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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _______
Commission File Number 0-13759
ANCHOR FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Incorporated in the State of South Carolina
IRS Employer Identification Number 57-0778015
Address: 2002 Oak Street, Myrtle Beach, S.C. 29577
Telephone: (843) 448-1411
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK -- NO PAR VALUE
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 such shorter period that the
Corporation was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
As of March 1, 1999, the Corporation had 6,553,561 shares of common stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Corporation was $191,691,659, based on the market price of $29.25 per
share on March 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated March 30, 1999, relating to the
Annual Meeting of Stockholders of the Corporation to be held April 27, 1999,
are incorporated herein by reference in response to Part III.
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<PAGE>
CROSS REFERENCE INDEX
<TABLE>
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PAGE
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<S> <C> <C> <C>
PART I Item 1 Business ..............................................4
Item 2 Properties ............................................7,37
Item 3 Legal Proceedings .....................................7
Item 4 Submission of Matters to a Vote of Shareholders........7
PART II Item 5 Market for the Registrant's Common
Stock and Related Shareholder Matters..................9
Item 6 Selected Financial Data ...............................11
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations .........10
Item 7A Quantitative and Qualitative
Disclosures About Market Risk..........................23-26
Item 8 Financial Statements and Supplementary Data............28
Consolidated Balance Sheets at December 31, 1998
and 1997...............................................32
Consolidated Statements of Income for
each of the three years in the period
ended December 31, 1998 ...............................33
Consolidated Statements of Changes in
Stockholders' Equity for each of the
three years in the period ended December 31, 1998 .....34
Consolidated Statements of Cash Flows
for each of the three years in the
period ended December 31, 1998 ........................35
Notes to Consolidated Financial Statements.............36
Report of Independent Accountants .....................29
Quarterly Financial Summary for 1998 and 1997..........53
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosures.
The Corporation had no disagreements
with its independent accountants on any
matter of accounting principles, practices or
financial statement disclosure during
1998, 1997, or 1996.
PART III Item 10 Directors and Executive Officers of the Registrant.....*,8
Item 11 Executive Compensation ................................*
Item 12 Security Ownership of Certain
Beneficial Owners and Management.......................*
Item 13 Certain Relationships and Related Transactions.........*
PART IV Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for reference.)
(2) Financial Statement Schedules
All other financial statements and
schedules not listed under Item 8 of
this report on Form 10-K are omitted since they are
not applicable, not required, or the
required information is included in the
consolidated financial statements.
(3) Exhibits
3.1 Articles of Incorporation, as amended (incorporated
herein by reference to the Corporation's Form 10-K for
the year ended December 31, 1996).
3.2 By-Laws (incorporated herein by reference to the
Corporation's Form 10-K for the year ended December 31,
1996).
10 Material Contracts:
(a) Employment Agreement between The Anchor Bank and
Chester A. Duke dated August 31, 1998 (incorporated
herein by reference to the Corporation's Form 10-Q for
the quarter ended September 30, 1998).
(b) M&M Financial Corporation and First National South
Incentive Stock Option Plan of 1997 (incorporated by
reference to the appendix to M&M Financial
Corporation's Proxy Statement for the 1997 annual
meeting of shareholders).
(c) Salary Continuation Agreements between Anchor Financial
Corporation and Stephen L. Chryst, Robert E. Coffee,
Jr., Robert R. DuRant, III, and Tommy E. Looper, dated
February 27, 1996 (incorporated herein by reference to
the Corporation's Form 10-Q for the quarter ended March
31, 1996).
(d) Anchor Financial Corporation, The Anchor Bank and The
Anchor Bank of North Carolina Incentive Stock Option
Plan of 1996 (incorporated herein by reference to the
Corporation's Form 10-K for the year ended December 31,
1995).
2
<PAGE>
(e) ComSouth Bankshares, Inc. 1995 Stock Option Plan
(incorporated by reference to exhibits filed with
ComSouth Bankshares, Inc.'s Proxy Statement for the
1995 annual meeting of shareholders).
(f) Anchor Financial Corporation, The Anchor Bank and The
Anchor Bank of North Carolina Incentive Stock Option
Plan of 1994 (incorporated herein by reference to the
Corporation's Form 10-K for the year ended
December 31, 1993).
(g) Non-Qualified Stock Option Plan of 1988 dated
November 14, 1988 (incorporated herein by reference to
the Corporation's Form 10-K for the
year ended December 31, 1988).
(h) ComSouth Bankshares, Inc. Incentive Stock Ownership Plan
(incorporated by reference to exhibits filed with
ComSouth Bankshares, Inc.'s Registration
Statement of Form S-1, File No. 33-29091).
21 Subsidiary of the Registrant
23.1 Consents of PricewaterhouseCoopers LLP, J.W. Hunt and
Company, LLP, and Tourville, Simpson & Henderson
27 Financial Data Schedule
Exhibits have been filed separately with the Commission and
are available upon written request.
(b) No reports of Form 8-K were filed during the fourth quarter of
1998.
</TABLE>
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* The information called for by Item 10 is incorporated herein by reference to
the information on pages 5 through 8 of the Corporation's definitive Proxy
Statement relating to the 1999 Annual Meeting of Stockholders of the
Corporation.
The information called for by Item 11 is incorporated herein by reference to
the information on pages 9 through 15 of the Corporation's definitive Proxy
Statement relating to the 1999 Annual Meeting of Stockholders of the
Corporation.
The information called for by Item 12 is incorporated herein by reference to
the information on pages 3 through 5 of the Corporation's definitive Proxy
Statement relating to the 1999 Annual Meeting of Stockholders of the
Corporation
The information called for by Item 13 is incorporated herein by reference to
the information on page 9 of the Corporation's definitive Proxy Statement
relating to the 1999 Annual Meeting of Stockholders of the Corporation
This report has not been approved or disapproved by the Securities and Exchange
Commission (the "Commission"), nor has the Commission passed upon the accuracy
or adequacy of this report.
3
<PAGE>
Business
General
Anchor Financial Corporation (the "Corporation") is a registered bank
holding company incorporated in 1984 under the laws of the State of South
Carolina. The purpose for incorporation was to acquire The Anchor Bank (the
"Bank") and to invest in other bank related businesses. The Corporation
provides its customers with banking services through its principal subsidiary,
the Bank. The Corporation owns 100% of the issued and outstanding stock of the
Bank, Anchor Automated Services, Inc., and Marion National Investment
Corporation (collectively the "Subsidiaries").
The principal role of the Corporation is to supervise and coordinate the
activities of its Subsidiaries and to provide them with capital and services of
various kinds. The Corporation derives substantially all of its income from
dividends from the Bank. Such dividends are determined on an individual basis,
generally in relation to the Bank's earnings, deposit growth and capital
position.
On August 31, 1998, Anchor Financial Corporation merged with ComSouth
Bankshares Inc. and M&M Financial Corporation. The transactions were accounted
for as poolings of interests. The surviving entity was Anchor Financial
Corporation and all information presented in this report reflects these mergers
for all periods presented.
The Anchor Bank
Organized in 1974 as a state-chartered bank, The Anchor Bank of Myrtle
Beach, Inc. was acquired by the Corporation on June 15, 1984, and subsequently
changed its name to The Anchor Bank.
In accordance with the Riegle-Neal Interstate Banking and Branch
Efficiency Act of 1994, the Corporation merged its two banking subsidiaries,
The Anchor Bank and The Anchor Bank of North Carolina on October 4, 1996. On
October 16, 1998, the Bank merged with the Bank of Columbia, NA, and the Bank
of Charleston, NA, and on November 20, 1998 the Bank merged with First National
South. The Anchor Bank survived these mergers and all information presented in
this report reflects these mergers for all periods presented.
The Bank accounted for 100% of the Corporation's total consolidated assets
as of December 31, 1998 and 100% of total net income for 1998. The Bank
conducts its business through 28 branches in North Carolina and South Carolina.
The primary market area served by the Bank is centered in the City of
Myrtle Beach, South Carolina and includes the entire segment of the South
Carolina coast known as the Grand Strand, which stretches from Little River to
Pawleys Island and west to Conway, South Carolina. In the merger with 1st
Atlantic Bank in 1993, the Bank acquired two offices in Little River and Cherry
Grove, South Carolina, which are approximately 20 miles north of Myrtle Beach.
In 1994, the Bank opened a branch office in the Crescent Beach section of North
Myrtle Beach, South Carolina, which is 10 miles north of Myrtle Beach. In 1995,
the Bank opened branches in Mount Pleasant, South Carolina and Wilmington,
North Carolina. Mount Pleasant is located north of Charleston, South Carolina
and Wilmington is located in the southeast corner of North Carolina. In 1996,
the Bank opened an additional branch office in Wilmington, North Carolina. The
Bank maintains three other branch offices in the coastal communities of
Wilmington, Hampstead, and Jacksonville, North Carolina. In 1997, the Bank
opened a branch in Charleston, South Carolina. The mergers with Bank of
Columbia and Bank of Charleston in 1998 added two branches to the Bank's branch
network and allowed the Bank to enter the Columbia market area. The merger with
First National South in 1998 expanded the Bank's branch network by seven
branches, most of which are located in the Pee Dee region of South Carolina.
Myrtle Beach and Hilton Head Island are coastal resort areas that serve a
significant amount of tourists primarily during the summer months. Because of
the seasonal nature of these market areas, most of the businesses, including
financial institutions, are subject to wide swings in activity between the
winter and summer months.
On July 17, 1995, the Bank formed Anchor Investor Services ("AIS"), a
non-bank securities brokerage firm, to market non-traditional banking products
to customers in all its markets. AIS offers mutual funds, annuities, and other
securities.
For the year ended December 31, 1998, approximately 73% of the revenues of
the Bank were derived from interest and fees on loans, 15% from income on
investment securities, 2% from temporary investments, 4% from service charges
on deposit accounts, and 6% from other sources.
The Bank offers a full range of banking services, including trust
services, to both businesses and individuals in its market area. These services
include regular and interest checking, money market, savings and time deposit
accounts, as well as personal and business loans. The Bank also provides
automated twenty-four hour banking for the convenience of its customers. In
1997, the Bank began offering Anchor PC Banking, which allows customers to do a
wide range of banking functions from their home computers.
4
<PAGE>
Anchor Automated Services, Inc.
Chartered in July 1985, Anchor Automated Services, Inc. has previously
provided data processing services to the Corporation and the Bank, as well as
to the public. This subsidiary was inactive for the year ended December 31,
1998.
Marion National Investment Corporation
The Corporation acquired Marion National Investment Corporation in the
acquisition of M&M Financial Corporation on August 31, 1998. Marion National
Investment Corporation is a wholly-owned subsidiary of the Corporation that
operated as a non-banking subsidiary insurance agency until September 1990. At
that time, certain assets of Marion National Investment Corporation were sold
to four individuals for a purchase price payable over 10 years. Marion National
Investment Corporation continues to exist as a corporation to receive payments
from the sale of its assets.
Employees
At December 31, 1998, the Corporation and its Subsidiaries employed a
total of 401 full-time equivalent persons.
Pending Mergers
On September 24, 1998, the Corporation entered into a definitive agreement
to acquire Bailey Financial Corporation ("Bailey Financial"), parent company of
M.S. Bailey & Son, Bankers and The Saluda County Bank in Clinton, South
Carolina. The merger is expected to be accounted for as a pooling of interests
and provides for a tax-free exchange of 16.32 shares of the Corporation's
common stock for each outstanding share of Bailey Financial common stock. The
acquisition is subject to shareholder approval. The transaction is expected to
be completed in the second quarter of 1999. After consummation of the merger,
The Saluda County Bank will be merged into M.S. Bailey & Son, Bankers, which
will operate as a subsidiary of the Corporation.
Competition
The banking industry is highly competitive and in a period of dynamic
transition. The industry continues to consolidate at a fast pace, which affects
competition. Competition continues to grow as customers select from a variety
of traditional and nontraditional financial institutions. The Bank competes for
loans, deposits, and other business with financial institutions located in the
coastal regions of North Carolina and South Carolina, as well as, Columbia,
South Carolina, and the Pee Dee region of South Carolina. The Bank competes
actively with national and state banks, savings and loan associations, federal
savings banks, credit unions, brokerage firms, and insurance companies.
Supervision and Regulation
The Corporation
The Corporation is under the supervisory and regulatory authority granted
the Federal Reserve Board of Governors (the "Board") by the Bank Holding
Company Act of 1956, as amended (the "Act"). The Corporation is required to
file with the Board an annual report and such additional information as the
Board may require pursuant to the Act. The Board may also make examinations of
the Corporation and each of its subsidiaries. Under the Act, bank holding
companies are prohibited, with certain exceptions, from acquiring direct or
indirect ownership or control of more than five percent of the voting shares of
any company engaging in activities other than banking or managing or
controlling banks or furnishing services to or performing services for their
banking subsidiaries. However, the Act authorizes the Board to permit bank
holding companies to engage in, and to acquire or retain shares of companies
that engage in, activities which the Board determines to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
The Act requires every bank holding company to obtain the prior approval
of the Board before it may acquire substantially all the assets of any bank or
ownership or control, directly or indirectly, of more than five percent of the
voting shares of any such bank. The Act prohibits the Board from approving an
application by a registered bank holding company to acquire shares of a bank
located outside the state in which the operations of the applicant's banking
subsidiaries are principally conducted unless such acquisition is specifically
authorized by the laws of the state in which the bank to be acquired is located
or the acquisition involves a closed or failed bank, which also requires
special regulatory approval.
The States of South Carolina and North Carolina, where the Corporation
currently operates, each have laws relating specifically to acquisitions of
banks, bank holding companies, and other types of financial institutions in
those states by financial institutions that are based in, and not based in,
those states. South Carolina and North Carolina have enacted regional
reciprocal banking acts.
5
<PAGE>
The Act generally imposes certain limitations on extensions of credit and
other transactions by and between banks which are members of the Federal
Reserve System and other affiliates (which includes any holding company of
which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Further, under Section 106 of the 1970 Amendments to the Act,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease
or sale of property, or the furnishing of services.
The Anchor Bank
The Community Reinvestment Act of 1977 ("CRA") and the related Regulations
of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve, and the Federal Deposit Insurance Corporation ("FDIC") are intended to
encourage regulated financial institutions to help meet the credit needs of
their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The CRA and such regulations provide that the appropriate
regulatory authority will assess the records of regulated financial
institutions in satisfying their continuing and affirmative obligations to help
meet the credit needs of their local communities as part of their regulatory
examination of the institution. The results of such examinations are made
public and are taken into account upon the filing of any application to
establish a domestic branch, or to merge or to acquire the assets or assume the
liabilities of a bank. In the case of a bank holding company, the CRA
performance record of the subsidiary banks involved in the transaction are
reviewed in connection with the filing of an application to acquire ownership
or control of shares or assets of a bank or to merge with any other bank
holding company. An unsatisfactory record can substantially delay or block the
transaction.
In December 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted. This act recapitalized the Bank Insurance
Fund, of which the Bank is a member, substantially revised bank regulations,
including capital standards, restricted certain powers of state banks, gave
regulators the authority to limit officer and director compensation and
required bank holding companies in certain circumstances to guarantee the
capital compliance of their banks. Among other things, FDICIA required the
federal banking agencies to take "prompt corrective action" in respect of banks
that do not meet minimum capital requirements. FDICIA established five capital
tiers: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized," as defined
by regulations adopted by the Federal Reserve, the FDIC, and the other federal
depository institution regulatory agencies. A depository institution is well
capitalized if it significantly exceeds the minimum level required by
regulation for each relevant capital measure, adequately capitalized if it
meets such measure, undercapitalized if it fails to meet any such measure,
significantly undercapitalized if it is significantly below such measure, and
critically undercapitalized if it fails to meet any critical capital level set
forth in the regulations. The critical capital level must be a level of
tangible equity capital equal to not less than 2% of total tangible assets and
not more than 65% of the minimum leverage ratio to be prescribed by regulation
(except to the extent that 2% would be higher than such 65% level). An
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.
If a depository institution fails to meet regulatory capital requirements,
the regulatory agencies can require submission and funding of a capital
restoration plan by the institution, place limits on its activities, require
the raising of additional capital and, ultimately, require the appointment of a
conservator or receiver for the institution. The obligation of a controlling
bank holding company under FDICIA to fund a capital restoration plan is limited
to the lesser of 5% of an undercapitalized subsidiary's assets or the amount
required to meet regulatory capital requirements. If the controlling bank
holding company fails to fulfill its obligations under FDICIA and files (or has
filed against it) a petition under the Federal Bankruptcy Code, the FDIC's
claim may be entitled to a priority in such bankruptcy proceeding over third
party creditors of the bank holding company.
An insured depository institution may not pay management fees to any
person having control of the institution nor may an institution, except under
certain circumstances and with prior regulatory approval, make any capital
distribution if, after making such payment or distribution, the institution
would be undercapitalized. FDICIA also restricts the acceptance of brokered
deposits by insured depository institutions and contains a number of consumer
banking provisions, including disclosure requirements and substantive
contractual limitations with respect to deposit accounts.
At December 31, 1998, the Bank was "well capitalized," and was not subject
to any of the foregoing restrictions.
FDICIA contains numerous other provisions, including reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy.
6
<PAGE>
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("1994 Act") provides for nationwide interstate banking and branching with
certain limitations. The 1994 Act permits bank holding companies to acquire
banks without regard to state boundaries after September 29, 1996. The Federal
Reserve may approve an interstate acquisition only if, as a result of the
acquisition, the bank holding company would control less than 10% of the total
amount of insured deposits in the United States or 30% of the deposits in the
home state of the bank being acquired. The home state can waive the 30% limit
as long as there is no discrimination against out-of-state institutions.
Pursuant to the 1994 Act, interstate branching took effect on June 1,
1997, except under certain circumstances. Once a bank has established branches
in a host state (a state other than its headquarters state) through an
interstate merger transaction, the bank may establish and acquire additional
branches at any location in the host state where any bank involved in the
interstate merger transaction could have established or acquired branches under
applicable federal or state law. The 1994 Act further provides that individual
states may opt out of interstate branching. If a state did not opt out of
interstate branching prior to May 31, 1997, then a bank in that state may merge
with a bank in another state provided that neither of the states have opted
out.
Other legislative and regulatory proposals regarding changes in banking,
and the regulation of banks, thrifts, and other financial institutions, are
being considered by the executive branch of the Federal government, Congress,
and various state governments, including South Carolina and North Carolina.
Certain of these proposals, if adopted, could significantly change the
regulation of banks and the financial services industry. It cannot be predicted
whether any of these proposals will be adopted or, if adopted, how these
proposals will affect the Corporation or the Bank.
As a state nonmember bank with deposits insured by the FDIC, the Bank is
subject to the supervisory and regulatory authority of the FDIC and the South
Carolina State Board of Financial Institutions. The South Carolina State Board
of Financial Institutions and the North Carolina Banking Commission regulate
all areas of commercial banking operations of state chartered banks under their
supervision, including reserves, loans, mergers, payment of dividends, interest
rates, establishment of branches, and other aspects of operations.
Research
The Corporation makes no expenditures for research and development.
Dependence Upon a Single Customer
Neither the Corporation nor the Bank is dependent upon a single customer
or very few customers. The economy of the Corporation's primary market area is,
however, heavily dependent on the tourism industry. Any adverse change in the
local tourism market is likely to have an adverse effect on the local economy
as well as the business and operations of the Corporation.
Properties
The Main Office of the Bank, which also serves as the principal office of
the Corporation, is located at 2002 Oak Street, Myrtle Beach, South Carolina.
The main office is an approximately 23,000 square foot, multi-story office
building that is owned by the Bank. To the limited extent necessary, the
Corporation occupies office space owned by the Bank.
The Bank owns the real property for 20 of its branch offices. The Bank
owns the buildings, but leases the land for four branch offices, leases the
land and building on which one branch office is located from unaffiliated third
parties under long-term leases, leases the buildings for two branch offices
from unaffiliated third parties under long-term leases, and leases office space
only for one branch from an unaffiliated third party under a long-term lease.
In July 1997, the Bank purchased land and a 15,656 square foot building in
Conway, South Carolina to house its operations center. None of the properties
owned by the Corporation or the Bank are encumbered.
Legal Proceedings
At December 31, 1998, the Corporation had no material pending legal
proceedings or other actions, to which the Corporation or any of its
Subsidiaries is a party or of which any of their property is the subject, that
are expected to have any material adverse effect on the financial condition or
results of operations of the Corporation.
Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders of the
Corporation during the fourth quarter of 1998.
7
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Directors and Executive Officers of the Corporation
Executive Officers
The following executive officers of the Corporation are principally
responsible for making policy for the Corporation and its Subsidiaries. The age
of each executive officer, his current position with the Corporation and/or
certain of its Subsidiaries and, if different, his business experience during
the past five years are as follows:
Stephen L. Chryst (53)
Chairman of the Board of the Corporation and the Bank beginning in 1998. Mr.
Chyrst has served as President and Chief Executive Officer of the Corporation
since 1984 and the Bank since 1982.
Robert E. Coffee, Jr. (51)
Executive Vice President and Chief Administrative Officer of the Bank since
1993.
Chester A. Duke (59)
Vice Chairman of the Bank. Mr. Duke previously served as Chairman, President,
and Chief Executive Officer of M&M Financial Corporation and First National
South from 1981 through 1998.
Robert R. DuRant, III (53)
Executive Vice President and Chief Credit Officer of the Bank since February
1988.
Tommy E. Looper (51)
Executive Vice President and Chief Financial Officer of the Corporation and the
Bank since 1987.
8
<PAGE>
SHAREHOLDER INFORMATION
The following table presents stock price and book value per share
information for the Corporation at December 31, for the last five years.
Stock and Dividends Performance
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Closing price ................... $ 34.00 $ 33.00 $ 21.67 $ 13.17 $ 9.17
Price/earnings ratio* ........... 20.0X 22.6X 18.7X 15.5X 12.9X
Price/book value ratio .......... 307% 322% 240% 163% 123%
Book value/share ................ $ 11.09 $ 10.23 $ 9.02 $ 8.08 $ 7.44
Dividend payout ratio ........... 30.52% 19.59% 14.70% 22.97% 24.81%
</TABLE>
* Earnings excludes merger related costs incurred in 1998.
Quarterly Common Stock Prices and Dividends
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------- -----------------------------------------------
Quarter High Low Close Dividend High Low Close Dividend
- ----------------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First .......... $ 44.00 $ 32.00 $ 40.50 $ 0.12 $ 23.00 $ 21.00 $ 21.33 $ 0.093
Second ......... 46.00 36.75 37.25 0.12 23.33 21.00 23.25 0.093
Third .......... 42.38 36.00 35.50 0.12 29.33 22.17 33.00 0.093
Fourth ......... 44.00 28.00 34.00 0.12 35.00 30.50 33.00 0.095
</TABLE>
Stock Exchange
The common stock of Anchor Financial Corporation is traded on The Nasdaq Stock
Market(R) under the symbol AFSC.
Dividend Reinvestment Plan
The Dividend Reinvestment Plan enables shareholders to reinvest in full and
fractional shares of Anchor Financial Corporation. Shareholders with 10 or more
shares of stock are eligible for the program.
Stock Purchase Program
The Stock Purchase Program, which is available to Dividend Reinvestment Plan
participants, allows investors to make cash payments to the plan for the
purchase of additional shares of Anchor Financial Corporation stock.
Participants may make monthly payments in an amount ranging from a minimum of
$25 to a maximum of $5,000.
Stock Transfer Agent Investor Relations
Registrar and Transfer Company The Anchor Bank
10 Commerce Drive Post Office Box 2428
Cranford, New Jersey 07016-3672 Myrtle Beach, SC 29578
1-800-368-5948 (843) 946-3105
1-800-ANCHOR-8
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and tabular data presented below analyze major factors and
trends regarding the financial condition and results of operations of Anchor
Financial Corporation (the "Corporation") and its principal subsidiary, The
Anchor Bank (the "Bank") for each of the three years in the period ended
December 31, 1998.
On August 31, 1998, Anchor Financial Corporation merged with ComSouth
Bankshares Inc. (ComSouth) and M&M Financial Corporation (M&M). The surviving
entity was Anchor Financial Corporation (the 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.
The following discussion and analysis should be read in conjunction with
the financial information and the Consolidated Financial Statements of the
Corporation (including the notes thereto) contained elsewhere in this document.
To the extent that any statement below (or elsewhere in this document) is not a
statement of historical fact and could be considered a forward-looking
statement, actual results could differ materially from those in the
forward-looking statement.
Results of Operations
Summary
Net income for the year ended December 31, 1998, totaled $11.4 million, or
$1.70 per diluted share, before pretax charges of $4.3 million ($3.3 million
after taxes) associated with the acquisitions of ComSouth and M&M. Excluding
these nonrecurring charges, net income and earnings per diluted share for 1998
increased 23.7% and 23.2% respectively, from 1997. Including the effect of the
charges, the Corporation had net income of $8.1 million or $1.21 per diluted
share for 1998. Net income for 1997 was $9.2 million, an increase of $1.9
million or 26.7% from $7.3 million earned in 1996. Basic net income per share,
before pretax merger charges, increased 22.0% to $1.78 in 1998, compared with
$1.46 in 1997 and $1.16 in 1996. Diluted net income per share increased 23.6%
to $1.38 in 1997 compared with $1.11 in 1996.
The primary factors affecting the increase in net income, before
nonrecurring charges, for 1998 were a $4.4 million or 11.3% increase in net
interest income, a $1.6 million or 22.8% increase in noninterest income, and a
$372 thousand or 18.2% decrease in provision for loan losses. These favorable
changes were partially offset by a $3.2 million or 10.9% increase in
noninterest expense and a $980 thousand or 18.5% increase in the provision for
income taxes. Nonrecurring charges totaled $4.3 million and are discussed in
detail in the noninterest expense and allowance for loan loss sections of this
report.
The increase in earnings from 1996 to 1997 was primarily due to a 21.6%
increase in net interest income and a 15.8% increase in noninterest income.
These favorable changes were partially offset by a 79.3% increase in the
provision for loan losses, a 14.3% increase in noninterest expense, and a 34.2%
increase in the provision for income taxes.
Return on average assets and return on average stockholders' equity are
key measures of earnings performance. Return on average assets, excluding
nonrecurring charges, for 1998 was 1.14% compared with 1.07% in 1997 and 1.01%
in 1996. Return on average stockholders' equity, excluding nonrecurring
charges, for 1998 was 16.19% versus 15.15% in 1997, and 13.64% in 1996.
Table 1 provides a summary of the statement of income, balance sheet, and
selected ratios for the last five years. A more detailed analysis of each
component of the Corporation's net income is included under the appropriate
captions which follow.
10
<PAGE>
Table 1
SUMMARY OF OPERATIONS
(in thousands, except for share data)
<TABLE>
<CAPTION>
Five Year
Compound
1998 1997 1996 1995 1994 Growth Rate
-------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data
Interest income ........................... $ 79,191 $ 70,452 $ 57,212 $ 48,106 $ 37,299 18.6%
Interest expense .......................... 36,099 31,732 25,377 21,562 14,621 22.0
---------- ---------- ---------- ---------- ----------
Net interest income ....................... 43,092 38,720 31,835 26,544 22,678 16.1
Provision for loan losses ................. 2,472 2,044 1,140 830 1,289 9.9
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses .............................. 40,620 36,676 30,695 25,714 21,389 16.6
Noninterest income ........................ 8,674 7,064 6,100 5,353 6,473 9.3
Noninterest expense ....................... 35,921 29,198 25,552 22,987 21,757 12.8
---------- ---------- ---------- ---------- ----------
Income before income taxes ................ 13,373 14,542 11,243 8,080 6,105 23.0
Provision for income taxes ................ 5,251 5,305 3,952 2,784 1,615 29.7
---------- ---------- ---------- ---------- ----------
Net income ................................ $ 8,122 $ 9,237 $ 7,291 $ 5,296 $ 4,490 19.6%
========== ========== ========== ========== ==========
Net income per share -- basic ............. $ 1.27 $ 1.46 $ 1.16 $ 0.85 $ 0.71 19.0%
Net income per share -- diluted ........... 1.21 1.38 1.11 0.83 0.70 18.1
Cash dividend per share ................... 0.48 0.37 0.28 0.24 0.21 19.1
Average common shares
outstanding -- basic ..................... 6,407,096 6,317,141 6,271,333 6,218,729 6,304,233 0.4
Average common shares
outstanding -- diluted ................... 6,732,590 6,703,191 6,539,544 6,349,626 6,377,337 1.3
Selected Year-End Assets and
Liabilities
Total assets .............................. $1,014,807 $ 945,454 $ 791,511 $ 658,977 $ 562,853 14.5%
Interest-earning assets ................... 940,521 872,300 720,525 596,237 506,709 15.4
Investment securities ..................... 231,571 197,325 172,759 145,740 100,549 12.1
Loans -- net of unearned income ........... 701,157 665,589 542,009 439,257 349,273 22.6
Deposits .................................. 832,016 796,682 673,093 567,723 482,437 13.1
Noninterest-bearing deposits .............. 157,243 170,840 133,562 103,365 84,127 15.3
Interest-bearing deposits ................. 674,773 625,842 539,531 464,358 398,310 12.6
Interest-bearing liabilities .............. 933,788 872,904 729,020 602,867 515,822 14.7
Stockholders' equity ...................... 72,896 66,100 57,127 50,812 44,656 10.9
Selected Ratios
Return on average assets .................. 0.81% 1.07% 1.01% 0.87% 0.84%
Return on average stockholders'
equity ................................... 11.51 15.15 13.64 11.09 10.23
Net yield on average interest-earning
assets (tax equivalent) .................. 4.64 4.84 4.81 4.71 4.70
Average loans to average deposits ......... 82.84 82.37 78.46 74.96 70.59
Net loan losses to average loans .......... 0.22 0.22 0.03 0.08 0.44
Nonperforming loans to total loans ........ 0.23 0.13 0.21 0.26 0.82
Allowance for loan losses to loans ........ 1.18 1.10 1.22 1.29 1.46
Allowance for loan losses to
nonperforming loans ...................... 509.70 844.04 587.85 503.91 178.87
Average stockholders' equity to
average assets ........................... 7.06 7.03 7.37 7.85 8.16
Total risk-based capital ratio ............ 12.01 11.93 13.19 12.88 14.31
Tier 1 leverage ratio ..................... 7.07 6.88 7.32 7.70 8.28
Dividend payout ratio ..................... 30.52 19.59 14.70 22.97 24.81
</TABLE>
11
<PAGE>
Net Interest Income
Net interest income, the major component of the Corporation's income, is
the amount by which interest and fees generated by earning assets exceed the
total interest costs of the funds used to carry them. Changes in the level of
interest rates and the change in the amount and composition of earning assets
and interest-bearing liabilities affect net interest income. Table 2,
Comparative Average Balance Sheets -- Yields and Costs, compares average
balance sheet items and analyzes net interest income on a tax equivalent basis
for the years ended December 31, 1998, 1997, and 1996.
Table 2
COMPARATIVE AVERAGE BALANCE SHEETS -- YIELDS AND COSTS
(Average balances on a tax equivalent basis for years ended December 31 in
thousands)
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ..................................... $694,390 $64,477 9.29% $607,381 $58,091 9.56%
Investment securities:
Taxable ................................. 202,439 12,765 6.31 178,266 11,260 6.32
Non-taxable ............................. 9,746 772 7.92 8,977 748 8.33
-------- ------- ---- -------- ------- ----
Total investment securities ............... 212,185 13,537 6.38 187,243 12,008 6.41
Interest-bearing balances
due from banks .......................... 6,502 390 6.00 2,075 143 6.89
Federal funds sold and securities
purchased under agreements to
resell .................................. 20,458 1,050 5.13 8,502 464 5.46
-------- ------- ---- -------- ------- ----
Total interest-earning assets .............. 933,535 79,454 8.51% 805,201 70,706 8.78%
-------- ------- ---- -------- ------- ----
Noninterest-earning assets:
Cash and due from banks ................... 35,245 32,734
Premises and equipment .................... 22,269 21,936
Other, less allowance for loan losses ..... 8,933 7,429
-------- --------
Total noninterest-earning assets ........ 66,447 62,099
-------- --------
TOTAL ASSETS ............................... $999,982 $867,300
======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking ....................... $ 79,460 $ 1,377 1.73% $ 74,696 $ 1,670 2.24%
Savings ................................. 83,137 3,101 3.73 76,896 1,853 2.41
Money market ............................ 252,986 11,842 4.68 211,208 9,925 4.70
Time deposits ........................... 270,361 14,937 5.52 242,530 14,397 5.94
-------- ------- ---- -------- ------- ----
Total interest-bearing deposits ........... 685,944 31,257 4.56 605,330 27,845 4.60
Federal funds purchased and securities
sold under agreements to
repurchase .............................. 31,987 1,605 5.02 20,527 1,087 5.30
Other short-term borrowings ............... 2,454 125 5.09 2,717 126 4.64
Long-term debt ............................ 37,034 2,181 5.89 28,753 1,742 6.06
Subordinated notes ........................ 11,000 931 8.46 11,000 931 8.46
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities ......... 768,419 36,099 4.70% 668,327 31,731 4.75%
-------- ------- ---- -------- ------- ----
Noninterest-bearing liabilities:
Demand deposits ........................... 152,258 132,071
Other liabilities ......................... 8,730 5,928
-------- --------
Total noninterest-bearing liabilities ...... 160,988 137,999
-------- --------
Stockholders' equity ....................... 70,575 60,974
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ...................... $999,982 $867,300
======== ========
Net interest income ........................ $43,355 $38,975
======= =======
Interest income/earning assets ............. 8.51% 8.78%
Interest expense/earning assets ............ 3.87 3.94
---- ----
Net interest income/earning assets ......... 4.64% 4.84%
==== ====
<CAPTION>
1996
---------------------------------
Average Revenue/ Yield/
Balance Expense Rate
----------- ---------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Loans ..................................... $488,084 $46,334 9.49%
Investment securities:
Taxable ................................. 157,593 9,595 6.09
Non-taxable ............................. 8,782 771 8.78
-------- ------- ----
Total investment securities ............... 166,375 10,366 6.23
Interest-bearing balances
due from banks .......................... 1,590 125 7.86
Federal funds sold and securities
purchased under agreements to
resell .................................. 10,868 649 5.97
-------- ------- ----
Total interest-earning assets .............. 666,917 57,474 8.62%
-------- ------- ----
Noninterest-earning assets:
Cash and due from banks ................... 30,617
Premises and equipment .................... 19,836
Other, less allowance for loan losses ..... 7,624
--------
Total noninterest-earning assets ........ 58,077
--------
TOTAL ASSETS ............................... $724,994
========
Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking ....................... $ 68,032 $ 1,641 2.41%
Savings ................................. 71,009 2,525 3.56
Money market ............................ 182,358 8,229 4.51
Time deposits ........................... 188,244 10,393 5.52
-------- ------- ----
Total interest-bearing deposits ........... 509,643 22,788 4.47
Federal funds purchased and securities
sold under agreements to
repurchase .............................. 13,967 664 4.75
Other short-term borrowings ............... 4,149 138 3.33
Long-term debt ............................ 20,879 1,331 6.37
Subordinated notes ........................ 5,197 456 8.77
-------- ------- ----
Total interest-bearing liabilities ......... 553,835 25,377 4.58%
-------- ------- ----
Noninterest-bearing liabilities:
Demand deposits ........................... 112,449
Other liabilities ......................... 5,244
--------
Total noninterest-bearing liabilities ...... 117,693
--------
Stockholders' equity ....................... 53,466
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ...................... $724,994
========
Net interest income ........................ $32,097
=======
Interest income/earning assets ............. 8.62%
Interest expense/earning assets ............ 3.81
----
Net interest income/earning assets ......... 4.81%
====
</TABLE>
- ---------
(1) Average loan balances are stated net of unearned income and include
nonaccrual loans. Interest recognized on nonaccrual loans has been
included in revenues.
(2) Non-taxable income has been adjusted to a tax equivalent basis using the
federal income tax rate of 34%.
12
<PAGE>
Net interest income on a tax equivalent basis increased $4.4 million or
11.2% from $39.0 million in 1997 to $43.4 million in 1998. This increase was
primarily attributable to the increased volume of earning assets, since the net
interest margin decreased 20 basis points from 4.84% in 1997 to 4.64% in 1998.
Interest income on a tax equivalent basis increased $8.7 million or 12.4%
in 1998 primarily due to the increased volume of earning assets. Average
earning assets increased 15.9% to $933.5 million or 93.4% of average total
assets in 1998, compared with $805.2 million or 92.8% in 1997. The two primary
types of earning assets are loans and investment securities. The income
generated from these assets is a function of their quality, growth, and yield.
The growth in these earning assets was primarily the result of improved quality
loan demand as average loans increased $87.0 million or 14.3%. Average
investment securities increased $24.9 million or 12.7%. The yield on earning
assets decreased 27 basis points from 8.78% in 1997 to 8.51% in 1998. The
primary reasons for the decrease in the yield on earning assets during the
period were falling interest rates, which resulted in a lower yield earned on
the loan and investment securities portfolios, and a less favorable mix of
earning assets. Average loans were 74.4% of average earning assets in 1998 and
75.4% in 1997. The yield on loans decreased 27 basis points from 9.56% in 1997
to 9.29% in 1998 largely due to a lower level of interest rates and competitive
market conditions. The yield on investment securities decreased 3 basis points
from 6.41% in 1997 to 6.38% in 1998, primarily due to declining interest rates.
The yield on federal funds sold and securities purchased under agreements to
resell, collectively, fell 33 basis points from 5.46% in 1997 to 5.13% in 1998
largely due to the decrease in rates paid on these short-term investments.
The cost of funding sources increased $4.4 million or 13.8% in 1998
primarily due to the increased volume of average interest-bearing liabilities.
Average interest-bearing liabilities increased $100.1 million or 15.0%.
Interest-bearing deposits grew $80.6 million or 13.3%, primarily due to 11.5%
growth in time deposits and 19.8% growth in money market accounts. Average
long-term debt and subordinated notes increased $8.3 million or 28.8% in 1998.
The average rate paid on interest-bearing liabilities decreased 5 basis points
from 4.75% in 1997 to 4.70% in 1998, primarily due to a lower level of interest
rates and a more favorable mix of funding sources. The mix of interest-bearing
liabilities changed slightly because traditionally lower-yielding interest
checking, savings, and money market deposit accounts as a group increased as a
percentage of interest-bearing liabilities from 59.9% in 1997 to 60.6% in 1998.
Average long-term debt and subordinated notes were 6.3% of interest-bearing
liabilities in 1998 versus 5.9% in 1997. Interest-bearing liabilities decreased
as a percentage of average earning assets to 82.3% in 1998 from 83.0% in 1997.
The net interest margin, computed by dividing net interest income by
average earning assets, reflects the impact of noninterest-bearing funds on net
interest income. Noninterest-bearing funding sources increased $23.0 million or
16.7% in 1998 to 17.2% of average earning assets from 17.1% in 1997. Table 3,
the Analysis of Net Interest Income Changes, shows the impact of balance sheet
changes, which occurred during 1998 and 1997, and the changes in interest rate
levels.
13
<PAGE>
Table 3
ANALYSIS OF NET INTEREST INCOME CHANGES
(in thousands)
<TABLE>
<CAPTION>
1998 compared to 1997 1997 compared to 1996
------------------------------------ ---------------------------------
Change in Change in Change in Change in
Volume Rate Total Volume Rate Total
----------- ----------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans ............................................... $ 8,120 $ (1,734) $6,386 $11,407 $ 350 $11,757
Investment securities:
Taxable ........................................... 1,525 (20) 1,505 1,295 370 1,665
Non-taxable ....................................... 62 (38) 24 17 (40) (23)
Interest-bearing balances due from banks ............ 268 (21) 247 35 (17) 18
Federal funds sold and securities purchased under
agreements to resell .............................. 615 (29) 586 (132) (53) (185)
------- -------- ------ ------- ------ -------
Total interest-earning assets .................... 10,590 (1,842) 8,748 12,622 610 13,232
------- -------- ------ ------- ------ -------
Interest expense:
Interest checking ................................... 101 (394) (293) 154 (125) 29
Savings ............................................. 161 1,087 1,248 195 (868) (672)
Money market ........................................ 1,956 (39) 1,917 1,345 352 1,696
Time deposits ....................................... 1,581 (1,041) 540 3,176 828 4,004
Federal funds purchased and securities sold under
agreements to repurchase .......................... 578 (60) 518 340 83 423
Other short-term borrowings ......................... (13) 12 (1) (56) 44 (12)
Long-term debt ...................................... 489 (50) 439 480 (69) 411
Subordinated notes .................................. 0 0 0 492 (17) 475
------- -------- ------- ------- ------ -------
Total interest-bearing liabilities ............... 4,853 (485) 4,368 6,126 228 6,354
------- -------- ------- ------- ------ -------
Net interest income .............................. $ 5,737 $ (1,357) $4,380 $ 6,496 $ 382 $ 6,878
======= ======== ======= ======= ====== =======
</TABLE>
- ---------
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
(2) Balances of nonaccrual loans and related income recognized have been
included for computational purposes.
(3) Non-taxable income has been converted to a tax equivalent basis using the
federal income tax rate of 34%.
Net interest income on a tax equivalent basis for 1997 increased $6.9
million or 21.4% from the amount earned in 1996. This increase was primarily
attributable to the increased volume of earning assets and the increase in net
interest margin. The net interest margin increased three basis points from
4.81% in 1996 to 4.84% in 1997. Average earning assets increased 20.7% to
$805.2 million or 92.8% of average total assets in 1997, compared with $666.9
million or 92.0% in 1996. The cost of funding sources increased $6.4 million or
25.0% in 1997 primarily due to the $115 million or 20.7% increase in interest-
bearing liabilities from 1996.
Noninterest Income
Noninterest income for the Corporation consists of service charges on
deposit accounts, trust revenues, mortgage banking income, gains and losses on
investment securities transactions, and other commissions and fees generated
from various banking and bank-related activities. Noninterest income has
traditionally been an important contributing factor to the Corporation's
overall profitability. Noninterest income increased $1.6 million or 22.8% and
totaled $8.7 million in 1998 compared to $7.1 million in 1997.
Commissions and fees, which include revenues from credit card-related
services, electronic banking services, and alternative investment product
services increased 17.4% to $2.0 million in 1998 from $1.7 million in 1997. The
primary reasons for this growth were increases of $180 thousand or 61.5% in
investment fee income, $49 thousand or 12.1% in revenues from electronic
banking services, and $41 thousand or 5.0% in credit card-related revenues.
The Corporation's trust operation produced revenues of $423 thousand in
1998, an increase of 35.1% compared with $313 thousand in 1997. In 1998,
mortgage banking income (which includes profits from the origination and sale
of residential real estate loans) rose $803 thousand or 104.5% to a total of
$1.6 million, compared to $768 thousand in 1997. The significant increase in
mortgage banking income resulted from increased volume of loan originations due
to the favorable interest rate environment and increased demand for mortgage
loans resulting from growth in the housing markets in the
14
<PAGE>
communities the Corporation serves. In connection with its mortgage banking
activities, the Corporation primarily originates mortgage loans under mandatory
delivery commitments, which substantially limit the Corporation's risk of loss
on the loans during the period they are held or committed to borrowers.
Gains on sales of investment securities totaled $107 thousand in 1998,
compared to losses of $17 thousand and $15 thousand in 1997 and 1996,
respectively. The net gain in 1998 resulted primarily from investment
strategies used to take advantage of current market conditions and sales of
short-term securities to provide liquidity for anticipated loan demand.
Although the Corporation achieved strong deposit growth, service charges
on deposit accounts experienced only a slight increase. Average deposits
increased 13.7% in 1998, whereas service charges on deposit accounts increased
only 3.3% over 1997. In 1998, management focused primarily on increasing
noninterest income with revenue from the sales of new products rather than
increased pricing of existing services. Other operating income increased
slightly in 1998, mostly due to an increase in the gain on sale of fixed assets
of $105 thousand.
Noninterest income excluding net investment securities transactions
increased $964 thousand or 15.8% to $7.1 million in 1997 compared to $6.1
million in 1996. The primary reasons for this increase were an 8.2% increase in
service charges on deposit accounts, a 40.8% increase in commissions and fees,
and a 29.6% increase in gains on sales of mortgage loans. The increase in
service charges reflected deposit growth and competitive pricing. The increase
in commissions and revenues resulted primarily from growth in credit
card-related revenues, electronic banking revenues and alternative investment
product income. The growth in gains on sales of mortgage loans reflected a more
favorable interest rate environment and higher volume of loan originations.
Noninterest Expense
Noninterest expense, excluding pretax nonrecurring charges of $3.5
million, increased $3.2 million or 10.9% and totaled $32.4 million in 1998
compared with $29.2 million in 1997. Each category of noninterest expense was
affected by the significant growth experienced by the Corporation during 1998
and 1997.
Salaries and employee benefits, excluding pretax nonrecurring charges of
$1.2 million, increased $2.4 million or 14.7% during 1998, primarily due to the
investment in new personnel. The staffing cost increases were due to the
opening of a new branch office in Florence, South Carolina during the fourth
quarter of 1997, expansion of sales-related positions in growing market areas,
and higher commissions paid to revenue generating personnel. Merit increases,
performance bonuses, and increased contributions to fund the Corporation's
employee benefit plans also contributed to this increase.
Net occupancy expense increased $188 thousand or 8.9% during 1998, largely
due to higher building depreciation and maintenance expenses. The Corporation
began construction on a new branch office in Florence, South Carolina, during
1998. Equipment expense increased $41 thousand or 1.9%, primarily due to higher
equipment lease and maintenance costs.
Other operating expense, excluding pretax nonrecurring charges, increased
$620 thousand or 6.9% in 1998 primarily due to the significant growth realized
by the Corporation. Note 10 to the consolidated financial statements presents a
comparison of other operating expense by category. The Corporation increased
spending in selected areas to enhance revenue growth. The selected areas
included marketing-related expenses, which increased 14.2%, and telephone and
data communications expense, which increased 33.4%. The Corporation launched
its new image campaign during the fourth quarter of 1998.
The Corporation's overhead efficiency ratio was 62.4% in 1998, an
improvement from 63.4% in 1997. These ratios exclude nonrecurring charges.
In connection with the ComSouth and M&M mergers, the Corporation incurred
merger-related operating expenses of $3.5 million, before taxes ($2.8 million
after taxes), of which $1.4 million was directly related to affecting the
mergers and $2.0 million was in restructuring costs. The charges directly
related to affecting the mergers included $903 thousand in consulting fees paid
to investment bankers, $265 thousand in legal fees, $91 thousand for
shareholder communications, and $48 thousand in accounting costs. Of the $2.0
million in restructuring charges, $1.2 million was incurred in salary
continuation plans, non-qualified options, employee contracts, and severance
plans, and $677 thousand was incurred for the disposal of fixed assets due to
the mergers. The Corporation expects the combined company resulting from the
mergers to achieve substantial benefits in the form of operating cost savings.
Noninterest expense in 1997 increased $3.6 million or 14.3% from 1996. The
primary reasons for the increase were increases in all categories of
noninterest expense, with the exception of equipment expense, due to the
Corporation's growth
15
<PAGE>
in 1997. Salaries and employee benefits increased 15.9% due primarily to the
increased number of employees from expansion into new markets and investment in
new personnel to further develop the infrastructure of the Corporation. Net
occupancy expense increased 4.4% primarily due to investments made to maintain
existing facilities. Other operating expense increased 18.4% primarily due to
expansion related expenses and expenses related to the significant growth
realized by the Corporation. Equipment expense decreased slightly in 1997.
Income Taxes
Total income tax expense included in the Consolidated Statements of Income
was $5.3 million in 1998 and 1997, and $4.0 million in 1996. The primary reason
for tax expense to remain essentially unchanged in 1998 was a higher effective
tax rate, since net income before taxes decreased in 1998. The Corporation's
effective tax rates were 39.3%, 36.5%, and 35.2% in 1998, 1997, and 1996,
respectively.
The Corporation's effective tax rate increased in 1998 primarily due to
higher nondeductible merger-related expenses. The Corporation's effective tax
rate increased in 1997 primarily due to an increase in state tax expense and a
decrease in non-taxable interest income.
Table 4
SOURCES AND USES OF FUNDS
(Average balances in thousands)
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------
Amount Percent Amount Percent
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Composition of Sources:
Demand deposits ................. $152,258 15.2% $132,071 15.2%
Interest checking ............... 79,460 8.0 74,696 8.6
Savings ......................... 83,137 8.3 76,896 8.9
Money market .................... 252,986 25.3 211,208 24.4
Time deposits ................... 270,361 27.0 242,530 28.0
Short-term borrowings ........... 34,441 3.4 23,244 2.7
Long-term borrowings ............ 37,034 3.7 28,753 3.3
Subordinated notes .............. 11,000 1.1 11,000 1.3
Other liabilities ............... 8,730 0.9 5,928 0.6
Stockholders' equity ............ 70,575 7.1 60,974 7.0
-------- ----- -------- -----
Total sources ................. $999,982 100.0% $867,300 100.0%
======== ===== ======== =====
Composition of Uses:
Loans ........................... $694,390 69.4% $607,381 70.0%
Investment securities ........... 212,185 21.2 187,243 21.6
Other interest-earning assets ... 26,960 2.8 10,577 1.2
-------- ----- -------- -----
Total interest-earning assets . 933,535 93.4 805,201 92.8
Noninterest-earning assets ...... 66,447 6.6 62,099 7.2
-------- ----- -------- -----
Total uses .................... $999,982 100.0% $867,300 100.0%
======== ===== ======== =====
</TABLE>
- ---------
(1) Loan balances are stated net of unearned income.
Year 2000
The Corporation utilizes computer software programs, systems and devices
("systems") throughout the organization to support its operations. If
corrective action is not taken, many of these systems may not be able to
correctly interpret and process dates into the Year 2000. The Corporation has
inventoried and analyzed its systems to determine which will require
modification, upgrade, or replacement. The Corporation has established a Year
2000 project committee to provide operational support, guidance, and project
management expertise to ensure that the Corporation meets its Year 2000
compliance requirements. The Year 2000 project committee is responsible for
ensuring that the Corporation complies with the guidelines established by the
Federal Financial Institutions Examinations Council ("FFIEC"). The FFIEC issues
guidelines to provide further clarification on the federal regulatory
requirements mandating how financial institutions prepare for the Year 2000.
16
<PAGE>
Project's State of Readiness
The Corporations Year 2000 Plan includes the five management phases
recommended by the FFIEC: awareness, assessment, renovation, validation, and
implementation.
The renovation phase involves the installation of upgraded mission
critical systems that are reported to be Year 2000 compliant. The validation
phase involves the testing of mission critical systems using future dates to
certify the system as Year 2000 compliant. The renovation phase of the project
was substantially completed in July 1998 with the upgrade of deposit and loan
servicing systems and general ledger applications to current release levels
which are reported by the software vendor to be Year 2000 compliant. The
Corporation is testing these applications using future dates during the
validation phase of this Project. Testing of these mission critical systems was
substantially complete on December 31, 1998, with the remaining systems
scheduled for testing to be completed by the end of the first quarter of 1999.
The Corporation has developed a Year 2000 customer communications plan which
will ensure that customers are aware of and understand the Corporation's Year
2000 compliance efforts and to address Year 2000 issues raised by customers.
The plan was developed in accordance with the FFIEC guidelines.
Estimated Year 2000 Project Costs
As of December 31, 1998, the Corporation has incurred Year 2000 related
expenses of approximately $33 thousand. The remaining expense for anticipated
Year 2000 project activities is not expected to exceed $250 thousand for 1999.
This forecast is based on information currently known about the Corporation's
systems, as well as management's interpretation of the FFIEC guidelines
released to date. Additional personnel have been required to perform the system
testing and produce the testing documentation required by the FFIEC.
Contingency Plans
The FFIEC requires the development of remediation and business resumption
contingency plans. Remediation contingency plans are initiated if the
Corporation fails to successfully complete renovation, validation, or
implementation of a mission-critical system. Business resumption plans are
initiated if one of the systems that the Corporation believed to be Year 2000
compliant unexpectedly fails during the Year 2000 event. An overall Business
Resumption Plan document has been developed and distributed to the
Corporation's operational units. This contingency plan was developed based on
guidelines issued by the FFIEC and other sources. The Corporation's operational
units have detailed contingency plans that exist within the Business Resumption
Plan. The identification of critical business functions and the associated
risks have been documented. This information is used to estimate the
probability and impact of a system failure and to identify alternate processing
procedures in the event of such a failure. The Business Resumption Plan is a
"dynamic document" and is updated as required by changes in the Corporation's
operations.
Risk Factors
The Corporation has substantially completed the future date testing of its
internal mission-critical systems. While it is believed that this testing has
validated these systems to be Year 2000 compliant, there can be no absolute
assurances that confirm this. Additional expenses and delays may be incurred if
further test results reveal the need for additional system renovation or
replacement. The Corporation utilizes the systems and services of a number of
third parties. The failure of a key third-party service provider could result
in a material business interruption. The Corporation is closely monitoring the
Year 2000 progress of its third-party vendors. Additional expenses and delays
may be incurred in the event that internal future date testing or further
analysis reveals test exceptions that require additional renovation or the
ultimate replacement of vendors. Unknown expenses and consequences could result
if it becomes necessary to execute elements of the Corporation's Year 2000
contingency plans. Although the Corporation has given the Year 2000 project a
high priority and believes that Year 2000 compliance is being achieved, there
can be no assurances that the Corporation will be successful in addressing this
issue within this estimated timeframe or budget.
Financial Condition
Investment Securities
Average investment securities represented 22.7% of average earning assets
during 1998 compared to 23.3% in 1997. The decrease in the percentage of
investment securities was due to strong loan growth in each of the
Corporation's market areas. At December 31, 1998, investment securities totaled
$231.6 million or 24.6% of total earning assets.
The Corporation primarily invests in U.S. Treasury securities, securities
of other U.S. Government agencies and corporations, and mortgage related
securities with average lives approximating five years. The amortized cost and
estimated fair value of debt securities at December 31, 1998 are shown in Table
5. Actual maturities may differ from contractual maturities because borrowers
have the right to prepay obligations with or without prepayment penalties.
17
<PAGE>
Table 5
INVESTMENT SECURITIES
(December 31 balances in thousands)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Estimated Average Tax
Par Amortized Fair Maturity Equivalent
Value Cost Value (Yrs/Mos) Yield
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
HELD-TO-MATURITY
U.S. Treasury securities:
Within one year ............ $ 6,000 $ 5,998 $ 6,046 6.14%
One to five years .......... 3,350 3,360 3,426 6.08
Five to ten years .......... 0 0 0 0.00
Over ten years ............. 0 0 0 0.00
-------- -------- -------- ----
Total ..................... 9,350 9,358 9,472 0/9 6.12
-------- -------- -------- --- ----
Securities of other U.S.
Government agencies and
corporations:
Within one year ............ 0 0 0 0.00
One to five years .......... 4,400 4,396 4,468 6.16
Five to ten years .......... 0 0 0 0.00
Over ten years ............. 0 0 0 0.00
-------- -------- -------- ----
Total ..................... 4,400 4,396 4,468 2/6 6.16
-------- -------- -------- --- ----
Mortgage-backed securities:
Within one year ............ 0 0 0 0.00
One to five years .......... 0 0 0 0.00
Five to ten years .......... 0 0 0 0.00
Over ten years ............. 0 0 0 0.00
-------- -------- -------- ----
Total ..................... 0 0 0 0/0 0.00
-------- -------- -------- --- ----
Obligations of states and
political subdivisions:
Within one year ............ 690 690 697 9.41
One to five years .......... 1,943 1,947 2,004 8.74
Five to ten years .......... 150 155 158 6.60
Over ten years ............. 0 0 0 0.00
-------- -------- -------- ----
Total ..................... 2,783 2,792 2,859 1/8 8.79
-------- -------- -------- --- ----
Total portfolio ............. $ 16,533 $ 16,546 $ 16,799 1/5 6.58%
======== ======== ======== === ====
AVAILABLE-FOR-SALE
U.S. Treasury securities:
Within one year ............ $ 7,600 $ 7,614 $ 7,680 6.36%
One to five years .......... 15,000 15,002 15,597 6.32
Five to ten years .......... 0 0 0 0.00
Over ten years ............. 0 0 0 0.00
-------- -------- -------- ----
Total ..................... 22,600 22,616 23,277 1/9 6.33
-------- -------- -------- --- ----
Securities of other U.S.
Government agencies
and corporations:
Within one year ............ 3,250 3,249 3,267 6.08
One to five years .......... 42,505 42,525 42,983 6.00
Five to ten years .......... 47,260 47,962 48,586 6.18
Over ten years ............. 2 2 2 4.00
-------- -------- -------- ----
Total ..................... 93,017 93,738 94,838 5/4 6.09
-------- -------- -------- --- ----
Mortgage-backed securities:
Within one year ............ 1,483 1,481 1,485 6.43
One to five years .......... 4,674 4,603 4,719 7.46
Five to ten years .......... 9,562 9,472 9,622 6.38
Over ten years ............. 68,571 67,751 67,848 6.11
-------- -------- -------- ----
Total ..................... 84,290 83,307 83,674 7/7 6.22
-------- -------- -------- --- ----
Obligations of states and
political subdivisions:
Within one year ............ 635 635 642 9.11
One to five years .......... 850 849 891 8.37
Five to ten years .......... 5,030 5,115 5,235 7.08
Over ten years ............. 2,065 2,069 2,077 6.82
-------- -------- -------- ----
Total ..................... 8,580 8,668 8,845 7/4 7.29
-------- -------- -------- --- ----
Marketable equity securities 4,392 4,392 4,392 N/A 6.43
-------- -------- -------- --- ----
Total portfolio ............. $212,879 $212,721 $215,026 4/2 6.22%
======== ======== ======== === ====
<CAPTION>
1997 1996
----------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
U.S. Treasury securities:
Within one year ............ $ 6,934 $ 6,929 $ 7,507 $ 7,521
One to five years .......... 10,379 10,433 11,828 11,790
Five to ten years .......... 0 0 0 0
Over ten years ............. 0 0 0 0
-------- -------- -------- --------
Total ..................... 17,313 17,362 19,335 19,311
-------- -------- -------- --------
Securities of other U.S.
Government agencies and
corporations:
Within one year ............ 3,718 3,726 1,000 1,006
One to five years .......... 5,865 5,875 8,562 8,533
Five to ten years .......... 0 0 0 0
Over ten years ............. 0 0 0 0
-------- -------- -------- --------
Total ..................... 9,583 9,601 9,562 9,539
-------- -------- -------- --------
Mortgage-backed securities:
Within one year ............ 0 0 41 43
One to five years .......... 63 65 0 0
Five to ten years .......... 25 27 107 111
Over ten years ............. 56 60 72 77
-------- -------- -------- --------
Total ..................... 144 152 220 231
-------- -------- -------- --------
Obligations of states and
political subdivisions:
Within one year ............ 1,370 1,375 330 332
One to five years .......... 3,144 3,226 4,465 4,581
Five to ten years .......... 235 237 509 519
Over ten years ............. 112 111 182 212
-------- -------- -------- --------
Total ..................... 4,861 4,949 5,486 5,644
-------- -------- -------- --------
Total portfolio ............. $ 31,901 $ 32,064 $ 34,603 $ 34,725
======== ======== ======== ========
AVAILABLE-FOR-SALE
U.S. Treasury securities:
Within one year ............ $ 10,684 $ 10,701 $ 10,713 $ 10,781
One to five years .......... 26,689 27,014 29,195 29,387
Five to ten years .......... 987 1,001 0 0
Over ten years ............. 0 0 0 0
-------- -------- -------- --------
Total ..................... 38,360 38,716 39,908 40,168
-------- -------- -------- --------
Securities of other U.S.
Government agencies
and corporations:
Within one year ............ 14,595 14,638 8,035 8,035
One to five years .......... 40,109 40,276 49,905 49,888
Five to ten years .......... 19,669 19,852 955 980
Over ten years ............. 3,768 3,794 4,616 4,622
-------- -------- -------- --------
Total ..................... 78,141 78,560 63,511 63,525
-------- -------- -------- --------
Mortgage-backed securities:
Within one year ............ 812 813 3 3
One to five years .......... 3,764 3,778 0 0
Five to ten years .......... 12,557 12,671 5,535 5,560
Over ten years ............. 19,370 19,577 19,404 19,346
-------- -------- -------- --------
Total ..................... 36,503 36,839 24,942 24,909
-------- -------- -------- --------
Obligations of states and
political subdivisions:
Within one year ............ 296 298 240 241
One to five years .......... 1,311 1,359 1,711 1,775
Five to ten years .......... 3,479 3,567 2,193 2,242
Over ten years ............. 0 0 0 0
-------- -------- -------- --------
Total ..................... 5,086 5,224 4,144 4,258
-------- -------- -------- --------
Marketable equity securities 6,085 6,085 5,296 5,296
-------- -------- -------- --------
Total portfolio ............. $164,175 $165,424 $137,801 $138,156
======== ======== ======== ========
</TABLE>
- ---------
(1) Tax equivalent yield has been calculated using an incremental income tax
rate of 34%.
18
<PAGE>
Investment securities available-for-sale are held for expected liquidity
requirements, capital planning, and asset/liability management. Such
securities, recorded at fair value, were $215 million or 92.9% of the total
investment portfolio at December 31, 1998 compared with $165.4 million or 81.9%
at December 31, 1997. The unrealized gain on investment securities
available-for-sale, net of tax, was $1.5 million and $814 thousand at December
31, 1998 and 1997, respectively.
Investment securities held-to-maturity and recorded at amortized cost
aggregated $16.5 million or 7.1% of the total investment portfolio at December
31, 1998 compared with $31.9 million or 18.1% at December 31, 1997. The
estimated fair value of such securities exceeded the carrying value by $253
thousand or 1.5% and $164 thousand or 0.5% at December 31, 1998 and 1997,
respectively.
Loans
Loans, the largest component of earning assets, represented 74.4% of
average earning assets and 69.4% of average total assets during 1998, compared
with 75.4% and 70.0%, respectively, during 1997. In 1998, average loans grew
14.3% to $694.4 million from $607.4 million in 1997. In 1998, the Corporation
focused on growth in new markets, loan quality, and expansion of existing
customer relationships.
Loan policies and procedures provide the overall direction for
administration of the loan portfolio. The lending strategy focuses on quality
growth in each of the Corporation's market areas. The Corporation's loan
underwriting process is intended to ensure that sound and consistent credit
decisions are made.
The Corporation's commercial lenders focus primarily on small and
medium-sized businesses in their primary market areas. The markets along the
coasts of North Carolina and South Carolina are dependent on the tourism
industry and are seasonal in nature. However, the Corporation's lenders have a
high level of experience analyzing the different types of businesses competing
in this industry in their primary market areas. Loan demand slowed considerably
during the second half of 1998.
Even though loan policies and procedures may provide the basis for a
quality loan portfolio with minimal risk, at times individual borrowers do
encounter problems which result in lower credit quality and higher risk of
loss. Additionally, general deterioration of loan quality may result from
weaknesses in specific industries or the economy in general. During 1998, the
Corporation did not experience any material credit deterioration attributable
to adverse trends in specific markets or the economy in general.
In 1998, the Corporation expanded its market area away from the coasts of
South Carolina and North Carolina. With the acquisitions of ComSouth and M&M
during 1998, the Corporation expanded into the Midlands and Pee Dee areas of
South Carolina, and strengthened its presence in Charleston, South Carolina.
This expansion has provided an opportunity for growth and diversification.
Loans, net of unearned income, at December 31, 1998 increased 5.3% to $701.2
million compared with $665.6 million reported in 1997. This growth was due to
quality loan demand and expansion into new market areas.
The composition of the loan portfolio at December 31 for the last five
years is presented in Table 6. Commercial, financial, and agricultural loans
decreased 3.6% from 1997 and represent 16.7% of gross loans at December 31,
1998. Real estate-construction loans, which were 8.7% of gross loans at
December 31, 1998, decreased 5.6% compared to the previous year. Real
estate-mortgage or commercial real estate loans increased 16.1% from 1997 and
represent 43.2% of gross loans at December 31, 1998. Installment loans to
individuals, which include residential real estate loans, represent 22.8% of
gross loans and decreased 8.3% during 1998.
19
<PAGE>
Table 6
LOAN PORTFOLIO COMPOSITION
(December 31 balances in thousands)
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Percent Percent
Amount of Gross Amount of Gross
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Commercial, financial, and
agricultural ................... $117,042 16.7% $121,426 18.2%
Real estate -- construction ..... 60,811 8.7 64,417 9.7
Real estate -- mortgage ......... 302,819 43.2 260,928 39.2
Installment loans to
individuals .................... 160,106 22.8 174,554 26.2
Other ........................... 60,532 8.6 44,383 6.7
-------- ----- -------- -----
Gross loans ..................... 701,310 100.0% 665,708 100.0%
===== =====
Unearned income ................. (152) (119)
-------- --------
Total loans ..................... $701,158 $665,589
======== ========
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ---------------------
Percent Percent Percent
Amount of Gross Amount of Gross Amount of Gross
----------- ---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural ................... $107,991 19.9% $195,489 44.5% $146,141 41.8%
Real estate -- construction ..... 43,249 8.0 23,295 5.3 14,132 4.1
Real estate -- mortgage ......... 215,000 39.6 107,272 24.4 108,706 31.1
Installment loans to
individuals .................... 146,762 27.1 101,538 23.1 71,400 20.4
Other ........................... 29,104 5.4 11,688 2.7 8,925 2.6
-------- ----- -------- ----- -------- -----
Gross loans ..................... 542,106 100.0% 439,282 100.0% 349,304 100.0%
===== ===== =====
Unearned income ................. (97) (25) (31)
-------- -------- --------
Total loans ..................... $542,009 $439,257 $349,273
======== ======== ========
</TABLE>
The changing mix of the loan portfolio reflects the Corporation's
expansion into new market areas and the changing economy. While several
categories of loans decreased in 1998, the growth in commercial real estate
loans offset the decrease and led the loan portfolio's growth. The primary
reason for this increase is the rapid growth and expansion of commercial
business in the Corporation's market areas.
Table 7
SELECTED LOAN MATURITIES AND INTEREST RATE SENSITIVITY
(December 31, 1998 balances in thousands)
<TABLE>
<CAPTION>
One Year One to Over Five
or Less Five Years Years Total
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Types of loans:
Commercial, financial and agricultural ............... $ 58,292 $ 47,925 $ 10,825 $117,042
Real estate -- construction .......................... 24,160 20,135 16,516 60,811
Real estate -- mortgage .............................. 44,868 135,224 122,727 302,819
Installment loans to individuals and other loans ..... 60,665 93,834 65,987 220,486
-------- -------- -------- --------
Total .............................................. $187,985 $297,118 $216,055 $701,158
======== ======== ======== ========
Total of loans above with:
Predetermined interest rates ......................... $ 80,010 $225,054 $ 78,983 $384,047
Adjustable interest rates ............................ 107,975 72,064 137,072 317,111
-------- -------- -------- --------
Total .............................................. $187,985 $297,118 $216,055 $701,158
======== ======== ======== ========
</TABLE>
- ---------
(1) Loan balances include unearned income.
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans on which the ultimate
collection of the full amount of principal and/or interest is uncertain,
restructured loans, loans past due ninety days or more as to principal or
interest, and other real estate owned. Management is not aware of any situation
where known information about a borrower would require disclosure as a
potential problem loan. The Corporation does not have any foreign loans or
loans for highly leveraged transactions. A summary of nonperforming assets at
December 31 follows:
20
<PAGE>
NONPERFORMING ASSETS
(Balances at December 31, in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans .................................................. $ 1,628 $ 790 $ 991 $ 1,034 $ 2,823
Loans past due ninety days or more ................................ 0 78 137 87 37
Troubled debt restructurings ...................................... 0 0 0 0 0
Other real estate owned ........................................... 213 187 126 301 487
------- ------- ------- ------- -------
Total nonperforming assets ........................................ $ 1,841 $ 1,055 $ 1,254 $ 1,422 $ 3,347
======= ======= ======= ======= =======
Nonperforming assets to total loans and other real estate owned ... 0.26% 0.16% 0.23% 0.32% 0.96%
</TABLE>
During 1998, nonperforming assets increased $786 thousand to $1.8 million,
compared with $1.1 million reported in 1997. The primary reason for
nonperforming assets increasing during 1998 was that two borrowers of one of
the acquired entities totaling $901 thousand were placed on nonaccrual prior to
the merger. Appropriate write-downs have been taken on these loans and no
further losses are anticipated. There were no loans past due 90 days or more in
1998. The nonperforming assets to total loans and other real estate owned ratio
increased to 0.26% and remains at a very favorable level. During 1997,
nonperforming assets declined slightly and the nonperforming assets to total
loans and other real estate owned ratio was 0.16%.
Allowance For Loan Losses
An analysis of activity in the allowance for loan losses is presented in
Table 8. The allowance for loan losses is established and maintained through
charges to expense in the form of a provision for loan losses. Loan losses and
recoveries are charged or credited directly to the allowance.
Table 8
SUMMARY OF LOAN LOSS EXPERIENCE
(December 31 Balances in thousands)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Allowance for loan losses at beginning of year .......................... $ 7,322 $ 6,631
------- -------
Amounts charged off during year:
Commercial, financial and agricultural ................................. 1,742 1,304
Real estate -- construction ............................................ 0 0
Real estate -- mortgage ................................................ 136 133
Installment loans to individuals and other loans ....................... 329 212
------- -------
Total loans charged off .............................................. 2,207 1,649
------- -------
Amount of recoveries during year:
Commercial, financial and agricultural ................................. 592 260
Real estate -- construction ............................................ 0 0
Real estate -- mortgage ................................................ 33 11
Installment loans to individuals and other loans ....................... 85 25
------- -------
Total recoveries ..................................................... 710 296
------- -------
Net loans charged off ................................................... 1,497 1,353
------- -------
Provision for loan losses ............................................... 2,472 2,044
------- -------
Allowance for loan losses at end of year ................................ $ 8,297 $ 7,322
======= =======
Ratio of net charge-offs during the year to average loans outstanding
during the year ........................................................ 0.22% 0.22%
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Allowance for loan losses at beginning of year .......................... $ 5,649 $ 5,116 $ 5,280
------- ------- -------
Amounts charged off during year:
Commercial, financial and agricultural ................................. 278 338 1,086
Real estate -- construction ............................................ 0 130 241
Real estate -- mortgage ................................................ 86 147 216
Installment loans to individuals and other loans ....................... 152 193 278
------- ------- -------
Total loans charged off .............................................. 516 808 1,821
------- ------- -------
Amount of recoveries during year:
Commercial, financial and agricultural ................................. 188 481 198
Real estate -- construction ............................................ 0 0 63
Real estate -- mortgage ................................................ 131 13 13
Installment loans to individuals and other loans ....................... 39 17 94
------- ------- -------
Total recoveries ..................................................... 358 511 368
------- ------- -------
Net loans charged off ................................................... 158 297 1,453
------- ------- -------
Provision for loan losses ............................................... 1,140 830 1,289
------- ------- -------
Allowance for loan losses at end of year ................................ $ 6,631 $ 5,649 $ 5,116
======= ======= =======
Ratio of net charge-offs during the year to average loans outstanding
during the year ........................................................ 0.03% 0.08% 0.44%
</TABLE>
The ratio of net charge-offs to average loans was 0.22% in 1998 and 1997,
and 0.03% in 1996. A $1.7 million provision for loan losses, excluding $800
thousand of additional provision for loan losses necessitated by charge-offs at
the acquired banks in a similar amount, was made in 1998, compared with $2.0
million in 1997, and $1.1 million in 1996.
The decreased level of the provision for loan losses during 1998 was
primarily attributable to loan growth slowing during the second half of 1998
and a significant decrease in net charge-offs, excluding the $800 thousand in
charge-offs at the acquired banks. The provision for loan losses was made to
reflect potential losses inherent in the loan portfolio and was not
21
<PAGE>
attributable to individual loans for which management believed specific
accruals were necessary at December 31, 1998. The level of the provision for
loan losses increased in 1997 and primarily reflected a higher level of net
charge-offs at banks that were acquired in 1998 and significant loan growth.
In determining the amount of the provision for loan losses, management
reviews past experience of loan charge-offs, the level of past due and
nonaccrual loans, the size and mix of the portfolio, adverse classifications of
recent regulatory examinations, general economic conditions in the market area,
and most importantly, individual loans to identify potential credit problems.
The level of the allowance for loan losses is believed to be adequate in
relation to the current size, mix, and quality of the portfolio.
Any loans classified by the Corporation or regulatory examiners as loss,
doubtful, substandard, or special mention not disclosed herein, or within the
relevant tables, do not (i) represent or result from trends or uncertainties
that management expects will materially impact future operating results,
liquidity, or capital resources, or (ii) represent material credits about which
management is aware of any information that causes management to have serious
doubt as to the abilities of such borrowers to comply with the loan repayment
terms.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Corporation measures loans for impairment when it is probable
that all amounts, including principal and interest, will not be collected in
accordance with the contractual terms of the loan agreement. It is the
Corporation's policy to apply the provisions of SFAS No. 114 to nonaccrual
commercial loans. At December 31, 1998, impaired loans had a related specific
allowance for loan losses totaling $243.3 thousand. There were no material
commitments to lend additional funds to customers whose loans were classified
as impaired at December 31, 1998.
Table 9 presents an allocation of the allowance for loan losses by
different loan categories. The breakdown is based upon a number of qualitative
factors, and the amounts presented are not necessarily indicative of actual
amounts which will be charged to any particular category.
Table 9
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(December 31 balances in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Amount Total Loans Amount Total Loans Amount Total Loans
-------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural .................... $2,961 16.7% $3,072 18.2% $2,992 19.9%
Real estate -- construction ...... 554 8.7 587 9.7 400 8.0
Real estate -- mortgage .......... 1,277 43.2 1,100 39.2 994 39.6
Installment loans to individuals
and other loans ................. 3,005 31.4 1,909 32.9 1,586 32.5
Unallocated ...................... 500 654 659
------ ----- ------ ----- ------ -----
Total .......................... $8,297 100.0% $7,322 100.0% $6,631 100.0%
====== ===== ====== ===== ====== =====
<CAPTION>
1995 1994
---------------------- ---------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
-------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Commercial, financial, and
agricultural .................... $2,850 44.5% $2,552 41.8%
Real estate -- construction ...... 510 5.3 146 4.1
Real estate -- mortgage .......... 513 24.4 740 31.1
Installment loans to individuals
and other loans ................. 1,102 25.8 1,059 23.0
Unallocated ...................... 674 619
------ ----- ------ -----
Total .......................... $5,649 100.0% $5,116 100.0%
====== ===== ====== =====
</TABLE>
Funding Sources
Average deposits increased 13.7% to $838.2 million in 1998 from $737.4
million in 1997. In 1998, the mix of interest-bearing deposits changed as
average certificates of deposit increased 11.5%, while average interest
checking, money market and savings accounts as a group increased 14.5%. Average
certificates of deposit represented 32.3% of average deposits in 1998 compared
with 32.9% in 1997. Average interest checking, money market and savings
accounts as a group were 49.6% of average deposits in 1998 compared with 49.2%
in 1997. Average demand deposits increased 15.3% to $152.2 million and
represented 18.2% of average deposits in 1998 compared with 17.9% in 1997.
Average short-term borrowings increased $11.2 million or 48.2% to $34.4
million in 1998 from $23.2 million in 1997. With the seasonality of the
Corporation's market area, the Corporation typically borrows money from
correspondent banks and the Federal Home Loan Bank ("FHLB") in the winter
months when deposits are at their lowest levels and loan demand is at its
highest. Pursuant to collateral agreements with the FHLB, advances are secured
by stock in the FHLB and qualifying first mortgage loans in the amount of $87.5
million. The Corporation's liquidity position remained favorable through the
winter months of 1998, however, the need for short-term borrowings increased
during the year.
At December 31, 1998, the Corporation had short-term borrowings of $58.8
million, an increase of $27.8 million from the $31.0 million reported at
December 31, 1997. Of the $58.8 million in short-term borrowings, $15.0 million
or 25.6%
22
<PAGE>
was in federal funds purchased, an increase of 76.5% over federal funds
purchased at December 31, 1997, and $42.4 million or 72.2% was in securities
sold under agreements to repurchase. The primary reason for the increase in
federal funds purchased was to fund seasonal lending needs. Securities sold
under agreements to repurchase at December 31, 1998 more than doubled from
December 31, 1997, primarily due to more customers purchasing the Corporation's
cash management system, which uses this type of account.
Advances from the FHLB with an initial maturity of more than one year
totaled $32 million at December 31, 1998, versus $33 million at December 31,
1997. These advances are collateralized by the same collateral agreements as
short-term funds from the FHLB. Fixed interest rates on these advances ranged
from 4.89% to 7.21%, payable monthly or quarterly, with principal due at
various maturities ranging from 1999 to 2008.
On December 20, 1996, the Corporation issued $6 million of 7.89%
Subordinated Notes due December 20, 2006. Under the terms of the Subordinated
Note Agreement, the balance of the debt can be prepaid on December 20, 2001 at
par plus accrued and unpaid interest. On December 20, 2001, the interest rate
on this issue will be reset to a rate approximately equal to the yield on the
5-year U.S. Treasury Note plus 195 basis points. On December 1, 1993, the
Corporation issued $5 million of 8.60% Subordinated Notes due December 1, 2003.
Under the terms of the Subordinated Note Agreement, the balance of the debt
cannot be paid prior to its final maturity. The interest on these single
principal payment issues is payable semi-annually of each year and at maturity.
This long-term debt qualifies for inclusion in the determination of total
capital under the risk-based capital guidelines.
Capital Resources
The Corporation maintains a strong level of capital as a margin of safety
for its depositors and stockholders, as well as to provide for future growth
and the ability to pay dividends. At December 31, 1998, stockholders' equity
was $72.9 million versus $66.1 million at December 31, 1997. The Corporation
paid cash dividends of $0.48 per share in 1998, $0.375 per share in 1997, and
$0.28 per share in 1996.
During 1990, the Federal Reserve Board adopted a minimum leverage ratio of
3.0% for bank holding companies. This ratio (defined as stockholders' equity
less goodwill and certain other intangibles divided by average assets) was
7.07% and 6.88% at December 31, 1998 and 1997, respectively, for the
Corporation.
The Federal Reserve Board adopted risk-based capital guidelines, which
assign risk-weightings to assets and off-balance sheet items. The guidelines
define and set minimum capital requirements (risk-based capital ratios). All
banks are required to maintain core capital (Tier 1) of at least 4.0% of
risk-adjusted assets and total capital of 8.0% of risk-adjusted assets. Tier 1
capital consists principally of stockholders' equity less goodwill and certain
other intangibles, while total capital consists of Tier 1 capital, certain debt
instruments, and a portion of the allowance for loan losses. Banks, which meet
or exceed a Tier 1 ratio of 6.0%, a total capital to risk-adjusted assets ratio
of 10.0% and a Tier 1 leverage ratio of 5.0% are considered well-capitalized by
regulatory standards. The Corporation had a Tier 1 capital ratio of 9.56% and
9.27% at December 31, 1998 and 1997, respectively, and a total risk-based
capital ratio of 12.01% and 11.93% at December 31, 1998 and 1997, respectively,
well above the regulatory requirements for a well-capitalized institution. Note
16 to the consolidated financial statements presents the Bank's actual capital
amounts and ratios at December 31, 1998 and 1997.
The following table shows several capital ratios for the last three years:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
Average stockholders' equity to:
Average assets .................... 7.06% 7.03% 7.37%
Average deposits .................. 8.42 8.27 8.59
Average loans and leases .......... 10.16 10.04 10.95
Risk-based capital ratios:
Tier 1 ............................ 9.56 9.27 10.05
Total ............................. 12.01 11.93 13.19
Tier 1 Leverage ratio ............. 7.07 6.88 7.32
</TABLE>
Market Risk Management
Asset/liability management is the process by which the Corporation
monitors and attempts to control the mix and maturities of its assets and
liabilities in order to maximize net interest income. The functions of
asset/liability management are to ensure adequate liquidity and to maintain an
appropriate balance between interest-sensitive assets and liabilities.
23
<PAGE>
Liquidity management involves meeting the cash flow requirements of the
Corporation which arise primarily from withdrawal of deposits, extensions of
credit, and payment of operating expenses. Because the economy of the
Corporation's primary market area is seasonal in nature, considerable attention
is required to manage liquidity needs. 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. Seasonality affects the
Corporation because there is an inverse relationship between sources of funds
(deposits) and demand for loans. Normally, deposits begin building on a
month-to-month basis in February or March, reach their peak in August or
September, and begin to decline thereafter. Loan demand begins building in
October and is highest during the winter months. This trend results in the
Corporation experiencing its heaviest need for funds to meet loan demand at the
time when deposits begin their annual decline.
To meet this need, the Corporation typically invests sizable amounts of
its deposit growth during the summer months in temporary investments and
short-term securities maturing during 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 FHLB, to meet
its liquidity needs during the winter months.
During the year ended December 31, 1998, the most significant cash flows
impacting the components of the Corporation's liquidity related to a $37.1
million increase in net loans and a $33.2 million increase in net investment
securities, which were funded by an increase of $35.3 million in deposits, and
an increase of $31.4 million in federal funds purchased and securities sold
under agreements to repurchase.
Interest-sensitive assets and liabilities are those that are subject to
repricing in the near term, including floating rate instruments and those with
near-term maturities. The interest-sensitivity gap is the difference between
total interest-sensitive assets and liabilities during a given time period.
Management's objective is to maintain the difference between interest-sensitive
assets and liabilities at a level that will minimize the effects of significant
interest rate shifts on the net interest margin.
Table 10 shows the Corporation's interest rate sensitivity at December 31,
1998, indicating a liability-sensitive position in the three months or less
period and the four months to six months period and an asset-sensitive position
in the seven months to twelve months period. On a cumulative basis through one
year, the Corporation's rate sensitive liabilities exceed rate sensitive
assets, resulting in a liability-sensitive position of $82.3 million or 8.8% of
total interest-earning assets. Generally, a liability-sensitive position
indicates that declining interest rates would have a positive impact on net
interest income and rising interest rates would adversely affect net interest
income. Rising and declining interest rates, respectively, would typically have
the opposite effect on net interest income in an asset-sensitive position.
Other factors, including the speed at which assets and liabilities reprice in
response to changes in market rates and competitive factors, can influence the
ultimate impact on net interest income resulting from changes in interest
rates. Although management actively monitors and reacts to a changing interest
rate environment, it is not possible to fully insulate the Corporation against
interest rate risk. Given the current mix and maturity of the Corporation's
assets and liabilities, it is possible that a rapid, significant and prolonged
increase or decrease in interest rates could have an adverse impact on the
Corporation's net interest margin.
During 1996, the Corporation purchased an interest rate floor contract
with a notional value of $25 million and a three-year term. The floor index of
the contract is three-month Libor and it has a strike rate of 5.25%. The
Corporation paid a premium of $102,500 for the contract. In a floor contract,
the Corporation pays a premium at the initiation of the contract for the right
to receive payments if market interest rates are less than the strike rate
during a period of the contract. The Corporation's liability is limited to the
premium paid for the contract. The primary purpose of this contract is to
reduce the Corporation's exposure to a significant decline in interest rates.
24
<PAGE>
Table 10
INTEREST RATE SENSITIVITY ANALYSIS
(December 31, 1998 balances in thousands)
<TABLE>
<CAPTION>
0-3 mos. 4-6 mos. 7-12 mos.
------------- -------------- -------------
<S> <C> <C> <C>
Interest-earning assets:
Loans .......................................... $345,614 $ 32,314 $ 51,797
Investment securities .......................... 6,884 5,445 7,434
Interest-bearing balances due from banks ....... 7,592 0 200
-------- -------- ---------
Total interest-earning assets ................ $360,090 $ 37,759 $ 59,431
======== ======== =========
Percent of total interest-earning assets ........ 38.4% 4.0% 6.3%
Interest-bearing liabilities:
Interest checking .............................. $ 0 $ 0 $ 0
Savings ........................................ 0 0 0
Money market ................................... 264,193 0 0
Certificates of deposit of $100,000 or more..... 41,371 14,337 13,576
Certificates of deposit less than $100,000...... 71,635 37,217 35,458
Short-term borrowings .......................... 58,772 0 0
Long-term debt ................................. 3,000 0 0
Subordinated notes ............................. 0 0 0
-------- -------- ---------
Total interest-bearing liabilities ........... 438,971 51,554 49,034
Other sources -- net ........................... 0 0 0
-------- -------- ---------
Total sources -- net ......................... $438,971 $ 51,554 $ 49,034
======== ======== =========
Percent of total interest-earning assets ........ 46.8% 5.5% 5.2%
Interest-sensitive gap .......................... $(78,881) $(13,795) $ 10,397
Cumulative interest-sensitive gap ............... (78,881) (92,676) (82,279)
Percent of total interest-earning assets ........ (8.4)% (9.9)% (8.8)%
<CAPTION>
Total Over one
within year or
one year non-sensitive Total
------------- --------------- -------------
<S> <C> <C> <C>
Interest-earning assets:
Loans .......................................... $429,725 $ 269,805 $ 699,530
Investment securities .......................... 19,763 211,808 231,571
Interest-bearing balances due from banks ....... 7,792 0 7,792
-------- --------- ---------
Total interest-earning assets ................ $457,280 $ 481,613 $ 938,893
======== ========= =========
Percent of total interest-earning assets ........ 48.7% 51.3% 100.0%
Interest-bearing liabilities:
Interest checking .............................. $ 0 $ 96,740 $ 96,740
Savings ........................................ 0 76,911 76,911
Money market ................................... 264,193 0 264,193
Certificates of deposit of $100,000 or more..... 69,284 6,710 75,994
Certificates of deposit less than $100,000...... 144,310 16,626 160,936
Short-term borrowings .......................... 58,772 0 58,772
Long-term debt ................................. 3,000 29,000 32,000
Subordinated notes ............................. 0 11,000 11,000
-------- --------- ---------
Total interest-bearing liabilities ........... 539,559 236,987 776,546
Other sources -- net ........................... 0 162,347 162,347
-------- --------- ---------
Total sources -- net ......................... $539,559 $ 399,334 $ 938,893
======== ========= =========
Percent of total interest-earning assets ........ 57.5% 42.5% 100.0%
Interest-sensitive gap .......................... $(82,279) $ 82,279 --
Cumulative interest-sensitive gap ............... (82,279) -- --
Percent of total interest-earning assets ........ (8.8)% -- --
</TABLE>
- ---------
(1) Loan balances are stated net of unearned income and do not include
nonaccrual loans.
<PAGE>
Table 10 is a "static gap" presentation, and while widely used as a
measure of interest rate sensitivity, it does not necessarily provide a true
indication of the Corporation's interest rate sensitivity position. The problem
with the "static gap" view is that it does not take into consideration that
changes in interest rates do not affect all assets and liabilities equally. In
addition, the Corporation's net interest income is also affected by other
significant factors in given interest rate environments, including the spread
between the prime rate and incremental borrowing cost and the volume and mix of
earning assets and liabilities. In view of these factors, the Corporation uses
a number of methods, including an asset/liability simulation model, to measure
and manage interest rate risk.
In January 1997, the Securities and Exchange Commission adopted new rules
that require more comprehensive disclosures of accounting policies for
derivatives as well as enhanced quantitative and qualitative disclosures of
market risk for derivative financial instruments and other financial
instruments. The market risk disclosures must be presented for most financial
instruments, which must be classified into two portfolios: financial
instruments entered into for trading purposes and all other financial
instruments (non-trading purposes). The Corporation does not maintain a trading
portfolio.
25
<PAGE>
Table 11
FINANCIAL INSTRUMENTS
(Balances in thousands)
<TABLE>
<CAPTION>
Expected Maturity
-----------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Loans, net of unearned income
Fixed Rate:
Book value ....................... $ 80,010 $ 55,194 $ 77,708 $ 44,007 $ 48,145 $ 78,983
Weighted average effective yield . 8.40% 9.18% 8.84% 8.87% 8.66% 8.07%
Variable Rate:
Book value ....................... $107,975 $ 15,774 $ 20,521 $ 18,188 $ 17,581 $137,072
Weighted average effective yield . 8.40% 8.38% 8.38% 8.65% 8.33% 8.38%
Securities held-to-maturity
Fixed Rate:
Book value ....................... $ 6,689 $ 5,589 $ 3,770 $ 343 $ 0 $ 155
Weighted average effective yield . 6.43% 6.69% 6.41% 8.66% 0.00% 6.60%
Variable Rate:
Book value ....................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Weighted average effective yield . 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Securities available-for-sale
Fixed Rate:
Book value ....................... $ 13,084 $ 15,729 $ 17,569 $ 8,722 $ 22,173 $127,451
Weighted average effective yield . 6.38% 6.20% 6.23% 6.42% 6.01% 6.22%
Variable Rate:
Book value ....................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,905
Weighted average effective yield . 0.00% 0.00% 0.00% 0.00% 0.00% 5.92%
Financial Liabilities:
Time deposits
Fixed Rate:
Book value ....................... $208,700 $ 15,909 $ 2,708 $ 609 $ 526 $ 0
Weighted average effective rate .. 5.31% 5.71% 5.56% 6.15% 6.00% 0.00%
Variable Rate:
Book value ....................... $ 7,354 $ 1,091 $ 31 $ 2 $ 0 $ 0
Weighted average effective rate .. 4.69% 4.69% 4.69% 4.69% 0.00% 0.00%
Long-term debt and subordinated notes
Fixed Rate:
Book value ....................... $ 4,000 $ 1,000 $ 7,000 $ 6,000 $ 15,000 $ 10,000
Weighted average effective rate .. 5.66% 6.19% 7.65% 5.75% 6.13% 6.36%
Variable Rate:
Book value ....................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Weighted average effective rate .. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
<CAPTION>
December 31, 1998
-------------------------
Total Fair Value
------------- -----------
<S> <C> <C>
Financial Assets:
Loans, net of unearned income
Fixed Rate:
Book value ....................... $ 384,047 $391,061
Weighted average effective yield . 8.62%
Variable Rate:
Book value ....................... $ 317,111 $317,111
Weighted average effective yield . 8.40%
Securities held-to-maturity
Fixed Rate:
Book value ....................... $ 16,546 $ 16,799
Weighted average effective yield . 6.56%
Variable Rate:
Book value ....................... $ 0 $ 0
Weighted average effective yield . 0.00%
Securities available-for-sale
Fixed Rate:
Book value ....................... $ 204,728 $204,728
Weighted average effective yield . 6.22%
Variable Rate:
Book value ....................... $ 5,905 $ 5,905
Weighted average effective yield . 5.92%
Financial Liabilities:
Time deposits
Fixed Rate:
Book value ....................... $ 228,452 $229,603
Weighted average effective rate .. 5.34%
Variable Rate:
Book value ....................... $ 8,478 $ 8,478
Weighted average effective rate .. 4.69%
Long-term debt and subordinated notes
Fixed Rate:
Book value ....................... $ 43,000 $ 44,848
Weighted average effective rate .. 6.33%
Variable Rate:
Book value ....................... $ 0 $ 0
Weighted average effective rate .. 0.00%
</TABLE>
Table 11 summarizes the expected maturities and weighted average effective
yields and interest rates associated with the Corporation's financial
instruments. Cash and short-term investments, deposits (excluding time
deposits), and short-term borrowings are excluded from Table 11, as their
respective carrying values approximate fair values. These financial instruments
generally expose the Corporation to insignificant market risk as they have
either no stated maturities or an average maturity of less than thirty days and
carry interest rates that approximate market. For further information on the
fair value of financial instruments, see Note 14 to the consolidated financial
statements.
Accounting and Regulatory Matters
In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130") which requires that changes in the amounts of
comprehensive income items, currently reported as separate components of
equity, be shown in a financial statement, displayed as prominently as other
financial statements. The most common components of other comprehensive income
include foreign currency translation adjustments, minimum pension liability
adjustments and/or unrealized gains and losses on available-for-sale
securities. SFAS No. 130 does not require a specific format for the new
financial statement, but does require that an amount representing total
comprehensive income be reported. The Corporation adopted SFAS No. 130 on
January 1, 1998.
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
26
<PAGE>
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.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Post-retirement Benefits," ("SFAS No. 132"), an
amendment of SFAS Nos. 87, 88, and 106. SFAS No. 132 revises employer's
disclosures about pensions and other post-retirement benefit plans. It does not
change the measurement or recognition of those plans. The Corporation adopted
SFAS No. 132 effective 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 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 the Corporation plans to adopt
SFAS No. 134 in 1999. The effects of adoption are not expected to be material.
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.
27
<PAGE>
REPORT OF MANAGEMENT
The consolidated financial statements of Anchor Financial Corporation (the
"Corporation") and other financial information presented in this Annual Report
were prepared by management which is responsible for the integrity of the
information presented. The statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances, and
include amounts that are based on management's best estimates and judgment.
The Corporation maintains accounting and control systems which are
believed to provide reasonable assurance that assets are safeguarded from loss
or unauthorized use and produce records adequate for preparation of financial
information. Management recognizes the limits inherent in any system of
internal control, as the cost of controls should not exceed the benefits
derived. Management believes the Corporation's system provides an appropriate
balance.
In order to monitor compliance with its system of controls, the
Corporation has an internal audit program. The program includes a review for
compliance with written policies and procedures and a comprehensive review of
the adequacy and effectiveness of control systems. Internal audit reports are
issued to the Audit Committee of the Board of Directors. The independent
accountants receive copies of internal audit reports, and the reports are
available for review by regulatory authorities.
The Audit Committee of the Board of Directors meets as necessary with
management, internal auditors and the independent accountants to review audit
scopes, audit reports, and fee arrangements of the independent accountants, in
order to evaluate management's performance of its financial reporting
responsibility. Both internal auditors and independent accountants have access
to the Audit Committee without any management present in the discussions.
Independent accountants are recommended by the Audit Committee to the Board of
Directors for selection and ratification by the stockholders.
PricewaterhouseCoopers LLP, as independent accountants, is engaged to
provide an objective, independent review as to management's discharge of its
responsibilities relating to the fairness of reported operating results and
financial condition. They have an understanding of the Corporation's accounting
and financial controls and conduct such tests and related procedures as they
deem appropriate to arrive at an opinion of the fairness of the financial
statements. Their opinion is included as a part of this Annual Report on Form
10-K.
The management of the Corporation is committed to, and has always
maintained and enforced, a philosophy of high ethical standards in the conduct
of its business. The policies covering conflicts of interest, community
affairs, and other subjects are uniformly applicable to all officers and
employees of the Corporation.
ANCHOR FINANCIAL CORPORATION
Myrtle Beach, South Carolina
February 19, 1999
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Anchor Financial Corporation
In our opinion, based upon our audits and the reports of other auditors,
the accompanying consolidated balance sheets and the related consolidated
statements of income, of changes in stockholders' equity and comprehensive
income, and of cash flows present fairly, in all material respects, the
financial position of Anchor Financial Corporation and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of ComSouth Bankshares
Inc. and M&M Financial Corporation, which statements reflect total assets of
$ 361,842,232 at December 31, 1997 and net interest income of $14,149,936, and
$11,416,263 for the years ended December 31, 1997 and 1996. Those statements
were audited by other auditors whose reports thereon have been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for ComSouth Bankshares Inc. and M&M Financial Corporation, is based solely on
the reports of the other auditors. We conducted our audits of the consolidated
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free from material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Columbia, South Carolina
February 19, 1999
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of ComSouth Bankshares, Inc.
We have audited the consolidated balance sheets of ComSouth Bankshares,
Inc. (the "Corporation") and its subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Corporation and its subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ J.W. Hunt and Company, LLP
Columbia, South Carolina
January 31, 1998
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO BOARD OF DIRECTORS
M&M FINANCIAL CORPORATION
Marion, South Carolina
We have audited the consolidated balance sheets of M&M Financial as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of M&M Financial
Corporation as of December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Tourville, Simpson & Henderson, LLP
Columbia, South Carolina
March 9, 1998
31
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
------------------ ----------------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................ $ 43,743,583 $ 42,123,859
Interest-bearing balances due from banks ....................................... 7,791,974 2,566,151
Federal funds sold ............................................................. 0 6,820,000
Investment securities:
Held-to-maturity, at amortized cost (fair value of $16,798,854 in 1998 and
$32,064,460 in 1997)......................................................... 16,545,655 31,900,798
Available-for-sale, at fair value ............................................ 215,025,562 165,424,294
-------------- ------------
Total investment securities .................................................... 231,571,217 197,325,092
-------------- ------------
Loans .......................................................................... 701,309,305 665,707,501
Less -- unearned income ...................................................... (151,712) (118,631)
-- allowance for loan losses ............................................ (8,296,635) (7,321,491)
-------------- ------------
Net loans ...................................................................... 692,860,958 658,267,379
-------------- ------------
Premises and equipment ......................................................... 22,065,304 22,432,590
Other assets ................................................................... 16,774,179 15,919,297
-------------- ------------
Total assets .................................................................... $1,014,807,215 $945,454,368
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits ............................................................. $ 157,242,527 $140,840,476
NOW and money market accounts ............................................... 360,933,245 295,530,031
Time deposits $100,000 and over.............................................. 75,993,814 122,048,841
Other time and savings deposits ............................................. 237,846,760 238,262,671
-------------- ------------
Total deposits ............................................................... 832,016,346 796,682,019
Federal funds purchased and securities sold under agreements to repurchase ... 57,374,526 25,966,838
Other short-term borrowings .................................................. 1,396,927 5,065,450
Long-term debt ............................................................... 32,000,000 34,189,167
Subordinated notes ........................................................... 11,000,000 11,000,000
Other liabilities ............................................................ 8,123,716 6,450,489
-------------- ------------
Total liabilities .............................................................. 941,911,515 879,353,963
-------------- ------------
Stockholders' Equity:
Common stock, no par value; 50,000,000 shares authorized; shares issued and
outstanding -- 6,533,108 in 1998 and 6,430,694 in 1997 ...................... 47,151,149 46,153,141
Retained earnings ............................................................ 25,318,399 19,660,080
Accumulated other comprehensive income ....................................... 1,521,152 813,809
Unearned ESOP shares ......................................................... (1,095,000) (526,625)
-------------- ------------
Total stockholders' equity ..................................................... 72,895,700 66,100,405
-------------- ------------
Commitments and Contingencies (Note 15)
Total liabilities and stockholders' equity ...................................... $1,014,807,215 $945,454,368
============== ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
32
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans .............................. $ 64,476,945 $58,091,521 $46,333,791
Interest on investment securities:
Taxable ............................................... 12,765,778 11,260,353 9,595,309
Non-taxable ........................................... 509,258 493,483 509,354
Other interest income ................................... 1,439,580 606,726 773,806
------------ ----------- -----------
Total interest income .................................... 79,191,561 70,452,083 57,212,260
------------ ----------- -----------
INTEREST EXPENSE:
Interest on deposits .................................... 31,257,113 27,845,800 22,787,796
Interest on short-term borrowings ....................... 1,729,961 1,213,026 802,152
Interest on long-term borrowings ........................ 2,180,842 1,741,576 1,331,048
Interest on subordinated notes .......................... 931,225 931,225 455,688
------------ ----------- -----------
Total interest expense ................................... 36,099,141 31,731,627 25,376,684
------------ ----------- -----------
Net interest income ...................................... 43,092,420 38,720,456 31,835,576
Provision for loan losses ................................ 2,472,000 2,044,000 1,140,000
------------ ----------- -----------
Net interest income after provision for loan losses ...... 40,620,420 36,676,456 30,695,576
------------ ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts ..................... 3,754,094 3,635,562 3,359,300
Commissions and fees .................................... 1,993,773 1,698,993 1,206,594
Trust income ............................................ 422,876 312,913 257,703
Gains on sales of mortgage loans ........................ 1,570,775 768,126 592,853
Gains (losses) on sales of investment securities, net ... 106,702 (17,420) (14,523)
Other operating income .................................. 825,570 665,943 697,856
------------ ----------- -----------
Total noninterest income ................................. 8,673,790 7,064,117 6,099,783
------------ ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits .......................... 19,475,145 15,891,941 13,708,211
Net occupancy expense ................................... 2,286,093 2,098,568 2,011,028
Equipment expense ....................................... 2,274,025 2,232,787 2,249,662
Other operating expense ................................. 11,885,512 8,975,043 7,583,598
------------ ----------- -----------
Total noninterest expense ................................ 35,920,775 29,198,339 25,552,499
------------ ----------- -----------
Income before income taxes ............................... 13,373,435 14,542,234 11,242,860
Provision for income taxes ............................... 5,251,429 5,305,284 3,951,990
------------ ----------- -----------
Net income ............................................... $ 8,122,006 $ 9,236,950 $ 7,290,870
============ =========== ===========
Net Income per share -- basic ............................ $ 1.27 $ 1.46 $ 1.16
============ =========== ===========
Net Income per share -- diluted .......................... $ 1.21 $ 1.38 $ 1.11
============ =========== ===========
Weighted average common shares outstanding -- basic ...... 6,407,096 6,317,141 6,271,333
============ =========== ===========
Weighted average common shares outstanding -- diluted .... 6,732,590 6,703,191 6,539,544
============ =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
33
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
<TABLE>
<CAPTION>
Common Stock
---------------------------- Retained
Shares Amount earnings
------------- -------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1995 ..................... 6,342,688 $44,887,216 $ 6,373,713
Comprehensive Income
Net income ..................................... 7,290,870
Other comprehensive income, net of tax .........
Unrealized loss on investment securities ......
Total Comprehensive Income ......................
Common stock issued pursuant to:
Dividend Reinvestment Plan ..................... 8,436 170,874 (16,872)
Stock Option Plan .............................. 28,687 166,571 (38,193)
Fractional shares paid in stock split ........... (2,216)
Change in unearned ESOP shares .................. 76,711 23,495
Cash dividends ($0.28 per share)................. (1,072,141)
Cash dividends from:
Acquired entities .............................. (335,372)
--------- ----------- ------------
Balance at December 31, 1996 ..................... 6,379,811 $45,301,372 $ 12,223,284
Comprehensive Income
Net income ..................................... 9,236,950
Other comprehensive income, net of tax .........
Unrealized gains on investment securities .....
Total Comprehensive Income ......................
Common stock issued pursuant to:
Dividend Reinvestment Plan ..................... 7,542 202,473 (10,902)
Stock Option Plan .............................. 43,362 282,352 (4,000)
Fractional shares paid in stock split ........... (21) (123) (2,526)
Tax benefit from exercised stock options ........ 218,031
Change in unearned ESOP shares .................. 149,036 26,612
Cash dividends ($0.375 per share)................ (1,440,429)
Cash dividends from:
Acquired entities .............................. (368,909)
--------- ----------- ------------
Balance at December 31, 1997 ..................... 6,430,694 $46,153,141 $ 19,660,080
Comprehensive Income
Net income ..................................... 8,122,006
Other comprehensive income, net of tax .........
Unrealized gains on investment securities .....
Total Comprehensive Income ......................
Common stock issued pursuant to:
Dividend Reinvestment Plan ..................... 7,483 295,067
Stock Option Plan .............................. 95,358 350,957
Fractional shares paid in acquisitions .......... (427) (15,718)
Change in unearned ESOP shares .................. 351,984 30,971
Cash dividends ($0.48 per share)................. (2,478,940)
--------- ----------- ------------
Balance at December 31, 1998 ..................... 6,533,108 $47,151,149 $ 25,318,399
========= =========== ============
<CAPTION>
Accumulated
other Total
comprehensive Unearned ESOP stockholders'
income shares equity
--------------- --------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995 ..................... $ 388,106 ($ 836,609) $ 50,812,426
Comprehensive Income
Net income ..................................... 7,290,870
Other comprehensive income, net of tax .........
Unrealized loss on investment securities ...... (152,636) (152,636)
------------
Total Comprehensive Income ...................... 7,138,234
------------
Common stock issued pursuant to:
Dividend Reinvestment Plan ..................... 154,002
Stock Option Plan .............................. 128,378
Fractional shares paid in stock split ........... (2,216)
Change in unearned ESOP shares .................. 203,359 303,565
Cash dividends ($0.28 per share)................. (1,072,141)
Cash dividends from:
Acquired entities .............................. (335,372)
----------- ------------ ------------
Balance at December 31, 1996 ..................... $ 235,470 ($ 633,250) $ 57,126,876
Comprehensive Income
Net income ..................................... 9,236,950
Other comprehensive income, net of tax .........
Unrealized gains on investment securities ..... 578,339 578,339
------------
Total Comprehensive Income ...................... 9,815,289
------------
Common stock issued pursuant to:
Dividend Reinvestment Plan ..................... 191,571
Stock Option Plan .............................. 278,352
Fractional shares paid in stock split ........... (2,649)
Tax benefit from exercised stock options ........ 218,031
Change in unearned ESOP shares .................. 106,625 282,273
Cash dividends ($0.375 per share)................ (1,440,429)
Cash dividends from:
Acquired entities .............................. (368,909)
----------- ------------ ------------
Balance at December 31, 1997 ..................... $ 813,809 ($ 526,625) $ 66,100,405
Comprehensive Income
Net income ..................................... 8,122,006
Other comprehensive income, net of tax .........
Unrealized gains on investment securities ..... 707,343 707,343
----------- ------------ ------------
Total Comprehensive Income ...................... 8,829,349
------------
Common stock issued pursuant to:
Dividend Reinvestment Plan ..................... 295,067
Stock Option Plan .............................. 350,957
Fractional shares paid in acquisitions .......... (15,718)
Change in unearned ESOP shares .................. (568,375) (185,420)
Cash dividends ($0.48 per share)................. (2,478,940)
----------- ------------ ------------
Balance at December 31, 1998 ..................... $1,521,152 ($ 1,095,000) $ 72,895,700
========== =========== ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
34
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 8,122,006 $ 9,236,950 $ 7,290,870
Adjustments to reconcile net income to net cash provided by operating
activities:
Accretion and amortization of investment securities .................... (279,353) (220,988) (54,822)
Depreciation and amortization .......................................... 2,644,402 2,527,049 2,343,950
Provision for loan losses .............................................. 2,472,000 2,044,000 1,140,000
(Gains) losses on sales of investment securities, net .................. (106,702) 17,420 14,523
Gains on sales of mortgage loans ....................................... (1,570,775) (768,126) (592,853)
Gains on sales of premises and equipment ............................... (114,359) (9,230) (14,302)
Change in interest receivable .......................................... 88,036 (999,370) (878,554)
Change in other assets ................................................. (2,007,441) (446,190) 150,443
Change in deferred taxes ............................................... (1,064,523) 62,403 (194,414)
Change in interest payable ............................................. (335,160) 1,066,309 528,351
Change in other liabilities ............................................ 2,008,387 18,816 (181,401)
Origination of mortgage loans held for sale ............................ (112,816,061) (16,251,094) (9,755,750)
Proceeds from sales of mortgage loans held for sale .................... 114,466,551 16,616,789 9,279,337
Net change in unearned ESOP shares ..................................... (185,420) 282,273 303,565
-------------- -------------- --------------
Net cash provided by operating activities ................................. 11,321,588 13,177,011 9,378,943
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of investment securities held-to-maturity ....................... 0 (6,963,543) (10,676,990)
Proceeds from maturities of investment securities held-to maturity ....... 14,257,924 9,718,820 20,787,557
Purchase of investment securities available-for-sale ..................... (146,053,480) (72,507,126) (74,762,151)
Proceeds from sales of investment securities available-for-sale .......... 22,951,809 16,261,551 10,770,039
Proceeds from maturities of investment securities available-for-sale ..... 75,691,020 29,706,394 27,637,468
Net change in loans ...................................................... (37,145,294) (124,530,387) (102,255,078)
Capital expenditures ..................................................... (1,579,193) (3,318,480) (4,268,152)
Purchase of insurance policies related to Salary Continuation Plan ....... 0 0 (1,875,000)
Other, net ............................................................... 1,545,482 (313,080) 44,016
-------------- -------------- --------------
Net cash used for investing activities .................................... (70,331,732) (151,945,851) (134,598,291)
-------------- -------------- --------------
Cash flows from financing activities:
Net change in deposits ................................................... 35,334,327 123,589,345 105,370,015
Net change in federal funds purchased and securities sold under
agreements to repurchase ............................................... 31,407,688 8,420,968 4,264,939
Net change in other short-term borrowings ................................ (3,668,523) 1,884,470 1,317,466
Net change in long-term debt ............................................. (2,189,167) 9,989,167 9,200,000
Proceeds from issuance of subordinated notes ............................. 0 0 6,000,000
Proceeds from issuance of stock in accordance with:
Stock Option Plan ...................................................... 350,957 278,352 128,378
Dividend Reinvestment Plan ............................................. 295,067 191,571 154,002
Cash dividends paid ...................................................... (2,478,940) (1,809,338) (1,407,513)
Other, net ............................................................... (15,718) 215,282 (2,216)
-------------- -------------- --------------
Net cash provided by financing activities ................................. 59,035,691 142,759,817 125,025,071
-------------- -------------- --------------
Net change in cash and cash equivalents ................................... 25,547 3,990,977 (194,277)
Cash and cash equivalents at January 1 .................................... 51,510,010 47,519,033 47,713,310
-------------- -------------- --------------
Cash and cash equivalents at December 31 .................................. $ 51,535,557 $ 51,510,010 $ 47,519,033
============== ============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................................................. $ 36,434,301 $ 30,673,422 $ 24,848,333
Income taxes ............................................................. 5,654,586 5,188,986 4,545,718
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
35
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation: On August 31, 1998,
Anchor Financial Corporation merged with ComSouth Bankshares Inc. (ComSouth)
and M&M Financial Corporation (M&M). The surviving entity was Anchor Financial
Corporation (the 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. All expenses relating to affecting
the poolings of interests have been deducted in determining the net income of
the Corporation in 1998.
The Corporation is a registered bank holding company incorporated on
January 6, 1984 under the laws of the State of South Carolina. The Corporation
was formed to acquire The Anchor Bank (the Bank) and to invest in other
bank-related businesses. The Corporation provides its customers with banking
services through its principal subsidiary, the Bank. The Corporation owns 100%
of the issued and outstanding stock of the Bank, Anchor Automated Services,
Inc., and Marion National Investment Corporation (collectively the
"Subsidiaries").
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
On August 11, 1997, the Board of Directors of the Corporation completed a
three-for-two split of its common stock. Accordingly, the consolidated
financial statements have been restated for all years to reflect the impact of
the stock split.
Use of Estimates: The consolidated financial statements are prepared in
accordance with generally accepted accounting principles which require
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
Investment Securities: In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," management determines at the time of purchase the
classification of securities as either held-to-maturity, available-for-sale, or
trading. In determining such classification, debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are carried at amortized cost. All other
securities are classified as available-for-sale and carried at estimated fair
value with unrealized gains and losses included in stockholders' equity on an
after-tax basis as accumulated other comprehensive income. Realized gains and
losses are recognized on the specific identification method. Premiums and
discounts are included in the basis of investment securities and are recognized
in income using the effective interest method.
Loans and Allowance for Loan Losses: Loans are reported at their face
amount less payments collected. Unearned income on discounted loans is reported
as a reduction of the loan balances and is recognized as income using the
sum-of-the-months-digits method, a method approximating the effective interest
method. Interest on non-discounted loans is recognized over the term of the
loan based on the loan balance outstanding.
In many lending transactions, collateral is obtained to provide an
additional measure of security. Generally, the cash flow and earnings power of
the borrower represent the primary source of repayment and collateral is
considered as an additional safeguard to further reduce credit risk. The need
for collateral is determined on a case-by-case basis after considering the
current and prospective creditworthiness of the borrower, terms of the lending
transaction, and economic conditions. When a loan becomes 90 days past due as
to interest or principal or serious doubt exists as to collectibility, the
accrual of income is discontinued unless the loan is well secured and in
process of collection. Previously accrued interest is reversed against current
earnings and any subsequent interest is recognized on the cash basis.
Net nonrefundable fees and direct costs of loan originations, if material,
are deferred and amortized over the lives of the underlying loans as an
adjustment to interest income in accordance with SFAS No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases." Deferred loan origination fees and direct
costs, if material, associated with originating mortgage loans for sale to
investors are deferred until the related loans are sold and are recognized as a
component of the gain on the sale of mortgage loans.
Generally, all commercial and commercial real estate loans that are past
due 90 days or more as to principal or interest, or where reasonable doubt
exists as to timely collection, including loans which are individually
identified as being impaired, are generally classified as nonaccrual loans
unless well secured and in the process of collection. Interest collections on
nonaccrual loans for which ultimate collectibility of principal is uncertain
are applied as principal reductions. Otherwise, such collections are credited
to income when received.
36
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Corporation measures loans for impairment when it is probable
that all amounts, including principal and interest, will not be collected in
accordance with the contractual terms of the loan agreement. It is the
Corporation's policy to apply the provisions of SFAS No. 114 to all impaired
commercial and commercial real estate loans on a loan by loan basis.
The allowance for loan losses is maintained at a level considered adequate
by management to provide for potential losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance is based on a review
of individual loans, recent loss experience, current economic conditions, risk
characteristics of the various classifications of loans, underlying collateral
values, and other relevant factors. Losses on loans are charged to and
recoveries are credited to the allowance at the time the loss or recovery
occurs. It is possible that a change in the relevant factors used in
management's evaluation may occur in the future.
Foreclosed Properties: Assets are classified as foreclosed properties upon
actual foreclosure or when physical possession of the collateral is taken
regardless of whether foreclosure proceedings have taken place.
Foreclosed properties are carried at the lower of the recorded amount of
the loan for which the property previously served as collateral, or the fair
value of the property less estimated costs to sell.
Prior to foreclosure, the recorded amount of the loan is reduced, if
necessary, to the fair value, less estimated costs to sell. Subsequent to
foreclosure, gains and losses on the sale of and losses on the periodic
revaluation of foreclosed properties are credited or charged to expense. Net
costs of maintaining foreclosed properties are expensed as incurred.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the asset's estimated useful life (15 to 40 years for buildings and
improvements; 3 to 20 years for furniture and equipment). Gains or losses on
routine dispositions are charged to operating expenses, and improvements and
betterments are capitalized. Interest cost incurred related to the construction
of banking premises is included in the cost of the related asset.
Intangible Assets: Goodwill and deposit base premium amounts arising from
a bank acquisition in 1991 and included in other assets were $972,813 and
$1,208,234 at December 31, 1998 and 1997, respectively, and are amortized over
the expected lives of the related assets (generally 10 to 15 years) using the
straight-line method of amortization.
Segment Information: During the year ended December 31, 1998, the
Corporation adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." The Statement requires that public business
enterprises report certain information about operating segments in their annual
financial statements. It also requires that enterprises disclose information
about products and services provided by significant segments, geographic areas,
major customers, differences between the measurement used in reporting segment
information and those used in the enterprise's general-purpose financial
statements, and changes in measurement of segment amounts from period to
period.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision makers in deciding how to allocate resources and in
assessing performance. The Corporation has determined that it has one
significant operating segment which is providing commercial banking services to
its customers located along the coast and in the Midlands of South Carolina,
and in certain coastal communities of North Carolina. The Corporation
implements a community banking philosophy in which each geographic region
markets each of the bank's products and services within the same competitive
strategy.
There are no differences between the measurements used in reporting
segment information and those used in the Corporation's general-purpose
financial statements, and the measurement of segment amounts has not changed
for 1998 from prior years.
Income Taxes: The Corporation recognizes deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities.
Statement of Cash Flows: For purposes of the Consolidated Statements of
Cash Flows, the Corporation has defined cash on hand, amounts due from banks,
and federal funds sold as cash and cash equivalents. Generally, federal funds
are purchased and sold for one-day periods.
37
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Comprehensive Income: The Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income" on January 1, 1998. SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components in
general-purpose financial statements.
Other: Securities and other property held by the Trust Department of the
Bank in a fiduciary or agency capacity are not included in the Consolidated
Balance Sheets since such items are not assets of the Corporation.
NOTE 2 -- MERGERS AND ACQUISITIONS
On August 31, 1998, the Corporation completed the merger of ComSouth with
and into the Corporation through the issuance of .75 shares of the
Corporation's common stock for each share of outstanding common stock of
ComSouth, or 1,755,990 shares.
In addition on August 31, 1998, the Corporation completed the merger of
M&M with and into the Corporation through the issuance of .87 shares of the
Corporation's common stock for each share of outstanding common stock of M&M,
or 875,321 shares.
The consolidated financial statements of the Corporation and its
subsidiaries have been prepared to give retroactive effect to the mergers with
ComSouth and M&M by combining the historical financial information of the
companies for all periods presented. Pre-merger intercompany balances and
transactions, as described below, have been eliminated.
As of December 31, 1997 and 1996, the Corporation owned 78,478 shares of
ComSouth common stock (58,874 shares after applying the ComSouth exchange
ratio) with a recorded fair value of $1,747,000 and $759,000, respectively. The
related unrealized gain of $842,000 (net of tax effect of $501,000) and
$223,000 (net of tax effect of $132,000) was recorded as a component of
stockholders' equity as of December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996, M&M owned 5,755 and 14,853 shares of the
Corporation's common stock, respectively. M&M sold 9,300 shares of the
Corporation's common stock in 1997 and recognized a $258,000 gain on the sale
of the stock. The related unrealized gain of $100,000 (net of tax effect of
$62,000) and $156,000 (net of tax effect of $98,000) was recorded as a
component of stockholders' equity as of December 31, 1997 and 1996,
respectively.
Separate results of the pooled entities for the three years ended December
31, 1998, in thousands, are as follows:
<TABLE>
<CAPTION>
Corporation ComSouth M&M Adjustments Combined
------------- ---------- ---------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
Total Interest and Noninterest Income
1998 ............................... $65,053 $12,797 $10,227 $ (212)(1,4) $87,865
1997 ............................... 47,728 16,588 13,476 (276)(1) 77,516
1996 ............................... 39,640 12,922 10,750 63,312
Net Interest Income
1998 ............................... 31,990 6,478 4,624 (4) 43,092
1997 ............................... 23,675 8,013 6,137 895 (2) 38,720
1996 ............................... 19,783 6,353 5,064 636 (2) 31,836
Net Income
1998 ............................... 6,108 1,178 1,048 (212)(1,4) 8,122
1997 ............................... 6,114 2,254 1,127 (258)(1) 9,237
1996 ............................... 4,769 1,828 859 (165)(3) 7,291
</TABLE>
- ---------
(1) M&M realized gross gains of $212 and $258 on the sale of 5,758 and 9,300
shares of Anchor Common Stock during 1998 and 1997, respectively. The
remaining adjustment in 1997 represents reclassification of certain
immaterial income and expense amounts.
(2) The Corporation reclassified certain items classified by ComSouth and M&M
as noninterest income to interest income.
(3) The consolidated financial statements have been adjusted to exclude from
net income certain tax benefits recognized by ComSouth in the years 1993
to 1996 associated with the reversal of deferred tax valuation allowances.
(4) Amounts for the year ended December 31, 1998 for ComSouth and M&M include
eight months of earnings due to the consummation of the mergers on August
31, 1998. Amounts reported for the Corporation include the earnings of the
merged entity from August 31, 1998 to December 31, 1998.
38
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 3 -- RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required by regulation to maintain average cash reserve
balances based on a percentage of deposits. The average amount of the cash
reserve balance for the year ended December 31, 1998 was approximately
$14,391,000.
NOTE 4 -- INVESTMENT SECURITIES
The amortized cost and the estimated fair value of investment securities
held-to-maturity at December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........... $ 9,357,924 $113,639 $0 $ 9,471,563
Securities of other U.S.
Government agencies and
corporations ...................... 4,396,209 71,829 0 4,468,038
Mortgage-backed securities ......... 0 0 0 0
Obligations of states and
political subdivisions ............ 2,791,522 67,731 0 2,859,253
----------- -------- -- -----------
Total debt securities .............. $16,545,655 $253,199 $0 $16,798,854
=========== ======== == ===========
<CAPTION>
1997
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........... $17,313,382 $ 66,687 $18,142 $17,361,927
Securities of other U.S.
Government agencies and
corporations ...................... 9,582,189 23,762 4,873 9,601,078
Mortgage-backed securities ......... 144,137 7,804 0 151,941
Obligations of states and
political subdivisions ............ 4,861,090 88,424 0 4,949,514
----------- -------- ------- -----------
Total debt securities .............. $31,900,798 $186,677 $23,015 $32,064,460
=========== ======== ======= ===========
</TABLE>
The amortized cost and the estimated fair value of investment securities
available-for-sale at December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........ $ 22,615,629 $ 661,152 $ 0 $ 23,276,781
Securities of other U.S.
Government agencies and
corporations ................... 93,738,419 1,165,564 65,776 94,838,207
Mortgage-backed securities....... 83,306,455 723,489 355,928 83,674,016
Obligations of states and
political subdivisions ......... 8,668,120 217,433 41,159 8,844,394
------------ ---------- -------- ------------
Total debt securities ........... 208,328,623 2,767,638 462,863 210,633,398
Marketable equity
securities ..................... 4,392,164 0 0 4,392,164
------------ ---------- -------- ------------
Total investment securities ..... $212,720,787 $2,767,638 $462,863 $215,025,562
============ ========== ======== ============
<CAPTION>
1997
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........ $ 38,359,676 $ 382,413 $26,216 $ 38,715,873
Securities of other U.S.
Government agencies and
corporations ................... 78,140,991 467,689 48,372 78,560,308
Mortgage-backed securities....... 36,502,814 336,420 285 36,838,949
Obligations of states and
political subdivisions ......... 5,085,722 137,921 0 5,223,643
------------ ---------- ------- ------------
Total debt securities ........... 158,089,203 1,324,443 74,873 159,338,773
Marketable equity
securities ..................... 6,085,521 0 0 6,085,521
------------ ---------- ------- ------------
Total investment securities ..... $164,174,724 $1,324,443 $74,873 $165,424,294
============ ========== ======= ============
</TABLE>
The amortized cost and estimated fair value of debt securities
held-to-maturity at December 31, 1998, based on their contractual maturities,
are shown below. Actual maturities may differ from contractual maturities or
maturities shown below because borrowers have the right to prepay obligations
with or without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Due in one year or less ............... $ 6,688,572 $ 6,741,958
Due after one year through five years . 9,702,443 9,898,444
Due after five years through ten years 154,640 158,452
Due after ten years ................... 0 0
----------- -----------
Total ................................. $16,545,655 $16,798,854
=========== ===========
</TABLE>
The amortized cost and estimated fair value of debt securities
available-for-sale at December 31, 1998, based on contractual maturities, are
shown below. Actual maturities may differ from contractual maturities or
maturities shown below because borrowers have the right to prepay obligations
with or without prepayment penalties.
39
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 4 -- INVESTMENT SECURITIES -- (Continued)
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
Due in one year or less ............... $ 12,978,816 $ 13,074,108
Due after one year through five years . 62,979,624 64,190,039
Due after five years through ten years 62,549,738 63,443,384
Due after ten years ................... 69,820,445 69,925,867
------------ ------------
Total ................................. $208,328,623 $210,633,398
============ ============
</TABLE>
Investment securities with an amortized cost of $122,781,000 and
$122,113,000, at December 31, 1998 and 1997, respectively, were pledged to
secure public deposits, as collateral for short-term borrowings, and for other
lawful purposes.
Proceeds from sales of investment securities available-for-sale were
$22,951,809, $16,261,551, and $10,770,039 in 1998, 1997, and 1996,
respectively. Gross realized gains of $194,606, $24,034, and $5,009 were
realized on these sales during 1998, 1997, and 1996, respectively. Gross
realized losses of $87,904, $41,454, and $19,532 were realized on these sales
during 1998, 1997, and 1996, respectively.
There were no sales of held-to-maturity investment securities during 1998,
1997, or 1996. In 1998, the Corporation transferred held-to-maturity investment
securities with an amortized cost of $1,116,183 to available-for-sale due to
portfolio restructuring during the acquisition of ComSouth.
NOTE 5 -- LOANS AND ALLOWANCES FOR LOAN LOSSES
Loans at December 31 are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commercial, financial, and agricultural ......... $117,041,868 $121,426,384
Real estate -- construction ..................... 60,811,144 64,417,006
Real estate -- mortgage ......................... 302,819,099 260,927,621
Installment loans to individuals ................ 160,105,657 174,553,733
Other ........................................... 60,531,537 44,382,757
------------ ------------
Gross Loans ..................................... 701,309,305 665,707,501
Unearned income ................................. (151,712) (118,631)
------------ ------------
Total Loans ..................................... $701,157,593 $665,588,870
============ ============
</TABLE>
Loans made by the Corporation to directors, executive officers, and their
associates totaled $13,329,792 and $16,981,739 at December 31, 1998 and 1997,
respectively. During 1998, loans made and other additions totaled $8,871,884
and repayments and other deductions totaled $12,523,831. All such loans were
made in the normal course of business on substantially the same terms as loans
to other customers of comparable size and financial status and the loans did
not include more than a normal risk of collectibility or present other
unfavorable features.
Installment loans to individuals include mortgage loans held-for-sale of
$915,575 and $995,290 in 1998 and 1997, respectively, and are recorded at the
lower of cost or market value.
The primary market area served by the Corporation is along the coast of
South Carolina. The coastal resort areas of the Grand Strand, Charleston, and
Hilton Head Island are largely dependent on the tourism industry and are
seasonal in nature with most of the businesses subject to wide swings in
business activity between the winter and summer months. The Corporation's
borrowers may be subject to adverse economic events including the effects of
local economic conditions or natural disasters.
40
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 5 -- LOANS AND ALLOWANCES FOR LOAN LOSSES -- (Continued)
Activity in the allowance for loan losses for the three years ended
December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- -------------
<S> <C> <C> <C>
Balance at beginning of year ..................... $ 7,321,491 $ 6,630,958 $5,648,801
Provision for loan losses ........................ 2,472,000 2,044,000 1,140,000
Recoveries on loans previously charged off ....... 710,653 295,819 358,279
Loans charged off ................................ (2,207,509) (1,649,286) (516,122)
------------ ------------ ----------
Balance at end of year ........................... $ 8,296,635 $ 7,321,491 $6,630,958
============ ============ ==========
</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. Impaired (including cash basis) loans
at December 31, 1998 and 1997 held by the Corporation, are summarized below:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Nonaccrual loans ...................................................................... $1,627,753 $ 789,766
Loans past due 90 days or more ........................................................ 0 77,673
Other real estate owned ............................................................... 212,912 187,000
---------- ----------
Total nonperforming assets ............................................................ $1,840,665 $1,054,439
========== ==========
Interest income which would have been recorded on nonaccrual loans pursuant to original
terms ................................................................................ $ 182,456 $ 71,992
Interest income recorded on nonaccrual loans .......................................... 83,410 26,436
</TABLE>
At December 31, 1998 and 1997 impaired loans had a related specific
allowance for loan losses totaling $243,299, and $224,022, respectively. There
were no material commitments to lend additional funds to customers whose loans
were classified as impaired at December 31, 1998 and 1997.
At December 31, 1998 and 1997, the Corporation did not have any loans for
which terms had been modified in troubled debt restructurings.
NOTE 6 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Land ...................................... $ 6,145,511 $ 6,366,786
Buildings and improvements ................ 16,402,265 15,945,882
Leasehold improvements .................... 1,264,075 972,862
Furniture and equipment ................... 14,893,899 14,379,537
Construction in process ................... 277,267 497,203
------------- -------------
Total ..................................... 38,983,017 38,162,270
Less -- Accumulated depreciation .......... (16,917,713) (15,729,680)
------------- -------------
Net premises and equipment ................ $ 22,065,304 $ 22,432,590
============= =============
</TABLE>
Provisions for depreciation included in noninterest expense in 1998, 1997,
and 1996 were $2,060,838, $2,085,903, and $1,979,479, respectively.
The Corporation has entered into various noncancellable operating leases
for land, buildings, and equipment used in its operations. Certain leases have
various renewal options and require increased rentals under cost of living
escalation clauses. Rental expenses charged to occupancy and equipment expense
in 1998, 1997, and 1996 were $578,734, $554,641, and $505,804, respectively.
41
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 6 -- PREMISES AND EQUIPMENT -- (Continued)
At December 31, 1998, future minimum rental commitments under
noncancellable operating leases that have a remaining life in excess of one
year are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 ............................. $ 460,909
2000 ............................. 275,448
2001 ............................. 231,649
2002 ............................. 195,965
2003 ............................. 49,424
2004 and thereafter .............. 249,824
----------
Total minimum obligation ......... $1,463,219
==========
</TABLE>
NOTE 7 -- INCOME TAXES
The components of consolidated income tax expense (benefit) for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ------------- -------------
Current:
<S> <C> <C> <C>
Federal ........................... $ 5,811,109 $4,659,093 $3,761,905
State ............................. 504,843 583,788 384,499
------------ ---------- ----------
Total .............................. 6,315,952 5,242,881 4,146,404
------------ ---------- ----------
Deferred:
Federal ........................... (987,552) 22,054 (210,437)
State ............................. (76,971) 40,349 16,023
------------ ---------- ----------
Total .............................. (1,064,523) 62,403 (194,414)
------------ ---------- ----------
Provision for income taxes ......... $ 5,251,429 $5,305,284 $3,951,990
============ ========== ==========
</TABLE>
The significant components of the Corporation's deferred tax liabilities
and assets recorded pursuant to SFAS No. 109 and included in other assets in
the Consolidated Balance Sheets at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation over book ............................. $ (602,629) $ (585,412)
Unrealized gain -- SFAS No. 115 ........................ (804,689) (441,859)
Other .................................................. (233,596) (404,314)
------------ ------------
Total deferred tax liabilities .......................... (1,640,914) (1,431,585)
------------ ------------
Deferred tax assets:
Allowance for loan losses .............................. 2,570,383 1,759,409
Deferred loan fees and costs ........................... 98,799 148,195
Deferred compensation .................................. 446,734 369,477
State net operating loss carryforward .................. 244,283 370,353
Other .................................................. 219,310 214,817
------------ ------------
Total deferred tax assets ............................... 3,579,509 2,862,251
------------ ------------
Net deferred tax asset before valuation allowance ....... 1,938,595 1,430,666
Less: Valuation allowance ............................... (157,220) (350,984)
------------ ------------
Net deferred tax asset .................................. $ 1,781,375 $ 1,079,682
============ ============
</TABLE>
The realization of deferred tax assets may be based on the utilization of
carrybacks to prior taxable years and the anticipation of future taxable income
in certain periods. The valuation allowance primarily relates to deductible
temporary
42
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 7 -- INCOME TAXES -- (Continued)
differences for state tax purposes. Management believes that it is more likely
than not that the deferred tax assets less the valuation allowance will be
realized.
Total income tax expense differs from the amount of income tax determined
by applying the U.S. statutory federal income tax rate (34% for all years
presented) to pretax income as a result of the following differences:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Tax expense at statutory rate .................................. $4,546,968 $4,944,359 $3,822,572
Increase (decrease) in taxes resulting from:
State income tax expense, net of federal income tax benefit .. 282,396 384,771 242,518
Non-taxable interest on investment securities ................ (149,477) (143,548) (153,524)
Non-deductible merger related costs .......................... 498,011 0 0
Other, net ................................................... 73,531 119,702 40,424
---------- ---------- ----------
Total .......................................................... $5,251,429 $5,305,284 $3,951,990
========== ========== ==========
</TABLE>
NOTE 8 -- SHORT-TERM BORROWINGS
Short-term borrowings at December 31 include the following:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Federal funds purchased ......................................................... $ 15,000,000 $ 8,500,000
Securities sold under agreements to repurchase .................................. 42,374,526 17,466,838
------------ ------------
Federal funds purchased and securities sold under agreements to repurchase ..... 57,374,526 25,966,838
------------ ------------
Other short-term borrowings ..................................................... 1,396,927 5,065,450
------------ ------------
Total short-term borrowings ..................................................... $ 58,771,453 $ 31,032,288
============ ============
Weighted average interest rate at December 31 ................................... 4.50% 5.18%
Weighted average interest rate during the year .................................. 5.02 4.75
Maximum amount outstanding at any month-end ..................................... $ 59,773,257 $ 34,924,755
Average amount outstanding during the year ...................................... 34,441,843 21,928,226
</TABLE>
The Bank has a line of credit with the Federal Home Loan Bank ("FHLB") of
$87.5 million under which short-term and long-term funds may be borrowed. At
December 31, 1998, the Bank had no short-term borrowings outstanding on this
line of credit. Pursuant to collateral agreements with the FHLB, advances are
secured by stock in the FHLB, and qualifying first mortgage loans in the amount
of $111.8 million. The Bank has a line of credit with the Federal Reserve Bank
of Richmond of $1,000,000 of which no amounts were outstanding at December 31,
1998. Advances on this line of credit must be secured by U.S. Treasury or
Government agency securities. Advances on the Federal Reserve Bank line of
credit generally mature within 31 days of the date of the advance. Securities
sold under agreements to repurchase generally mature on demand while federal
funds purchased are generally for one-day periods.
NOTE 9 -- LONG-TERM DEBT AND SUBORDINATED NOTES
Advances from the FHLB with an initial maturity of more than one year
totaled $32,000,000 at December 31, 1998. These advances are collateralized by
the same collateral agreements as short-term funds from the FHLB (See Note 8).
Fixed interest rates on these advances ranged from 4.89% to 7.21%, payable
monthly or quarterly, with principal due at various maturities ranging from
1999 to 2008.
On December 1, 1993, the Corporation issued $5,000,000 of 8.60%
Subordinated Notes due December 1, 2003. Under the terms of the Subordinated
Note Agreement, the balance of the debt cannot be paid prior to its final
maturity. On December 20, 1996, the Corporation issued $6,000,000 of 7.89%
Subordinated Notes due December 20, 2006. Under the terms of the Subordinated
Note Agreement, the balance of the debt can be prepaid on December 20, 2001 at
par plus accrued and
43
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 9 -- LONG-TERM DEBT AND SUBORDINATED NOTES -- (Continued)
unpaid interest. On December 20, 2001, the interest rate on this issue will be
reset to a rate approximately equal to the yield on the 5-year U.S. Treasury
Note plus 195 basis points. The interest on these single principal payment
issues is payable semi-annually each year and at maturity. There are no
significant debt covenants related to Subordinated Notes. This long-term debt
qualifies for inclusion in the determination of total capital under the
Risk-Based Capital guidelines.
Principal maturities on long-term debt and subordinated notes are
summarized below:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 ........................ $ 3,000,000
2000 ........................ 0
2001 ........................ 0
2002 ........................ 9,000,000
2003 ........................ 15,000,000
2004 and thereafter ......... 16,000,000
-----------
Total ....................... $43,000,000
===========
</TABLE>
NOTE 10 -- COMPARISON OF OTHER OPERATING EXPENSE
Other operating expense for the years ended December 31 includes the
following:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Advertising and promotional materials .......... $ 1,014,052 $ 888,054 $ 717,226
FDIC insurance assessment ...................... 99,044 83,000 10,054
Legal (1) ...................................... 644,349 933,357 201,901
Supplies ....................................... 675,804 651,439 728,626
Telephone and data communications .............. 923,581 692,504 582,739
Other professional (2) ......................... 1,280,759 278,387 212,765
Other losses (3) ............................... 1,174,397 77,943 163,405
Other .......................................... 6,073,527 5,370,359 4,966,882
----------- ---------- ----------
Total .......................................... $11,885,513 $8,975,043 $7,583,598
=========== ========== ==========
</TABLE>
- ---------
(1) Legal expense for the year ended December 31, 1998 includes nonrecurring
charges of $265,710 related to the costs associated with completing the
acquisitions of ComSouth and M&M.
(2) Other professional expense for the year ended December 31, 1998 includes
nonrecurring charges of $1,033,001 related to the costs associated with
completing the acquisitions mentioned above.
(3) Other losses for the year ended December 31, 1998 include nonrecurring
charges of $677,209 for fixed assets disposed of due to the acquisitions
mentioned above.
NOTE 11 -- NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share, which establishes standards for computing and
presenting earnings per share ("EPS") by replacing the presentation of primary
EPS with a presentation of basic EPS. In addition, SFAS No. 128 requires dual
presentation of basic and diluted EPS on the face of the income statement and
requires a reconciliation of the numerator and denominator of the diluted EPS
calculation. The Corporation adopted SFAS No. 128 as of December 31, 1997 and
has restated EPS for all prior periods presented.
Net income per share -- basic is computed by dividing net income by the
weighted average number of common shares outstanding. Net income per share --
diluted is computed by dividing net income by the weighted average number of
common shares outstanding and dilutive common share equivalents using the
treasury stock method. Dilutive common share equivalents include common shares
issuable upon exercise of outstanding stock options. Unallocated common shares
held by the Employee Stock Ownership Plan are excluded from the weighted
average number of common shares outstanding.
44
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 11 -- NET INCOME PER SHARE -- (Continued)
In accordance with SFAS No. 128, the calculation of net income per share
- -- basic and net income per share -- diluted is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income per share -- basic computation
Net income ................................................ $8,122,006 $9,236,950 $7,290,870
Income available to common shareholders ................... $8,122,006 $9,236,950 $7,290,870
========== ========== ==========
Weighted average common shares outstanding ................ 6,470,006 6,380,398 6,347,452
Unallocated ESOP Shares .................................. (62,910) (63,257) (76,119)
---------- ---------- ----------
Weighted average common shares outstanding -- basic ....... 6,407,096 6,317,141 6,271,333
---------- ---------- ----------
Net income per share -- basic ............................. $ 1.27 $ 1.46 $ 1.16
========== ========== ==========
Net income per share -- diluted computation
Income available to common shareholders ................... $8,122,006 $9,236,950 $7,290,870
========== ========== ==========
Weighted average common shares outstanding -- basic ....... 6,407,096 6,317,141 6,271,333
Incremental shares from assumed conversions:
Stock Options ............................................ 325,494 386,050 268,211
---------- ---------- ----------
Weighted average common shares outstanding -- diluted ..... 6,732,590 6,703,191 6,539,544
---------- ---------- ----------
Net income per share -- diluted ........................... $ 1.21 $ 1.38 $ 1.11
========== ========== ==========
</TABLE>
NOTE 12 -- EMPLOYEE BENEFIT PLANS
The Corporation has an Employee Stock Ownership Plan ("ESOP") and a
pre-tax savings plan ("401(k) Plan") which cover substantially all employees of
the Corporation. Both ComSouth and M&M also had 401(k) plans which were
terminated in 1998. Contributions to the ESOP, which are at the discretion of
and determined annually by the Board of Directors, are not to exceed the
maximum amount deductible under the applicable sections of the Internal Revenue
Code, and are funded annually. The 401(k) Plans allow for discretionary
employer matching contributions and/or profit sharing contributions. For 1998,
the Boards of Directors of each company approved a discretionary employer
matching contribution and/or a profit sharing contribution to the 401(K) Plans.
Total expenses of the ESOP and 401(k) Plans, including amounts contributed,
which are included in employee benefits expense for the three years ended
December 31, 1998, 1997, and 1996 were $1,046,069, $700,797, and $571,384,
respectively.
At various times, the ESOP has borrowed funds from the Bank and the
Corporation and used the proceeds to purchase stock of the Corporation. At
December 31, 1998, the ESOP owned 361,685 shares of Corporation stock of which
67,633 shares were pledged to secure loans outstanding. The remainder were
allocated to individual accounts of participants. At December 31, 1998 and
1997, the principal balance outstanding on the loans was $1,095,000 and
$526,625, respectively.
In accordance with the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," the Corporation
records compensation expense equal to the fair value of the shares released to
compensate employees. The Corporation reports the cost of unallocated shares as
a reduction of stockholders' equity on the Consolidated Balance Sheets. As of
December 31, 1998 and 1997, the historical cost of unallocated shares of
$1,095,000 and $526,625, respectively were reflected as a reduction of
stockholders' equity. Compensation expense related to the ESOP of $644,116,
$409,532, and $386,649, respectively, has been included in employee benefits
expense for the three years ended December 31, 1998, 1997, and 1996 as
discussed above.
During 1997, M&M terminated its noncontributory defined benefit pension
plan and replaced it with a money purchase pension plan and trust which was
terminated in 1998. A gain of $53,005 was recognized on the termination of the
defined benefit plan in 1997. Plan expense for the money purchase pension plan
was $96,976 in 1998 and $140,000 in 1997.
45
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 12 -- EMPLOYEE BENEFIT PLANS -- (Continued)
During 1996 and 1997, the Corporation adopted Salary Continuation Plans
("the Plans") which provide salary continuation benefits after retirement for
certain officers. The Plans also provide for limited benefits in the event of
early termination or disability while employed by the Corporation and full
benefits to beneficiaries in the event of death of the officer. The officers
vest in the benefits in periods up to eight years and in the event of a change
in control of the Corporation as defined in the Plan, the officers become 100%
vested in the total benefit immediately. During 1998, three officers of M&M
became fully vested in their total benefit due to the change in control. The
Corporation has purchased life insurance policies on these officers in order to
fund the payments required by the Plan. Compensation expense related to the
Salary Continuation Plans totaled $584,364, $114,272 and $79,440 for 1998, 1997
and 1996, respectively.
NOTE 13 -- STOCK OPTION PLANS
During 1988, 1994 and 1996, the Corporation adopted stock option plans
covering certain of its officers. Options granted under the 1988 and 1994 plans
are fully vested. Options granted under the 1996 plan vest one-third each year
on the anniversary date of the grant. The exercise period for options granted
under the 1988 plan is ten years from each vesting date and the exercise period
for options granted under the 1994 and 1996 plans is ten years from the date of
grant. M&M adopted a stock option plan in 1997 covering certain of its officers
and employees. The per share exercise price of options granted under the plan
could not be less than fair market value on the date of the grant and the
expiration date could not exceed ten years. Participants became vested in
options granted based on years of service, and vesting was accelerated to 100%
upon the change of control of the company. ComSouth also had a number of stock
option plans for certain officers, employees and non-employee directors. The
options are exercisable after periods of six months to five years; and the
options expire in periods of five to ten years; vesting was accelerated with
the change in control of the company. During 1997 two officers of ComSouth were
awarded options to purchase 13,500 shares each at $0.89 per share with the
options vesting one fifth each year for five years beginning October 10, 1998
and immediate vesting with the change in control. Since these options were
granted at a price less than fair market value, the difference between the fair
market value at the date of grant and the exercise price was recognized as
additional compensation during 1997 and 1998. The amounts included in
compensation expense were $537,920 in 1998 and $28,000 in 1997.
Activity under the plans is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- ------------------------------- ------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------- ------------------ ------------ ------------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year ........................ 624,223 $ 9.43 540,323 $ 7.45 561,149 $ 7.25
Granted ...................... 45,380 34.67 127,162 16.87 7,607 10.90
Exercised .................... (112,799) ( 8.57) (42,763) (6.51) (28,433) (4.52)
Expired ...................... (7,948) (22.76) (499) (9.67) 0 0.00
-------- -------- ------- ------- ------- -------
Outstanding at end of year ... 548,856 $ 11.50 624,223 $ 9.43 540,323 $ 7.45
======== ======== ======= ======= ======= =======
Options exercisable at end of
year ........................ 499,527 $ 9.11 441,555 $ 7.45 390,323 $ 6.59
Weighted-average fair value
of options granted during
the year .................... $ 20.63 $ 12.49 $ 5.27
</TABLE>
At December 31, 1998, 499,527 optioned shares were exercisable at prices
between $0.89 and $39.00 per share for a total of $4,548,698. When options are
exercised, the exercise price is recorded as an addition to common stock
(including any tax benefit, if applicable). With the exception of the ComSouth
stock options above, no income or expense has been recognized in connection
with the exercise of these stock options. The following table summarizes
information about stock options outstanding at December 31, 1998.
46
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 13 -- STOCK OPTION PLANS -- (Continued)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ------------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at December 31 Contractual Life Exercise Price at December 31 Exercise Price
- ----------------- ---------------- ------------------ ------------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.89-5.92 183,551 2.6 Years $ 4.57 183,551 $ 4.57
$ 6.87-15.33 294,490 6.0 Years 10.16 294,490 10.16
$ 21.22-40.25 70,815 9.0 Years 35.00 21,486 33.37
</TABLE>
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123"). SFAS No. 123 provides for a fair value
approach to recording stock-based compensation. The Statement also allows an
entity to continue to apply APB Opinion No. 25 for measurement of stock-based
compensation. The Corporation adopted SFAS No. 123 on January 1, 1996, and will
continue to apply the measurement principles of APB Opinion No. 25 to its stock
option plans. The Corporation has elected to provide SFAS No. 123 disclosures
as if the Corporation had adopted the fair value approach to recording
stock-based compensation in 1998, 1997 and 1996 as indicated below:
<TABLE>
<CAPTION>
As Reported Pro Forma
----------------------------------------------- -----------------------------------------------
1998 1997 1996 1998 1997 1996
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net income ..................... $ 8,122,006 $ 9,236,950 $ 7,290,870 $ 7,686,117 $ 9,055,408 $ 7,098,379
Net income per share -- basic .. $ 1.27 $ 1.46 $ 1.16 $ 1.20 $ 1.43 $ 1.13
Net income per share -- diluted $ 1.21 $ 1.38 $ 1.11 $ 1.14 $ 1.35 $ 1.09
</TABLE>
In determining the pro forma amounts above, the fair value of options
granted was estimated on the date of grant using the Black-Scholes Option
Pricing Model using the following assumptions for options granted in 1998,
1997, and 1996: a risk-free interest rate of 5.53%, 6.45%, and 6.25%, a
dividend yield of 1.50%, 1.53% and 0.00%, an expected life of 10 years, 8.56
years, and 10 years, and a volatility ratio of 43%, 16% and 17%, respectively.
The effects of applying SFAS No. 123 in the above pro forma disclosure are not
indicative of future amounts.
NOTE 14 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized (See Note 15).
Many of the Corporation's financial instruments lack an available trading
market as characterized by a willing buyer and a willing seller engaging in an
exchange transaction. Further, the Corporation's general practice is to hold
its financial instruments to maturity and not to engage in trading activities.
Therefore, significant estimates and present value calculations were used by
the Corporation for the purpose of this disclosure. Such estimates involve
judgments as to economic conditions, risk characteristics, and future expected
loss experience of various financial instruments and other factors that cannot
be determined with precision. The fair value estimates presented herein are
based on information available to management as of December 31, 1998 and 1997.
The following is a description of the methods and assumptions used to
estimate the fair value of each class of the Corporation's financial
instruments:
Cash and short-term investments: The carrying amount is a reasonable
estimate of fair value.
Investment securities: For marketable securities held-to-maturity, fair
values are based on quoted market prices or dealer quotes. For securities
available-for-sale, fair value equals the carrying amount which is the quoted
market price. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans: For certain categories of loans, such as variable rate loans,
credit card receivables, and other lines of credit, the carrying amount,
adjusted for credit risk, is a reasonable estimate of fair value because there
is no contractual maturity and/or the Corporation has the ability to reprice
the loan as interest rate shifts occur. The fair value of other types of loans
47
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 14 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
is estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. As the discount rates are based on current
loan rates as well as management estimates, the fair values presented may not
necessarily be indicative of the value negotiated in an actual sale.
Deposit liabilities: The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities.
Short-term borrowings: The carrying amount is a reasonable estimate of
fair value.
Long-term debt and subordinated notes: The fair value of long-term debt
and subordinated notes is estimated using discounted cash flow analyses, based
on the Corporation's estimated borrowing rates for similar types of borrowing
arrangements.
Commitments to extend credit: For certain categories of commitments, such
as credit card lines and variable rate lines of credit, a reasonable estimate
of fair value would be nominal because the Corporation has the ability to
reprice the commitment as interest rate shifts occur. The fair value of other
types of commitments to extend credit is estimated by discounting the potential
future cash flows using the current rate at which similar commitments would be
made to borrowers with similar credit ratings. As the discount rates are based
on current loan rates as well as management estimates, the fair values
presented may not necessarily be indicative of the value negotiated in an
actual sale.
Standby letters of credit: The fair value of standby letters of credit are
generally based upon fees charged to enter into similar agreements taking into
account the remaining terms of the agreements and the counterparties' credit
standing. A reasonable estimate of fair value would be nominal.
Interest rate contracts: The fair values of interest rate contracts are
based on quoted market prices or dealer quotes.
The estimated fair values (in thousands) of the Corporation's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments ............. $ 51,536 $ 51,536 $ 51,510 $ 51,510
Investment securities ....................... 231,571 231,824 197,325 197,489
Loans ....................................... 692,861 699,875 658,267 663,277
Financial Liabilities:
Deposits .................................... 832,016 833,342 796,682 797,460
Short-term borrowings ....................... 58,772 58,772 31,032 31,032
Long-term debt and subordinated notes ....... 43,000 44,848 45,189 45,425
</TABLE>
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Off-Balance Sheet Financial Instruments:
Commitments to extend credit .......... $197,279 $53 $150,109 $ (97)
Standby letters of credit ............. 7,615 0 5,406 0
Interest rate contracts ............... 25,000 42 25,000 24
</TABLE>
NOTE 15 -- COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Corporation has various claims, commitments, and contingent
liabilities arising from the normal conduct of its business which are not
reflected in the accompanying consolidated financial statements and are not
expected to have any material adverse effect on the financial position or
results of operations of the Corporation.
48
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 15 -- COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK -- (Continued)
The Corporation is party to financial instruments with off-balance sheet
risk (See Note 14) in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated financial statements. The notional value of
those instruments reflect the extent of involvement the Corporation has in each
class of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Generally, the Corporation does not charge a
fee to customers to extend a commitment. Because many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Commitments on mortgage
loans to be held for sale are generally 45 to 60 days in duration. Commitments
to sell are made at prices comparable to the prices charged to customers to
originate loans and are generally contingent on the closing of the loan(s).
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending credit to customers. The amount of collateral
obtained if deemed necessary by the Corporation upon extension of credit is
based on management's credit evaluation of the counterparty.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the notional value of those
instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Corporation requires collateral or other security to support
certain financial instruments with credit risk. The notional and estimated fair
value of these financial instruments at December 31, 1998 and 1997 are
presented in Note 14.
The Corporation may utilize financial instruments such as interest rate
contracts to transfer, modify, or reduce its interest rate risk exposure. In an
interest rate cap or floor contract, the Corporation pays a premium at the
initiation of the contract for the right to receive payments if market interest
rates are greater than the strike rate of a cap or less than the strike rate of
a floor during a period of the contract. The Corporation's liability is limited
to the premium paid for the contract. During 1996, the Corporation purchased an
interest rate floor contract with a notional value of $25 million and a
three-year term. The floor index of the contract is equal to three-month Libor
and has a strike rate of 5.25%. As of December 31, 1998, three-month Libor was
5.0656%. The Corporation paid a premium of $102,500 for the contract. The
notional and estimated fair value of this interest rate contract at December
31, 1998 and 1997 is presented in Note 14.
NOTE 16 -- REGULATORY MATTERS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that if undertaken, could have a
direct material effect on the Corporation's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the Corporation's and
the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weighting, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital to risk-weighted
assets, and of Tier 1 capital to average assets as defined in the regulations.
Management believes, as of December 31, 1998, that the Corporation and the Bank
meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the Corporation and the Bank were well
capitalized under this regulatory framework. To be categorized as
well-capitalized, each entity must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage
49
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 16 -- REGULATORY MATTERS -- (Continued)
ratios as set forth in the table. There are no conditions or events since
December 31, 1998 that management believes have changed either the
Corporation's or the Bank's capital classifications.
The Corporation's and the Bank's actual capital amounts and ratios are
also presented in the table.
(Dollars in thousands)
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk-Weighted Assets)
Anchor Financial Corporation ..... $89,465 12.01% $59,584 8.00% $74,480 10.00%
The Anchor Bank .................. 82,523 11.14 59,244 8.00 74,056 10.00
Tier 1 Capital
(to Risk-Weighted Assets)
Anchor Financial Corporation ..... 71,168 9.56 29,792 4.00 44,688 6.00
The Anchor Bank .................. 69,726 9.42 29,622 4.00 44,433 6.00
Tier 1 Capital
(to Average Assets)
Anchor Financial Corporation ..... 71,168 7.07 40,266 4.00 50,333 5.00
The Anchor Bank .................. 69,726 6.96 40,090 4.00 50,113 5.00
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets)
Anchor Financial Corporation ..... 82,182 11.93 55,120 8.00 68,900 10.00
The Anchor Bank .................. 77,941 11.31 55,151 8.00 68,939 10.00
Tier 1 Capital
(to Risk-Weighted Assets)
Anchor Financial Corporation ..... 63,861 9.27 27,560 4.00 41,340 6.00
The Anchor Bank .................. 66,125 9.59 27,576 4.00 41,363 6.00
Tier 1 Capital
(to Average Assets)
Anchor Financial Corporation ..... 63,861 6.88 37,120 4.00 46,400 5.00
The Anchor Bank .................. 66,125 7.13 37,106 4.00 46,382 5.00
</TABLE>
50
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 17 -- ANCHOR FINANCIAL CORPORATION (PARENT COMPANY ONLY)
The Parent's principal assets are its investments in the Bank, and the
principal source of income for the Parent is dividends from the Bank. Certain
regulatory and legal requirements restrict payment of dividends and lending of
funds between the Bank and the Parent. The Parent's financial statements have
been restated for all periods presented to reflect the mergers with ComSouth
and M&M which were accounted for as poolings of interest.
The Parent's condensed balance sheets at December 31, 1998 and 1997 and
condensed statements of income and of cash flows for each of the three years in
the period ended December 31, 1998 are presented below.
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
Balance Sheet Data ------------- -------------
<S> <C> <C>
Assets:
Cash and cash equivalents ........................ $ 554,903 $ 318,998
Repurchase agreements ............................ 1,894,695 3,278,990
Investment in bank subsidiaries .................. 71,984,483 67,927,214
Investment in bank subsidiary subordinated notes . 4,500,000 4,500,000
Investment in other subsidiaries ................. 92,354 108,694
Loans ............................................ 4,195,000 526,625
Other assets ..................................... 774,645 1,962,062
----------- -----------
Total assets ....................................... $83,996,080 $78,622,583
=========== ===========
Liabilities and Stockholders' Equity:
Notes payable .................................... $ 0 $ 1,189,167
Subordinated notes ............................... 11,000,000 11,000,000
Other liabilities ................................ 100,380 333,012
----------- -----------
Total liabilities .................................. 11,100,380 12,522,179
Stockholders' equity ............................... 72,895,700 66,100,404
----------- -----------
Total liabilities and stockholders'equity .......... $83,996,080 $78,622,583
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1998 1997 1996
Income Statement Data ------------- ------------- -------------
<S> <C> <C> <C>
Income:
Dividend income from bank subsidiaries ...................................... $6,800,000 $2,866,580 $1,610,372
Dividend income from other subsidiaries ..................................... 20,000 0 0
Interest income from subsidiaries ........................................... 548,818 106,911 25,169
Management fees from subsidiaries ........................................... 752,527 1,019,265 971,336
Interest and fees on loans .................................................. 41,850 435,185 64,851
Other income ................................................................ 43,941 45,101 58,221
---------- ---------- ----------
Total income ................................................................. 8,207,136 4,473,042 2,729,949
---------- ---------- ----------
Expense:
Interest on notes payable ................................................... 49,245 90,096 45,912
Interest on subordinated notes .............................................. 931,224 931,225 455,688
Salaries and employee benefits .............................................. 427,753 752,165 640,763
Other expense ............................................................... 1,852,261 1,322,909 1,114,111
---------- ---------- ----------
Total expense ................................................................ 3,260,483 3,096,395 2,256,474
---------- ---------- ----------
Income before equity in undistributed earnings of subsidiaries and taxes ..... 4,946,653 1,376,647 473,475
Equity in undistributed earnings of subsidiaries ............................. 2,838,555 7,380,872 6,535,939
---------- ---------- ----------
Income before taxes .......................................................... 7,785,208 8,757,519 7,009,414
Income tax benefit ........................................................... (336,798) (479,431) (281,456)
---------- ---------- ----------
Net income ................................................................... $8,122,006 $9,236,950 $7,290,870
========== ========== ==========
</TABLE>
51
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 17 -- ANCHOR FINANCIAL CORPORATION (PARENT COMPANY ONLY) -- (Continued)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1998 1997 1996
Cash Flows Data --------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 8,122,006 $ 9,236,950 $ 7,290,870
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries ...................... (2,838,555) (7,380,872) (6,535,939)
Depreciation of premises and equipment ................................ 40,717 66,250 57,980
Gains on sales of premises and equipment .............................. 973 0 0
Change in other assets ................................................ 661,955 (42,447) (216,916)
Change in other liabilities ........................................... (232,632) 116,215 (268,441)
------------ ------------ ------------
Net cash provided by operating activities ............................ 5,754,464 1,996,096 327,554
------------ ------------ ------------
Cash flows from investing activities:
Investment in bank subsidiaries ......................................... 0 0 (100,000)
Investment in bank subsidiary subordinated notes ........................ 0 0 (4,500,000)
Investment in bank repurchase agreement ................................. 1,384,295 (1,276,911) (1,700,169)
Change in loans ......................................................... (3,668,375) 106,625 203,359
Capital expenditures .................................................... 566,179 (30,570) (41,321)
Other, net .............................................................. (762,857) 330,998 (64,926)
------------ ------------ ------------
Net cash used for investing activities ............................... (2,480,758) (869,858) (6,203,057)
------------ ------------ ------------
Cash flows from financing activities:
Net change in notes payable ............................................. (1,189,167) (10,833) 1,200,000
Proceeds from issuance of subordinated notes ............................ 0 0 6,000,000
Proceeds from issuance of common stock pursuant to:
Stock Option Plan ..................................................... 350,957 278,352 128,378
Dividend Reinvestment Plan ............................................ 295,067 191,571 154,002
Fractional shares paid in stock split ................................... (15,718) (2,649) (2,216)
Cash dividends paid ..................................................... (2,478,940) (1,809,338) (1,407,513)
------------ ------------ ------------
Net cash (used for) provided by financing activities ................. (3,037,801) (1,352,897) 6,072,651
------------ ------------ ------------
Net change in cash and cash equivalents .................................. 235,905 (226,659) 197,148
Cash and cash equivalents at January 1 ................................... 318,998 545,657 348,509
------------ ------------ ------------
Cash and cash equivalents at December 31 ................................. $ 554,903 $ 318,998 $ 545,657
============ ============ ============
</TABLE>
The Parent paid interest of $955,645, $1,021,321, and $487,094 in 1998,
1997, and 1996, respectively.
52
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 18 -- QUARTERLY OPERATING RESULTS (UNAUDITED)
The following is a summary of the unaudited condensed consolidated
quarterly operating results of the Corporation for the years ended December 31,
1998 and 1997:
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
1998
Quarter ended
-------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income ........................ $ 19,500 $ 20,301 $ 20,233 $ 19,157
Interest expense ....................... 8,545 9,323 9,263 8,968
----------- ----------- ----------- -----------
Net interest income .................... 10,955 10,978 10,970 10,189
Provision for loan losses .............. 100 1,409 429 534
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses ...................... 10,855 9,569 10,541 9,655
Gains (losses) on sale of
investment securities, net ........... 87 20 0 0
Noninterest income ..................... 2,228 2,217 2,101 2,021
Noninterest expense .................... 8,829 11,247 8,155 7,690
----------- ----------- ----------- -----------
Income before income taxes ............. 4,341 559 4,487 3,986
Provision for income taxes ............. 1,546 684 1,645 1,376
----------- ----------- ----------- -----------
Net income ............................. $ 2,795 $ (125) $ 2,842 $ 2,610
=========== =========== =========== ===========
Net income per share -- basic .......... $ 0.43 $ (0.02) $ 0.44 $ 0.41
Net income per share -- diluted ........ 0.41 (0.02) 0.43 0.39
Weighted average shares
outstanding -- basic ................. 6,429,874 6,411,030 6,401,210 6,385,742
Weighted average shares
outstanding -- diluted ............... 6,760,730 6,411,030 6,704,915 6,687,611
<CAPTION>
1997
Quarter ended
-------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income ........................ $ 18,964 $ 18,073 $ 17,323 $ 16,094
Interest expense ....................... 8,719 8,103 7,731 7,181
----------- ----------- ----------- -----------
Net interest income .................... 10,245 9,970 9,592 8,913
Provision for loan losses .............. 852 469 424 299
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses ...................... 9,393 9,501 9,168 8,614
Gains (losses) on sale of
investment securities, net ........... (21) 4 0 0
Noninterest income ..................... 1,840 1,832 1,722 1,687
Noninterest expense .................... 7,532 7,431 7,387 6,848
----------- ----------- ----------- -----------
Income before income taxes ............. 3,680 3,906 3,503 3,453
Provision for income taxes ............. 1,444 1,387 1,234 1,240
----------- ----------- ----------- -----------
Net income ............................. $ 2,236 $ 2,519 $ 2,269 $ 2,213
=========== =========== =========== ===========
Net income per share -- basic .......... $ 0.35 $ 0.40 $ 0.36 $ 0.35
Net income per share -- diluted ........ 0.33 0.38 0.34 0.33
Weighted average shares
outstanding -- basic ................. 6,335,533 6,316,065 6,309,263 6,305,659
Weighted average shares
outstanding -- diluted ............... 6,769,416 6,694,799 6,652,478 6,643,312
</TABLE>
NOTE 19 - SUBSEQUENT EVENTS
On March 23, 1999, the acquisition by the Corporation of Bailey
Financial Corporation was approved by the shareholders of both companies. The
acquisition has been approved by applicable regulatory agencies. The merger is
expected to be accounted for as a pooling of interests and provides for a
tax-free exchange of 16.32 shares of the Corporation's common stock for each
share of Bailey Financial Corporation common stock. The acquisition is expected
to be completed in the second quarter of 1999.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 as of March 30,
1999.
ANCHOR FINANCIAL CORPORATION
(Registrant)
By /s/ STEPHEN L. CHRYST
-------------------------------------
Stephen L. Chryst
Chairman, President and
Chief Executive Officer
By /s/ TOMMY E. LOOPER
-------------------------------------
Tommy E. Looper
Executive Vice President and
Chief Financial Officer
By /s/ JOHN J. MORAN
-------------------------------------
John J. Moran
Senior Vice President and Comptroller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 30, 1999.
<TABLE>
<CAPTION>
Signature Title
- ---------------------------------------- --------------------------------------
<S> <C>
/s/ STEPHEN L. CHRYST Chairman, President, and Chief
---------------------------------- Executive Officer
Stephen L. Chryst Director
/s/ CHESTER A. DUKE
----------------------------------
Chester A. Duke
/s/ TOMMY E. LOOPER Executive Vice President, Chief
---------------------------------- Financial Officer and Director
Tommy E. Looper Executive Vice President and Director
/s/ ARTHUR P. SWANSON
----------------------------------
Arthur P. Swanson
/s/ C. JASON AMMONS, JR. Director
----------------------------------
C. Jason Ammons, Jr.
/s/ HOWELL V. BELLAMY, JR. Director
----------------------------------
Howell V. Bellamy, Jr.
/s/ W. CECIL BRANDON, JR. Director
----------------------------------
W. Cecil Brandon, Jr.
/s/ JAMES E. BURROUGHS Director
----------------------------------
James E. Burroughs
/s/ C. DONALD CAMERON Director
----------------------------------
C. Donald Cameron
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Signature Title
- ---------------------------------------- --------------------------------------
<S> <C>
/s/ MASON R. CHRISMAN Director
----------------------------------
Mason R. Chrisman
/s/ ROBIN H. DIAL Director
----------------------------------
Robin H. Dial
/s/ J. BRYAN FLOYD Director
----------------------------------
J. Bryan Floyd
/s/ CHARLES B. MCELVEEN Director
----------------------------------
Charles B. McElveen
/s/ W. GAIRY NICHOLS, III Director
----------------------------------
W. Gairy Nichols, III
/s/ RUPPERT L. PIVER Director
----------------------------------
Ruppert L. Piver
/s/ THOMAS J. ROGERS Director
----------------------------------
Thomas J. Rogers
/s/ JOHN C.B. SMITH, JR. Director
----------------------------------
John C.B. Smith, Jr.
/s/ ALBERT A. SPRINGS, III Director
----------------------------------
Albert A. Springs, III
/s/ J. RODDY SWAIM Director
----------------------------------
J. Roddy Swaim
/s/ HARRY A. THOMAS Director
----------------------------------
Harry A. Thomas
</TABLE>
55
<PAGE>
EXHIBIT EXHIBIT TITLE
21 Subsidiary of the Registrant
23.1 Consents of PricewaterhouseCoopers LLP, J.W. Hunt and
Company, LLP, and Tourville, Simpson & Henderson, LLP
27 Financial Data Schedule
Exhibit 21
SUBSIDIARY OF THE REGISTRANT
STATE OR OTHER JURISDICTION
SUBSIDIARY OF INCORPORATION
- --------------------------- ----------------------------
The Anchor Bank South Carolina
Anchor Automated Services, Inc. South Carolina
Marion National Investment Corporation South Carolina
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3, (No. 33-73186) as amended, of Anchor Financial
Corporation of our report dated February 19, 1999 appearing on page 29 of this
Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbia, South Carolina
March 26, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-73186) of
Anchor Financial Corporation of our report dated January 31, 1998, relating to
the consolidated financial statements of ComSouth Bankshares, Inc. appearing on
page 30 of this Annual Report on Form 10-K. The consolidated financial
statements of ComSouth Bankshares, Inc. are not separately presented in the Form
10-K.
/s/ J.W. Hunt and Company, LLP
J.W. Hunt and Company, LLP
Columbia, South Carolina
March 26, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-73186) of
Anchor Financial Corporation of our report dated March 9, 1998, relating to the
consolidated financial statements of M&M Financial Corporation appearing on page
31 of this Annual Report on Form 10-K. The consolidated financial statements of
M&M Financial Corporation are not separately presented in the Form 10-K.
/s/ Tourville, Simpson & Henderson, LLP
Tourville, Simpson & Henderson, LLP
Columbia, South Carolina
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 43,743,583
<INT-BEARING-DEPOSITS> 7,791,974
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 215,025,562
<INVESTMENTS-CARRYING> 16,798,854
<INVESTMENTS-MARKET> 16,545,655
<LOANS> 701,157,593
<ALLOWANCE> 8,296,635
<TOTAL-ASSETS> 1,014,807,215
<DEPOSITS> 832,016,346
<SHORT-TERM> 58,744,453
<LIABILITIES-OTHER> 8,123,716
<LONG-TERM> 43,000,000
47,151,149
0
<COMMON> 0
<OTHER-SE> 25,744,551
<TOTAL-LIABILITIES-AND-EQUITY> 1,014,807,215
<INTEREST-LOAN> 64,476,945
<INTEREST-INVEST> 13,275,036
<INTEREST-OTHER> 1,439,580
<INTEREST-TOTAL> 79,191,561
<INTEREST-DEPOSIT> 31,257,113
<INTEREST-EXPENSE> 36,099,141
<INTEREST-INCOME-NET> 43,092,420
<LOAN-LOSSES> 2,472,000
<SECURITIES-GAINS> 106,702
<EXPENSE-OTHER> 35,920,775
<INCOME-PRETAX> 13,373,435
<INCOME-PRE-EXTRAORDINARY> 13,373,435
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,122,006
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 4.64
<LOANS-NON> 1,627,753
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,321,491
<CHARGE-OFFS> 2,207,509
<RECOVERIES> 710,653
<ALLOWANCE-CLOSE> 8,296,635
<ALLOWANCE-DOMESTIC> 7,796,635
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 500,000
</TABLE>
