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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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
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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
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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
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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
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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 14, 2000, the Corporation had 8,107,819 shares of common stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Corporation was $255,903,037, based on the market price of $31.5625 per
share on March 14, 2000.
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CROSS REFERENCE INDEX
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PART I
Item 1 Business......................................................... 1
Item 2 Properties....................................................... 6, 39
Item 3 Legal Proceedings................................................ 6
Item 4 Submission of Matters to a Vote of Shareholders ................. 6
PART II
Item 5 Market for the Registrant's Common Stock and Related Shareholder
Matters........................................................ 8
Item 6 Selected Financial Data.......................................... 10
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9
Item 7A Quantitative and Qualitative Disclosures About Market Risk....... 25-27
Item 8 Financial Statements and Supplementary Data...................... 29
Reports of Independent Public Accountants........................ 30
Consolidated Balance Sheets at December 31, 1999 and 1998........ 34
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1999................................. 35
Consolidated Statements of Changes in Stockholders' Equity for each of
the three years in the period ended December 31, 1999.......... 36
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999................................. 37
Notes to Consolidated Financial Statements....................... 38
Quarterly Financial Summary for 1999 and 1998.................... 60
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
Anchor Financial Corporation engaged new independent public
accountants in 1999. This was reflected in the 8-K filed on April
12, 1999.
The Corporation had no disagreements with its independent public
accountants on any matter of accounting principles, practices or
financial statement disclosure during 1999, 1998, or 1997.
PART III
Item 10 Directors and Executive Officers of the Corporation.............. 7, 63
Item 11 Executive Compensation........................................... 67
Item 12 Security Ownership of Certain Beneficial Owners and Management... 61
Item 13 Certain Relationships and Related Transactions................... 64
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.
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(3) Exhibits
3.1 Articles of Incorporation, as amended (incorporated herein by
reference to the Corporation's Form 10K for the year ended December
31, 1996).
3.2 By-Laws (incorporated herein by reference to the Corporation's Form
10K for the year ended December 31, 1996).
10 Material Contracts:
(a) Anchor Financial Corporation 1999 Long Term Incentive Plan dated
April 27, 1999 (incorporated herein by reference to the
Corporation's Proxy Statement for the 1999 annual meeting of
shareholders).
(b) Employment Agreement between The Anchor Bank and Chester A. Duke
dated August 31, 1998 (incorporated herein by reference to the
Corporation's Form 10Q for the quarter ended September 30, 1998).
(c) 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).
(d) 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 10Q
for the quarter ended March 31, 1996).
(e) 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 10K
for the year ended December 31, 1995).
(f) 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).
(g) 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).
(h) 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).
(i) 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).
(j) Anchor Financial Corporation signed a Reorganization Agreement on
January 10, 2000 to merge with Carolina First Corporation
(incorporated herein by reference to the Corporation's Form 8-K
filed January 13, 2000).
21 Subsidiaries of the Registrant.*
23.1 Consent of Arthur Andersen LLP*
23.2 Consent of PricewaterhouseCoopers LLP*
23.3 Consent of J.W. Hunt and Company LLP*
23.4 Consent of Tourville, Simpson, and Henderson LLP*
23.5 Consent of Tourville, Simpson, and Henderson LLP*
24 Power of Attorney.*
27 Financial Data Schedule.*
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* Exhibits have been filed separately with the Commission and are available
upon written request.
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(b) Exhibits and Reports on Form 8-K
(1) A report on Form 8-K dated December 6, 1999 was filed with the
Securities and Exchange Commission on December 8, 1999 announcing that
Anchor Financial Corporation expected lower fourth quarter earnings
than previously expected.
(2) A report on Form 8-K dated December 15, 1999 was filed with the
Securities and Exchange Commission on December 16, 1999 announcing that
Anchor Financial Corporations's Board of Directors authorized the
purchase of up to 160,000 of its outstanding shares in the open market
or in privately negotiated transactions.
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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.
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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 April 9, 1999, Anchor Financial Corporation merged with Bailey Financial
Corporation. 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.
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. On October 8, 1999, the Bank merged with M.S. Bailey & Son
Bankers and Saluda County Bank. The Anchor Bank survived these mergers and all
information presented in this report reflects these mergers for all periods
presented.
The Bank accounted for 99.5% of the Corporation's total consolidated assets
as of December 31, 1999 and 100% of total net income for 1999. The Bank
conducts its business through 33 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. The mergers with
M.S. Bailey & Son Bankers and Saluda County Bank in 1999 added five branches in
the Upstate region of South Carolina. Myrtle Beach and Hilton Head Island are
coastal resort areas that serve a significant amount of tourists primarily
during the
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summer months. Because of the seasonal nature of these market areas, most of
the businesses, including financial institutions, are subject to semi-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.
From the merger with M.S. Bailey & Son Bankers, the Bank acquired MSB
Securities, Inc., a non-bank securities brokerage firm, which has been inactive
since 1996.
On November 1, 1999 the Bank formed AFC Insurance Services, Inc., a non-bank
insurance firm, to market insurance products to customers in all its markets.
For the year ended December 31, 1999, approximately 72% of the revenues of
the Bank were derived from interest and fees on loans, 16% from income on
investment securities, 4% from service charges on deposit accounts, and 8% 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, and Anchor PC
Banking, which allows customers to do a wide range of banking functions from
their home computers.
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,
1999.
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, 1999, the Corporation and its Subsidiaries employed a total
of 498 full-time equivalent persons.
Pending Mergers
On January 10, 2000, Anchor Financial Corporation and Carolina First
Corporation signed a Reorganization Agreement calling for the merger of Anchor
Financial with Carolina First. The merger is expected to be accounted for as a
pooling-of-interests and provide for a tax-free exchange of 2.175 shares of
Carolina First's common stock for each outstanding share of Anchor Financial
common stock. The resulting holding company will be known as The South
Financial Group and will have $4.4 billion in assets, along with 108 branches
in North Carolina, South Carolina, and Florida. The acquisition is subject to
regulatory and shareholder approvals. The transaction is expected to be
completed in the second quarter of 2000.
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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, the Pee Dee region of South Carolina, and the Upstate 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.
The Act requires every bank holding company to obtain the prior approval of
the Board before it may acquire substantially all of the assets of any bank or
bank holding company or ownership or control, directly or indirectly, of more
than five percent of the voting shares of any bank or bank holding company.
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
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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, 1999, 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.
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.
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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.
Recent Legislation
On November 12, 1999, the Gramm-Leach-Bliley Act ("GLBA") was enacted into
law. The GLBA removes various barriers imposed by the Glass-Steagall Act of
1933, specifically those prohibiting banks and bank holding companies from
engaging in the securities and insurance business. The GLBA also expands the
bank holding company act framework to permit bank holding companies with
subsidiary banks meeting certain capital and management requirements to elect
to become a "financial holding company."
Beginning March, 2000, financial holding companies may engage in a full
range of financial activities, including not only banking, insurance and
securities activities, but also merchant banking and additional activities
determined to be "financial in nature" or "complementary" to an activity that
is financial in nature. The GLBA also provides that the list of permissible
financial activities will be expanded as necessary or a financial holding
company to keep abreast of competitive and technological changes.
The GLBA also expands the activities in which insured state banks may
engage. Under the GLBA, insured state banks are given the ability to engage in
financial activities through a subsidiary, as long as the bank and its bank
affiliates meet and comply with certain requirements. First, the state bank
each of its bank affiliates must be "well capitalized." Second, the bank must
comply with certain capital deduction and financial statement requirements
provided under the GLBA. Third, the bank must comply with certain financial and
operational safeguards provided under the GLBA. Fourth, the bank must comply
with the limits imposed by the GLBA on transactions with affiliates.
Although, the GLBA preserves the Federal Reserve as the umbrella supervisor
of financial holding companies, it adopts an administrative approach to
regulation that defers to the action and paperwork requirements of the
"functional" regulators of insurers, broker-dealers, investment companies and
banks. Thus, the various state and federal regulators of a financial holding
company's operating subsidiaries would retain their jurisdiction and authority
over those operating entities. As the umbrella supervisor, however, the Federal
Reserve has the potential to affect the operations and activities of a
financial holding company's subsidiaries through its power over the financial
holding company parent. In addition, the GLBA contains numerous trigger points
related to legal non-compliance and other serious problems affecting bank
affiliates that could lead to direct Federal Reserve involvement and to the
possible exercise of remedial authority affecting both financial holding
companies and their affiliate operating companies.
Research
The Corporation makes no expenditures for research and development.
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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 26 of its branch offices. The Bank owns
the buildings, but leases the land for three branch offices, leases the
buildings for six branch offices from unaffiliated third parties under long-
term leases, and leases office space only for four branches 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, 1999, 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 Shareholders
There were no matters submitted to a vote of security holders of the
Corporation during the fourth quarter of 1999.
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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 (54)
Mr. Chyrst has served as President and Chief Executive Officer of the
Corporation since 1984 and the Bank since 1982, and Chairman of the Board of
the Corporation and the Bank beginning in 1998.
Robert E. Coffee, Jr. (52)
Executive Vice President and Chief Administrative Officer of the Bank since
1993.
Chester A. Duke (60)
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 (54)
Executive Vice President and Chief Credit Officer of the Bank since February
1988.
Tommy E. Looper (52)
Executive Vice President and Chief Financial Officer of the Corporation and the
Bank since 1987.
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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
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1999 1998 1997 1996 1995
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Closing price.......................... $27.50 $34.00 $33.00 $21.67 $13.17
Price/earnings ratio*.................. 15.6X 20.5X 25.6X 20.2X 15.7X
Price/book value ratio................. 232% 310% 328% 243% 164%
Book value/share....................... $11.84 $10.97 $10.06 $ 8.93 $ 8.05
Dividend payout ratio.................. 33.04% 27.81% 19.88% 19.85% 22.86%
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* Earnings excludes merger related costs incurred.
Quarterly Common Stock Prices and Dividends
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1999 1998
Quarter High Low Close Dividend High Low Close Dividend
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First.............. $33.50 $28.00 $28.00 $0.14 $44.00 $32.00 $40.50 $0.12
Second............. 36.00 25.50 33.25 0.14 46.00 36.75 37.25 0.12
Third.............. 36.25 28.00 36.25 0.14 42.38 35.00 35.50 0.12
Fourth............. 34.00 25.25 27.50 0.14 44.00 28.00 34.00 0.12
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Stock Exchange
The common stock of Anchor Financial Corporation is traded on the Nasdaq
National Market tier of 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 and Investor Relations
Investor Relations
Registrar and Transfer Company The Anchor Bank
10 Commerce Drive Post Office Box 2428
Cranford, New Jersey 07016-3572 Myrtle Beach, SC 29578
1-800-368-5948 (843) 946-3105
1-800-ANCHOR-8
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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, 1999.
On April 9, 1999, Anchor Financial Corporation merged with Bailey Financial
Corporation (Bailey). 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 mergers 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, 1999, totaled $14.6 million, or
$1.76 per diluted share, before pretax charges of $1.7 million ($1.3 million
after taxes) associated with the acquisition of Bailey Financial Corporation.
Excluding these nonrecurring charges, net income and earnings per diluted share
for 1999 increased 6.1% and 5.4% respectively, from 1998. Including the effect
of the charges, the Corporation had net income of $13.3 million or $1.61 per
diluted share for 1999, an increase of $3.1 million or 30.2% from $10.2 million
earned in 1998. Basic net income per share, before pretax merger charges,
increased 5.3% to $1.82 in 1999 compared with $1.73 in 1998 and $1.36 in 1997.
Diluted net income per share, before pretax merger charges, increased 28.7% to
$1.66 in 1998 compared with $1.29 in 1997.
The primary factors affecting the increase in net income, before
nonrecurring charges, for 1999 were a $2.4 million or 4.8% increase in net
interest income and a $864 thousand or 7.6% increase in noninterest income.
These favorable changes were partially offset by a $1.7 million or 4.3%
increase in noninterest expense, a $557 thousand or 7.7% increase in the
provision for income taxes, and a $305 thousand or 14.4% increase in the
provision for loan losses. Nonrecurring charges totaled $1.7 million in 1999,
and $4.3 million in 1998, and are discussed in detail in the noninterest
expense section of this report.
The increase in earnings from 1997 to 1998 was primarily due to a 10.6%
increase in net interest income, a 24.4% increase in noninterest income, and a
16.3% decrease in the provision for loan losses. These favorable changes were
partially offset by an 8.8% increase in noninterest expense and a 21.6%
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 1999 was 1.21% compared with 1.17% in 1998 and 1.04%
in 1997. Return on average stockholders' equity, excluding nonrecurring
charges, for 1999 was 15.83% versus 15.96% in 1998, and 14.27% in 1997.
9
<PAGE>
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.
Table 1
ANCHOR FINANCIAL CORPORATION
SUMMARY OF OPERATIONS
(in thousands, except for share data)
<TABLE>
<CAPTION>
Five
Year
Compound
Growth
1999 1998 1997 1996 1995 Rate
---------- ---------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data
Interest income......... $ 92,224 $ 92,488 $ 83,137 $ 69,389 $ 59,629 14.2%
Interest expense........ 39,354 42,302 37,535 31,069 26,751 16.2
---------- ---------- ---------- --------- ---------
Net interest income..... 52,870 50,186 45,602 38,320 32,878 12.9
Provision for loan
losses................. 2,427 2,922 2,534 1,370 1,117 5.1
---------- ---------- ---------- --------- ---------
Net interest income
after provision for
loan losses............ 50,443 47,264 43,068 36,950 31,761 13.3
Noninterest income...... 12,259 11,395 9,161 8,087 7,026 8.6
Noninterest expense..... 42,060 42,507 35,627 31,582 28,791 8.8
Equity in net income
(loss) of
unconsolidated
subsidiary............. 56 242 15 (269) 0 N/A
---------- ---------- ---------- --------- ---------
Income before income
taxes.................. 20,698 16,394 16,617 13,186 9,996 22.3
Provision for income
taxes.................. 7,399 6,183 5,935 4,563 3,363 29.7
---------- ---------- ---------- --------- ---------
Net income.............. $ 13,299 $ 10,211 $ 10,682 $ 8,623 $ 6,633 19.2%
========== ========== ========== ========= =========
Net income per share--
basic.................. $ 1.66 $ 1.28 $ 1.36 $ 1.10 $ 0.85 18.7%
Net income per share--
diluted................ 1.61 1.23 1.29 1.07 0.84 18.1
Cash dividend per
share.................. 0.72 0.48 0.375 0.28 0.24 21.7
Average common shares
outstanding--basic..... 8,016,908 7,959,766 7,869,812 7,824,004 7,771,400 0.4
Average common shares
outstanding--diluted... 8,285,446 8,285,260 8,255,862 8,092,215 7,902,297 0.9
Selected Year-End Assets
and Liabilities
Total assets............ $1,206,843 $1,183,458 $1,118,755 $ 941,223 $ 808,395 11.6%
Interest-earning
assets................. 1,127,922 1,093,859 1,028,634 854,353 732,390 12.4
Investment securities... 262,575 269,236 239,106 203,638 178,624 15.1
Loans--net of unearned
income................. 862,495 810,891 777,567 644,858 535,450 14.3
Investment in
unconsolidated
subsidiary(1).......... 0 3,050 2,813 2,791 350 N/A
Deposits................ 966,657 968,340 932,512 801,329 698,402 9.9
Noninterest-bearing
deposits............... 164,563 169,220 153,906 145,628 118,927 11.3
Interest-bearing
deposits............... 802,094 799,120 778,606 655,701 579,475 9.7
Interest-bearing
liabilities............ 942,997 916,129 876,414 718,353 619,544 11.7
Stockholders' equity.... 90,773 89,002 80,685 70,540 63,370 10.3
Selected Ratios
Return on average
assets................. 1.11% 0.87% 1.04% 0.98% 0.88%
Return on average
stockholders' equity... 14.44 11.86 14.27 12.94 11.11
Net yield on average
interest-earning assets
(tax equivalent)....... 4.74 4.64 4.83 4.78 4.76
Average loans to average
deposits............... 87.93 82.76 81.78 77.75 75.39
Net loan losses to
average loans.......... 0.24 0.22 0.30 0.05 0.10
Nonperforming loans to
total loans............ 0.32 0.37 0.19 0.43 0.27
Allowance for loan
losses to loans........ 1.15 1.18 1.08 1.23 1.29
Allowance for loan
losses to nonperforming
loans.................. 364.72 315.91 580.44 288.94 480.84
Average stockholders'
equity to average
assets................. 7.67 7.34 7.26 7.58 7.95
Total risk-based capital
ratio.................. 12.52 12.07 11.80 12.87 12.56
Tier 1 leverage ratio... 7.76 7.24 6.97 7.40 7.70
Dividend payout ratio... 33.04 27.81 19.88 19.85 22.86
</TABLE>
- --------
(1) As a result of the merger of Anchor and Bailey in 1999 the investment in
Rock Hill Bank & Trust was reclassified from an investment in
unconsolidated subsidiary to an available-for-sale equity investment.
10
<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, 1999, 1998, and 1997.
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>
1999 1998 1997
-------------------------- -------------------------- -------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................. $ 846,182 $75,303 8.90% $ 807,705 $74,977 9.28% $ 712,376 $68,103 9.56%
Investment securities:
Taxable.............. 249,877 15,231 6.10 231,261 14,573 6.30 209,146 13, 256 6.34
Non-taxable.......... 24,620 1,810 7.35 19,612 1,596 8.14 15,270 1,316 8.62
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total investment
securities........ 274,497 17,041 6.21 250,873 16,169 6.45 224,416 14,572 6.49
Interest-bearing
balances due from
banks................. 2,159 117 5.42 7,057 427 6.05 2,145 151 7.04
Federal funds sold and
securities purchased
under agreements to
resell................ 4,193 356 8.49 25,154 1,339 5.32 14,934 807 5.40
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-
earning assets.... 1,127,031 92,817 8.24% 1,090,789 92,912 8.52% 953,871 83,633 8.77%
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Noninterest-earning
assets:
Cash and due from
banks................. 40,627 41,190 38,183
Premises and
equipment............. 27,095 27,460 27,102
Other, less allowance
for loan losses....... 5,297 13,900 11,403
---------- ---------- ----------
Total noninterest-
earning assets.... 73,019 82,550 76,688
---------- ---------- ----------
TOTAL ASSETS....... $1,200,050 $1,173,339 $1,030,559
========== ========== ==========
Interest-bearing
liabilities:
Interest-bearing
deposits:
Interest checking.... $ 122,910 $ 1,762 1.43% $ 110,786 $ 1,963 1.77% $ 105,229 $ 2,241 2.13%
Savings.............. 70,494 1,931 2.74 94,779 3,373 3.56 88,401 2,144 2.43
Money market......... 312,413 13,925 4.46 265,167 12,269 4.63 223,917 10,366 4.63
Time deposits........ 281,285 14,308 5.09 340,123 18,743 5.51 310,189 18,027 5.81
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-
bearing deposits.. 787,102 31,926 4.06 810,855 36,348 4.48 727,736 32,778 4.50
Federal funds
purchased and
securities sold under
agreements to
repurchase............ 56,871 2,740 4.82 39,467 1,975 5.00 27,609 1,448 5.24
Other short-term
borrowings............ 1,600 70 4.38 2,454 125 5.09 2,717 126 4.64
Long-term debt......... 70,167 3,694 5.26 48,176 2,922 6.07 35,703 2,251 6.30
Subordinated notes..... 11,000 924 8.39 11,000 931 8.46 11,000 931 8.46
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-
bearing
liabilities....... 926,740 39,354 4.25% 911,952 42,301 4.64% 804,765 37,534 4.66%
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Noninterest-bearing
liabilities:
Demand deposits........ 175,187 165,075 143,336
Other liabilities...... 6,039 10,222 7,592
---------- ---------- ----------
Total noninterest-
bearing
liabilities....... 181,226 175,297 150,928
---------- ---------- ----------
Stockholders' equity.... 92,084 86,090 74,866
---------- ---------- ----------
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY............ $1,200,050 $1,173,339 $1,030,559
========== ========== ==========
Net interest income..... $53,463 $50,611 $46,099
======= ======= =======
Interest income/earning
assets................. 8.24% 8.52% 8.77%
Interest expense/earning
assets................. 3.49 3.88 3.93
---- ---- ----
Net interest
income/earning assets.. 4.74% 4.64% 4.83%
==== ==== ====
</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%.
11
<PAGE>
Net interest income on a tax equivalent basis increased $2.9 million or 5.6%
from $50.6 million in 1998 to $53.5 million in 1999. This increase was
primarily attributable to the increased volume of earning assets and the
increase in net interest margin. The net interest margin increased 10 basis
points from 4.64% in 1998 to 4.74% in 1999. The net interest margin widened
from 1998 primarily because of a lower cost of funding earning assets.
Interest income on a tax equivalent basis decreased slightly in 1999.
Average earning assets increased 3.3% to $1.13 billion or 93.9% of average
total assets in 1999, compared with $1.09 billion or 93.0% in 1998. 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 $38.5 million or 4.8%. Average
investment securities increased $23.6 million or 9.4%. The yield on earning
assets decreased 28 basis points from 8.52% in 1998 to 8.24% in 1999. The
primary reasons for the decrease in the yield on earning assets during the
period were a slowing in the growth of the loan portfolio and investment
security portfolio and decreased volume in federal funds sold. Average loans
were 75.1% of average earning assets in 1999 and 74.0% in 1998. The yield on
loans decreased 38 basis points from 9.28% in 1998 to 8.90% in 1999 largely due
to a significant slowing of loan growth caused by rising interest rates in the
latter half of 1999 and competitive market conditions. The yield on investment
securities decreased 24 basis points from 6.45% in 1998 to 6.21% in 1999. The
yield on federal funds sold and securities purchased under agreements to
resell, collectively, rose 317 basis points from 5.32% in 1998 to 8.49% in 1999
largely due to the increase in rates paid on these short term investments.
The cost of funding sources decreased $2.9 million or 7.0% in 1999 primarily
due to the decreased rates paid on interest-bearing deposits. Average interest-
bearing liabilities increased $14.8 million or 1.6%. Interest-bearing deposits
were down $23.8 million or 2.9%, primarily due to a decrease in time deposits
of 17.3% and a 25.6% decrease in savings deposits. Average long-term debt and
subordinated notes increased $22.0 million or 37.2% in 1999. The average rate
paid on interest-bearing liabilities decreased 39 basis points from 4.64% in
1998 to 4.25% in 1999, primarily due to a more favorable mix of funding
sources. The mix of interest-bearing liabilities improved as traditionally
lower-yielding interest checking, savings, and money market deposit accounts as
a group increased as a percentage of interest-bearing liabilities from 59.0% in
1998 to 64.3% in 1999. Average long-term debt and subordinated notes were 8.8%
of interest-bearing liabilities in 1999 versus 6.5% in 1998. Interest-bearing
liabilities decreased as a percentage of average earning assets to 82.2% in
1999 from 83.6% in 1998.
12
<PAGE>
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 $5.9 million or
3.4% in 1999. Noninterest-bearing funding sources were 16.1% of average earning
assets in 1999 and 1998. Table 3, the Analysis of Net Interest Income Changes,
shows the impact of balance sheet changes, which occurred during 1999 and 1998,
and the changes in interest rate levels.
Table 3
ANALYSIS OF NET INTEREST INCOME CHANGES
(in thousands)
<TABLE>
<CAPTION>
1999 compared to 1998 1998 compared to 1997
-------------------------- --------------------------
Change in Change in Change in Change in
Volume Rate Total Volume Rate Total
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans................. $3,493 ($3,167) $ 326 $8,896 ($2,022) $6,874
Investment securities:
Taxable............... 1,146 (488) 658 1,394 (77) 1,317
Non-taxable........... 379 (166) 213 357 (77) 280
Interest-bearing bal-
ances due from
banks................ (270) (40) (310) 300 (24) 276
Federal funds sold and
securities purchased
under agreements to
resell............... (1,503) 520 (983) 544 (12) 532
------ ------- ------ ------ ------- ------
Total interest-
earning assets..... 3,245 (3,341) (96) 11,491 (2,212) 9,279
------ ------- ------ ------ ------- ------
Interest expense:
Interest checking..... 200 (401) (201) 114 (392) (278)
Savings............... (759) (683) (1,442) 164 1,065 1,229
Money market.......... 2,120 (464) 1,656 1,909 (6) 1,903
Time deposits......... (3,070) (1,365) (4,435) 1,681 (965) 716
Federal funds pur-
chased and securities
sold under agreements
to repurchase........ 841 (76) 765 596 (69) 527
Other short-term
borrowings........... (39) (16) (55) (13) 12 (1)
Long-term debt........ 1,197 (425) 772 759 (88) 671
Subordinated notes.... 0 (8) (8) 0 0 0
------ ------- ------ ------ ------- ------
Total interest-
bearing
liabilities........ 490 (3,438) (2,948) 5,210 (443) 4,767
------ ------- ------ ------ ------- ------
Net interest
income............. $2,755 $ 97 $2,852 $6,281 ($1,769) $4,512
====== ======= ====== ====== ======= ======
</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 1998 increased $4.5
million or 9.8% from the amount earned in 1997. This increase was primarily
attributable to the increased volume of earning assets since the net interest
margin decreased 19 basis points from 4.83% in 1997 to 4.64% in 1998. Average
earning assets increased 14.4% to $1.1 billion or 93.0% of average total assets
in 1998, compared with $953.9 million or 92.6% in 1997. The cost of funding
sources increased $4.8 million or 12.7% in 1998 primarily due to the
$107 million or 13.3% increase in interest-bearing liabilities from 1997.
13
<PAGE>
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, insurance commissions, 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
$864 thousand or 7.6% and totaled $12.3 million in 1999 compared to $11.4
million in 1998.
Commissions and fees, which include revenues from credit card-related
services, electronic banking services, insurance product services, and
alternative investment product services increased 14.4% to $2.8 million in 1999
from $2.5 million in 1998. The primary reasons for this growth were increases
of $244 thousand or 51.5% in investment fee income, $59 thousand or 12.5% in
revenues from electronic banking services, and $85 thousand or 9.4% in credit
card-related revenues.
The Corporation's trust operation produced revenues of $2.2 million in 1999,
an increase of 32.2% compared with $1.7 million in 1998. In 1999, mortgage
banking income (which includes profits from the origination and sale of
residential real estate loans) decreased $307 thousand or 19.6% to a total of
$1.3 million, compared to $1.6 million in 1998. The decrease in mortgage
banking income resulted from a decline in volume of loan originations due to a
less favorable interest rate environment created by rising interest rates in
the latter part of 1999. In connection with its mortgage banking activities,
the Corporation primarily originates mortgage loans under mandatory delivery
commitments, which substantially limits 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 was $83 thousand in 1999, compared
to $275 thousand in 1998. The net gains in both years 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.
Service charges on deposit accounts decreased in 1999 due to lower deposits.
Average deposits decreased slightly in 1999 causing service charges on deposit
accounts to decrease 1.5% over 1998. In 1999, management continued to focus
primarily on increasing noninterest income with revenue from the sales of new
products rather than increased pricing of existing services.
Noninterest income increased $2.2 million or 24.4% to $11.4 million in 1998
compared to $9.2 million in 1997. The primary reasons for this increase were, a
33.0% increase in commissions and fees, a 104.5% increase in gains on sales of
mortgage loans, a 19.3% increase in trust income, and a 4.8% increase in
service charges on deposit accounts. The increase in service charges reflected
deposit growth and competitive pricing. The increase in commissions and fees
resulted primarily from growth in credit card-related revenues, electronic
banking network 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 $1.7 million,
increased $1.7 million or 4.3% and totaled $40.4 million in 1999 compared with
$38.7 million in 1998.
Salaries and employee benefits, the largest component of noninterest
expense, totaled $22.5 million in 1999 and $21.6 million in 1998, net of
nonrecurring merger charges. This 4.3% increase during 1999 was primarily due
to the investment in new 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 $255 thousand or 9.1% during 1999, largely
due to higher building depreciation and maintenance expenses. Equipment expense
decreased $279 thousand or 9.4%, primarily due to lower maintenance costs.
14
<PAGE>
Other operating expense, excluding pretax nonrecurring charges, increased
$755 thousand or 6.6% in 1999 primarily due to the 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, including telephone and data communications expense
to enhance revenue growth.
The Corporation's overhead efficiency ratio was 61.2% in 1999, an
improvement from 62.3% in 1998. These ratios exclude nonrecurring charges.
In connection with the Bailey merger, the Corporation incurred merger-
related operating expenses of $1.7 million before taxes ($1.3 million after
taxes), of which $608 thousand was directly related to effecting the mergers
and $1.0 million was in restructuring costs. The charges directly related to
effecting the mergers included $417 thousand in consulting fees paid to
investment bankers, $80 thousand in legal fees, $28 thousand for shareholder
communications, and $59 thousand in accounting costs. Of the $1.0 million in
restructuring charges, $234 thousand was incurred in salary continuation plans,
employee contracts, and severance plans, $95 thousand was incurred for
maintenance contracts, and $592 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, excluding pretax nonrecurring charges of $3.5 million,
increased $3.1 million or 8.8% in 1998 from 1997. The primary reasons for the
increase were increases in all categories of noninterest expense due to the
Corporation's growth in 1998. Salaries and employee benefits, net of
nonrecurring merger costs, increased 13.3% 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 6.7% primarily due to investments made to maintain
existing facilities. Other operating expense increased 3.5% primarily due to
expansion related expenses and expenses related to the growth realized by the
Corporation. Equipment expense increased slightly in 1998.
Income Taxes
Total income tax expense included in the Consolidated Statements of Income
was $7.4 million in 1999, $6.2 million in 1998, and $5.9 million in 1997. The
primary reason for tax expense to increase in 1999 was higher net income before
taxes, since the effective tax rate decreased in 1999. The Corporation's
effective tax rates were 35.7%, 37.7%, and 35.7% in 1999, 1998, and 1997,
respectively.
The Corporation's effective tax rate decreased in 1999 primarily due to
lower nondeductible merger-related expenses. The Corporation's effective tax
rate increased in 1998 primarily due to higher nondeductible merger-related
expenses.
15
<PAGE>
Table 4
SOURCES AND USES OF FUNDS
(Average balances in thousands)
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Composition of Sources:
Demand deposits......................... $ 175,187 14.6% $ 165,075 14.1%
Interest checking....................... 122,910 10.2 110,786 9.4
Savings................................. 70,494 6.0 94,779 8.1
Money market............................ 312,413 26.0 265,167 22.6
Time deposits........................... 281,285 23.4 340,123 29.0
Short-term borrowings................... 58,471 4.9 41,921 3.6
Long-term borrowings.................... 70,167 5.8 48,176 4.1
Subordinated notes...................... 11,000 0.9 11,000 0.9
Other liabilities....................... 6,039 0.5 10,222 0.9
Stockholders' equity.................... 92,084 7.7 86,090 7.3
---------- ----- ---------- -----
Total sources......................... $1,200,050 100.0% $1,173,339 100.0%
========== ===== ========== =====
Composition of Uses:
Loans................................... $ 846,182 70.5% $ 807,705 68.8%
Investment securities................... 274,497 22.9 250,873 21.4
Other interest-earning assets........... 6,352 0.5 32,211 2.8
---------- ----- ---------- -----
Total interest-earning assets......... 1,127,031 93.9 1,090,789 93.0
Noninterest-earning assets.............. 73,019 6.1 82,550 7.0
---------- ----- ---------- -----
Total uses............................ $1,200,050 100.0% $1,173,339 100.0%
========== ===== ========== =====
</TABLE>
- --------
(1) Loan balances are stated net of unearned income.
Year 2000 Issue
The Corporation did not encounter computer or system problems from the
transition into the Year 2000. The anticipated Year 2000 problem was publicized
as the possible failure or malfunction of systems or computer chips that
improperly recognized date sensitive information when the year changes to 2000.
The Corporation is not aware of Year 2000 problems encountered by major
customers, suppliers, or hardware and software vendors. No liquidity problems
or material withdrawals by depositors of the Bank were experienced during the
transition into the Year 2000.
Total Year 2000 project costs were approximately $194 thousand, which is
under the amount previously estimated and disclosed. The expenditures did not
have a material impact on the Corporations' results of operations, liquidity or
capital resources.
Although highly unlikely, certain Year 2000 problems could surface later
during 2000. The Corporation continues to monitor systems for possible future
disruptions and has a business resumption plan to deal with such problems.
Financial Condition
Investment Securities
Average investment securities represented 24.4% of average earning assets
during 1999 compared to 23% in 1998. The increase in the percentage of
investment securities was due to the slowing of loan growth in each of the
Corporation's market areas. At December 31, 1999, investment securities totaled
$262.6 million or 22.6% of total earning assets.
16
<PAGE>
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, 1999 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.
Table 5
INVESTMENT SECURITIES--HELD-TO-MATURITY
(December 31 balances in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------- ------------------- -------------------
Estimated Average Tax Estimated Estimated
Par Amortized Fair Maturity Equivalent Amortized Fair Amortized Fair
Value Cost Value (Yrs/Mos) Yield Cost Value Cost Value
------ --------- --------- -------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities:
Within one year........ $2,350 $2,349 $2,352 6.10% $ 5,998 $ 6,046 $ 6,934 $ 6,929
One to five years...... 0 0 0 0.00 3,360 3,426 10,379 10,433
Five to ten years...... 0 0 0 0.00 0 0 0 0
Over ten years......... 0 0 0 0.00 0 0 0 0
------ ------ ------ --- ---- ------- ------- ------- -------
Total................ 2,350 2,349 2,352 0/5 6.10 9,358 9,472 17,313 17,362
------ ------ ------ --- ---- ------- ------- ------- -------
Securities of other U.S.
Government agencies
and corporations:
Within one year........ 1,000 1,000 999 6.14 0 0 3,718 3,726
One to five years...... 2,650 2,648 2,633 6.12 4,396 4,468 5,865 5,875
Five to ten years...... 0 0 0 0.00 0 0 0 0
Over ten years......... 0 0 0 0.00 0 0 0 0
------ ------ ------ --- ---- ------- ------- ------- -------
Total................ 3,650 3,648 3,632 1/5 6.13 4,396 4,468 9,583 9,601
------ ------ ------ --- ---- ------- ------- ------- -------
Mortgage-backed
securities:
Within one year........ 0 0 0 0.00 1,470 1,485 129 131
One to five years...... 0 0 0 0.00 5,384 5,600 2,841 2,981
Five to ten years...... 0 0 0 0.00 5,689 5,948 749 799
Over ten years......... 0 0 0 0.00 3,184 3,344 3,968 4,114
------ ------ ------ --- ---- ------- ------- ------- -------
Total................ 0 0 0 0/0 0.00 15,727 16,377 7,687 8,025
------ ------ ------ --- ---- ------- ------- ------- -------
Obligations of states
and
political subdivisions:
Within one year........ 1,101 1,101 1,106 7.64 0 0 1,370 1,375
One to five years...... 865 867 881 7.61 0 0 3,144 3,226
Five to ten years...... 0 0 0 0.00 0 0 235 237
Over ten years......... 0 0 0 0.00 0 0 112 111
------ ------ ------ --- ---- ------- ------- ------- -------
Total................ 1,966 1,968 1,987 1/3 7.63 0 0 4,861 4,949
------ ------ ------ --- ---- ------- ------- ------- -------
Total portfolio...... $7,966 $7,965 $7,971 1/1 6.48% $29,481 $30,317 $39,444 $39,937
====== ====== ====== === ==== ======= ======= ======= =======
</TABLE>
- --------
(1) Tax equivalent yield has been calculated using an incremental income tax
rate of 34%.
17
<PAGE>
Table 5
INVESTMENT SECURITIES--AVAILABLE-FOR-SALE (Continued)
(December 31 balances in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------- ------------------- -------------------
Estimated Average Tax Estimated Estimated
Par Amortized Fair Maturity Equivalent Amortized Fair Amortized Fair
Value Cost Value (Yrs/Mos) Yield Cost Value Cost Value
-------- --------- --------- -------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities:
Within one year........ $ 2,200 $ 2,202 $ 2,206 6.50% $ 8,064 $ 8,132 $ 15,676 $ 15,698
One to five years...... 7,000 6,972 7,000 6.36 15,951 16,572 36,356 36,765
Five to ten years...... 0 0 0 0.00 0 0 987 1,001
Over ten years......... 0 0 0 0.00 0 0 0 0
-------- -------- -------- ---- ---- -------- -------- -------- --------
Total................ 9,200 9,174 9,206 1/6 6.39 24,015 24,704 53,019 53,464
-------- -------- -------- ---- ---- -------- -------- -------- --------
Securities of other U.S.
Government agencies
and corporations:
Within one year........ 3,935 3,932 3,932 6.24 5,400 5,414 16,293 16,331
One to five years...... 20,920 20,964 20,416 5.74 55,015 55,292 50,636 50,854
Five to ten years...... 60,366 60,700 58,693 6.37 49,462 50,100 20,669 20,852
Over ten years......... 7,491 7,928 7,457 5.99 302 300 4,898 4,915
-------- -------- -------- ---- ---- -------- -------- -------- --------
Total................ 92,712 93,524 90,498 6/6 6.19 110,179 111,106 92,496 92,952
-------- -------- -------- ---- ---- -------- -------- -------- --------
Mortgage-backed
securities:
Within one year........ 0 0 0 0.00 1,481 1,485 812 813
One to five years...... 6,680 6,599 6,539 6.70 8,973 9,065 3,764 3,778
Five to ten years...... 11,309 11,317 11,087 6.31 10,582 10,728 16,959 17,068
Over ten years......... 110,122 108,955 104,184 6.58 67,751 67,848 19,370 19,577
-------- -------- -------- ---- ---- -------- -------- -------- --------
Total................ 128,111 126,871 121,810 7/3 6.56 88,787 89,126 40,905 41,236
-------- -------- -------- ---- ---- -------- -------- -------- --------
Obligations of states
and
political subdivisions:
Within one year........ 100 100 101 7.93 790 799 437 440
One to five years...... 2,366 2,378 2,390 6.80 1,123 1,173 1,767 1,828
Five to ten years...... 6,860 6,985 6,800 6.35 5,303 5,431 3,564 3,657
Over ten years......... 12,670 12,761 11,764 6.58 2,069 2,077 0 0
-------- -------- -------- ---- ---- -------- -------- -------- --------
Total................ 21,996 22,224 21,055 11/4 6.53 9,285 9,480 5,768 5,925
-------- -------- -------- ---- ---- -------- -------- -------- --------
Marketable equity
securities 9,025 9,025 12,041 N/A 3.91 5,339 5,339 6,085 6,085
-------- -------- -------- ---- ---- -------- -------- -------- --------
Total portfolio...... $261,044 $260,818 $254,610 7/1 6.33% $237,605 $239,755 $198,273 $199,662
======== ======== ======== ==== ==== ======== ======== ======== ========
</TABLE>
- --------
(1) Tax equivalent yield has been calculated using an incremental income tax
rate of 34%.
Investment securities available-for-sale are held for expected liquidity
requirements, capital planning, and asset/liability management. Such
securities, recorded at fair value, were $254.6 million or 97% of the total
investment portfolio at December 31, 1999 compared with $239.8 million or 89%
at December 31, 1998. The Corporation had an unrealized loss on investment
securities available-for-sale, net of tax, of $4.1 million at December 31,
1999, compared to an unrealized gain, net of tax, of $1.4 million at the same
time last year.
In 1995, Bailey Financial Corporation, along with a group of investors,
formed Rock Hill Bank &Trust. As of 1997, Bailey owned 100% of Class B common
stock, representing 51% of total ownership. On August 3, 1998, Rock Hill Bank &
Trust was involved in a secondary stock offering, reducing Bailey's investment
to 22%. However, Bailey maintained two Board Members on the Rock Hill Bank &
Trust Board of Directors and maintained effective control. Therefore, Bailey's
investment in Rock Hill Bank & Trust was unconsolidated on Bailey's books from
1995 through April 9, 1999, the date of the Bailey and Anchor merger, and is
presented as such in these consolidated financial statements for the periods
ending December 31, 1998 and 1997.
18
<PAGE>
As a result of Anchor's merger with Bailey, the combined company no longer
employed the Bailey representatives serving on the Rock Hill Bank & Trust Board
of Directors. Anchor maintained its 22% ownership interest in Rock Hill Bank &
Trust, but no longer exhibited effective control. As the investment is readily
marketable (the rights of the Class B common stockholder are the same as a
Class A common stockholder, except for restricted voting rights), the
investment is classified as an available for sale equity investment recorded in
accordance with SFAS No. 115 with mark to market adjustments flowing through
equity at December 31, 1999.
Investment securities held-to-maturity and recorded at amortized cost
aggregated $8.0 million or 3% of the total investment portfolio at December 31,
1999 compared with $29.5 million or 11% at December 31, 1998. The estimated
fair value of such securities exceeded the carrying value by 0.1% and 2.8% at
December 31, 1999 and 1998, respectively.
Loans
Loans, the largest component of earning assets, represented 75.1% of average
earning assets and 70.5% of average total assets during 1999, compared with
74.1% and 68.8%, respectively, during 1998. In 1999, average loans grew 4.8% to
$846.2 million from $807.7 million in 1998. In 1999, the Corporation focused on
growth in new markets, loan quality, and expansion of existing customer
relationships. The Corporation experienced a slowing of loan growth due to
rising interest rates in the latter part of 1999.
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 in
1999.
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 1999, the Corporation
did not experience any material credit deterioration attributable to adverse
trends in specific markets or the economy in general.
In 1999, the Corporation expanded its market area into the Upstate of South
Carolina. With the acquisition of Bailey during 1999, the Corporation added
five branches in the Piedmont region. 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.
These expansions have provided opportunities for growth and diversification.
Loans, net of unearned income, at December 31, 1999 increased 6.4% to $862.5
million compared with $810.9 million reported in 1998. This growth was due to
quality loan demand and expansion into new market areas.
19
<PAGE>
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 12.8% from 1998 and represent 14.5% of gross loans at December 31,
1999. Real estate-construction loans, which were 11% of gross loans at December
31, 1999, increased 56% compared to the previous year. Real estate-mortgage or
commercial real estate loans increased 2.9% from 1998 and represent 44% of
gross loans at December 31, 1999. Installment loans to individuals, which
include residential real estate loans, represent 22.1% of gross loans and
increased 12% during 1999.
Table 6
LOAN PORTFOLIO COMPOSITION
(December 31 balances in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of Gross Amount of Gross Amount of Gross Amount of Gross Amount of Gross
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural....... $125,409 14.5% $143,755 17.7% $143,545 18.5% $130,578 20.2% $215,495 40.2%
Real estate--
construction........... 94,891 11.0 60,811 7.5 65,815 8.4 43,827 6.8 23,950 4.5
Real estate--mortgage... 379,853 44.0 369,060 45.5 319,632 41.1 273,509 42.4 163,335 30.5
Installment loans to
individuals............ 191,029 22.1 170,550 21.0 204,311 26.3 167,937 26.1 121,007 22.6
Other................... 71,472 8.4 66,867 8.3 44,383 5.7 29,104 4.5 11,688 2.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross loans............ 862,654 100.0% 811,043 100.0% 777,686 100.0% 644,955 100.0% 535,475 100.0%
===== ===== ===== ===== =====
Unearned income......... (159) (152) (119) (97) (25)
-------- -------- -------- -------- --------
Total loans............ $862,495 $810,891 $777,567 $644,858 $535,450
======== ======== ======== ======== ========
</TABLE>
The changing mix of the loan portfolio reflects the Corporation's expansion
into new market areas and the changing economy. While most categories of loans
increased during 1999, construction real estate loans experienced the fastest
growth. The primary reason for this increase is the rapid growth and expansion
in the Corporation's market areas.
Table 7
SELECTED LOAN MATURITIES AND INTEREST RATE SENSITIVITY
(December 31, 1999 balances in thousands)
<TABLE>
<CAPTION>
One Year One to Over
or Less Five Years Five Years Total
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Types of loans:
Commercial, financial and
agricultural........................ $ 57,521 $ 56,244 $ 11,644 $125,409
Real estate--construction............ 47,493 28,651 18,748 94,892
Real estate--mortgage................ 62,573 175,195 142,085 379,853
Installment loans to individuals and
other loans......................... 59,200 122,142 80,999 262,341
-------- -------- -------- --------
Total.............................. $226,787 $382,232 $253,476 $862,495
======== ======== ======== ========
Total of loans above with:
Predetermined interest rates......... $ 84,246 $292,544 $104,914 $481,704
Adjustable interest rates............ 142,541 89,688 148,562 380,791
-------- -------- -------- --------
Total.............................. $226,787 $382,232 $253,476 $862,495
======== ======== ======== ========
</TABLE>
- --------
(1) Loan balances net of unearned income
20
<PAGE>
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:
NONPERFORMING ASSETS
(Balances at December 31, in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans...................... $2,721 $2,988 $1,353 $2,605 $1,342
Loans past due ninety days or more ... 0 34 89 146 89
Troubled debt restructurings.......... 0 0 0 0 0
Other real estate owned............... 347 810 567 375 733
------ ------ ------ ------ ------
Total nonperforming assets............ $3,068 $3,832 $2,009 $3,126 $2,164
====== ====== ====== ====== ======
Nonperforming assets to total loans
and other real estate owned.......... 0.36% 0.47% 0.26% 0.48% 0.40%
</TABLE>
During 1999, nonperforming assets declined 19.9% to $3.1 million, compared
with $3.8 million reported in 1998. There were no loans past due 90 days or
more at December 31, 1999. The nonperforming assets to total loans and other
real estate owned ratio improved to 0.36% in 1999, and remains at a favorable
level. During 1998, nonperforming assets increased $1.8 million and the
nonperforming assets to total loans and other real estate owned ratio was
0.47%. 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.
21
<PAGE>
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>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning
of year.............................. $9,546 $8,367 $7,949 $6,882 $6,244
------ ------ ------ ------ ------
Amounts charged off during year:
Commercial, financial and
agricultural....................... 1,874 1,942 1,969 360 393
Real estate--construction........... 0 0 0 0 130
Real estate--mortgage............... 185 221 160 131 247
Installment loans to individuals and
other loans........................ 566 542 475 372 343
------ ------ ------ ------ ------
Total loans charged off........... 2,625 2,705 2,604 863 1,113
------ ------ ------ ------ ------
Amount of recoveries during year:
Commercial, financial and
agricultural....................... 301 730 335 244 500
Real estate--construction........... 0 0 0 0 0
Real estate--mortgage............... 86 76 47 210 65
Installment loans to individuals and
other loans........................ 189 156 106 106 69
------ ------ ------ ------ ------
Total recoveries.................. 576 962 488 560 634
------ ------ ------ ------ ------
Net loans charged off................. 2,049 1,743 2,116 303 479
------ ------ ------ ------ ------
Provision for loan losses............. 2,427 2,922 2,534 1,370 1,117
------ ------ ------ ------ ------
Allowance for loan losses at end of
year................................. $9,924 $9,546 $8,367 $7,949 $6,882
====== ====== ====== ====== ======
Ratio of net charge-offs during the
year to average loans outstanding
during the year...................... 0.24% 0.21% 0.30% 0.05% 0.10%
</TABLE>
The ratio of net charge-offs to average loans was 0.24% in 1999 and 0.21% in
1998, and 0.30% in 1997. A $2.4 million provision for loans losses was made in
1999, compared with $2.9 million in 1998, and $2.5 million in 1997.
The decreased level of the provision for loan losses during 1999 was
primarily attributable to loan growth slowing during 1999. The provision for
loan losses was made to reflect potential losses inherent in the loan portfolio
at the balance sheet date. Specific reserves are provided on individual loans
for which management believed specific reserves were necessary. The specific
reserves are determined on a loan-by-loan basis based on management's
evaluation of Anchor's exposure for each credit, given the current payment
status of the loan and the value of any underlying collateral. Loans for which
specific reserves are provided are excluded from the general allowance
calculations described above to prevent redundant reserves. The level of the
provision for loan losses increased in 1998 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)
22
<PAGE>
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, 1999, impaired loans had a related specific
allowance for loan losses totaling $995 thousand. There were no material
commitments to lend additional funds to customers whose loans were classified
as impaired at December 31, 1999.
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>
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
Percent Percent Percent Percent Percent
of of of of of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $2,759 14.5% $3,184 17.7% $3,278 18.5% $3,281 20.2% $3,106 21.0%
Real estate--
construction 914 11.0 586 7.5 600 8.5 407 6.8 518 7.1
Real estate--mortgage 2,038 44.0 1,980 45.3 1,648 41.0 1,744 42.4 1,232 40.1
Installment loans to
individuals and other
loans 3,713 30.5 3,296 29.5 2,187 32.0 1,857 30.6 1,352 31.8
Unallocated 500 500 654 660 674
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $9,924 100.0% $9,546 100.0% $8,367 100.0% $7,949 100.0% $6,882 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Funding Sources
Average deposits decreased slightly to $962.3 million in 1999 from $975.9
million in 1998. In 1999, the mix of interest-bearing deposits changed as
average certificates of deposit decreased 17.3%, while average interest
checking, money market and savings accounts as a group increased 7.5%. Average
certificates of deposit represented 29.2% of average deposits in 1999 and 34.9%
in 1998. Average interest checking, money market and savings accounts as a
group were 52.6% of average deposits in 1999 and 48.2% in 1998. Average demand
deposits increased 6.1% to $175.2 million and represented 18.2% of average
deposits in 1999 compared with 16.9% in 1998.
Average short-term borrowings increased $16.6 million or 39.5% to $58.5
million in 1999 from $41.9 million in 1998. 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
$106.9 million. The Corporation's liquidity position remained favorable through
the winter months of 1999, however, the need for short-term borrowings
increased during the year.
At December 31, 1999, the Corporation had short-term borrowings of $44.7
million, a decrease of $19.1 million from the $63.8 million reported at
December 31, 1998. Of the $44.7 million in short-term borrowings, $42.1 million
or 94.2% was in securities sold under agreements to repurchase. The 30%
decrease in short-term borrowings was due to the Corporation purchasing $25
million in brokered certificates of deposit to fund short term lending needs.
23
<PAGE>
Advances from the FHLB with an initial maturity of more than one year
totaled $85.2 million at December 31, 1999, versus $42.2 million at December
31, 1998. These advances are collateralized by the same collateral agreements
as short-term funds from the FHLB. Fixed interest rates on these advances
ranged from 4.58% to 7.21%, payable monthly or quarterly, with principal due at
various maturities ranging from 2001 to 2009.
On December 20, 1996, the Corporation issued $6.0 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, 1999, stockholders' equity
was $90.8 million versus $89.0 million at December 31, 1998. The Corporation
paid cash dividends of $0.56 per share in 1999, $0.48 per share in 1998, and
$0.375 per share in 1997.
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
7.76% and 7.24% at December 31, 1999 and 1998, 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 10.36% and
9.94% at December 31, 1999 and 1998, respectively, and a total risk-based
capital ratio of 12.52% and 12.07% at December 31, 1999 and 1998, 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, 1999 and 1998.
The following table shows several capital ratios for the last three years:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Average stockholders' equity to:
Average assets........................................... 7.67% 7.34% 7.26%
Average deposits......................................... 9.57 8.82 8.59
Average loans and leases................................. 10.88 10.66 10.51
Risk-based capital ratios:
Tier 1................................................... 10.36 9.94 9.52
Total.................................................... 12.52 12.07 11.80
Tier 1 Leverage ratio...................................... 7.76 7.24 6.97
</TABLE>
24
<PAGE>
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.
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, 1999, the most significant cash flows
impacting the components of the Corporation's liquidity relate to a $51.2
million increase in net loans, which was funded by an increase of $43.0 million
in long term debt.
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,
1999, indicating a liability-sensitive position in the three months or less
period, the four months to six months period, and 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 $148.4 million or 13.2% 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. This contract expired in
1999. The floor index of the contract was three-month Libor and it had 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
25
<PAGE>
the premium paid for the contract. The primary purpose of this contract was to
reduce the Corporation's exposure to a significant decline in interest rates.
Table 10
INTEREST RATE SENSITIVITY ANALYSIS
(December 31, 1999 balances in thousands)
<TABLE>
<CAPTION>
7-12 within year or
0-3 mos. 4-6 mos. mos. one year non-sensitive Total
-------- -------- -------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................. $398,271 $ 20,533 $ 53,393 $ 472,197 $390,298 $ 862,495
Investment
securities........... 3,906 1,303 5,378 10,587 251,988 262,575
Federal funds sold.... 2,700 0 0 2,700 0 2,700
Interest-bearing bal-
ances due from
banks................ 152 0 0 152 0 152
-------- -------- -------- --------- -------- ----------
Total interest-
earning assets..... $405,029 $ 21,836 $ 58,771 $ 485,636 $642,286 $1,127,922
======== ======== ======== ========= ======== ==========
Percent of total
interest-earning
assets................. 35.9 % 1.9 % 5.2 % 43.1 % 56.9% 100.0%
Interest-bearing
liabilities:
Interest checking..... $ 0 $ 0 $ 0 $ 0 $114,971 $ 114,971
Savings............... 0 0 0 0 56,426 56,426
Money market.......... 312,518 0 0 312,518 0 312,518
Certificates of
deposit of $100,000
or more.............. 34,372 23,547 22,361 80,280 3,668 83,948
Certificates of
deposit less than
$100,000............. 58,486 70,131 67,965 196,582 37,649 234,231
Short-term
borrowings........... 44,704 0 0 44,704 0 44,704
Long-term debt........ 0 0 0 0 85,200 85,200
Subordinated notes.... 0 0 0 0 11,000 11,000
-------- -------- -------- --------- -------- ----------
Total interest-
bearing
liabilities........ 450,080 93,678 90,326 634,084 308,914 942,998
Other sources--net.... 0 0 0 0 184,924 184,924
-------- -------- -------- --------- -------- ----------
Total sources--net.. $450,080 $ 93,678 $ 90,326 $ 634,084 $493,838 $1,127,922
======== ======== ======== ========= ======== ==========
Percent of total
interest-earning
assets................. 39.9 % 8.3 % 8.0 % 56.2 % 43.8% 100.0%
Interest-sensitive gap.. ($45,051) ($71,842) ($31,555) ($148,448) $148,448 --
Cumulative interest-
sensitive gap.......... (45,051) (116,893) (148,448) (148,448) -- --
Percent of total
interest-earning
assets................. (4.0)% (10.4)% (13.2)% (13.2)% -- --
</TABLE>
- --------
(1) Loan balances are stated net of unearned income and do not include
nonaccrual loans.
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.
26
<PAGE>
In January 1998, 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.
Table 11
FINANCIAL INSTRUMENTS
(Balances in thousands)
<TABLE>
<CAPTION>
Expected Maturity December 31, 1999
-------------------------------------------------------- ------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
-------- ------- ------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Loans, net of unearned
income
Fixed Rate:
Book value............. $ 84,225 $76,544 $73,652 $64,781 $77,472 $105,030 $481,704 $469,829
Weighted average
effective yield....... 8.64% 8.85% 8.76% 8.50% 8.23% 8.00% 8.47%
Variable Rate:
Book value............. $142,541 $36,784 $16,158 $15,225 $20,622 $149,461 $380,791 $380,791
Weighted average
effective yield....... 9.32% 9.03% 9.31% 9.00% 9.11% 8.91% 9.11%
Securities held-to-
maturity
Fixed Rate:
Book value............. $ 4,450 $ 3,022 $ 341 $ 0 $ 152 $ 0 $ 7,965 $ 7,971
Weighted average
effective yield....... 5.88% 5.97% 6.51% 0.00% 6.30% 0.00% 5.95%
Variable Rate:
Book value............. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Weighted average
effective yield....... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Securities available-
for-sale
Fixed Rate:
Book value............. $ 8,229 $ 5,695 $ 4,616 $17,386 $ 6,659 $184,860 $227,445 $227,445
Weighted average
effective yield....... 6.29% 6.18% 5.94% 5.77% 5.77% 6.18% 6.13%
Variable Rate:
Book value............. $ 0 $ 0 $ 0 $ 0 $ 0 $ 27,165 $ 27,165 $ 27,165
Weighted average
effective yield....... 0.00% 0.00% 0.00% 0.00% 0.00% 6.65% 6.65%
Financial Liabilities:
Time deposits
Fixed Rate:
Book value............. $293,176 $12,668 $ 2,513 $ 792 $ 171 $ 156 $309,476 $311,931
Weighted average
effective rate........ 5.33% 5.20% 5.47% 5.75% 4.98% 5.64% 5.33%
Variable Rate:
Book value............. $ 7,813 $ 838 $ 52 $ 0 $ 0 $ 0 $ 8,703 $ 8,703
Weighted average
effective rate........ 4.89% 4.90% 4.88% 0.00% 0.00% 0.00% 4.89%
Long-term debt and
subordinated notes
Fixed Rate:
Book value............. $ 0 $ 7,000 $10,200 $16,000 $ 5,000 $ 33,000 $ 71,200 $ 72,105
Weighted average
effective rate........ 0.00% 7.44% 5.42% 6.07% 5.71% 5.43% 5.79%
Variable Rate:
Book value............. $ 0 $ 0 $ 0 $ 0 $ 0 $ 25,000 $ 25,000 $ 25,000
Weighted average
effective rate........ 0.00% 0.00% 0.00% 0.00% 0.00% 4.58% 4.58%
</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.
27
<PAGE>
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, 1999.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"), which establishes new
standards for business segment reporting. Requirements of SFAS No. 131 include
reporting of (a) financial and descriptive information about reportable
operating segments, (b) a measure of segment profit or loss, certain specific
revenue and expense items and segment assets with reconciliations of such
amounts to the Corporation's financial statements, and (c) information
regarding revenues derived from the Corporation's products and services,
information about major customers and information related to geographic areas.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997
and was adopted by the Corporation on January 1, 1998.
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, 1999.
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. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133," which delays the original effective date of SFAS No. 133 until fiscal
years beginning after June 15, 2000. Adoption of SFAS No. 133 is not expected
to have a material impact on the Corporation. 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. Due to its limited
use of derivative instruments, the adoption of SFAS No. 133 has not had 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. The Corporation adopted SFAS No. 134 in 1999, and the
effects of adoption were not 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.
28
<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 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 judgement.
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 public 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 public accountants to review
audit scopes, audit reports, and fee arrangements of the independent public
accountants, in order to evaluate management's performance of its financial
reporting responsibility. Both internal auditors and independent public
accountants have access to the Audit Committee without any management present
in the discussions. Independent public accountants are recommended by the Audit
Committee to the Board of Directors for selection and ratification by the
stockholders.
Arthur Andersen LLP, as independent public 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 the Corporation's 1999
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 18, 2000
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Anchor Financial Corporation:
We have audited the accompanying consolidated balance sheet of Anchor
Financial Corporation and its subsidiaries (the Company) as of December 31,
1999, and the related statements of income, shareholders' equity and
comprehensive income, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Anchor Financial
Corporation as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Charlotte, North Carolina
February 18, 2000
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders 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
31
<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, L.L.P
Columbia, South Carolina
March 9, 1998
32
<PAGE>
Report Of Independent Accounts
To the Board of Directors
and Shareholders of
Anchor Financial Corporation
We previously audited and reported on the consolidated balance sheets as of
December 31, 1998 and the related consolidated statements of income, of changes
in stockholders' equity and comprehensive income and of cash flows of Anchor
Financial Corporation and subsidiaries for the years ended December 31, 1998
and 1997, prior to their restatement for the 1999 pooling of interests. Our
report dated February 19, 1999, made reference to the work of other auditors.
The contribution of Anchor Financial Corporation and subsidiaries to interest
and noninterest income and to net income represented 85 percent and 82 percent
of the respective restated totals for 1998 and 52 percent and 57 percent for
1997. Separate financial statements of the other companies included in the 1998
and 1997 restated consolidated financial statements were audited and reported
on separately by other auditors. We also audited the combination of the
accompanying consolidated balance sheets and statements of income, of changes
in stockholders' equity and comprehensive income and of cash flows for the
years ended December 31, 1998 and 1997 after restatement for the 1999 pooling
of interests; in our opinion, such consolidated statements have been properly
conbined on the basis described in Note 2 of the notes to consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
Columbia, South Carolina
February 19, 1999 except as to the pooling of interest described in Note 2
which date is April 9, 1999.
33
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks........................ $ 35,843,218 $ 49,347,029
Interest-bearing balances due from banks....... 151,561 8,082,081
Federal funds sold............................. 2,700,000 5,650,000
Investment securities:
Held-to-maturity, at amortized cost (fair
value of $7,971,374 in 1999 and $30,317,309
in 1998).................................... 7,965,008 29,481,031
Available-for-sale, at fair value............ 254,609,916 239,754,861
-------------- --------------
Total investment securities.................... 262,574,924 269,235,892
-------------- --------------
Total Loans, net of unearned income............ 862,495,316 810,890,670
Less--allowance for loan losses.............. (9,924,114) (9,546,139)
-------------- --------------
Net loans...................................... 852,571,202 801,344,531
-------------- --------------
Premises and equipment......................... 27,112,076 27,492,886
Investment in unconsolidated subsidiary........ 0 3,050,135
Other assets................................... 25,889,826 19,255,881
-------------- --------------
Total assets............................... $1,206,842,807 $1,183,458,435
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits.............................. $ 164,562,983 $ 169,219,776
NOW and money market accounts................ 427,488,660 407,438,747
Time deposits $100,000 and over.............. 83,947,691 89,885,760
Other time and savings deposits.............. 290,657,318 301,795,611
-------------- --------------
Total deposits................................. 966,656,652 968,339,894
Federal funds purchased and securities sold
under agreements to repurchase................ 42,091,707 62,424,543
Other short-term borrowings.................... 2,611,741 1,396,927
Long-term debt................................. 85,200,000 42,187,000
Subordinated notes............................. 11,000,000 11,000,000
Other liabilities.............................. 8,509,863 9,108,376
-------------- --------------
Total liabilities.............................. 1,116,069,963 1,094,456,740
-------------- --------------
Stockholders' Equity:
Common stock, no par value; 50,000,000 shares
authorized; shares issued and outstanding--
8,093,476 in 1999 and 8,085,779 in 1998....... 54,147,996 54,653,232
Retained earnings.............................. 41,673,366 34,025,512
Accumulated other comprehensive income (loss).. (4,135,143) 1,417,951
Unearned ESOP shares........................... (913,375) (1,095,000)
-------------- --------------
Total stockholders' equity..................... 90,772,844 89,001,695
-------------- --------------
Total liabilities and stockholders' equity..... $1,206,842,807 $1,183,458,435
============== ==============
</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 INCOME
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans............................ $75,302,768 $75,095,635 $68,103,342
Interest on investment securities:
Taxable............................................. 15,231,010 14,571,482 13,214,174
Non-taxable......................................... 1,194,239 1,053,071 853,435
Other interest income................................. 495,789 1,767,143 966,540
----------- ----------- -----------
Total interest income................................. 92,223,806 92,487,331 83,137,491
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits.................................. 31,926,101 36,348,454 32,779,103
Interest on short-term borrowings..................... 2,782,122 2,100,000 1,574,109
Interest on long-term borrowings...................... 3,714,457 2,921,992 2,250,850
Interest on subordinated notes........................ 930,946 931,224 931,225
----------- ----------- -----------
Total interest expense................................ 39,353,626 42,301,670 37,535,287
----------- ----------- -----------
Net interest income................................... 52,870,180 50,185,661 45,602,204
Provision for loan losses............................. 2,427,250 2,922,000 2,534,000
----------- ----------- -----------
Net interest income after provision for loan losses... 50,442,930 47,263,661 43,068,204
----------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts................... 4,472,773 4,540,025 4,331,841
Commissions and fees.................................. 2,835,585 2,478,803 1,863,519
Trust income.......................................... 2,222,281 1,681,585 1,409,863
Gains on sales of mortgage loans...................... 1,263,445 1,570,775 768,126
Gains (losses) on sales of investment securities,
net.................................................. 82,817 275,473 (8,860)
Other operating income................................ 1,382,316 848,139 797,003
----------- ----------- -----------
Total noninterest income.............................. 12,259,217 11,394,800 9,161,492
----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits........................ 22,717,673 22,797,024 19,015,674
Net occupancy expense................................. 3,051,531 2,796,896 2,620,543
Equipment expense..................................... 2,678,097 2,957,343 2,937,905
Other operating expense............................... 13,612,948 13,955,372 11,052,863
----------- ----------- -----------
Total noninterest expense............................. 42,060,249 42,506,635 35,626,985
----------- ----------- -----------
Income before income taxes and equity in net income of
unconsolidated subsidiary............................ 20,641,898 16,151,826 16,602,711
Equity in net income of unconsolidated subsidiary..... 56,103 242,324 14,888
----------- ----------- -----------
Income before income taxes............................ 20,698,001 16,394,150 16,617,599
Provision for income taxes............................ 7,398,852 6,182,870 5,935,404
----------- ----------- -----------
Net income............................................ $13,299,149 $10,211,280 $10,682,195
=========== =========== ===========
Net Income per share--basic........................... $ 1.66 $ 1.28 $ 1.36
Net Income per share--diluted......................... $ 1.61 $ 1.23 $ 1.29
Weighted average common shares outstanding--basic..... 8,016,908 7,959,766 7,869,812
Weighted average common shares outstanding--diluted... 8,285,446 8,285,260 8,255,862
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
35
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Accumulated
Common Stock other Total
---------------------- Retained comprehensive Unearned stockholders'
Shares Amount earnings income ESOP shares equity
--------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 7,932,482 $52,803,455 $18,070,421 $ 299,012 $ (633,250) $70,539,638
Comprehensive Income
Net income................................. 10,682,195 10,682,195
Other comprehensive income, net of tax
Unrealized gains on investment securities.. 619,393 619,393
-----------
Total Comprehensive Income............... 11,301,588
-----------
Common stock issued pursuant to:
Dividend Reinvestment Plan................. 7,542 202,473 (10,902) 191,571
Stock Option Plan.......................... 43,362 282,352 (4,000) 278,352
Fractional shares paid in stock split....... (21) (123) (2,526) (2,649)
Tax benefit from exercised stock options.... 218,031 218,031
Change in unearned ESOP shares.............. 149,036 26,612 106,625 282,273
Cash dividends ($0.375 per share)........... (1,440,429) (1,440,429)
Cash dividends from:
Acquired entities.......................... (682,871) (682,871)
--------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997................ 7,983,365 $53,655,224 $26,638,500 $ 918,405 $ (526,625) $80,685,504
Comprehensive Income
Net income................................. 10,211,280 10,211,280
Other comprehensive income, net of tax
Unrealized gains on investment
securities................................ 499,546 499,546
-----------
Total Comprehensive Income............... 10,710,826
-----------
Common stock issued pursuant to:
Dividend Reinvestment Plan................. 7,483 295,067 295,067
Stock Option Plan.......................... 95,358 350,957 350,957
Fractional shares paid in acquisitions...... (427) (15,718) (15,718)
Change in unearned ESOP shares.............. 351,984 30,971 (568,375) (185,420)
Cash dividends ($0.48 per share)............ (2,478,940) (2,478,940)
Cash dividends from:
Acquired entities.......................... (360,581) (360,581)
--------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998................ 8,085,779 $54,653,232 $34,025,512 $ 1,417,951 $(1,095,000) $89,001,695
Comprehensive Income
Net income................................. 13,299,149 13,299,149
Other comprehensive income, net of tax
Unrealized loss on investment securities... (5,553,094) (5,553,094)
-----------
Total Comprehensive Income............... 7,746,055
-----------
Common stock issued pursuant to:
Stock Option Plan.......................... 88,551 304,183 304,183
Tax benefit from exercised stock options.... 1,165,697 1,165,697
Dissenters from Bailey Merger............... (63,322) (1,726,469) (402) (1,726,871)
Fractional shares paid in acquisitions...... (6) (163) (163)
Change in unearned ESOP shares.............. 229,923 37,875 181,625 449,423
Shares repurchased.......................... (17,526) (478,570) (478,570)
Cash dividends ($0.72 per share)............ (5,688,605) (5,688,605)
--------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999................ 8,093,476 $54,147,996 $41,673,366 $(4,135,143) $ (913,375) $90,772,844
========= =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
36
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income........................ $ 13,299,149 $ 10,211,280 $ 10,682,195
Adjustments to reconcile net
income to net cash provided by
operating activities:
Accretion and amortization of
investment securities.......... 185,710 (404,457) (321,228)
Depreciation and amortization... 3,258,573 3,234,897 3,060,555
Provision for loan losses....... 2,427,250 2,922,000 2,534,000
(Gains) losses on sales of
investment securities, net..... (82,817) (275,473) 8,860
Gains on sales of mortgage
loans.......................... (1,263,445) (1,570,775) (768,126)
Losses (gains) on sales of
premises and equipment......... 6,174 (114,359) 8,257
Change in interest receivable... (168,401) 183,706 (1,201,510)
Change in other assets.......... 1,965,885 (1,634,160) (319,895)
Change in deferred taxes........ (3,800,182) (1,128,882) 190,213
Change in interest payable...... (243,347) (329,057) 1,267,282
Change in other liabilities..... 941,233 1,999,652 (371,513)
Equity in net income of
unconsolidated subsidiary...... (56,103) (245,393) (14,888)
Origination of mortgage loans
held for sale.................. (80,494,317) (112,816,061) (16,251,094)
Proceeds from sales of mortgage
loans held for sale............ 82,398,712 114,466,551 16,616,789
Net change in unearned ESOP
shares......................... 449,423 (185,420) 282,273
------------ ------------- -------------
Net cash provided by operating
activities................... 18,823,497 14,314,049 15,402,170
------------ ------------- -------------
Cash flows from investing
activities:
Purchase of investment securities
held-to-maturity................. 0 (5,795,619) (11,312,066)
Proceeds from maturities of
investment securities held-to-
maturity......................... 21,502,248 14,650,460 10,627,820
Purchase of investment securities
available-for-sale............... (94,019,821) (195,912,914) (96,822,491)
Proceeds from sales of investment
securities available-for-sale.... 59,901,085 69,755,058 25,430,216
Proceeds from maturities of
investment securities available-
for-sale......................... 9,923,023 89,212,463 37,544,172
Net change in loans............... (54,294,871) (36,037,502) (135,031,295)
Capital expenditures.............. (2,136,159) (2,839,244) (3,584,587)
Other, net........................ 0 1,772,892 (378,499)
------------ ------------- -------------
Net cash used for investing
activities................... (59,124,495) (65,194,406) (173,526,730)
------------ ------------- -------------
Cash flows from financing
activities:
Net change in deposits............ (1,683,242) 35,828,039 131,183,615
Net change in federal funds
purchased and securities sold
under agreements to repurchase... (20,332,836) 25,357,705 16,295,968
Net change in other short-term
borrowings....................... 1,214,814 (3,668,523) 1,884,470
Net change in long-term debt...... 43,013,000 (2,489,167) 16,976,167
Proceeds from issuance of stock
in accordance with:
Stock Option Plan............... 304,183 350,957 278,352
Dividend Reinvestment Plan...... 0 295,067 191,571
Cash dividends paid............. (4,393,648) (2,839,521) (2,123,300)
Purchase common stock........... (478,570) 0 0
Other, net...................... (1,727,034) (15,718) 215,282
------------ ------------- -------------
Net cash provided by financing
activities................... 15,916,667 52,818,839 164,902,125
------------ ------------- -------------
Net change in cash and cash
equivalents....................... (24,384,331) 1,938,482 6,777,565
Cash and cash equivalents at
January 1......................... 63,079,110 61,140,628 54,363,063
------------ ------------- -------------
Cash and cash equivalents at
December 31....................... $ 38,694,779 $ 63,079,110 $ 61,140,628
============ ============= =============
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest........................ $ 39,596,973 $ 42,630,451 $ 36,276,422
Income taxes.................... 8,551,004 6,554,586 6,017,986
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
37
<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 April 9, 1999, Anchor Financial Corporation merged with Bailey Financial
Corporation (Bailey). 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 mergers had been in
effect for all periods presented. All expenses relating to the poolings-of-
interests have been recognized in determining the net income of the Corporation
in 1999.
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 and Anchor Automated Services,
Inc. (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 and all share information have been restated for all years
to reflect the impact of the stock split.
New Accounting Pronouncements
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards requiring balance sheet recognition of all derivative instruments at
fair value. The statement specifies that changes in the fair value of
derivative instruments be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows derivative gains and losses to offset related results on hedged items in
the income statement. Companies must formally document, designate and assess
the effectiveness of transactions utilizing hedge accounting. In June, 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133",
which delays the original effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. Adoption of SFAS No. 133 is not expected to have
a material impact on the Corporation.
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.
38
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
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 at
the balance sheet date. 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
39
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
bank acquisitions in 1991 and 1993 and included in other assets were $528,830
and $807,458 at December 31, 1999 and 1998, 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.
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 April 9, 1999, the Corporation completed the merger of Bailey with and
into the Corporation through the issuance of 16.32 shares of the Corporation's
common stock for each share of outstanding common stock of Bailey, or 91,260
(95,140 total shares outstanding, less 3,880 of dissenting shares). The merger
was accounted for as a pooling-of-interests.
40
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The merger was accounted for as a pooling-of-
interests.
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 merger was accounted for as a pooling-of-interests.
The consolidated financial statements of the Corporation and its
subsidiaries have been prepared to give retroactive effect to the mergers with
ComSouth, M&M, and Bailey 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, 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. The related unrealized gain of $842,000 (net
of tax effect of $501,000) was recorded as a component of stockholders' equity
as of December 31, 1997.
As of December 31, 1997, M&M owned 5,755 shares of the Corporation's common
stock. 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) was recorded as a component of
stockholders' equity as of December 31, 1997.
Separate results of the pooled entities for the period beginning January 1,
1999 through April 9, 1999, and for the two years ended December 31, 1998, in
thousands, are as follows:
<TABLE>
<CAPTION>
Anchor Bailey Adjustments Combined
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Total Interest And Noninterest Income
1999.................................. $21,325 $ 3,816 (1) $ 25,141
1998.................................. 87,865 15,813 204(2)(3) 103,882
1997.................................. 77,516 14,783 92,299
Net Interest Income
1999.................................. 11,210 1,728 (1) 12,938
1998.................................. 43,092 7,031 63(3) 50,186
1997.................................. 38,720 6,882 45,602
Net Income
1999.................................. 3,174 491 (1) 3,665
1998.................................. 8,122 2,090 10,212
1997.................................. 9,237 1,445 10,682
</TABLE>
- --------
(1) Results of operations from January 1, 1999 through April 9, 1999, the date
of the Anchor and Bailey merger.
(2) The consolidated financial statements have been adjusted to exclude from
interest income and interest expense $42 that Bailey paid to the
Corporation in interest on long-term debt for the year ended December 31,
1998.
(3) The Corporation reclassified certain items classified by Bailey as
noninterest income to interest income and certain items classified by
Bailey as noninterest expense to noninterest income.
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, 1999 was approximately $17,898,000.
41
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--INVESTMENT SECURITIES
The amortized cost and the estimated fair value of investment securities
held-to-maturity at December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
---------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities............. $2,348,731 $ 3,129 $ 0 $2,351,860 $ 9,357,924 $113,639 $ 0 $ 9,471,563
Securities of other U.S.
Government agencies and
corporations........... 3,648,015 0 15,694 3,632,321 4,396,209 71,829 0 4,468,038
Mortgage--backed
securities............. 0 0 0 0 0 0 0 0
Obligations of states
and political
subdivisions........... 1,968,262 18,931 0 1,987,193 15,726,898 650,810 0 16,377,708
---------- ------- ------- ---------- ----------- -------- --- -----------
Total debt
securities........... $7,965,008 $22,060 $15,694 $7,971,374 $29,481,031 $836,278 $ 0 $30,317,309
========== ======= ======= ========== =========== ======== === ===========
</TABLE>
The amortized cost and the estimated fair value of investment securities
available-for-sale at December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities............. $ 9,174,183 $ 37,708 $ 5,922 $ 9,205,969 $ 24,014,477 $ 689,458 $ 0 $ 24,703,935
Securities of other U.S.
Government agencies and
corporations........... 93,523,903 4,429 3,030,518 90,497,814 115,659,220 1,247,529 347,970 116,558,779
Mortgage--backed
securities............. 126,871,464 5,521 5,066,645 121,810,340 83,306,455 723,489 355,928 83,674,016
Obligations of states
and political
subdivisions........... 22,223,888 25,555 1,194,313 21,055,130 9,285,325 235,001 41,159 9,479,167
------------ ---------- ---------- ------------ ------------ ---------- -------- ------------
Total debt securities... 251,793,438 73,213 9,297,398 242,569,253 232,265,477 2,895,477 745,057 234,415,897
Marketable equity
securities............. 9,025,141 3,015,522 0 12,040,663 5,338,964 0 0 5,338,964
------------ ---------- ---------- ------------ ------------ ---------- -------- ------------
Total investment
securities........... $260,818,579 $3,088,735 $9,297,398 $254,609,916 $237,604,441 $2,895,477 $745,057 $239,754,861
============ ========== ========== ============ ============ ========== ======== ============
</TABLE>
42
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1995, Bailey Financial Corporation, along with a group of investors,
formed Rock Hill Bank & Trust. As of 1997, Bailey owned 100% of Class B common
stock, representing 51% of total ownership. On August 3, 1998, Rock Hill Bank &
Trust was involved in a secondary stock offering, reducing Bailey's investment
to 22%. However, Bailey maintained two Board Members on the Rock Hill Bank &
Trust Board of Directors and maintained effective control. Therefore, Bailey's
investment in Rock Hill Bank & Trust was unconsolidated on Bailey's books from
1995 through April 9, 1999, the date of the Bailey and Anchor merger, and is
presented as such in these consolidated financial statements for the periods
ending December 31, 1998 and 1997.
Subsequent to the Bailey and Anchor merger, the Corporation no longer
maintained two board members on the Rock Hill Bank & Trust board of directors.
As a result, the Corporation's investment in Rock Hill Bank & Trust is now
classified as an available-for-sale equity investment in Anchor's investment
portfolio.
The amortized cost and estimated fair value of debt securities held-to-
maturity at December 31, 1999, 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>
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
Due in one year or less.................................. $4,450,123 $4,457,184
Due after one year through five years.................... 3,514,885 3,514,190
Due after five years through ten years................... 0 0
Due after ten years...................................... 0 0
---------- ----------
Total.................................................. $7,965,008 $7,971,374
========== ==========
</TABLE>
The amortized cost and estimated fair value of debt securities available-
for-sale at December 31, 1999, 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.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------ ------------
<S> <C> <C>
Due in one year or less.............................. $ 6,233,304 $ 6,239,281
Due after one year through five years................ 36,914,196 36,345,080
Due after five years through ten years............... 79,001,864 76,580,183
Due after ten years.................................. 129,644,074 123,404,709
------------ ------------
Total.............................................. $251,793,438 $242,569,253
============ ============
</TABLE>
Investment securities with an amortized cost of $138,405,000 and
$134,816,000, at December 31, 1999 and 1998, 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
$59,901,085, $69,755,058, and $25,430,216 in 1999, 1998, and 1997,
respectively. Gross realized gains of $198,424, $377,566, and $49,076 were
realized on these sales during 1999, 1998, and 1997, respectively. Gross
realized losses of $115,607, $150,817, and $57,936 were realized on these sales
during 1999, 1998, and 1997, respectively.
There were no sales of held-to-maturity investment securities during 1999,
1998, or 1997.
43
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Commercial, financial, and agricultural............. $125,409,308 $143,755,473
Real estate--construction........................... 94,891,597 60,811,144
Real estate--mortgage............................... 379,852,739 369,060,680
Installment loans to individuals.................... 191,028,665 170,549,942
Other............................................... 71,472,273 66,865,143
------------ ------------
Gross Loans......................................... 862,654,582 811,042,382
Unearned income..................................... (159,266) (151,712)
------------ ------------
Total Loans......................................... $862,495,316 $810,890,670
============ ============
</TABLE>
Loans made by the Corporation to directors, executive officers, and their
associates totaled $15,720,495 and $13,375,792 at December 31, 1999 and 1998,
respectively. During 1999, loans made and other additions totaled $9,311,212
and repayments and other deductions totaled $6,966,509. 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
$274,625 and $915,575 in 1999 and 1998, 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.
Activity in the allowance for loan losses for the three years ended December
31, 1999 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year........... $ 9,546,139 $ 8,366,713 $ 7,948,659
Provision for loan losses.............. 2,427,250 2,922,000 2,534,000
Recoveries on loans previously charged
off................................... 576,141 962,128 488,627
Loans charged off...................... (2,625,416) (2,704,702) (2,604,573)
----------- ----------- -----------
Balance at end of year............... $ 9,924,114 $ 9,546,139 $ 8,366,713
=========== =========== ===========
</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, 1999 and 1998 held by the Corporation, are summarized below:
44
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Nonaccrual loans........................................ $2,721,057 $2,987,753
Loans past due 90 days or more.......................... 0 34,000
Other real estate owned................................. 346,727 810,157
Interest income which would have been recorded on
nonaccrual loans pursuant to original terms............ 240,898 265,245
Interest income recorded on nonaccrual loans............ 148,790 83,410
</TABLE>
At December 31, 1999 and 1998, impaired loans had a related specific
allowance for loan losses totaling $994,873, and $943,202, respectively. There
were no material commitments to lend additional funds to customers whose loans
were classified as impaired at December 31, 1999 and 1998.
At December 31, 1999 and 1998, 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>
1999 1998
------------ ------------
<S> <C> <C>
Land................................................ $ 7,080,487 $ 6,933,207
Buildings and improvements.......................... 21,639,594 20,831,905
Leasehold improvements.............................. 1,282,710 1,264,075
Furniture and equipment............................. 18,717,389 20,561,569
Construction in process............................. 471,799 277,267
------------ ------------
Total............................................. 49,191,979 49,868,023
Less-Accumulated depreciation....................... (22,079,903) (22,375,137)
------------ ------------
Net premises and equipment........................ $ 27,112,076 $ 27,492,886
============ ============
</TABLE>
Provisions for depreciation included in noninterest expense in 1999, 1998,
and 1997 were $2,580,860, $2,651,333 and $2,619,409, respectively.
The Corporation has entered into various noncancelable 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 1999, 1998, and 1997 were $683,769, $578,734, and $554,641, respectively.
At December 31, 1999, future minimum rental commitments under noncancelable
operating leases that have a remaining life in excess of one year are
summarized as follows:
<TABLE>
<S> <C>
2000.......................................................... $ 593,196
2001.......................................................... 553,578
2002.......................................................... 440,848
2003.......................................................... 272,605
2004.......................................................... 258,472
2005 and thereafter........................................... 200,770
----------
Total minimum obligation...................................... $2,319,469
==========
</TABLE>
45
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--INCOME TAXES
The components of consolidated income tax expense (benefit) for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal................................... $6,694,477 $ 6,698,180 $5,098,361
State..................................... 528,196 613,572 646,830
---------- ----------- ----------
Total....................................... 7,222,673 7,311,752 5,745,191
---------- ----------- ----------
Deferred:
Federal................................... 133,867 (1,056,987) 148,691
State..................................... 42,312 (71,895) 41,522
---------- ----------- ----------
Total....................................... 176,179 (1,128,882) 190,213
---------- ----------- ----------
Provision for income taxes.................. $7,398,852 $ 6,182,870 $5,935,404
========== =========== ==========
</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>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation over book......................... $(1,083,794) $(1,073,495)
Unrealized gain--SFAS No. 115...................... 0 (755,295)
Other.............................................. (252,523) (233,596)
----------- -----------
Total deferred tax liabilities....................... (1,336,317) (2,062,386)
----------- -----------
Deferred tax assets:
Allowance for loan losses.......................... 2,819,015 2,796,698
Deferred loan fees and costs....................... 27,694 45,658
Deferred compensation.............................. 615,828 411,333
State net operating loss carryforward.............. 355,116 304,668
Unrealized loss--SFAS No. 115...................... 2,094,827 0
Other.............................................. 316,421 370,312
----------- -----------
Total deferred tax assets............................ 6,228,901 3,928,669
----------- -----------
Net deferred tax asset before valuation allowance.... 4,892,584 1,866,283
Less: Valuation allowance............................ (157,220) (187,220)
----------- -----------
Net deferred tax asset............................... $ 4,735,364 $ 1,679,063
=========== ===========
</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 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 (35% for 1999, 34% for 1998
and 1997) to pretax income as a result of the following differences:
46
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Tax expense at statutory rate.............. $7,244,300 $5,574,011 $5,649,983
Increase (decrease) in taxes resulting
from:
State income tax expense, net of federal
income tax benefit...................... 370,830 321,089 427,552
Non-taxable interest on investment
securities.............................. (362,788) (354,563) (293,999)
Non-deductible merger related costs...... 212,804 498,011 0
Other, net............................... (66,294) 144,322 151,868
---------- ---------- ----------
Total...................................... $7,398,852 $6,182,870 $5,935,404
========== ========== ==========
</TABLE>
NOTE 8--SHORT-TERM BORROWINGS
Short-term borrowings at December 31 include the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Federal funds purchased............................. $ 0 $19,400,000
Securities sold under agreements to repurchase...... 42,091,707 43,024,543
----------- -----------
Federal funds purchased and securities sold under
agreements to repurchase........................... 42,091,707 62,424,543
----------- -----------
Other short-term borrowings......................... 2,611,741 1,396,927
----------- -----------
Total short-term borrowings....................... $44,703,448 $63,821,470
=========== ===========
Weighted average interest rate at December 31....... 4.77% 4.52%
Weighted average interest rate during the year...... 4.76 5.87
Maximum amount outstanding at any month-end......... $81,005,859 $64,823,257
Average amount outstanding during the year.......... 58,471,334 35,770,542
</TABLE>
The Bank has a line of credit with the Federal Home Loan Bank ("FHLB") under
which short-term and long-term funds may be borrowed up to 16% of total assets.
At December 31, 1999, 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 $106.9 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,
1999. 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 $85,200,000 at December 31, 1999. 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 4.58% to 7.21%, payable
monthly or quarterly, with principal due at various maturities ranging from
2001 to 2009.
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
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. At December 31, 1999,
47
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$10,000,000 of 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>
<S> <C>
2000................................................................ $ 0
2001................................................................ 1,000,000
2002................................................................ 10,200,000
2003................................................................ 16,000,000
2004................................................................ 5,000,000
2005 and thereafter................................................. 64,000,000
-----------
Total............................................................... $96,200,000
===========
</TABLE>
NOTE 10--COMPARISON OF OTHER OPERATING EXPENSE
Other operating expense for the years ended December 31 includes the
following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Advertising and promotional materials...... $ 1,006,320 $ 1,124,907 $ 1,017,131
FDIC insurance assessment.................. 104,789 99,044 83,000
Legal(1)................................... 734,686 725,640 982,939
Supplies................................... 834,037 826,495 794,245
Telephone and data communications.......... 1,145,887 1,051,028 793,187
Other professional(2)...................... 801,738 1,601,747 605,677
Other losses(3)............................ 671,774 1,226,404 132,414
Other...................................... 8,313,717 7,300,107 6,644,270
----------- ----------- -----------
Total.................................... $13,612,948 $13,955,372 $11,052,863
=========== =========== ===========
</TABLE>
- --------
(1) Legal expense for the years ended December 31, 1999 and 1998 includes
nonrecurring charges of $80,150 and $265,710, respectively, related to the
costs associated with completing the acquisition of Bailey in 1999 and the
acquisitions of ComSouth and M&M in 1998.
(2) Other professional expense for the years ended December 31, 1999 and 1998
includes nonrecurring charges of $423,218 and $1,033,001, respectively,
related to the costs associated with completing the acquisitions mentioned
above.
(3) Other losses for the years ended December 31, 1999 and 1998 include
nonrecurring charges of $591,266 and $677,209, respectively, 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 established 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
48
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income per share--basic computation
Net income............................ $13,299,149 $10,211,280 $10,682,195
Income available to common
shareholders......................... $13,299,149 $10,211,280 $10,682,195
=========== =========== ===========
Weighted average common shares
outstanding.......................... 8,076,644 8,022,676 7,933,069
Unallocated ESOP Shares............... (59,736) (62,910) (63,257)
----------- ----------- -----------
Weighted average common shares
outstanding--basic................... 8,016,908 7,959,766 7,869,812
----------- ----------- -----------
Net income per share--basic........... $ 1.66 $ 1.28 $ 1.36
=========== =========== ===========
Net income per share--diluted
computation
Income available to common
shareholders......................... $13,299,149 $10,211,280 $10,682,195
=========== =========== ===========
Weighted average common shares
outstanding--basic................... 8,016,908 7,959,766 7,869,812
Incremental shares from assumed
conversions:
Stock Options......................... 268,538 325,494 386,050
----------- ----------- -----------
Weighted average common shares
outstanding--diluted................. 8,285,446 8,285,260 8,255,862
----------- ----------- -----------
Net income per share--diluted......... $ 1.61 $ 1.23 $ 1.29
=========== =========== ===========
</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, and Bailey had a 401(k) plan which was terminated in 1999.
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. The
401(k) Plans allow for discretionary employer matching contributions and/or
profit sharing contributions. For 1999, 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, 1999, 1998, and 1997 were $1,033,977,
$1,064,358 and $715,868, 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, 1999, the ESOP owned 358,595 shares of Corporation stock of which
51,839 shares were pledged to secure loans outstanding. The remainder were
allocated to individual accounts of participants. At December 31, 1999 and
1998, the principal balance outstanding on the loans was $913,375 and
$1,095,000, 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
49
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999 and 1998, the historical cost of unallocated shares of
$913,375 and $1,095,000, respectively were reflected as a reduction of
stockholders' equity. Compensation expense related to the ESOP of $668,102,
$644,116, and $409,532, respectively, has been included in employee benefits
expense for the three years ended December 31, 1999, 1998, and 1997 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.
Bailey sponsored a noncontributory defined benefit pension plan that covered
substantially all of its employees. Pension benefits are based on salary and
years of service. All employees are vested in the plan after five years of
service. The actuarially determined pension benefits are based on the projected
unit credit method. During 1999 and 1998, the Company's contributions to the
plan satisfied minimum funding requirements. During 1999, the Company formally
amended the pension plan to provide for its termination. Plan participants
ceased to accrue additional pension benefits as of April 7, 1999. The portion
of the projected benefit obligation based on future compensation levels beyond
April 7, 1999 is $514,000. As a result, the Company recognized a curtailment
gain of $514,000 as of March 16, 1999, the date of the pension plan amendment.
The Company currently is seeking to obtain the appropriate regulatory approvals
for termination of the pension plan.
Based on the latest actuarial information available, the following tables
provide a reconciliation of benefit obligations, plan assets, and funded status
of the plan. Plan assets are stated ar a fair value and consist primarily of
marketable equity securities, corporate indebtedness and U.S. Government
indebtedness. The minimum pension liability will change from year to year as a
result of revisions to actuarial assumptions, experience gains or losses and
settlement rate changes.
<TABLE>
<CAPTION>
Change in Projected Benefit Obligation 1999 1998
- -------------------------------------- ---------- ----------
<S> <C> <C>
Projected benefit obligation, January 1,................ $3,206,990 $3,237,389
Service cost.......................................... 43,668 175,210
Interest cost......................................... 190,273 215,490
Benefits paid......................................... (579,961) (106,001)
Curtailment, of projected benefit obligation.......... (463,918) 0
(Gain)/Loss........................................... 28,157 (315,098)
---------- ----------
Projected benefit obligation, December 31,.............. $2,425,209 $3,206,990
========== ==========
<CAPTION>
Change in Plan Assets 1999 1998
- --------------------- ---------- ----------
<S> <C> <C>
Fair value of plan assets, January 1,................... $3,676,012 $3,061,648
Actual return on plan assets.......................... 89,798 492,740
Employer contributions................................ 34 67,699
Benefits paid......................................... (579,961) (106,001)
Other, net............................................ 43,304 159,926
---------- ----------
Fair value of plan assets, December 31,................. $3,229,187 $3,676,012
========== ==========
</TABLE>
50
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Net Amount Recognized 1999 1998
- --------------------- -------- --------
<S> <C> <C>
Funded Status............................................... $803,978 $469,022
Unrecognized transition (asset) liability................... (46,083) (57,604)
Recognized prior service cost............................... 0 (50,733)
Unrecognized net gain....................................... (86,211) (268,734)
-------- --------
Net amount recognized....................................... $671,684 $ 91,951
======== ========
<CAPTION>
Reconciliation of Net Pension Asset (Liability) 1999 1998
- ----------------------------------------------- -------- --------
<S> <C> <C>
Prepaid pension cost, January 1,............................ $ 91,951 $142,499
Contributions............................................. 34 67,699
Net periodic interest cost................................ 66,166 (118,247)
Curtailment of projected benefit obligation and
unrecognized prior service cost.......................... 513,533 0
-------- --------
Prepaid (accrued) pension cost, December 31,................ $671,684 $ 91,951
======== ========
<CAPTION>
December 31,
------------------
Weighted Average Assumptions 1999 1998
- ---------------------------- -------- --------
<S> <C> <C>
Weighted average assumed discount rate...................... 7.50% 7.50%
Weighted average expected long-term rate of return on plan
assets..................................................... 8.00% 8.00%
Assumed rate of annual compensation increases............... 5.00% 5.00%
</TABLE>
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 $441,448, $584,364 and $114,272 for 1999,
1998 and 1997, 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 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.
51
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity under the plans is summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- --------------------------
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................ 548,856 $11.50 624,223 $ 9.43 540,323 $ 7.45
Granted................. -- -- 45,380 34.67 127,162 16.87
Exercised............... (107,437) (8.55) (112,799) (8.57) (42,763) (6.51)
Expired or cancelled.... (26,915) (6.72) (7,948) (22.76) (499) (9.67)
--------- ------ --------- ------- -------- ------
Outstanding at end of
year................... 414,504 $10.02 548,856 $ 11.50 624,223 $ 9.43
========= ====== ========= ======= ======== ======
Options exercisable at
end of year............ 406,098 $10.02 499,527 $ 9.11 441,555 $ 7.45
Weighted-average fair
value of options
granted during the
year................... $ -- $ 20.63 $ 12.49
</TABLE>
At December 31, 1999, 406,098 optioned shares were exercisable at prices
between $0.89 and $39.00 per share for a total of $4,067,841. 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, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at December 31 Contractual Life Exercise Price at December 31 Exercise Price
-------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.89-5.92 125,443 2.3 Years $ 4.21 125,443 $ 4.21
$ 6.87-15.33 251,995 5.1 Years 10.10 251,995 10.10
$22.00-39.00 37,066 8.1 Years 34.08 28,660 34.75
</TABLE>
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." 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 1999, 1998 and 1997 as indicated below:
<TABLE>
<CAPTION>
As Reported Pro Forma
----------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income.............. $13,299,149 $10,211,280 $10,682,195 $13,178,501 $9,507,421 $10,500,653
Net income per share--
basic.................. $ 1.66 $ 1.28 $ 1.36 $ 1.64 $ 1.19 $ 1.33
Net income per share--
diluted................ $ 1.61 $ 1.23 $ 1.29 $ 1.59 $ 1.15 $ 1.27
</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 and
1997: a risk-free interest rate of 5.53% and 6.45%, a dividend yield of 1.50%
and 1.53%, an expected
52
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
life of 10 years and 8.56 years, and a volatility ratio of 43% and 16%,
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, 1999 and 1998.
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 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
53
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 markets prices or dealer quotes.
The estimated fair values (in thousands) of the Corporation's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments...... $ 38,695 $ 38,695 $ 63,080 $ 63,080
Investment securities................ 262,575 262,581 269,236 270,072
Loans................................ 852,571 840,696 801,344 808,622
Financial Liabilities:
Deposits............................. 966,657 947,374 968,340 969,930
Short-term borrowings................ 44,703 44,703 63,822 63,822
Long-term debt and subordinated
notes............................... 96,200 97,105 53,187 54,903
<CAPTION>
1999 1998
------------------- -------------------
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Off-Balance Sheet Financial
Instruments:
Commitments to extend credit......... $243,787 $243,054 $217,747 $217,800
Standby letters of credit............ 3,751 3,751 7,845 7,845
Interest rate contracts.............. 0 0 25,000 42
</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.
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
54
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999 and 1998 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%. The Corporation paid $102,500 for the contract. The
contract expired in September 1999. The notional and estimated fair value of
this interest rate contract at December 31, 1998 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, 1999, that the Corporation and the Bank
meet all capital adequacy requirements to which they are subject.
As of December 31, 1999, 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 ratios as set forth in the table. There are no conditions or events
since December 31, 1999 that management believes have changed either the
Corporation's or the Bank's capital classifications.
55
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Corporation's and the Bank's actual capital amount and ratios are also
presented in the table. (Dollars in thousands)
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
-------------- ------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk-Weighted
Assets)
Anchor Financial
Corporation.......... $115,114 12.52% $73,527 8.00% $ 91,909 10.00%
The Anchor Bank....... 108,421 11.84 73,256 8.00 91,570 10.00
Tier 1 Capital
(to Risk-Weighted
Assets)
Anchor Financial
Corporation.......... 95,190 10.36 36,764 4.00 55,146 6.00
The Anchor Bank....... 93,997 10.27 36,628 4.00 54,942 6.00
Tier 1 Capital
(to Average Assets)
Anchor Financial
Corporation.......... 95,190 7.76 49,083 4.00 61,353 5.00
The Anchor Bank....... 93,997 7.70 48,853 4.00 61,066 5.00
As of December 31, 1998:
Total Capital
(to Risk-Weighted
Assets)
Anchor Financial
Corporation.......... 103,597 12.07 68,682 8.00 85,852 10.00
The Anchor Bank....... 99,639 11.63 68,568 8.00 85,711 10.00
Tier 1 Capital
(to Risk-Weighted
Assets)
Anchor Financial
Corporation.......... 85,300 9.94 34,341 4.00 51,511 6.00
The Anchor Bank....... 85,593 9.99 34,284 4.00 51,426 6.00
Tier 1 Capital
(to Average Assets)
Anchor Financial
Corporation.......... 85,300 7.24 47,134 4.00 58,918 5.00
The Anchor Bank....... 85,593 7.31 46,867 4.00 58,583 5.00
</TABLE>
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 Bailey,
ComSouth, and M&M which were accounted for as poolings of interest.
The Parent's condensed balance sheets at December 31, 1999 and 1998, and
condensed statements of income and of cash flows for each of the three years in
the period ended December 31, 1999 are presented below.
56
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Balance Sheet Data
Assets:
Cash and cash equivalents........................... $ 30,168 $ 669,196
Repurchase agreements............................... 1,537,617 1,894,695
Investment in bank subsidiaries..................... 88,503,513 87,747,166
Investment in bank subsidiary subordinated notes.... 4,500,000 4,500,000
Investment in other subsidiaries.................... 94,429 92,354
Investment in unconsolidated subsidiaries........... 0 3,050,135
Loans............................................... 913,375 1,095,000
Other assets........................................ 7,576,381 1,055,248
------------ ------------
Total assets.......................................... $103,155,483 $100,103,794
============ ============
Liabilities and Stockholders' Equity:
Subordinated notes.................................. 11,000,000 11,000,000
Other liabilities................................... 1,382,639 102,099
------------ ------------
Total liabilities..................................... 12,382,639 11,102,099
Stockholders' equity................................. 90,772,844 89,001,695
------------ ------------
Total liabilities and stockholders'equity............. $103,155,483 $100,103,794
============ ============
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income Statement Data
Income:
Dividend income from bank
subsidiaries........................ $ 6,680,000 $ 7,665,000 $ 3,551,580
Dividend income from other
subsidiaries........................ 0 20,000 0
Interest income from subsidiaries.... 516,910 550,855 106,911
Management fees from subsidiaries.... 0 752,527 1,019,265
Interest and fees on loans........... 0 0 435,185
Other income......................... 44,588 43,941 45,101
----------- ----------- -----------
Total income........................... 7,241,498 9,032,323 5,158,042
Expense:
Interest on notes payable............ 20,754 251,083 377,008
Interest on subordinated notes....... 930,946 931,224 931,225
Salaries and employee benefits....... 0 427,753 752,165
Other expense........................ 1,178,862 2,129,297 1,381,076
----------- ----------- -----------
Total expense.......................... 2,130,562 3,739,357 3,441,474
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiaries and taxes.... 5,167,039 5,292,966 1,716,568
Equity in undistributed earnings of
subsidiaries.......................... 7,720,913 4,241,792 8,353,908
Equity in net income of unconsolidated
subsidiaries.......................... 56,103 242,324 14,888
----------- ----------- -----------
Income before taxes.................... 12,887,952 9,777,082 10,085,364
Income tax benefit..................... (411,197) (434,198) (596,831)
----------- ----------- -----------
Net income............................. $13,299,149 $10,211,280 $10,682,195
=========== =========== ===========
</TABLE>
57
<PAGE>
ANCHOR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows Data
Cash flows from operating activities:
Net income............................. $13,299,149 $10,211,280 $10,682,195
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in undistributed earnings of
subsidiaries........................ (7,720,913) (4,241,792) (8,353,908)
Equity in net income of
unconsolidated subsidiaries......... (56,103) (242,324) (14,888)
Depreciation and amortization........ 47,230 40,717 78,635
Gains on sales of premises and
equipment........................... 0 973 0
Change in other assets............... 120,631 681,882 (65,384)
Change in other liabilities.......... (14,417) (230,913) 116,215
----------- ----------- -----------
Net cash provided by operating
activities........................ 5,675,577 6,219,823 2,442,865
----------- ----------- -----------
Cash flows from investing activities:
Investment in bank repurchase
agreement............................. 357,078 1,384,295 (1,276,911)
Change in loans........................ 181,625 (568,375) 106,625
Capital expenditures................... 0 566,179 (30,570)
Other, net............................. (558,239) (762,857) 330,998
----------- ----------- -----------
Net cash (used for) provided by
investing activities.............. (19,536) 619,242 (869,858)
----------- ----------- -----------
Cash flows from financing activities:
Net change in notes payable............ 0 (4,489,167) (210,833)
Proceeds from issuance of common stock
pursuant to:
Stock Option Plan.................... 304,183 350,957 278,352
Dividend Reinvestment Plan........... 0 295,067 191,571
Fractional shares paid................. (163) (15,718) (2,649)
Purchase common stock.................. (478,570) 0 0
Cash dividends paid.................... (4,393,648) (2,839,521) (2,123,300)
Other.................................. (1,726,871) 0 0
----------- ----------- -----------
Net cash (used for) provided by
financing activities.............. (6,295,069) (6,698,382) (1,866,859)
----------- ----------- -----------
Net change in cash and cash
equivalents............................ (639,028) 140,683 (293,852)
----------- ----------- -----------
Cash and cash equivalents at January 1.. 669,196 528,513 822,365
----------- ----------- -----------
Cash and cash equivalents at December
31..................................... $ 30,168 $ 669,196 $ 528,513
=========== =========== ===========
</TABLE>
The Parent paid interest of $925,875, $1,197,613, and $1,308,233 in 1999,
1998, and 1997, respectively.
58
<PAGE>
NOTE 18--QUARTERLY OPERATING RESULTS
The following is a summary of the unaudited condensed consolidated quarterly
operating results of the Corporation for the years ended December 31, 1999 and
1998: (Dollars in thousands except per share data)
<TABLE>
<CAPTION>
1999 Quarter ended 1998 Quarter ended
------------------------------------------- -------------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income.............. $ 23,914 $ 23,353 $ 22,741 $ 22,215 $ 22,687 $ 23,876 $ 23,448 $ 22,285
Interest expense............. 10,796 9,890 9,390 9,278 10,022 10,939 10,845 10,496
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.......... 13,118 13,463 13,351 12,938 12,665 12,937 12,603 11,789
Provision for loan losses.... 1,200 376 426 425 235 1,514 534 639
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses... 11,918 13,087 12,925 12,513 12,430 11,423 12,069 11,150
Gains on sale of
investment securities, net.. 0 9 11 63 92 77 85 21
Noninterest income........... 3,394 2,924 2,996 2,919 3,012 2,850 2,866 2,848
Noninterest expense.......... 10,800 10,010 11,426 9,825 10,714 12,836 9,657 9,301
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes... 4,512 6,010 4,506 5,670 4,820 1,514 5,363 4,718
Provision for income taxes... 1,545 2,078 1,772 2,004 1,658 1,040 1,895 1,590
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................... $ 2,967 $ 3,932 $ 2,734 $ 3,666 $ 3,162 $ 474 $ 3,468 $ 3,128
========== ========== ========== ========== ========== ========== ========== ==========
Net income per share--basic.. $ 0.37 $ 0.49 $ 0.34 $ 0.46 $ 0.40 $ 0.06 $ 0.44 $ 0.39
Net income per share--
diluted..................... 0.36 0.48 0.33 0.44 0.38 0.06 0.42 0.38
Weighted average shares
outstanding--basic.......... 8,029,799 8,000,461 7,998,382 8,039,276 7,982,544 7,963,715 7,953,895 7,938,427
Weighted average shares
outstanding--diluted........ 8,274,428 8,273,749 8,274,929 8,319,098 8,313,401 8,328,509 8,257,600 8,240,296
</TABLE>
NOTE 19--SUBSEQUENT EVENTS
On January 10, 2000, Carolina First and Anchor Financial Corporation
announced the signing of a definitive agreement under which Anchor will merge
with Carolina First. The resulting holding company will be called The South
Financial Group. The merger agreement provides that Anchor shareholders will
receive 2.1750 shares of Carolina First common stock for each Anchor share.
Carolina First will record the acquisition, which is expected to close in the
second quarter of 2000, under the pooling-of-interests method of accounting.
The transaction is subject to customary regulatory approvals and the
shareholder approval of both companies.
59
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of management of the Corporation, as of March 1, 2000, no
stockholder owned beneficially more than 5% of the Corporation's outstanding
common stock. The following table shows the shares of the Corporation's common
stock owned beneficially by each director and executive officer and directors
and executive officers of the Corporation as a group as of March 1, 2000.
<TABLE>
<CAPTION>
Number of Percentage of
Shares Outstanding
Beneficially Shares of
Shareholder Owned Common Stock(1)
- ----------- ------------ ---------------
<S> <C> <C>
C. Jason Ammons, Jr............................ 36,788 0.55%
Howell V. Bellamy, Jr.......................... 14,719(2) 0.17%
W. Cecil Brandon, Jr........................... 32,508(3) 0.38%
James E. Burroughs............................. 2,860(4) 0.03%
Mason R. Chrisman.............................. 40,637(5) 0.48%
Stephen L. Chryst.............................. 152,731(6) 1.80%
Robert E. Coffee, Jr........................... 81,537(7) 0.96%
Robin H. Dial.................................. 3,772(8) 0.04%
Chester A. Duke................................ 19,868(9) 0.23%
Robert R. DuRant, III.......................... 70,636(10) 0.83%
J. Bryan Floyd................................. 63,016(11) 0.74%
Tommy E. Looper................................ 90,293(12) 1.06%
Charles B. McElveen............................ 9,428 0.11%
W. Gairy Nichols, III.......................... 47,749(13) 0.56%
Ruppert L. Piver............................... 17,205 0.20%
Thomas J. Rogers............................... 28,839(14) 0.34%
John C. B. Smith............................... 40,876(15) 0.48%
Albert A. Springs, III......................... 41,783 0.49%
J. Roddy Swaim................................. 29,496(16) 0.35%
Arthur P. Swanson.............................. 34,165(17) 0.40%
Harry A. Thomas................................ 48,235(18) 0.57%
All directors and executive officers as a group
(21 persons).................................. 907,141 10.79%
</TABLE>
- --------
(1) The calculation is based on 8,107,509 shares of outstanding common stock
and 391,616 shares of common stock that can be acquired within 60 days
upon the exercise of stock options. Five members of the Board of
Directors, as trustees, also have voting power as to 51,839 (0.61%)
unallocated shares owned by The Anchor Bank Employee Stock Ownership Plan.
(2) This includes 103 shares owned by Mr. Bellamy's spouse.
(3) This includes 1,382 shares owned by Mr. Brandon's spouse.
(4) This includes 2,529 shares owned by Windjammer Village, of which Mr.
Burroughs is the president.
(5) This includes 1,767 shares of common stock issuable to Mr. Chrisman under
the Corporation's stock option plans and 2,674 shares owned by Mr.
Chrisman's spouse.
(6) This includes 35,411 shares owned by Mr. Chryst through the Employee Stock
Ownership Plan, 80,480 shares of common stock issuable to Mr. Chryst under
the Corporation's stock option plans, 3,121 shares owned by Mr. Chryst's
spouse, and 815 shares that Mr. Chryst's spouse holds as custodian for the
benefit of his children.
(7) This includes 3,801 shares owned by Mr. Coffee through the Employee Stock
Ownership Plan, 33,600 shares of common stock issuable to Mr. Coffee under
the Corporation's stock option plans, 16,011 shares owned by Mr. Coffee's
spouse, and 881 shares owned by Mr. Coffee's child.
(8) This includes 1,045 shares of common stock issuable to Mr. Dial under the
Corporation's stock option plans.
60
<PAGE>
(9) This includes 458 shares owned by Mr. Duke through the Employee Stock
Ownership Plan, 11,745 shares of common stock issuable to Mr. Duke under
the Corporation's stock option plans, and 3 shares owned by Mr. Duke's
spouse.
(10) This includes 12,475 shares owned by Mr. DuRant through the Employee Stock
Ownership Plan, 46,900 shares of common stock issuable to Mr. DuRant under
the Corporation's stock option plans, and 33 shares owned by Mr. DuRant's
spouse.
(11) This includes 517 shares owned by Mr. Floyd's spouse and 1,484 shares he
holds as custodian for the benefit of his grandchildren.
(12) This includes 21,430 shares owned by Mr. Looper through the Employee Stock
Ownership Plan, 40,500 shares of common stock issuable to Mr. Looper under
the Corporation's stock option plans, 2,007 shares owned by Mr. Looper's
spouse, and 158 shares that Mr. Looper holds as custodian for the benefit
of his child.
(13) This includes 2,853 shares owned by Mr. Nichols' spouse and 1,908 shares
that Mr. Nichols holds as custodian for the benefit of his children.
(14) This includes 3,012 shares owned by Mr. Rogers' spouse.
(15) This includes 3,120 shares of common stock issuable to Mr. Smith under the
Corporation's stock option plans, 3,557 shares owned by his spouse and
4,036 shares owned by his children.
(16) This includes 5,262 shares owned by Mr. Swaim's spouse.
(17) This includes 80 shares owned by Mr. Swanson through the Employee Stock
Ownership Plan and 20,925 shares of common stock issuable to Mr. Swanson
under the Corporation's stock option plans.
(18) This includes 1,034 shares owned by Mr. Thomas' spouse and 382 shares
owned by his child.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Corporation's directors,
its executive officers, and any persons holding more than ten percent of the
Corporation's common stock are required to report their ownership of the
Corporation's common stock and any changes in that ownership to the Securities
and Exchange Commission. Specific due dates for these reports have been
established, and the Corporation is required to report in this Proxy Statement
any failure by such persons to file by these dates during 1999. To the best of
the Corporation's knowledge, its directors and officers satisfied these filing
requirements in 1999, except the following instances. In May 1999, a Form 4 was
filed late by Charles B. McElveen reporting seven transactions for 1999. In
October 1999, a Form 4 was filed by W. Cecil Brandon, Jr., reporting three
transactions for 1998 and one transaction for 1999. In March 1999, a Form 4 was
filed by Chester A. Duke reporting one transaction for 1998 and in December
1999, a Form 5 was filed reporting one transaction in 1999. In December 1999,
James E. Burroughs filed a Form 5 reporting nine transactions in 1996, twelve
transactions for 1997, twelve transactions for 1998 and ten transactions for
1999. In December 1999, a Form 5 was filed by Mr. Floyd reporting two
transactions for 1998.
61
<PAGE>
INFORMATION REGARDING THE DIRECTORS AND EXECUTIVE OFFICERS
The persons listed are current directors and executive officers of the
Corporation elected to serve until the year their term will expire.
<TABLE>
<CAPTION>
Served as Year
Director Term will Principal Occupation
Name Age Since Expire for Past Five Years
---- --- --------- --------- --------------------
<C> <C> <C> <C> <S>
C. Jason Ammons, Jr..... 54 1987 2002 Real Estate Investor
Howell V. Bellamy, Jr... 63 1989 2000 Chairman of the Board--
Bellamy, Rutenberg,
Copeland, Epps, Gravely and
Bowers, P.A. (Attorney)
W. Cecil Brandon, Jr.... 70 1974 2000 Chairman of the Board--
Brandon Advertising &
Sales Co., Inc.
James E. Burroughs...... 53 1989 2001 Chairman of the Board--
Burroughs & Chapin
Company
Mason R. Chrisman....... 62 1998 2002 Chairman--Harbor Equities
Stephen L. Chryst....... 54 1978 2001 Chairman of the Board,
President and Chief
Executive Officer of the
Corporation
Robert E. Coffee, Jr.... 52 NA NA Executive Vice President and
Chief Administrative
Officer--The Anchor Bank
Robin H. Dial........... 54 1998 2002 Partner--DDMS Real Estate
Chester A. Duke......... 60 1998 2001 Vice Chairman--The Anchor
Bank
Robert R. Durant, III... 54 NA NA Executive Vice President and
Chief Credit Officer
--The Anchor Bank
J. Bryan Floyd.......... 64 1994 2001 Owner and Operator, Hoskins
Restaurant;
President, Caro-Stand
Corporation d/b/a Bay
Tree Golf Plantation
Tommy E. Looper......... 52 1993 2002 Executive Vice President,
Chief Financial Officer,
and Secretary of the
Corporation
Charles B. McElveen..... 51 1998 2000 Co-Owner--Swamp Fox Timber
Co.
W. Gairy Nichols, III... 48 1987 2002 Owner--Dunes Realty, Inc.
Ruppert L. Piver........ 60 1994 2001 Retired--U. S. Postal Service
Thomas J. Rogers........ 63 1974 2002 President--Grand Strand
Broadcasting Corporation
John C. B. Smith, Jr.... 55 1998 2001 Owner--John C. B. Smith, Jr.
Real Estate;
Attorney--Nexsen Pruet,
Jacobes, Pollard
Albert A. Springs, III.. 60 1974 2001 Owner--H. B. Springs Company
(Insurance)
J. Roddy Swaim.......... 54 1987 2000 Owner--Dunes Realty, Inc.
Executive Vice President--The
Arthur P. Swanson ...... 48 1998 2000 Anchor Bank
President--Thomas Real Estate
Harry A. Thomas ........ 50 1994 2000 Company
</TABLE>
- --------
NA Executive officer that is not a member of the Board of Directors.
Director Compensation
Directors of the Corporation who are also members of the Board of Directors
of The Anchor Bank (the "Bank") receive $250 per quarter and $1,000 per special
Board meeting (not held on a regularly scheduled meeting date) attended for
their services to the Corporation. In addition, these directors earn fees for
their services on the Bank Board. Directors of the Corporation who are not
members of the Board of Directors of the Bank receive $250 per quarter and
$1,000 per regular or special Board meeting attended for their services to the
Corporation. All committee members receive $300 for each committee meeting
attended and payment for one excused absence, if applicable.
62
<PAGE>
CERTAIN RELATIONS AND RELATED TRANSACTIONS
The Corporation has had in the past, and expects to have in the future,
banking transactions in the ordinary course of its business with directors,
officers, principal shareholders, and their associates, on the same terms,
including interest rates and collateral on loans, as those prevailing at the
same time for comparable transactions with others, and do not involve more than
normal risks of collectibility or present other unfavorable features.
Albert A. Springs, III, director of the Corporation, is the owner of H.B.
Springs Company, an insurance agency. During 1999, the Corporation and its
subsidiaries purchased insurance through this company. The premiums paid for
such insurance are considered reasonable in relation to those premiums that
would have been paid to a third party. Howell V. Bellamy, Jr., director of the
Corporation, is the Chairman of the Board of the law firm of Bellamy,
Rutenberg, Copeland, Epps, Gravely and Bowers, P.A. The law firm rendered legal
services to the Corporation and its subsidiaries during 1999. The fees paid for
these legal services are considered reasonable in relation to those fees that
would have been paid to a third party. Ruppert L. Piver, director of the
Corporation, leases land to The Anchor Bank on which its Hampstead, North
Carolina office is located. The lease expires on December 31, 2002, but the
Bank has the option to extend the lease for two additional ten-year periods.
The current rental rate is approximately $3,600 annually. The Corporation made
payments of approximately $3,600 in 1999. Management believes that the terms of
the lease are as favorable as would have been obtainable from a third party.
Other than these transactions, there were no material transactions with any
directors, officers, principal shareholders and their associates during 1999.
63
<PAGE>
EXECUTIVE COMPENSATION
Compensation Committee Report of Executive Compensation
The Compensation Committee's executive compensation philosophy (which
includes the Chief Executive Officer) is to provide competitive levels of
compensation, integrate management's pay with the achievement of the
Corporation's annual and long-term performance goals, recognize individual
initiative and achievement, and assist the Corporation in attracting and
retaining qualified management. Management compensation is intended to be set
at levels that the Compensation Committee believes is consistent with others in
the Corporation's industry and also considers general economic conditions and
other external factors.
Base salaries for executive management are determined initially by
evaluating the responsibilities of the position held and the experience of the
individual, and by reference to the competitive marketplace for management
talent, including a comparison of base salaries for comparable positions at
comparable companies within the financial services industry. Annual salary
adjustments are determined by evaluating the competitive marketplace, the
performance of the Corporation, the performance of the executive, and any
increased responsibilities assumed by the executive.
Compensation paid during 1999 to executive officers consisted of base
salary, bonus, matching contributions paid to the Corporation's 401(k) Plan,
and ESOP contributions. Payments to the Corporation's 401(k) Plan and ESOP are
made to all employees on a non-discriminatory basis. The Corporation adopted
Salary Continuation Agreements for its executive officers in 1996.
The Corporation has an existing executive management incentive bonus
program, which is administered by the Compensation Committee. The amounts,
which are awarded annually, are determined based upon a combination of the
level of achievement by the Corporation of its strategic and operating goals
and the level of achievement of individual objectives by participants.
During 1999, in addition to the successful completion of another significant
merger and the integration of the banks merged in 1998, the Corporation
achieved a return on average assets of 1.21% and a return on average
stockholders' equity of 15.83% excluding nonrecurring charges associated with
the merger completed during the year. Also during 1999, the Corporation's total
assets reached $1.2 billion.
It is the philosophy of the Compensation Committee that corporate
performance is reviewed annually and that stock options and other equity
compensation should be awarded to key employees who have contributed to the
Corporation's success. This provides an increased incentive for key employees
to contribute to the future success and prosperity of the Corporation, thus
enhancing the value of the Corporation's common stock for the benefit of the
Corporation's stockholders. This philosophy will increase the ability of the
Corporation to attract and retain individuals of exceptional skill upon whom,
in large measure, the Corporation's sustained progress, growth and
profitability will depend.
The Corporation adopted a Non-Qualified Stock Option Plan during 1988
covering certain of its officers. Options granted under this plan vested at 25%
per year. The exercise period for options granted under this plan is ten years
from each vesting date. During the year ended December 31, 1988, participating
officers, including certain executive officers, received options to purchase an
aggregate of 165,588 common shares at an average option price of $5.92 per
share. All shares were vested at December 31, 1999. The Corporation adopted the
Anchor Financial Corporation, The Anchor Bank and The Anchor Bank of North
Carolina Incentive Stock Option Plan of 1994 during 1994 covering certain of
its officers. Options granted under this plan vest on a cumulative basis for
one-third of the shares on each of the first three anniversaries of the grant.
During the year ended December 31, 1995, participating officers, including
certain executive officers, received options to purchase an aggregate of
225,000 common shares at an average option price of $9.67 per share. Under this
plan, all of these shares were vested at December 31, 1999. The exercise period
for options granted under this plan is ten years from the grant date. Both of
the companies that were merged in 1998 had stock option plans
64
<PAGE>
and options outstanding under those plans were converted to options to purchase
shares of the Corporation. At December 31, 1999, Messrs. Chryst, Coffee, Duke,
DuRant and Looper had options to purchase 80,480, 33,600, 11,745, 46,900 and
40,500 common shares, respectively, at an average price of $8.86 per share.
The Corporation has adopted certain broad-based employee benefit plans
including retirement and life insurance plans in which executive officers
participate. The value of these items is set forth in the Executive
Compensation Table under "All Other Compensation." Executive officers also may
have received perquisites in connection with their employment not described in
any of the tables in this statement. Such perquisites totaled less than 10% of
their cash compensation in 1999. The foregoing benefits and compensation
generally are not directly or indirectly tied to the Corporation's performance.
During the latter part of 1998, subsequent to the two mergers completed in
that year, salaries of the executive officers were adjusted to reflect the
added responsibility of their positions relative to the new size of the
Corporation, and Messrs. Coffee, Duke, DuRant and Looper received increases of
21.6%, 25.9%, 23.3% and 38.4%, respectively. Since this action was taken in the
latter part of 1998, there were no increases given during 1999. Messrs. Coffee,
Duke, DuRant, and Looper were awarded a bonus of 25%, 25%, 25% and 62.9% of
their base salaries paid for the year 1999, respectively.
Mr. Stephen L. Chryst has been Chief Executive Officer of the Corporation
since 1982. Mr. Chryst's 1999 compensation consisted of base salary, cash
bonus, certain perquisites (which did not exceed 10% of his base salary and
bonus) and the various forms of other compensation described in the preceding
paragraphs. During the latter part of 1998, upon the completion of the two
mergers, the Compensation Committee reviewed the salaries of the executive
officers and increased the base salary of Mr. Chryst to $465,000. The level of
base salary was based in part on compensation levels of chief executive
officers of comparable companies and the total assets of the Corporation. Since
this action was taken during the latter part of 1998, Mr. Chryst did not
receive an increase in base pay during 1999. Mr. Chryst's cash bonus was
determined principally by the achievement of certain performance goals on a
predetermined scale set by the Compensation Committee which include goals for
return on average assets, return on average stockholders equity and asset
growth rate. These performance achievements resulted in a cash bonus to Mr.
Chryst of $386,135 or 83% of his annual salary amount. The Compensation
Committee believes that the Corporation's strong performance during 1999 and
the completion of another merger and the integration of the banks merged in
1998 were directly related to Mr. Chryst's leadership and that all compensation
paid to him was warranted.
Periodically, independent compensation consultants are engaged to review the
total compensation of all members of executive management as compared with
peers with comparable responsibilities in other companies. Results of the study
are reported to the Compensation Committee.
Compensation Committee
J. Bryan Floyd
Thomas J. Rogers
Albert A. Springs, III
J. Roddy Swaim
Zeb M. Thomas, Sr.
65
<PAGE>
Executive Compensation Table
The following table discloses compensation for services in all capacities
for the three years ended December 31, 1999, which was paid by the Corporation
to those executive officers whose total annual salary and bonus exceeded
$100,000.
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation(1) Compensation
----------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options(#) Compensation(2)
- --------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Stephen L. Chryst.......... 1999 $465,000 $386,135 0 $42,111
Chairman, President and
Chief 1998 377,000 217,755 0 36,293
Executive Officer 1997 300,000 163,000 0 30,390
Robert E. Coffee, Jr....... 1999 $163,000 $ 40,750 0 $23,785
Executive Vice President
and Chief 1998 143,667 39,114 0 20,809
Administrative Officer--
The Anchor Bank 1997 120,000 38,900 0 19,803
Chester A. Duke............ 1999 $185,000 $ 46,250 0 $29,847
Vice-Chairman of the
Board 1998 158,692 22,300 0 28,076
--The Anchor Bank 1997 140,000 0 11,745 37,043
Robert R. DuRant, III...... 1999 $185,000 $ 46,250 0 $19,372
Executive Vice President
and 1998 161,667 40,039 0 16,101
Chief Credit Officer--The
Anchor Bank 1997 135,000 52,900 0 13,254
Tommy E. Looper............ 1999 $238,000 $149,727 0 $29,524
Executive Vice President
and 1998 194,000 112,054 0 25,101
Chief Financial Officer 1997 155,000 84,216 0 23,021
</TABLE>
- --------
(1) The aggregate amount of perquisites and other personal benefits not
reported above during 1999 for any individual named above did not exceed
the lesser of either $50,000 or 10% of the total annual salary and bonus
reported above for such named executive officer.
(2) The amounts disclosed in this column include:
(a) The Corporation adopted an Employee Stock Ownership Plan ("ESOP")
effective January 1, 1982 covering all employees with at least one-year
of continuous service. The ESOP is administered by eight members of the
Board of Directors of the Corporation. Contributions to the ESOP, which
are discretionary with the Board of Directors, are used to purchase
shares of the Corporation's stock. The shares are held in trust for
each employee until retirement, death, or break in service. Each
participant is allocated a portion of the contribution in proportion to
his compensation up to $160,000 relative to the aggregate compensation
of all participants. Participants employed less than seven years will
be less than 100% vested in their account in the ESOP. Benefits are
distributed in the form of shares of the Corporation's stock. For the
year 1999, the Corporation's contribution to the ESOP was $399,780,
including contributions of $4,509, $4,509, $4,509, $4,509 and $4,509
for Messrs. Chryst, Coffee, Duke, DuRant, and Looper, respectively.
(b) The Corporation adopted a pre-tax savings plan ("401(k) Plan")
effective June 1, 1991 covering all employees with at least three-
months of continuous service. Under the 401(k) Plan, employees are
eligible to contribute up to 15% of compensation up to the statutory
limit. The 401(k) Plan allows for discretionary employer matching
contributions. For the year 1999, the Board of Directors approved a
discretionary employer matching contribution of 100% of compensation
contributed by the employee up to 3% of the employee's total
compensation. The discretionary employer matching contributions will
cover all employees with at least one-year of continuous service.
Participants employed less than
66
<PAGE>
seven years will be less than 100% vested in the discretionary employer
matching contributions portion of their account in the 401(k) Plan. For
the year 1999, the Corporation's matching contribution to the 401(k)
Plan was $365,875, including a matching contribution of $4,800, $4,800,
$4,800, $4,800, and $4,800 for Messrs. Chryst, Coffee, Duke, DuRant, and
Looper, respectively.
(c) Officers that are directors and members of the committees of the Board
of Directors receive fees for attendance at such meetings in the same
manner as outside directors. For the year 1999, the Corporation paid in
director and committee fees $28,300, $13,300, $14,300, $7,200, and
$16,900 to Messrs. Chryst, Coffee, Duke, DuRant, and Looper,
respectively.
(d) Payment was made by the Corporation in the year 1999 of premiums of
$2,502, $1,176, $6,238, $1,363, and $1,815 for life insurance on behalf
of Messrs. Chryst, Coffee, Duke, DuRant and Looper, respectively.
(e) On January 27, 1996, the Corporation and its subsidiary, The Anchor
Bank, entered into Salary Continuation Agreements with Stephen L.
Chryst, Robert E. Coffee, Jr., Robert R. DuRant, III, and Tommy E.
Looper. These Agreements provide for a continuation of salary payments
to these executives upon retirement, termination, death or disability.
The Agreements have a vesting schedule that requires 8 years of service
after the date of the Agreements before an executive is 100% vested. In
the event of a change in control of the Corporation or The Anchor Bank,
the vesting schedule is stepped up to 100%. The normal retirement
benefit payable to the executives each year for 15 years when each
executive retires after reaching age 65 would be $150,600, $36,900,
$46,308 and $53,300 for Messrs. Chryst, Coffee, DuRant, and Looper,
respectively. The vested termination benefits for each of the
executives upon termination prior to a normal retirement date for
reasons other than death or disability and prior to a change in control
would be the vested portion of the accrued liability for the normal
retirement benefit. Mr. Duke also had a similar salary continuation
agreement with M&M Financial Corporation in which he became 100% vested
with the change of control. The agreement provides a normal retirement
benefit payable to Mr. Duke of $48,208 each year for 19 years beginning
at age 65. During 1999, the Corporation and The Anchor Bank entered
into an additional Salary Continuation Agreement with Mr. Duke which
provides a normal retirement benefit payable of $13,000 each year for
15 years when Mr. Duke reaches age 65. The agreement provides for five
year vesting with 100% vesting in the event of a change in control.
Options Grants For Fiscal 1999
There were no options granted to executive officers in 1999.
Option Exercises And Values For Fiscal 1999
The following table sets forth the aggregated option exercises in fiscal
1999 by the named executive officers and the value of such officers'
unexercised options at December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES TABLE
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options At FY-End(#) Options At FY-End(2)
Acquired On Value ------------------------- -------------------------
Name Exercise(#) Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen L. Chryst....... 15,000 $308,750 80,480 0 $1,547,727 $ 0
Robert E. Coffee, Jr.... 8,517 213,801 33,600 0 599,200 0
Chester A. Duke......... 0 0 11,745 0 142,988 0
Robert R. DuRant, III... 8,400 254,800 46,900 0 899,383 0
Tommy E. Looper......... 14,175 376,088 40,500 0 785,250 0
</TABLE>
- --------
(1)The value is calculated by subtracting the exercise price from the market
value on the date of exercise.
(2) The value is determined by subtracting the exercise or base price from the
market value of the underlying securities at the fiscal year-end. The
market value of the Corporation's common stock at its fiscal year-end of
December 31, 1999 was $27.50 per share.
67
<PAGE>
Comparative Performance Graph
The following chart shows a five-year comparison of the cumulative total
return on the Corporation's stock, assuming reinvestment of dividends, with
that of a broad equity market index, the Nasdaq Stock Market Composite Index,
and with that of a published industry index, the Nasdaq Bank Stocks Index.
The yearly percentage change in the cumulative total return on the
Corporation's stock is computed by dividing the sum of the cumulative amount of
dividends for the five year period ended December 31, 1999, assuming dividend
reinvestment, and the difference between the Corporation's share price at
December 31, 1999 and December 31, 1994 by the share price at December 31,
1994. The Nasdaq Stock Market Composite Index and the Nasdaq Bank Stocks Index
are constructed using this methodology for large samples of companies.
[Performance Graph Appears Here]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Anchor Financial
Corporation............ 100.00 146.89 246.24 380.84 397.34 326.84
Nasdaq Stock Market
Composite Index........ 100.00 141.33 173.89 213.07 300.25 542.43
Nasdaq Bank Stocks
Index.................. 100.00 149.00 196.73 329.39 327.11 314.42
</TABLE>
68
<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 8,
2000.
Anchor Financial Corporation
(Registrant)
/s/ Stephen L. Chryst
By: _________________________________
Stephen L. Chryst
Chairman, President andChief
Executive Officer
/s/ Tommy E. Looper,
By: _________________________________
Tommy E. Looper
Executive Vice PresidentChief
Financial Officer and Director
Stephen L. Chryst, pursuant to powers of attorney which are being filed with
this Annual Report on Form 10-K/A, has signed this report on March 8, 2000, as
attorney-in-fact for the following directors who constitute a majority of the
board of directors.
C. Jason Ammons, Jr.
Charles B. McElveen
Howell V. Bellamy, Jr.
W. Gairy Nichols, III
W. Cecil Brandon, Jr.
Ruppert L. Piver
James E. Burroughs
Thomas J. Rogers
Mason R. Chrisman
John C.B. Smith, Jr.
Robin H. Dial
J. Roddy Swaim
Chester A. Duke
Harry A. Thomas
J. Bryan Floyd
/s/ Stephen L. Chryst
_________________________________
Stephen L. Chryst
Attorney-in-factMarch 8, 2000
69
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit Title
------- -------------
<C> <S>
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of J.W. Hunt and Company, LLP
23.4 Consent of Tourville, Simpson & Henderson, LLP
23.5 Consent of Tourville, Simpson & Henderson, LLP
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or OtherJurisdiction
Subsidiaries of Incorporation
------------ --------------------------
<S> <C>
The Anchor Bank South Carolina
Anchor Automated Services, Inc. South Carolina
Marion National Investment Corporation South Carolina
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into Anchor Financial Corporation's previously
filed Registration Statement File No. 33-73186 filed on Form S-3, as amended.
/s/ Arthur Anderson LLP
Charlotte, North Carolina,
March 15, 2000
<PAGE>
Exhibit 23.2
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, except as to the pooling of
interests described in Note 2 which date is April 9, 1999, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
Columbia, South Carolina
March 14, 2000
<PAGE>
Exhibit 23.3
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. for the year
ended December 31, 1997. The consolidated financial statements of ComSouth
Bankshares, Inc. are not separately presented in the Form 10-K.
J.W. Hunt and Company, LLP
Columbia, South Carolina
March 13, 2000
<PAGE>
Exhibit 23.4
Anchor Financial Corporation
Myrtle Beach, South Carolina
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report relating to Bailey Financial
Corporation dated January 8, 1999, included in Registration Statement File No.
33-73186. It should be noted that we have not audited any financial statements
of the company subsequent to December 31, 1998 or performed any audit
procedures subsequent to the date of our report.
Tourville, Simpson & Henderson, L.L.P.
Tourville, Simpson & Henderson, L.L.P.
Columbia, South Carolina
March 15, 2000
<PAGE>
Exhibit 23.5
Anchor Financial Corporation
Myrtle Beach, South Carolina
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report relating to M&M Financial Corporation
dated March 8, 1998, included in Registration Statement File No. 33-73186. It
should be noted that we have not audited any financial statements of the
company subsequent to December 31, 1997 or performed any audit procedures
subsequent to the date of our report.
Tourville, Simpson & Henderson, L.L.P
Tourville, Simpson & Henderson, L.L.P
Columbia, South Carolina
March 15, 2000
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
The directors of Anchor Financial Corporation (the "Company") whose
signatures appear below hereby appoint Stephen L. Chryst or Tommy E. Looper as
their attorney to sign, in their name and behalf and in any and all capacities
stated below, the Company's Annual Report on Form 10-K pursuant to Section 13
of the Securities Exchange Act of 1934, and likewise to sign any and all
amendments and other documents relating thereto as shall be necessary, and such
persons hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation and hereby ratifying all of
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following persons in the
capacities indicated on the 14th day of February 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/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/ Mason R. Chrisman Director
- --------------------------------------
Mason R. Chrisman
/s/ Robin H. Dial Director
- --------------------------------------
Robin H. Dial
/s/ Chester A. Duke Director
- --------------------------------------
Chester A. Duke
/s/ J. Bryan Floyd Director
- --------------------------------------
J. Bryan Floyd
</TABLE>
<PAGE>
EXHIBIT 24, continued
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 35,843,218
<INT-BEARING-DEPOSITS> 151,561
<FED-FUNDS-SOLD> 2,700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 254,609,916
<INVESTMENTS-CARRYING> 7,971,374
<INVESTMENTS-MARKET> 7,965,008
<LOANS> 862,495,316
<ALLOWANCE> 9,924,114
<TOTAL-ASSETS> 1,206,842,807
<DEPOSITS> 966,656,652
<SHORT-TERM> 44,703,448
<LIABILITIES-OTHER> 8,509,863
<LONG-TERM> 96,200,000
0
0
<COMMON> 54,147,996
<OTHER-SE> 36,624,848
<TOTAL-LIABILITIES-AND-EQUITY> 1,206,842,807
<INTEREST-LOAN> 75,302,768
<INTEREST-INVEST> 16,425,249
<INTEREST-OTHER> 495,789
<INTEREST-TOTAL> 92,223,806
<INTEREST-DEPOSIT> 31,926,101
<INTEREST-EXPENSE> 39,353,626
<INTEREST-INCOME-NET> 52,870,180
<LOAN-LOSSES> 2,427,250
<SECURITIES-GAINS> 82,817
<EXPENSE-OTHER> 13,612,948
<INCOME-PRETAX> 20,698,001
<INCOME-PRE-EXTRAORDINARY> 20,698,001
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,299,149
<EPS-BASIC> 1.66
<EPS-DILUTED> 1.61
<YIELD-ACTUAL> 4.74
<LOANS-NON> 2,721,057
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,546,139
<CHARGE-OFFS> 2,625,416
<RECOVERIES> 576,141
<ALLOWANCE-CLOSE> 9,924,114
<ALLOWANCE-DOMESTIC> 9,424,114
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 500,000
</TABLE>
