,173,000
Gains on sales of investment securities, net (74,032) (106,401)
Gains on sales of mortgage loans (724,711) (734,191)
Gains on sales of premises and equipment (63) (12,570)
Change in interest receivable (62,620) (731,540)
Change in other assets (28,531) 1,160,029
Change in deferred taxes (2,951,402) (493,088)
Change in interest payable (1,043,888) (388,432)
Change in other liabilities 584,805 1,416,730
Origination of mortgage loans held for sale (47,428,216) (55,092,396)
Proceeds from sales of mortgage loans held for sale 48,642,409 55,826,587
Net change in unearned ESOP shares 182,843 261,304
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,762,708 9,991,892
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to maturity 17,196,230 10,160,107
Purchase of investment securities available-for-sale (90,841,719) (95,290,140)
Proceeds from sales of investment securities available-for-sale 48,794,246 25,689,846
Proceeds from maturities of investment securities available-for-sale 12,179,233 28,588,838
Net change in loans (33,326,771) (36,082,399)
Capital expenditures (10,582) (1,787,054)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (46,009,363) (68,720,802)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits (6,433,969) 80,462,308
Net change in federal funds purchased and securities sold under
agreements to repurchase 3,126,404 3,232,702
Net change in other short-term borrowings 5,761,885 (1,917,023)
Net change in long-term debt 28,200,080 5,970,833
Proceeds from issuance of stock in accordance with:
Stock Option Plan 223,733 225,143
Dividend Reinvestment Plan 0 295,067
Cash dividends paid (2,134,034) (1,309,268)
Other, net (1,696,621) 0
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 27,047,478 86,959,762
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (13,199,177) 28,230,852
Cash and cash equivalents at January 1 63,079,110 61,140,628
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30 $ 49,879,933 $ 89,371,480
===========================================================================================================================
</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 six month periods
ended June 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 six months ended
June 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 851,500 1,173,000
Recoveries of charged off loans 328,804 439,972
Loans charged off (422,190) (666,893)
-------------------------------------
Balance, end of period $10,304,253 $9,312,793
=====================================
</TABLE>
NOTE 4: NONPERFORMING ASSETS
The following is a summary of nonperforming assets at June
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>
6/30/99 12/31/98
-------------------------------------
<S> <C> <C>
Nonaccrual loans $1,888,880 $2,987,753
Loans past due ninety days or more 10,149 34,000
Other real estate owned 1,017,823 212,912
-------------------------------------
Total nonperforming assets $2,916,852 $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 June 30, 1999, impaired loans had a related specific allowance
for loan losses totaling $434,121. There were no material
commitments to lend additional funds to customers whose loans
were classified as impaired at June 30, 1999.
6
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: LONG-TERM DEBT AND SUBORDINATED NOTES
Long-term debt and subordinated notes are summarized as follows:
<TABLE>
<CAPTION>
6/30/99 12/31/98
---------------------------------
Parent Company:
<S> <C> <C>
6.50% floating rate note due in 2000 $1,700,000 $0
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 $12,700,000 $11,000,000
---------------------------------
Subsidiaries:
5.48% Federal Home Loan Bank advance due in 1999 0 3,000,000
6.04% Federal Home Loan Bank advance due in 1999 0 484,701
6.17% Federal Home Loan Bank advance due in 1999 0 1,502,299
5.00% Federal Home Loan Bank advance due in 2000 1,987,080 0
4.77% Federal Home Loan Bank advance due in 2001 1,000,000 1,000,000
5.01% Federal Home Loan Bank advance due in 2002 2,200,000 2,200,000
5.14% Federal Home Loan Bank advance due in 2002 5,000,000 0
5.66% Federal Home Loan Bank advance due in 2002 5,000,000 5,000,000
6.19% Federal Home Loan Bank advance due in 2002 3,500,000 4,000,000
4.89% Federal Home Loan Bank advance due in 2003 10,000,000 10,000,000
5.16% Federal Home Loan Bank advance due in 2003 1,000,000 1,000,000
7.21% Federal Home Loan Bank advance due in 2005 5,000,000 5,000,000
4.97% Federal Home Loan Bank advance due in 2008 1,000,000 1,000,000
5.51% Federal Home Loan Bank advance due in 2008 5,000,000 5,000,000
5.53% Federal Home Loan Bank advance due in 2008 3,000,000 3,000,000
4.25% Federal Home Loan Bank advance due in 2009 25,000,000 0
---------------------------------
Total 68,687,080 42,187,000
---------------------------------
Total long-term debt and subordinated notes $81,387,080 $53,187,000
=================================
<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, 1999 is
$3,687,080 in 2000, $1,000,000 in 2001, $15,700,000 in 2002,
$16,000,000 in 2003, and $45,000,000 there after.
7
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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 six months ended June 30 is presented below:
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------------
1999 1998
--------------------------------------------
<S> <C> <C>
Net income per share - basic computation
Net income $6,400,556 $6,575,900
Income available to common shareholders $6,400,556 $6,575,900
============================================
Average common shares outstanding 8,078,452 7,997,539
Unallocated ESOP Shares (59,717) (51,335)
--------------------------------------------
Average common shares outstanding - basic 8,018,735 7,946,204
--------------------------------------------
Net income per share - basic $0.80 $0.83
============================================
Net income per share - diluted computation
Income available to common shareholders $6,400,556 $6,575,900
============================================
Average common shares outstanding - basic 8,018,735 7,946,204
Incremental shares from assumed conversions:
Stock Options 278,372 302,792
--------------------------------------------
Average common shares outstanding - diluted 8,297,107 8,248,996
--------------------------------------------
Net income per share - diluted $0.77 $0.80
============================================
</TABLE>
8
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7: OTHER MATTERS
At June 30, 1999, outstanding standby letters of credit totaled
$4,139,465.
For the six months ended June 30, 1999 and 1998, the Corporation
paid interest of $19,711,246 and $21,602,971 respectively. The
Corporation paid $2,991,300 in income taxes during the six months
ended June 30, 1999 and $3,038,811 during the same period in
1998.
9
<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 pending acquisitions; 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 second quarter of 1999 totaled $3,883,459, or $0.47
per diluted share, before pretax charges of $1,523,733 ($1,148,692 after taxes)
associated with the acquisition of Bailey Financial. Excluding these
nonrecurring charges, net income and earnings per diluted share for the quarter
ended June 30, 1999, increased 4.2% and 3.7% respectively, from the second
quarter of 1998. Including the effect of the charges, net income totaled
$2,734,768, or $0.33 per diluted share, for the quarter ended June 30, 1999,
compared to net income of $3,468,451, or $0.42 per diluted share earned in the
same period of 1998.
The primary factors affecting net income, before nonrecurring charges,
for the second quarter of 1999 were increases of $748,584 in net interest income
and $56,439 in noninterest income, and a decrease in the provision for loan
losses of $108,250. These positive factors were partially offset by increases in
noninterest expense of $506,018, and the provision for income taxes of $249,352.
For the quarter ended June 30, 1999, return on average assets and
return on average equity, excluding nonrecurring charges, were 1.30% and 17.03%,
respectively, compared to prior year ratios of 1.27% and 17.66%.
During the three months ended June 30, 1999, the Corporation incurred
$1,041,781, before tax effect, in restructuring fees, $417,284, before tax
effect, in investment banking fees, and $64,027, 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).
10
<PAGE>
Net income for the six months ended June 30, 1999 totaled $7,670,806,
or $0.92 per diluted share, before pretax charges of $1,645,989 ($1,270,588
after taxes) associated with the acquisition of Bailey Financial. Excluding
these nonrecurring charges, net income and earnings per diluted share for the
six months ended June 30, 1999, increased 12.3% and 10.9% respectively, from the
same period in 1998. Including the effect of the charges, net income totaled
$6,400,556, or $0.77 per diluted share, for the six months ended June 30, 1999,
compared to net income of $6,575,900, or $0.80 per diluted share earned in the
same period of 1998.
The primary factors affecting net income, before nonrecurring charges,
for the six months ended June 30, 1999 were increases of $1,744,873 in net
interest income and $409,544 in noninterest income, and a decrease in the
provision for loan losses of $321,500. These positive factors were partially
offset by increases in noninterest expense of $975,319, and the provision for
income taxes of $662,459.
For the six months ended June 30, 1999, return on average assets and
return on average equity, excluding nonrecurring charges, were 1.31% and 17.13%,
respectively, compared to prior year ratios of 1.19% and 16.58%.
During the six months ended June 30, 1999, the Corporation incurred
$1,042,779, before tax effect, in restructuring charges, $417,284, before tax
effect, in investment banking fees and $162,197, 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 $13,351,327 for the second quarter of 1999, an increase of $748,583
or 5.9% from the $12,602,744 reported for the same period in 1998. This increase
was attributed to the increased volume of earning assets, increased volume of
noninterest bearing sources, and the increased tax equivalent net yield on
earning assets during the period. The tax equivalent net yield on earning assets
increased from 4.67% in 1998 to 4.86% in 1999. The net interest margin widened
from 1998 primarily because of a lower cost of funding earning assets.
Interest income was down $706,857 or 3.01% for the quarter ended June
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 8.61% in 1998 to 8.18% in 1999. Average interest earning assets for the
second quarter of 1999 increased $27.5 million or 2.5% from the same period in
1998. Average loans increased $32.9 million or 4.0% and average investment
securities increased $32.0 million or 13.2% for the second quarter of 1999
compared with the same period in 1998. Average interest earning assets
represented 93.7% of average total
11
<PAGE>
assets during the second quarter of 1999 compared with 92.8% in 1998. The
yield on earning assets decreased primarily because the yield on loans
decreased from 9.23% 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 74.0% in 1998 to 75.1% in 1999.
Interest expense decreased $1,455,440 or 13.4% for the quarter ended
June 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 4.73%
for the quarter ended June 30, 1998 to 4.09% 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 second quarter of 1998 to 55.1% for the second
quarter of 1999. Average certificates of deposit decreased as a percentage of
interest-bearing liabilities from 38.0% for the quarter ended June 30, 1998 to
29.7% for the second quarter of 1999. Average interest-bearing liabilities
increased slightly for the second quarter of 1999 compared with the same period
in 1998. Average noninterest bearing sources increased $25.6 million or 14.4%
for the second quarter of 1999 compared with the same period in 1998. Average
interest-bearing liabilities represented 81.9% of funding sources during the
second quarter of 1999 compared with 83.8% in 1998.
Net interest income was $26,289,200 for the six months ended June 30,
1999, an increase of $1,744,872 or 7.1% from the $24,544,328 reported for the
same period in 1998. This increase was attributed to the increased volume of
earning assets, increased volume of noninterest bearing sources, and the
increased tax equivalent net yield on earning assets during the period. The tax
equivalent net yield on earning assets increased from 4.66% in 1998 to 4.85% in
1999. The net interest margin widened from the first six months of 1998
primarily because of a lower cost of funding earning assets.
Interest income was down $928,467 or 2.0% for the six months ended June
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 8.66% in 1998 to 8.24% in 1999. Average interest earning assets for the six
months ended June 30, 1999 increased $34.0 million or 3.2% from the same period
in 1998. Average loans increased $30.9 million or 3.8% and average investment
securities increased $30.2 million or 12.7% for the six months ended June 30,
1999 compared with the same period in 1998. Average interest earning assets
represented 93.5% of average total assets during the six months ended June 30,
1999 compared with 92.8% in 1998. The yield on earning assets decreased
primarily because the yield on loans decreased from 9.24% in 1998 to 8.66% in
1999. The composition of average interest-earning assets changed as the
percentage of average loans to average interest-earning assets increased from
74.9% in 1998 to 75.3% in 1999.
12
<PAGE>
Interest expense decreased $2,673,339 or 12.5% for the six months ended
June 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 remained relatively the same for the six
months ended June 30, 1999 and June 30, 1998. The rate paid on average
interest-bearing liabilities decreased from 4.74% for the six months ended June
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 51.8% for the six
months ended June 30, 1998 to 54.7% for the same period in 1999. Average
certificates of deposit decreased as a percentage of interest-bearing
liabilities from 38.7% for the first six months of 1998 to 31.4% for the six
months ended June 30, 1999. Average long-term debt and subordinated notes for
the first six months of 1999 increased slightly from 1998. Average
interest-bearing liabilities remained relatively the same for the six months
ended June 30, 1999 and June 30, 1998. Average noninterest bearing sources
increased $34.3 million or 20.7% for the six months ended June 30, 1999 compared
with the same period in 1998. Average interest-bearing liabilities represented
82.0% of funding sources during the six months ended June 30, 1999 compared with
84.6% in 1998.
Provision for Loan Losses
A $425,750 provision for loan losses was made during the second quarter
of 1999 compared with a provision of $534,000 in 1998. An $851,500 provision for
loan losses was made during the six months ended June 30, 1999 compared with a
provision of $1,173,000 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. At June 30, 1999 and 1998 the ratio of annualized net charge-offs
to average loans was 0.02% and 0.05% respectively.
Nonperforming assets at June 30, 1999 totaled $2,916,852 compared with
$3,217,854 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 0.35% at
June 30, 1999 compared with 0.40% at June 30, 1998.
The reserve for loan losses at June 30, 1999 and June 30, 1998
represented 1.22% and 1.14% respectively of total loans outstanding. Based on
the current evaluation of the loan portfolio, management believes the reserve at
June 30, 1999 is adequate to cover potential losses in the portfolio.
13
<PAGE>
Noninterest Income
Noninterest income for the second quarter of 1999 was up $56,439 or
1.9% from the same period in 1998. The primary factors contributing to this
increase were increases in commissions and fees of $253,932 or 42.3% and trust
income of $62,907 or 14.1%. These positive factors were offset by decreases in
other operating income of $115,963 or 37.0%, mortgage banking income of $44,661
or 11.5%, and service charges on deposit accounts of $25,784 or 2.3%.
Noninterest income for the six months ended June 30, 1999 was up
$409,544 or 7.3% from the same period in 1998. The primary factors contributing
to this increase were increases in commissions and fees of $480,474 or 46.7% and
trust income of $187,918 or 22.6%. These positive factors were offset by a
decrease in other operating income of $150,592 or 24.3%, and slight decreases in
service charges on deposit accounts and mortgage banking income.
The growth in commissions and fees for the second quarter and the six
months ended June 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 six months
ended June 30, 1999 decreased. During the quarter and the six months ended June
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 of
$1,523,733, for the second quarter of 1999 increased $506,018 or 5.4% from the
same period in 1998. The primary factors contributing to this increase were
increases in salaries and employee benefits of $399,651 or 7.5%, net occupancy
expense of $83,617 or 12.0%, and other operating expense of $101,565 or 3.9%.
These increases were offset by an 11.2% 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
$1,645,989, for the six months ended June 30, 1999 increased $975,319 or 5.2%
from the same period in 1998. The primary factors contributing to this increase
were increases in salaries and employee benefits of
14
<PAGE>
$640,534 or 6.0%, net occupancy expense of $85,272 or 5.5%, and other operating
expense of $273,028 or 5.2%. These increases were offset by a slight decrease in
equipment expense.
The Corporation's overhead efficiency ratio was 60.2% for the first six
months of 1999, an improvement from 61.6% 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 benefit of $375,042
associated with tax deductible nonrecurring charges, for the second quarter of
1999 increased $249,352 or 13.1% from the same period in 1998. The provision for
income taxes, excluding the tax benefit of $375,401 associated with tax
deductible nonrecurring charges, for the six months ended June 30, 1999
increased $662,459 or 19.0% 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 six months ended June 30, 1999, average total assets increased
1.5% while average loans increased 4.0% and average deposits decreased 3.9% from
the same period in 1998. Loan growth slowed considerably during the second half
of 1998 and the first half 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 June 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.
15
<PAGE>
The Corporation utilizes long-term advances from the FHLB as part of
its funding strategy. FHLB long-term advances totaled $68,687,080 at June 30,
1999 compared with $37,500,000 at June 30, 1998.
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, 1999 of 7.63% and June 30, 1998 of 7.19%. At June 30, 1999 and June
30, 1998, the total risk-based capital ratio was 12.39% and 11.95%,
respectively, and the leverage ratio was 7.52% and 7.24%, 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 is currently in the process of upgrading systems and
testing to validate Year 2000 compliance. As of June 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
16
<PAGE>
order to manage the Year 2000 risks posed by 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 is scheduled for
August, 1999.
As of June 30, 1999, the Corporation incurred Year 2000 related
expenses of approximately $165,000. Management anticipates that the total
additional out-of-pocket expenditures required for bringing the systems into
compliance for the Year 2000 will not exceed $250,000. Management believes that
these required expenditures will not have a material adverse impact on
operations, cashflow, or financial condition. 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
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
17
<PAGE>
SFAS No. 133 will not have a significant effect on the Corporation's results
of operations or its financial position.
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 six
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.
18
<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.
19
<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
/s/ John J. Moran
John J. Moran, Senior Vice President
and Comptroller
Date: July 31, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<PERIOD-TYPE> 6-MOS
<CASH> 46,437,823
<INT-BEARING-DEPOSITS> 3,442,110
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<INVESTMENTS-HELD-FOR-SALE> 264,270,643
<INVESTMENTS-CARRYING> 12,286,772
<INVESTMENTS-MARKET> 12,190,176
<LOANS> 843,634,573
<ALLOWANCE> 10,304,253
<TOTAL-ASSETS> 1,212,475,608
<DEPOSITS> 961,905,925
<SHORT-TERM> 7,158,812
<LIABILITIES-OTHER> 8,865,686
<LONG-TERM> 81,387,080
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<OTHER-SE> 34,312,507
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<INTEREST-TOTAL> 44,956,558
<INTEREST-DEPOSIT> 15,423,641
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<LOAN-LOSSES> 851,500
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<EXPENSE-OTHER> 21,251,026
<INCOME-PRETAX> 10,175,543
<INCOME-PRE-EXTRAORDINARY> 10,175,543
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<NET-INCOME> 6,400,556
<EPS-BASIC> 0.80
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