FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 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 April 30, 1999
- --------------------------------------------- -----------------------------
(Common stock, no par value) 8,053,793
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheet - March 31, 1999
and December 31, 1998 1
Consolidated Statement of Income - Three months
ended March 31, 1999 and 1998 2
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income - Three months ended
March 31, 1999 and 1998 3
Consolidated Statement of Cash Flows -
Three months ended March 31, 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 9-15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 15
Part II - Other Information
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 16
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to a Vote of Security-Holders 16-17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
<PAGE>
Anchor Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
- -----------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------
(Unaudited) *
ASSETS
<S> <C> <C>
Cash and due from banks $ 34,893,029 $ 43,743,583
Interest-bearing balances due from banks 7,914,382 7,791,974
Federal funds sold 10,000,000 0
Investment securities:
Held-to-maturity, at amortized cost (fair value of $14,289,892
in 1999 and $16,798,854 in 1998) 14,136,712 16,545,655
Available-for-sale, at fair value 204,688,958 215,025,562
- -----------------------------------------------------------------------------------------------------------
Total investment securities 218,825,670 231,571,217
- -----------------------------------------------------------------------------------------------------------
Loans 717,172,752 701,309,305
Less - unearned income (142,481) (151,712)
- allowance for loan losses (8,732,332) (8,296,635)
- -----------------------------------------------------------------------------------------------------------
Net loans 708,297,939 692,860,958
- -----------------------------------------------------------------------------------------------------------
Premises and equipment 22,053,905 22,065,304
Other assets 17,541,249 16,774,179
- -----------------------------------------------------------------------------------------------------------
Total assets $ 1,019,526,174 $ 1,014,807,215
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits $ 167,985,191 $ 157,242,527
NOW and money market accounts 384,369,284 360,933,245
Time deposits $100,000 and over 75,239,641 75,993,814
Other time and savings deposits 201,266,877 237,846,760
- -----------------------------------------------------------------------------------------------------------
Total deposits 828,860,993 832,016,346
Federal funds purchased and securities
sold under agreements to repurchase 35,561,218 57,374,526
Other short-term borrowings 1,924,642 1,396,927
Long-term debt 59,000,000 32,000,000
Subordinated notes 11,000,000 11,000,000
Other liabilities 10,589,556 8,123,716
- -----------------------------------------------------------------------------------------------------------
Total liabilities 946,936,409 941,911,515
- -----------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, no par value; 50,000,000 shares
authorized; shares issued and outstanding - 6,553,561
in 1999 and 6,533,108 in 1998 47,315,208 47,151,149
Retained earnings 26,451,572 25,318,399
Accumulated other comprehensive income (loss) (132,015) 1,521,152
Unearned ESOP shares (1,045,000) (1,095,000)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 72,589,765 72,895,700
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,019,526,174 $ 1,014,807,215
===========================================================================================================
<FN>
* Obtained from audited financial statements.
</FN>
</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>
Three months ended March 31,
- -----------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C>
Interest and fees on loans $ 15,640,957 $ 15,922,692
Interest on investment securities:
Taxable 3,287,008 2,909,603
Non-taxable 142,036 124,999
Other interest income 30,820 291,887
- -----------------------------------------------------------------------------------------------
Total interest income 19,100,821 19,249,181
- -----------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 6,626,824 7,976,097
Interest on short-term borrowings 557,006 204,321
Interest on long-term borrowings 476,532 574,445
Interest on subordinated notes 230,324 230,324
- -----------------------------------------------------------------------------------------------
Total interest expense 7,890,686 8,985,187
- -----------------------------------------------------------------------------------------------
Net interest income 11,210,135 10,263,994
Provision for loan losses 350,000 534,000
- -----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,860,135 9,729,994
- -----------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 918,487 955,236
Commissions and fees 549,320 424,971
Trust income 155,142 78,131
Gains on sales of mortgage loans 363,875 341,774
Gains on sales of securities 56,300 0
Other operating income 181,371 147,376
- -----------------------------------------------------------------------------------------------
Total noninterest income 2,224,495 1,947,488
- -----------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 4,596,795 4,454,022
Net occupancy expense 615,982 587,372
Equipment expense 518,861 524,727
Other operating expense 2,377,025 2,122,661
- -----------------------------------------------------------------------------------------------
Total noninterest expense 8,108,663 7,688,782
- -----------------------------------------------------------------------------------------------
Income before income taxes 4,975,967 3,988,700
Provision for income taxes 1,801,777 1,376,388
- -----------------------------------------------------------------------------------------------
Net income $ 3,174,190 $ 2,612,312
===============================================================================================
Net income per share - basic $ 0.49 $ 0.41
===============================================================================================
Net income per share - diluted $ 0.47 $ 0.39
===============================================================================================
Weighted average common shares outstanding - basic 6,486,624 6,385,742
===============================================================================================
Weighted average common shares outstanding - diluted 6,766,446 6,687,611
===============================================================================================
</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
Three Months ended March 31, 1999 and March 31, 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 6,430,694 $46,153,141 $19,660,080 $813,809 ($526,625) $66,100,405
Comprehensive Income
Net income 2,612,312 2,612,312
Other comprehensive income, net of tax
Unrealized gains on investment securities 31,560 31,560
---------------
Total Comprehensive Income 2,643,872
---------------
Common stock issued pursuant to:
Dividend Reinvestment Plan 4,313 160,341 160,341
Stock Option Plan 27,753 186,912 186,912
Change in unearned ESOP shares 84,671 6,982 27,000 118,653
Cash dividends ($0.12 per share) (465,124) (465,124)
-----------------------------------------------------------------------------------
Balance at March 31, 1998 6,462,760 $46,585,065 $21,814,250 $845,369 ($499,625) $68,745,059
===================================================================================
Balance at December 31, 1998 6,533,108 $47,151,149 $25,318,399 $1,521,152 ($1,095,000) $72,895,700
Comprehensive Income
Net income 3,174,190 3,174,190
Other comprehensive income, net of tax
Unrealized loss on investment securities (1,653,167) (1,653,167)
---------------
Total Comprehensive Income 1,521,023
---------------
Common stock issued pursuant to:
Stock Option Plan 20,453 80,498 80,498
Tax benefit from exercised stock options 30,250 30,250
Change in unearned ESOP shares 53,311 9,469 50,000 112,780
Cash dividends ($0.14 per share) (2,050,486) (2,050,486)
===================================================================================
Balance at March 31, 1999 6,553,561 $47,315,208 $26,451,572 ($132,015) ($1,045,000) $72,589,765
===================================================================================
</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>
Three Months ended March 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 3,174,190 $ 2,612,312
Adjustments to reconcile net income to net cash provided by
operating activities: Accretion and amortization of investment securities 1,919 (102,567)
Depreciation and amortization 890,564 614,046
Provision for loan losses 350,000 534,000
Gains on sales of investment securities, net (56,300) 0
Gains on sales of mortgage loans (363,875) (220,324)
(Gains) losses on sales of premises and equipment (3,955) 192
Change in interest receivable 104,204 (280,224)
Change in other assets 124,204 (873,965)
Change in deferred taxes (1,376,135) 430,061
Change in interest payable (596,509) 388,569
Change in other liabilities 2,779,106 1,489,829
Origination of mortgage loans held for sale (26,554,951) (23,870,667)
Proceeds from sales of mortgage loans held for sale 27,247,801 23,388,538
Net change in unearned ESOP shares 112,780 118,653
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,833,043 4,228,453
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to maturity 2,405,931 7,656,008
Purchase of investment securities available-for-sale (22,301,126) (20,745,185)
Proceeds from sales of investment securities available-for-sale 12,235,829 1,563,100
Proceeds from maturities of investment securities available-for-sale 17,954,496 20,051,336
Net change in loans (16,115,956) (33,615,357)
Capital expenditures (494,553) (721,665)
Purchase of insurance policies related to Salary Continuation Plan 0 250
Other, net 0 (373,868)
- ---------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (6,315,379) (26,185,381)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits (3,155,353) 44,410,451
Net change in federal funds purchased and securities sold under agreements (21,813,308) 1,703,544
to repurchase
Net change in other short-term borrowings 527,715 (2,157,808)
Net change in long-term debt 27,000,000 13,919,167
Proceeds from issuance of stock in accordance with:
Stock Option Plan 80,498 186,912
Dividend Reinvestment Plan 0 160,342
Cash dividends paid (915,612) (465,124)
Other, net 30,250 0
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,754,190 57,757,484
- ---------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 1,271,854 35,800,556
Cash and cash equivalents at January 1 51,535,557 51,535,557
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31 $ 52,807,411 $ 87,336,113
===============================================================================================================
</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 month period ended March
31, 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 March 23, 1999, the Corporation and Bailey Financial
Corporation ("Bailey Financial") held special shareholder
meetings and received shareholder approval for the merger
between the Corporation and Bailey Financial. The merger was
completed on April 9, 1999, and 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.
5
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3: RESERVE FOR LOAN LOSSES
Activity in the reserve for loan losses for the three months
ended March 31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
<S> <C> <C>
Balance, beginning of year $8,296,635 $7,321,491
Provision charged to operations 350,000 534,000
Recoveries of charged off loans 192,954 33,123
Loans charged off (107,257) (230,275)
-------------------------------------
Balance, end of period $8,732,332 $7,658,339
=====================================
</TABLE>
NOTE 4: NONPERFORMING ASSETS
The following is a summary of nonperforming assets at March
31,1999 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>
3/31/99 12/31/98
-------------------------------------
<S> <C> <C>
Nonaccrual loans $1,986,180 $1,627,753
Loans past due ninety days or more 0 0
Other real estate owned 158,536 212,912
-------------------------------------
Total nonperforming assets $2,144,716 $1,840,665
=====================================
</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 March 31, 1999, impaired loans had a related specific
allowance for loan losses totaling $1,349,425. There were no
material commitments to lend additional funds to customers whose
loans were classified as impaired at March 31, 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>
3/31/99 12/31/98
-------------------------------------
Parent Company:
<S> <C> <C>
8.60% subordinated notes due in 2003 (a) $5,000,000 $5,000,000
7.89% subordinated notes due in 2006 (a) 6,000,000 6,000,000
-------------------------------------
Total $11,000,000 $11,000,000
-------------------------------------
Subsidiaries:
5.48% Federal Home Loan Bank advance due in 1999 0 3,000,000
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 4,000,000 4,000,000
4.89% Federal Home Loan Bank advance due in 2003 10,000,000 10,000,000
7.21% Federal Home Loan Bank advance due in 2005 5,000,000 5,000,000
5.51% Federal Home Loan Bank advance due in 2008 5,000,000 5,000,000
4.25% Federal Home Loan Bank advance due in 2009 25,000,000 0
-------------------------------------
Total 59,000,000 32,000,000
-------------------------------------
Total long-term debt and subordinated notes $70,000,000 $43,000,000
=====================================
<FN>
(a) Debt qualifies for inclusion in the determination of total
capital under the Risk- Based Capital Guidelines.
</FN>
</TABLE>
The principal maturity of long-term debt and subordinated notes
for the next five years subsequent to March 31, 1999 is
$14,000,000 in 2002, $15,000,000 in 2003, and $41,000,000 there
after.
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
7
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 three months ended March 31 is presented below:
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------
1999 1998
-------------------------------------
Net income per share - basic computation
<S> <C> <C>
Net income $3,174,190 $2,612,312
Income available to common shareholders $3,174,190 $2,612,312
=====================================
Average common shares outstanding 6,546,341 6,448,652
Unallocated ESOP Shares (59,717) (62,910)
-------------------------------------
Average common shares outstanding - basic 6,486,624 6,385,742
=====================================
Net income per share - basic $0.49 $0.41
=====================================
Net income per share - diluted computation
Income available to common shareholders $3,174,190 $2,612,312
=====================================
Average common shares outstanding - basic 6,486,624 6,385,742
Incremental shares from assumed conversions:
Stock Options 279,822 301,869
-------------------------------------
Average common shares outstanding - diluted 6,766,446 6,687,611
=====================================
Net income per share - diluted $0.47 $0.39
=====================================
</TABLE>
NOTE 7: OTHER MATTERS
At March 31, 1999, outstanding standby letters of credit totaled
$7,043,385.
For the three months ended March 31, 1999 and 1998, the
Corporation paid interest of $8,487,195 and $8,579,526
respectively. The Corporation paid $55,000 in income taxes during
the three months ended March 31, 1999 and $147,644 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 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 first quarter of 1999 totaled $3,248,062, or $0.50
per diluted share, before pretax charges of $75,189 ($73,872 after taxes)
associated with the acquisition of Bailey Financial. Excluding these
nonrecurring charges, net income and earnings per diluted share for the quarter
ended March 31, 1999, increased 24.3% and 22.9% respectively, from the first
quarter of 1998. Including the effect of the charges, net income totaled
$3,174,190, or $0.47 per diluted share, for the quarter ended March 31, 1999,
compared to net income of $2,612,312, or $0.39 per diluted share earned in the
same period of 1998.
The primary factors affecting the increase in net income, before
nonrecurring charges, for the first quarter of 1999 were increases of $946,141
in net interest income and $277,007 in noninterest income, and a decrease in the
provision for loan losses of $184,000. These positive factors were partially
offset by increases in noninterest expense of $344,692, and the provision for
income taxes of $426,706.
For the quarter ended March 31, 1999, return on average assets and
return on average equity, excluding nonrecurring charges, were 1.32% and 17.99%,
respectively, compared to prior year ratios of 1.09% and 16.14%.
During the three months ended March 31, 1999, the Corporation incurred
$75,189, 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).
9
<PAGE>
Net Interest Income
Net interest income, the major component of the Corporation's net
income, was $11,210,135 for the first quarter of 1999, an increase of $946,141
or 9.2% from the $10,263,994 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 4.64% in 1998 to 4.89% in 1999. The net interest margin widened
from the first quarter of 1998 primarily because of a lower cost of funding
earning assets.
Interest income was down $148,360 or 0.8% for the quarter ended March
31, 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 8.69% in 1998 to 8.33% in 1999. Average interest earning assets for the
first quarter of 1999 increased $31.8 million or 3.5% from the same period in
1998. Average loans increased $26.7 million or 3.9% and average investment
securities increased $28.9 million or 15.0% for the first quarter of 1999
compared with the same period in 1998. Average interest earning assets
represented 93.5% of average total assets during the first quarter of 1999
compared with 92.3% in 1998. The yield on earning assets decreased primarily
because the yield on loans decreased from 9.27% in 1998 to 8.67% in 1999. The
composition of average interest-earning assets changed as the percentage of
average loans to average interest-earning assets increased from 75.8% in 1998 to
76.1% in 1999.
Interest expense decreased $1,094,501 or 12.2% for the quarter ended
March 31, 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 from the first quarter of 1998. The rate
paid on average interest-bearing liabilities decreased from 4.86% for the
quarter ended March 31, 1998 to 4.20% 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 37.8% for the first quarter of 1998 to 57.3% for the first
quarter of 1999. Average certificates of deposit decreased as a percentage of
interest-bearing liabilities from 37.8% for the quarter ended March 31, 1998 to
30.1% for the first quarter of 1999. Average long-term debt and subordinated
notes decreased as a percentage of interest-bearing liabilities from 7.0% in
1998 to 5.7% in 1999. Average interest-bearing liabilities increased $11.5
million or 1.5% for the first quarter of 1999 compared with the same period in
1998. Average noninterest bearing sources increased $20.3 million or 13.5% for
the first quarter of 1999 compared with the same period in 1998. Average
interest-bearing liabilities represented 81.7% of funding sources during the
first quarter of 1999 compared with 83.3% in 1998.
10
<PAGE>
Provision for Loan Losses
A $350,000 provision for loan losses was made during the first quarter
of 1999 compared with a provision of $534,000 in 1998. The decrease in the
provision for loan losses for the three months ended March 31, 1999 was
primarily due to slowing of loan growth and a significant decrease in net
charge-offs. At March 31, 1999 and 1998 the ratio of annualized net charge-offs
(recoveries) to average loans was (0.05)% and 0.12% respectively.
Nonperforming assets at March 31, 1999 totaled $2,144,716 compared with
$1,186,519 reported at the same time last year. The increase was primarily due
to two loans of one of the entities acquired by the Corporation in 1998 totaling
$901,000 placed on nonaccrual prior to the merger. Appropriate write-downs have
been taken on these loans and no further losses are anticipated. A payoff of
$392,000 was received on one of these nonaccrual loans in April 1999. 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 0.30% at March 31, 1999 compared with 0.17% at March 31, 1998.
The reserve for loan losses at March 31, 1999 and March 31, 1998
represented 1.22% and 1.09% respectively of total loans outstanding. Based on
the current evaluation of the loan portfolio, management believes the reserve at
March 31, 1999 is adequate to cover potential losses in the portfolio.
Noninterest Income
Noninterest income for the first quarter of 1999 was up $277,007 or
14.2% from the same period in 1998. The primary factors contributing to this
increase were increases in commissions and fees of $124,349 or 29.3%, trust
income of $77,011 or 98.6%, other operating income of $33,995 or 23.1%, and
mortgage banking income of $22,101 or 6.5%. These positive factors were offset
by a slight decrease in service charges on deposit accounts of $36,749 or 3.9%.
The growth in commissions and fees resulted primarily from ATM network
revenue, credit card-related service fees, and investment fee income. Trust
revenue continues to benefit from increased sales efforts and favorable
conditions in the Corporation's expanding markets. The increase in mortgage
banking income resulted from increased volume of loan originations due to the
favorable interest rate environment and the Corporation's expansion of its
mortgage origination program. Although average deposits increased, service
charges on deposit account revenues for the three months ended March 31, 1999
decreased. During the first quarter of 1999, management continued to focus on
increasing noninterest income with revenue from the sales of new products rather
than increased pricing of existing services.
11
<PAGE>
Noninterest Expense
Noninterest expense, excluding pretax nonrecurring charges of $75,189,
for the first quarter of 1999 increased $344,692 or 4.5% from the same period in
1998. The primary factors contributing to this increase were increases in other
operating expense of $179,175 or 8.4%, salaries and employee benefits of
$142,773 or 3.2%, and net occupancy expense of $28,610 or 4.9%. These increases
were offset by a slight decrease in equipment expense.
Increases in advertising expense, primarily due to a new image
campaign, and courier expense contributed to the increase in other operating
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.
The Corporation's overhead efficiency ratio was 59.7% for the first
quarter of 1999, an improvement from 62.6% 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 $1,317
associated with tax deductible nonrecurring charges, for the first quarter of
1999 increased $426,706 or 31% from the same period in 1998. The provision for
income taxes increased in 1999 primarily due to higher income before taxes since
tax rates remained approximately the same as 1998.
Financial Position
For the three months ended March 31, 1999, average total assets
increased 2.3% while average loans increased 3.9% and average deposits increased
2.4% from the same period in 1998.
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
12
<PAGE>
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 $59,000,000 at March 31,
1999 compared with $46,000,000 at March 31, 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 March 31, 1999 of 7.36% and March 31, 1998 of 6.74%. At March 31, 1999 and
March 31, 1998, the total risk-based capital ratio was 11.95% and 11.87%,
respectively, and the leverage ratio was 7.29% and 7.06%, 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 March 31, 1999, testing was 97%
complete and the Corporation had renovated and tested all but one of the mission
critical systems. The remaining mission critical system is scheduled to be
tested for Year 2000 compliance by April 30, 1999. The
13
<PAGE>
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
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 is
developing 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 is scheduled
to be completed by June 30, 1999.
As of March 31, 1999, the Corporation incurred Year 2000 related
expenses of approximately $113,000. 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, 1999 (January 1, 2000 for the
14
<PAGE>
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.
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 quarter 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.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On March 23,1999, the Corporation held a Special Meeting of
Shareholders. The following is a brief description of matters voted
upon at the Special Meeting and the number of votes cast for and
withheld, as well as, the number of abstentions.
Proposal to ratify and approve the Agreement and Plan of Merger, dated
as of September 24, 1999, (the "Bailey Agreement"), by and between
the Corporation and Bailey Financial Corporation. ("Bailey") pursuant
to which Bailey will merge with and into the Corporation and each
share of common stock (except for certain shares held by the
Corporation) will be converted into 16.32 shares of Anchor common
stock, and such other terms and conditions as are set forth in the
Bailey Agreement.
For - 4,491,323 Withheld - 28,979 Abstain - 26,732
On April 27, 1999, the Corporation held its 1999 Annual Meeting of
Shareholders. At the 1999 Annual Meeting, the following individuals
were elected as Directors with the votes indicated.
<TABLE>
<CAPTION>
Director For Withheld
----------------------------------------- ---------------------- ----------------------
<S> <C> <C>
C. Jason Ammons, Jr. 4,653,449 221,097
Mason R. Chrisman 4,856,268 18,278
Robin H. Dial 4,853,919 20,627
Chester A. Duke 4,836,667 37,879
Tommy E. Looper 4,855,807 18,739
Charles B. McElveen 4,855,444 19,102
W. Gairy Nichols, III 4,856,000 18,546
Thomas J. Rogers 4,857,496 17,050
John C. B. Smith, Jr. 4,855,719 18,827
Arthur P. Swanson 4,854,544 20,002
</TABLE>
16
<PAGE>
Howell V. Bellamy, Jr., W. Cecil Brandon, Jr., James E. Burroughs, C.
Donald Cameron, Stephen L. Chryst, J. Bryan Floyd, Ruppert L. Piver,
Albert A. Springs, III, J. Roddy Swaim, and Harry A. Thomas continued
in their terms of office as directors of the Corporation.
The following is a brief description of other matters voted upon at
the 1999 Annual Meeting and the number of votes cast for and withheld,
as well as, the number of abstentions.
Proposal to adopt the Anchor Financial Corporation 1999 Long Term
Incentive Plan.
For - 4,464,322 Withheld - 326,374 Abstain - 83,850
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A report on Form 8-K dated January 27, 1999 was filed with the
Securities and Exchange Commission on January 29, 1999. Anchor
Financial Corporation's December 31, 1997 Financial Statements were
restated to reflect the mergers with M&M Financial Corporation and
ComSouth Bankshares, Inc. The mergers were accounted for as poolings
of interests and were completed August 31, 1998.
A report on Form 8-K dated April 12, 1999 was filed with the
Securities and Exchange Commission on April 16, 1999. Due to the
significant growth of Anchor Financial Corporation and the level of
merger and acquisition activity experienced by the Corporation over
the last two years, management determined the need to evaluate its
relationship with its independent accountants, PricewaterhouseCoopers
LLP. Anchor Financial Corporation dismissed PricewaterhouseCoopers
LLP as its independent certified public accountants and engaged Arthur
Andersen LLP as its new independent certified public accountants
effective April 12, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Stephen L. Chryst
Stephen L. Chryst, 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: May 14, 1999
18
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<PERIOD-TYPE> 3-MOS
<CASH> 34,893,029
<INT-BEARING-DEPOSITS> 7,914,382
<FED-FUNDS-SOLD> 10,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 204,688,958
<INVESTMENTS-CARRYING> 14,136,712
<INVESTMENTS-MARKET> 14,289,892
<LOANS> 717,030,271
<ALLOWANCE> 8,732,332
<TOTAL-ASSETS> 1,019,526,174
<DEPOSITS> 828,860,993
<SHORT-TERM> 1,924,642
<LIABILITIES-OTHER> 10,589,556
<LONG-TERM> 70,000,000
<COMMON> 47,315,208
0
0
<OTHER-SE> 25,274,557
<TOTAL-LIABILITIES-AND-EQUITY> 1,019,526,174
<INTEREST-LOAN> 15,640,957
<INTEREST-INVEST> 3,429,044
<INTEREST-OTHER> 30,820
<INTEREST-TOTAL> 19,100,821
<INTEREST-DEPOSIT> 6,626,824
<INTEREST-EXPENSE> 7,890,686
<INTEREST-INCOME-NET> 11,210,135
<LOAN-LOSSES> 350,000
<SECURITIES-GAINS> 56,300
<EXPENSE-OTHER> 8,108,663
<INCOME-PRETAX> 4,975,967
<INCOME-PRE-EXTRAORDINARY> 4,975,967
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,174,190
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.47
<YIELD-ACTUAL> 4.64
<LOANS-NON> 1,627,753
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,296,635
<CHARGE-OFFS> 107,257
<RECOVERIES> 192,954
<ALLOWANCE-CLOSE> 8,732,332
<ALLOWANCE-DOMESTIC> 8,232,332
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 500,000
</TABLE>
