UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 21, 1997
CAROLINA FIRST CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 0-15083 57-0824914
(State of other juris- (Commission (IRS Employer
diction of incorporation) File Number) Identification Number)
102 South Main Street, Greenville, South Carolina 29601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 255-7900
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
The Exhibit Index appears on page 4 hereof.
1
<PAGE>
Item 2. Acquisition of Assets
On November 21, 1997, Carolina First Corporation ("CFC") acquired First
Southeast Financial Corporation ("FSFC") through the merger of FSFC with and
into an interim subsidiary of CFC. At September 30, 1997, FSFC had total assets
of approximately $350 million. In connection with such transaction, First
Federal Savings and Loan Association of Anderson ("FFA"), a wholly-owned
subsidiary of FSFC, was merged with and into Carolina First Bank ("CFB"). FFA
has 13 offices located in Anderson, Greenville, Abbeyville and Greenwood
counties in South Carolina which were converted into CFB offices upon
consummation of the merger. As of September 30, 1997, FFA had total assets of
approximately $350 million, total loans of approximately $275 million, and total
deposits of approximately $285 million. In connection with such acquisition,
approximately 3.5 million new shares of CFC common stock valued at approximately
$70 million were exchanged for all outstanding shares of FSFC common stock based
on an exchange ratio of 0.7971 shares of CFC common stock for each share of FSFC
common stock. The transaction will be accounted for as a purchase.
Certain historical, supplemental and pro forma financial information
relating to FSFC are included herewith under Item 7.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of the Businesses Acquired.
[CRISP HUGHES EVANS LLP Firm Letterhead]
Independent Auditors' Report
----------------------------
To the Board of Directors
First Southeast Financial Corporation
We have audited the accompanying consolidated balance sheets of First Southeast
Financial Corporation and Subsidiary (the "Company") as of June 30, 1996 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated 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 Company as of
June 30, 1996 and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles.
/s/ Crisp Hughes Evans LLP
Asheville, North Carolina
July 31, 1997
32 Orange Street - P.O. Box 3049 - Asheville, North Carolina 28802 -
(704) 254-2254 - FAX (704) 254-6859
4
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share data)
June 30,
------------------------
Assets 1996 1997
------ ---- ----
Cash and due from banks $ 3,865 $ 3,274
Interest-earning deposits 9,458 10,377
Investment securities:
Held to maturity (market value of in $22,917 in
1996 and $15,730 in 1997) 23,674 16,092
Available for sale (amortized cost of $27,218 in
1996 and $21,089 in 1997) 27,316 21,268
Loans receivable, net 238,337 272,401
Mortgage-backed securities:
Held to maturity (market value of in $11,217 1996
and $9,338 in 1997) 11,508 9,392
Available for sale (amortized cost of $6,155 in
1996 and $4,960 in 1997) 6,090 4,960
Office properties and equipment, net 4,381 4,282
Real estate 791 751
Federal Home Loan Bank stock 2,691 2,691
Interest receivable 2,294 2,342
Other 1,447 700
---------- ----------
Total assets $ 331,852 $ 348,530
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 288,217 $ 284,783
Securities sold under agreement to repurchase 5,000 15,000
Federal Home Loan Bank advances - 10,000
Advance payments by borrowers for taxes and insurance 1,436 1,387
Accrued expenses and other liabilities 3,331 1,488
Income taxes payable 365 826
---------- ----------
Total liabilities 298,349 313,484
---------- ----------
Stockholders' equity:
Preferred stock ($.01 par value, 2,000,000 shares
authorized; none outstanding) - -
Common stock ($.01 par value, 8,000,000 shares
authorized; 4,388,231 shares issued and
outstanding at June 30, 1996 and June 30, 1997) 44 44
Paid-in capital 19,137 19,137
Retained income, substantially restricted 14,300 15,747
Unrealized gains on securities, net 22 118
---------- ----------
Total stockholders' equity 33,503 35,046
---------- ----------
Total liabilities and stockholders' equity $ 331,852 $ 348,530
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
(in thousands, except per share data)
Years Ended June 30,
------------------------------------
1995 1996 1997
---- ---- ----
Interest income:
Mortgage loans $ 14,492 $ 16,265 $ 18,151
Mortgage-backed securities 1,306 1,351 1,082
Other loans 2,037 2,122 2,378
Investments 5,450 4,929 2,886
Deposits with other banks 665 1,110 441
---------- ---------- ----------
Total interest income 23,950 25,777 24,938
---------- ---------- ----------
Interest expense:
Deposits 11,801 14,226 13,596
Borrowings 164 131 821
---------- ---------- ----------
Total interest expense 11,965 14,357 14,417
---------- ---------- ----------
Net interest income 11,985 11,420 10,521
Provision for loan losses 180 180 180
---------- ---------- ----------
Net interest income after provision
for loan losses 11,805 11,240 10,341
---------- ---------- ----------
Noninterest income:
Loan fees and service charges 622 585 794
Securities losses (46) (891) -
Income from rental of real estate
acquired for development or rental 88 86 86
Other 392 330 301
---------- ---------- ----------
Total other income 1,056 110 1,181
---------- ---------- ----------
Noninterest expenses:
Compensation and employee benefits 4,607 6,643 3,598
Net occupancy expense 979 954 919
Deposit insurance premiums 625 640 2,172
Provision for real estate losses 21 - -
Other 1,144 1,153 1,184
---------- ---------- ----------
Total other expenses 7,376 9,390 7,873
---------- ---------- ----------
Income before income taxes 5,485 1,960 3,649
Income tax expense 1,908 1,021 1,324
---------- ---------- ----------
Net income $ 3,577 $ 939 $ 2,325
========== ========== ==========
Weighted average common equivalent shares
outstanding 3,946 4,061 4,388
Net income per share $.91 $.23 $.53
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
<TABLE>
<CAPTION>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Unrealized Unearned Compensation
Common Paid-In Retained Gains Treasury ---------------------
Stock Capital Income (Losses) Stock For ESOP For MRPs Total
----- ------- ------ -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ 43 $41,949 $30,213 $(399) $(1,846) $(2,995) $(832) $66,133
Net income - - 3,577 - - - - 3,577
Cash dividends ($.265 per share) - - (1,018) - - - - (1,018)
Unrealized gains on securities,
net of taxes of $150 - - - 241 - - - 241
Purchase of treasury stock - - - - (1,074) - - (1,074)
(80,285 shares)
ESOP and MRPs compensation - 157 - - - 333 575 1,065
earned ---- ------- ------- ----- ------- ------- ----- -------
Balance at June 30, 1995 43 42,106 32,772 (158) (2,920) (2,662) (257) 68,924
Net income - - 939 - - - - 939
Cash dividends ($10.48 per - (23,738) (19,411) - - 185 - (42,964)
share)
Unrealized gains on securities,
net of taxes of $106 - - - 180 - - - 180
Issuance of common stock 1 617 - - - - - 618
(61,831 shares)
Issuance of treasury stock - (622) - - 2,920 - - 2,298
(229,785 shares)
Tax benefit of stock options - 505 - - - - - 505
exercised
ESOP and MRPs compensation - 269 - - - 2,477 257 3,003
earned ---- ------- ------- ----- ------- ------- ----- -------
Balance at June 30, 1996 44 19,137 14,300 22 - - - 33,503
Net income - - 2,325 - - - - 2,325
Cash dividends ($.20 per share) - - (878) - - - - (878)
Unrealized gains on securities,
net of taxes of $50 - - - 96 - - - 96
---- ------- ------- ----- ------- ------- ----- -------
Balance at June 30, 1997 $ 44 $19,137 $15,747 $ 118 $ - $ - $ - $35,046
==== ======= ======= ===== ======= ======= ===== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
------------------------------------
1995 1996 1997
---- ---- ----
Operating activities:
Net income $ 3,577 $ 939 $ 2,325
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 454 418 375
Provision for loan losses 180 180 180
Provision for losses on real estate 21 - -
Deferred income taxes (benefit) (11) (250) 134
Gain on sale of equipment (25) - -
Amortization of premium on savings 18 13 10
deposits
Amortization of fees and discounts on (1,093) (1,000) (424)
loans
Loss on sale of securities 46 891 -
Gain on sale of mortgage loans - (4) -
Net realized gain on real estate (62) (15) (10)
Amortization of premium on mortgage-
backed securities 108 180 131
Amortization of premiums (discounts)
on investments (215) 26 (4)
Amortization of unearned ESOP and MRP
compensation 1,065 3,003 -
Increase in accrued interest receivable (293) (97) (48)
Decrease (increase) in other assets (416) (1,033) 1,072
Increase (decrease) in accrued expenses
and other liabilities 1,301 2,401 (1,472)
---------- ---------- ----------
Net cash provided by operating
activities 4,655 5,652 2,269
---------- ---------- ----------
Investing activities:
Net decrease in insured certificates of
deposit 3,479 448 5,579
Purchase of investment securities held
to maturity (17,930) (15,000) (996)
Maturities of investment securities held
to maturity 23,063 12,625 3,000
Purchase of investment securities available
for sale (1,358) (5,000) (9,981)
Maturities of investment securities
available for sale - 10,550 16,113
Proceeds from sale of investment securities
available for sale 1,250 34,964 -
Proceeds from sale of real estate 237 289 67
Capitalized costs on real estate (7) (2) (10)
Purchase of stock subscription rights - - (325)
Net loan originations (22,974) (24,722) (31,430)
Purchase of loans (3,250) (5,000) (2,412)
Proceeds from sale of loans - 775 -
Principal payments on mortgage-backed
securities held to maturity 4,091 3,036 2,035
Purchase of mortgage-backed securities
held to maturity - (7,041) -
Purchase of mortgage-backed securities
available for sale - (5,192) -
Principal payments on mortgage-backed
securities available for sale - 1,771 1,145
(continued)
8
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
------------------------------------
1995 1996 1997
---- ---- ----
Investing activities, continued:
Proceeds from sale of mortgage-backed
securities available for sale $ - $ 9,706 $ -
Purchase of office properties and
equipment (100) (43) (261)
Proceeds from sale of equipment 25 - -
Net cash provided (used) by ---------- ---------- ----------
investing activities (13,474) 12,164 (17,476)
---------- ---------- ----------
Financing activities:
Net increase (decrease) in deposits 6,479 9,973 (3,444)
Increase in repurchase agreements - 5,000 10,000
Increase (decrease) in advance payments
by borrowers for taxes and insurance 299 (200) (49)
Increase (decrease) in mortgage
servicing payments (127) 44 (94)
Proceeds from FHLB advances - - 10,000
Repayment of FHLB advances (318) (1,597) -
Proceeds from borrowings - - 2,040
Repayment of borrowings - - (2,040)
Proceeds from issuance of common stock
and treasury stock - 2,916 -
Purchase of treasury stock (1,074) - -
Dividends paid (1,018) (42,964) (878)
---------- ---------- ----------
Net cash provided (used) by
financing activities 4,241 (26,828) 15,535
---------- ---------- ----------
Decrease in cash and cash
equivalents (4,578) (9,012) 328
Cash and cash equivalents at beginning of
year 26,913 22,335 13,323
---------- ---------- ----------
Cash and cash equivalents at end of year $ 22,335 $ 13,323 $ 13,651
========== ========== ==========
Supplemental disclosures of cash flow
information: Cash paid during the
period for:
Interest on deposits and other
borrowings $ 11,872 $ 14,350 $ 14,348
Income taxes net of refunds 1,353 1,869 121
========== ========== ==========
Noncash investing and financing activities:
Real estate acquired in satisfaction
of mortgage loans $ 27 $ 118 $ 149
Loan loss reserve charge-offs 84 44 57
Unrealized gains on securities, net
of taxes 241 180 96
Reclassification of mortgage-backed
securities to mortgage-backed
securities available for sale - 12,749 -
Reclassification of investment securities
to securities available for sale - 39,801 -
Loans originated for real estate
owned disposition 60 36 127
Transfer from office properties to
real estate held for sale 210 - -
Tax benefit of stock options exercised - 505 -
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1996 and 1997
(Tabular amounts in thousands)
1. Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of First Southeast Financial
Corporation (the "Holding Company") and First Federal Savings and Loan
Association of Anderson (the "Association") and Subsidiary (collectively
referred to as the "Company") conform, in all material respects, to
generally accepted accounting principles and to general practices within the
savings and loan industry. The following summarize the more significant of
these policies and practices.
Nature of Operations - The Holding Company's only endeavor is its investment
in the Association, a federally chartered stock savings and loan
association. The Association's principal line of business is originating
residential and nonresidential first mortgage loans. The loans are primarily
with individuals.
Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Holding Company and its subsidiary, the Association, and
the Association's wholly-owned subsidiary, First Master Service Corporation.
Intercompany balances and transactions have been eliminated.
Loans Receivable - Loans receivable are carried at their unpaid principal
balance less, where applicable, unearned income, net deferred loan fees, and
allowances for losses. Unearned discounts on mortgage loans purchased are
amortized to interest income using the level yield interest method over the
lives of the underlying loans adjusted for anticipated prepayment rates.
Additions to the allowances for losses are based on management's evaluation
of the loan portfolio under current economic conditions and such other
factors which, in management's judgment, deserve recognition in estimating
losses. Interest accrual is discontinued when a loan becomes 90 days
delinquent unless, in management's opinion, the loan is well secured and in
process of collection. Interest income on impaired loans is recognized on a
cash basis.
Loan Fees - Loan fees result from the origination of mortgage loans. Such
fees and certain direct incremental costs related to origination of such
loans are deferred ("net deferred loan fees") and reflected as a reduction
of the carrying value of mortgage loans. The net deferred loan fees (or
costs) are amortized using the interest method over the contractual lives of
the loans. Unamortized net deferred loan fees on loans sold prior to
maturity are credited to income at the time of sale.
Investment Securities and Mortgage-Backed Securities - Investment securities
and mortgage-backed securities held to maturity are stated at amortized cost
since the Company has both the ability and intent to hold such securities to
maturity. Premiums and discounts on the investment and mortgage-backed
securities are amortized or accreted into income over the contractual terms
of the securities using a level yield interest method. Gains and losses on
the sale of these securities are calculated based on the specific
identification method.
10
<PAGE>
Investment securities and mortgage-backed securities available for sale are
carried at fair value. The Company has identified their holdings in certain
debt securities and mortgage-backed securities as securities available for
sale. The unrealized holding gains or losses on securities available for
sale are excluded from income and reported, net of related income tax
effects, as a separate component of stockholders' equity until realized.
Gains or losses on sales of securities available for sale are based on
average cost method for the mutual funds and specific identification method
for all other securities.
Real Estate - Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of foreclosure.
Subsequent to foreclosure, real estate is recorded at the lower of initial
fair value or existing fair value less estimated cost to sell (net
realizable value). Real estate properties held for development and resale
are carried at the lower of cost, including cost of improvements incurred
subsequent to acquisition, or net realizable value. Costs relating to
development and improvement of properties are capitalized, whereas costs
relating to the holding of property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to income if the carrying value of a
property exceeds its estimated net realizable value.
Office Properties and Equipment - Office properties and equipment are
carried at cost less accumulated depreciation. Depreciation is computed on
the straight-line method over the estimated useful lives of the assets
ranging up to 40 years. The cost of maintenance and repairs is charged to
expense as incurred while expenditures which materially increase property
lives are capitalized.
Federal Home Loan Bank Stock - Investment in stock of a Federal Home Loan
Bank is required by law of every federally insured savings and loan or
savings bank. The investment is carried at cost. No ready market exists for
the stock, and it has no quoted market value.
Income Taxes - The Holding Company and the Association and its subsidiary
follow the practice of filing consolidated federal income tax returns.
Income taxes are allocated to the Association and subsidiary as though
separate returns are being filed. Individual state income tax returns are
filed for each company.
The Company utilizes the liability method of computing income taxes in
accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the liability method,
deferred tax liabilities and assets are established for future tax return
effects of temporary differences between the stated value of assets and
liabilities for financial reporting purposes and their tax basis adjusted
for tax rate changes. The focus is on accruing the appropriate balance sheet
deferred tax amount, with the statement of income effect being the result of
changes in balance sheet amounts from period to period. Current income tax
expense is provided based upon the actual tax liability incurred for tax
return purposes.
Premium on Deposit Acquisitions - The premium on deposit acquisitions is
being amortized over the estimated life of the deposits (primarily thirteen
years) using an interest method. The amount is included in interest expense
on deposits.
Income Per Share - Income per share is computed by dividing net income by
the weighted average number of shares and share equivalents outstanding
during the year. Share equivalents include, if applicable, dilutive stock
option share equivalents determined using the treasury stock method, ESOP
shares, and MRP shares. For the year ended June 30, 1997, no common stock
equivalents existed.
Cash Flow Information - As presented in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand and interest-earning
deposits in other banks. The Company considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents.
11
<PAGE>
2. Investment Securities
---------------------
The carrying values and estimated market values of investment securities are
summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Held to Maturity:
June 30, 1996:
U.S. government and
agency securities $ 17,995 $ 3 $ (760) $ 17,238
Insured certificates
of deposit 5,679 - - 5,679
-------- -------- -------- --------
$ 23,674 $ 3 $ (760) $ 22,917
======== ======== ======== ========
June 30, 1997:
U.S. government and
agency securities $ 15,992 $ - $ (362) $ 15,630
Insured certificates
of deposit 100 - - 100
-------- -------- -------- --------
$ 16,092 $ - $ (362) $ 15,730
======== ======== ======== ========
Available for Sale:
June 30, 1996:
U.S. government and
agency securities $ 27,218 $ 110 $ (12) $ 27,316
======== ======== ======== ========
June 30, 1997:
U.S. government
and agency $ 21,089 $ 179 $ - $ 21,268
======== ======== ======== ========
The amortized cost and estimated market values of debt securities by
contractual maturity are as follows:
Amortized Cost Estimated Market Value
----------------- ----------------------
1996 1997 1996 1997
---- ---- ---- ----
Held to Maturity:
Due in one year $ 5,579 $ 100 $ 5,579 $ 100
Due after one year
through five years 1,100 1,996 1,079 1,987
Due after five years
through ten years 7,995 7,996 7,663 7,830
Due after ten years 9,000 6,000 8,596 5,813
-------- -------- -------- --------
$ 23,674 $ 16,092 $ 22,917 $ 15,730
======== ======== ======== ========
Available for Sale:
Due in one year $ 16,114 $ 4,499 $ 16,127 $ 4,516
Due after one year
through five years 6,104 1,608 6,189 1,636
Due after five years
through ten years 5,000 14,982 5,000 15,116
-------- -------- -------- --------
$ 27,218 $ 21,089 $ 27,316 $ 21,268
======== ======== ======== ========
12
<PAGE>
The Company had approximately $9,000,000 and $17,279,000 of investment
securities pledged against deposits and other borrowings at June 30, 1996
and 1997, respectively. There were no investment securities held to maturity
sold during the fiscal years 1995, 1996 and 1997.
For the years ended June 30, 1995 and 1996, proceeds on sales of securities
available for sale were approximately $1,250,000 and $34,964,000, with
realized losses of approximately $38,000 and $582,000, respectively. There
were no investment securities available for sale sold for the year ended
June 30, 1997. The net unrealized gains at June 30, 1996 and 1997, of
approximately $64,000 and $118,000 are reported as a separate component of
stockholders' equity.
In December 1995, the Company transferred investment securities held to
maturity with an amortized cost of approximately $39,801,000 and market
value of approximately $40,036,000 to the available for sale category. The
transfer was a result of the FASB (Financial Accounting Standards Board)
allowing a one-time reallocation of an entity's investment portfolio without
penalty.
The Company had no commitments to purchase investment securities at June 30,
1996 and 1997.
3. Loans Receivable
----------------
Loans receivable are summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
Real estate first mortgage loans:
One-to-four-family dwellings $ 209,810 $ 237,124
Construction 14,220 12,350
Commercial real estate 2,022 2,843
Other real estate 686 904
--------- ---------
Total real estate loans 226,738 253,221
--------- ---------
Other loans:
Consumer installment loans 20,317 22,250
Commercial loans 3,496 6,603
--------- ---------
Total other loans 23,813 28,853
--------- ---------
Total loans 250,551 282,074
--------- ---------
Less:
Undisbursed portion of loans in process 9,059 6,862
Unearned discounts on consumer loans 141 117
Unearned discounts on loans purchased 1,348 948
Net deferred loan fees 433 376
Allowance for loan losses 1,233 1,370
--------- ---------
12,214 9,673
--------- ---------
$ 238,337 $ 272,401
========= =========
13
<PAGE>
The Company's primary lending area for the origination of mortgage loans
includes parts of six counties in northwestern South Carolina. The Company
is also involved with correspondent lenders that broker loans throughout
South and North Carolina. The Company limits uninsured loans to 80% of the
appraised value of the property securing the loan. Generally, the Company
allows loans covered by private mortgage insurance up to 95% of the
appraised value of the property securing the loan.
The general policy is to limit loans on commercial real estate to 75% of the
lesser of appraised value or construction cost of the property securing the
loan.
The Company's policy requires that consumer and other installment loans be
supported primarily by the borrower's ability to repay the loan and
secondarily by the value of the collateral securing the loan, if any.
Management of the Company believes that its allowances for losses on its
loan portfolio are adequate. However, the estimates used by management in
determining the adequacy of such allowances are susceptible to significant
changes due primarily to changes in economic and market conditions. In
addition, various regulatory agencies periodically review the Company's
allowance for losses as an integral part of their examination processes.
Such agencies may require the Company to recognize additions to the
allowances based on their judgments of information available to them at the
time of their examinations.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan", no loans in non-homogenous groups were determined to be impaired
for the years ended or as of June 30, 1996 and 1997, respectively.
Commercial real estate and other loans are included in the non-homogenous
group.
For the loans in homogeneous groups, loans which are contractually past due
ninety days or more total approximately $791,000 at June 30, 1996 and
$523,000 at June 30, 1997. The amount the Company will ultimately realize
from these loans could differ materially from their carrying value because
of unanticipated future developments affecting the underlying collateral or
the borrower's ability to repay the loans. If collection efforts are
unsuccessful, these loans will be subject to foreclosure proceedings in the
ordinary course of business. Management believes that the Company has
adequate collateral on these loans and that the Company will not incur
material losses in the event of foreclosure.
The changes in the allowance for loan losses are summarized as follows:
June 30,
----------------------------------
1995 1996 1997
---- ---- ----
Beginning balance $ 914 $ 1,062 $ 1,233
Provision charged to income 180 180 180
Recoveries 52 35 14
Charge-offs (84) (44) (57)
--------- --------- ---------
Ending balance $ 1,062 $ 1,233 $ 1,370
========= ========= =========
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans
are approximately $4,286,000, $3,646,000 and $3,238,000 at June 30, 1995,
1996 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $45,000, $28,000 and $26,000 at June 30, 1995,
1996 and 1997, respectively.
14
<PAGE>
4. Mortgage-Backed Securities
--------------------------
Mortgage-backed securities are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Held to maturity:
June 30, 1996:
FHLMC Certificates $ 2,839 $ 1 $ (14) $ 2,826
FNMA Certificates 4,368 - (240) 4,128
GNMA Certificates 4,301 - (38) 4,263
---------- ---------- ---------- ----------
$ 11,508 $ 1 $ (292) $ 11,217
========== ========== ========== ==========
June 30, 1997:
FHLMC Certificates $ 2,386 $ 37 $ - $ 2,423
FNMA Certificates 3,454 - (117) 3,337
GNMA Certificates 3,552 26 - 3,578
---------- ---------- ---------- ----------
$ 9,392 $ 63 $ (117) $ 9,338
========== ========== ========== ==========
Available for sale:
June 30, 1996:
FHLMC Certificates $ 910 $ 21 $ - $ 931
FNMA Certificates 582 14 - 596
GNMA Certificates 4,663 - (100) 4,563
---------- ---------- ---------- ----------
$ 6,155 $ 35 $ (100) $ 6,090
========== ========== ========== ==========
June 30, 1997:
FHLMC Certificates $ 689 $ 11 $ - $ 700
FNMA Certificates 420 6 - 426
GNMA Certificates 3,851 - (17) 3,834
---------- ---------- ---------- ----------
$ 4,960 $ 17 $ (17) $ 4,960
========== ========== ========== ==========
Although mortgage-backed securities are initially issued with a stated
maturity date, the underlying mortgage collateral may be prepaid by the
mortgagee and, therefore, such securities may not reach their maturity date.
The Company had no sales of mortgage-backed securities held to maturity
during the years ended June 30, 1995, 1996 and 1997. Mortgage-backed
securities pledged were approximately $4 million and $.5 million at June 30,
1996 and 1997, respectively.
There were no mortgage-backed securities available for sale sold for the
years ended June 30, 1995 and 1997. For the year ended June 30, 1996,
proceeds on sales of mortgage-backed securities available for sale were
approximately $9,706,000, with realized losses of approximately $309,000.
The net unrealized loss at June 30, 1996, of approximately $42,000 is
reported as a separate component of stockholders' equity.
In December 1995, the Company transferred mortgage-backed securities held to
maturity with an amortized cost of approximately $12,749,000 and market
value of approximately $12,610,000 to the available for sale category. The
transfer was a result of the FASB allowing a one-time reallocation of an
entity's investment portfolio without penalty.
15
<PAGE>
5. Real Estate
-----------
Real estate is summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
Real estate acquired on settlement of loans $ 25 $ -
Real estate acquired for development, rental
and sale 984 984
--------- ---------
1,009 984
Less:
Accumulated depreciation 218 233
--------- ---------
$ 791 $ 751
========= =========
Real estate acquired for development, rental and sale consists of:
June 30,
-----------------------
1996 1997
---- ----
Commercial buildings $ 350 $ 350
Improved land 46 46
Unimproved land 588 588
--------- ---------
$ 984 $ 984
========= =========
Real estate acquired for development, rental and sale includes the
Association's subsidiary's investment in commercial rental property located
in Anderson, South Carolina. The subsidiary recognized income from this
property of approximately $88,000, $86,000 and $86,000 during the years
ended June 30, 1995, 1996 and 1997, respectively.
In 1995, the Company reclassified improved land and a building of
approximately $210,000 from office properties and equipment to real estate.
This property consisted of a former branch office which was no longer used
in operations. The property was sold in 1996, with proceeds on sale of
approximately $164,000, resulting in a realized loss of approximately
$23,000.
The changes in the allowance for losses on real estate acquired in
settlement of loans is summarized as follows:
1995 1996 1997
---- ---- ----
Beginning balance $ 12 $ 21 $ -
Provision charged to income 21 - -
Charge-offs (12) (21) -
--------- --------- -------
Ending balance $ 21 $ - $ -
========= ========= =======
16
<PAGE>
6. Office Properties and Equipment
-------------------------------
Office properties and equipment are summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
Land and improvements $ 1,591 $ 1,591
Buildings 5,660 5,742
Furniture, fixtures and equipment 3,348 3,374
Construction in progress - 152
--------- ---------
10,599 10,859
Less accumulated depreciation 6,218 6,577
--------- ---------
$ 4,381 $ 4,282
========= =========
7. Interest Receivable
-------------------
Interest receivable is summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
Investments $ 835 $ 750
Loans receivable 1,330 1,485
Mortgage-backed securities 129 107
--------- ---------
$ 2,294 $ 2,342
========= =========
8. Deposits
--------
Deposit account balances are summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
NOW deposits at 1.87% and 1.19% at June 30,
1996 and 1997 (including non-interest bearing
accounts of $1,577 and $2,782, respectively) $ 21,424 $ 22,815
Money Market deposits with weighted average
rates of 3.23% and 3.05% at June 30, 1996 and
1997, respectively 15,574 13,108
Passbook deposits at 2.47% at June 30, 1996 and
1997 27,470 26,633
Fixed rate certificates with weighted average
rates of 5.62% and 5.65% at June 30, 1996 and
1997, respectively 223,767 222,235
Less premium on deposits acquired (18) (8)
--------- ---------
Total deposits $ 288,217 $ 284,783
========= =========
Weighted average cost of deposits 4.91% 4.88%
==== ====
17
<PAGE>
Contractual maturities of certificate accounts are summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
12 months or less $ 164,736 $ 191,934
Over 12 months 59,031 30,301
--------- ---------
$ 223,767 $ 222,235
========= =========
The Company had deposit accounts in amounts of $100,000 or more of
approximately $38 million and $33 million at June 30, 1996 and 1997,
respectively.
9. Securities Sold Under Agreement to Repurchase
---------------------------------------------
The securities sold under reverse repurchase agreements were delivered to
safekeeping with an independent third-party on the Company's behalf. The
underlying collateral consists of various government and agency securities.
The broker-dealers have agreed to resell to the Company the identical
securities at the maturity of the agreements. The agreements contain
provisions for maturity every 90 days, with final maturities through January
1999.
Information concerning the securities sold under agreement to repurchase is
summarized as follows:
June 30,
------------------------
1996 1997
---- ----
Average balance during the year (monthly basis) $ 417 $ 12,083
Average interest rate 6.41% 6.27%
Maximum month-end balance during the year $ 5,000 $ 15,000
Investment securities underlying the agreements
at year-end:
Carrying value (including accrued interest) $ 5,000 $ 15,298
Estimated fair value $ 5,000 $ 15,432
========= =========
10. Advances from the Federal Home Loan Bank
----------------------------------------
Advances from the Federal Home Loan Bank are summarized as follows:
June 30,
-----------------------
Interest Rate Maturity 1996 1997
------------- Date ---- ----
----
5.87 June 2002 $ - $ 10,000
======== ==========
The Federal Home Loan Bank stock and mortgage loans receivable were pledged
as collateral for these advances.
11. Compensation Benefit Agreements
-------------------------------
Effective January 9, 1996, the Association established unfunded nonqualified
compensation agreements with its directors providing for fixed benefits for
life. The benefits are payable to those directors beginning the month
following retirement from the Board or, in the event of their death prior to
retirement, to their designated beneficiary for a five year period. The
liability for the benefits has been accrued at the balance sheet date at the
net present value of the expected future benefits. Annual expense is based
on the increase in the net present value of expected future benefits. The
expense before income tax effect associated with these agreements was
approximately $46,000 for the year ending June 30, 1996. No additional
expense was recognized for the year ended June 30, 1997.
18
<PAGE>
12. Income Taxes
------------
Income tax expense (benefit) is summarized as follows:
Years Ended June 30,
-----------------------------------
1995 1996 1997
---- ---- ----
Current $ 1,919 $ 1,271 $ 1,190
Deferred (11) (250) 134
--------- --------- ---------
Total $ 1,908 $ 1,021 $ 1,324
========= ========= =========
The differences between actual income tax expense and the amount computed by
applying the federal statutory income tax rate of 34% to income before
income taxes and cumulative effect adjustment are reconciled as follows:
Years Ended June 30,
----------------------------------
1995 1996 1997
---- ---- ----
Computed income tax expense $ 1,865 $ 666 $ 1,241
Increase (decrease) resulting from:
State income tax, net of federal
benefit 49 - 57
Nondeductible ESOP compensation
expense - 341 -
Other (6) 14 26
--------- --------- ---------
Actual income tax expense $ 1,908 $ 1,021 $ 1,324
========= ========= =========
Net deferred tax assets (liabilities) are included in other assets or income
taxes payable in the accompanying consolidated balance sheets. The
components of net deferred tax assets (liabilities) are as follows:
June 30,
----------------------
1996 1997
---- ----
Deferred tax assets:
Bad debt reserves $ - $ 476
Loan origination fees 67 -
Deferred compensation and benefit deductions 272 243
Carryforward of capital losses 234 234
State net operating loss 56 56
Tax credits 124 -
Other 31 47
Valuation allowance - -
--------- ---------
784 1,056
Deferred tax liabilities:
Bad debt reserves 277 -
Bad debt recapture adjustment - 784
Excess tax depreciation 112 100
FHLB stock dividends 315 315
Unrealized gains on securities available
for sale 11 61
Loan origination fees - 6
--------- ---------
715 1,266
--------- ---------
Net deferred tax asset (liability) $ 69 $ (210)
========= =========
19
<PAGE>
The Association's annual addition to its reserve for bad debts allowed under
the Internal Revenue Code may differ significantly from the bad debt
experience used for financial statement purposes. Such bad debt deductions
for income tax purposes are included in taxable income of later years only
if the bad debt reserves are used for purposes other than to absorb bad debt
losses. Since the Association does not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes have been
provided on the amount of bad debt reserves for tax purposes that arose in
tax years beginning before December 31, 1987, in accordance with SFAS No.
109. Therefore, retained income at June 30, 1996 and 1997, includes
approximately $7.8 million, representing such bad debt deductions for which
no deferred income taxes have been provided.
With the repeal of the reserve method of accounting for thrift bad debt
reserves for tax year beginning after December 31, 1995, the Association
will have to recapture into taxable income its post-1987 excess reserves
over a six-year period. The Association currently meets a recapture
provision which allows it to delay the start of the recapture period due to
loan origination volume. The amount of the post-1987 excess is approximately
$2,066,000. Since the tax effect of this excess had been previously recorded
as deferred income taxes, the Association will have no material impact on
its results of operations when it begins recapture of the excess reserves.
13. Stockholders' Equity
--------------------
At the time of its conversion to a stock association, the Association
established a liquidation account in an amount equal to its total retained
income as of June 30, 1993. The liquidation account will be maintained for
the benefit of eligible account holders who continue to maintain their
accounts at the Association after the conversion. The liquidation account
will be reduced annually to the extent that eligible account holders reduce
their qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualified balances for accounts then
held.
Subsequent to the conversion, the Association may not declare or pay cash
dividends on or repurchase any of its shares of common stock, if the effect
would cause stockholders' equity to be reduced below the amount required for
the liquidation account, applicable regulatory capital maintenance
requirements, or if such declaration and payment would otherwise violate
regulatory requirements.
Unlike the Association, the Company is not subject to these regulatory
restrictions on payment of dividends to its stockholders. However, the
source of future dividends may be dependent upon dividends from the
Association. On June 17, 1996, the Board of Directors of the Holding Company
authorized a one-time special cash dividend of $10 per share to be paid on
June 27, 1996, to stockholders of record on June 21, 1996. The Company's
earnings for the fourth quarter were substantially reduced due to losses
that were recognized upon the liquidation of securities to fund the cash
dividend as well as the recognition of the remaining unearned ESOP
compensation. The ESOP expense recognition was accelerated because the
special dividend payment on unallocated shares provided sufficient funds for
the ESOP to repay its outstanding debt obligation and release the remaining
unallocated shares. The Association received Office of Thrift Supervision
approval to provide $19.5 million of dividends to the Holding Company to
partially fund the one-time special dividend.
14. Regulatory Matters
------------------
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision (OTS). 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 Association's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets,liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Association's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
20
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table below) of tangible and core capital (as defined in the
regulations) to adjusted total assets (as defined), and of risk-based
capital (as defined) to risk-weighted assets (as defined). Management
believes, as of June 30, 1997, that the Association meets all capital
adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the OTS categorized
the Association as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the
Association must maintain minimum total tangible, core, and risk-based
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
The Association's actual capital amounts and ratios are also presented in
the table (in thousands) and assumed no additional deductions from capital
for interest-rate risk.
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------ --------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 1997:
Tangible Capital
(to adjusted
total assets) $33,801 9.7% $ 5,227 >1.5% $ 17,422 >5%
- -
Core Capital (to
adjusted total
assets) $33,801 9.7% $10,454 >3.0% $ 17,422 >5%
- -
Risk-Based (to
risk-weighted
assets $35,171 20.3% $13,857 >8.0% $ 17,321 >10%
- -
As of June 30, 1996:
Tangible Capital (to
adjusted total
assets) $33,470 10.5% $ 4,794 >1.5% $ 15,980 >5%
- -
Core Capital (to
adjusted total
assets) $33,470 10.5% $ 9,588 >3.0% $ 15,980 >5%
- -
Risk-Based (to
risk-weighted
assets) $34,686 22.7% $12,203 >8.0% $ 15,254 >10%
- -
15. Stock Option Plans
------------------
The Holding Company's 1993 stock option plan provides for the benefit of
directors, officers, and other key employees. The number of shares of common
stock reserved for issuance under the stock option plan was equal to
approximately 10% of the total number of common shares issued pursuant to
the Company's offering. The plan provides for incentive options for officers
and employees and non-incentive options for directors. The plan is
administered by a committee of three directors appointed by the board of
directors. The option exercise price cannot be less than the fair value of
the underlying common stock as the date of the option grant, and the maximum
option term cannot exceed ten years. The number of shares of common stock
authorized under the stock option and incentive plan is 416,000, and 291,616
were granted in October 1993 at an exercise price of $10. No options were
granted in 1995, 1996, or 1997 and granted options were exercised in the
1996 fiscal year. The non-incentive options exercised in 1996 provided the
Holding Company with a tax deduction of approximately $1.3 million, which
consisted of the excess of the fair market value over the exercise price.
The tax benefit of that deduction of approximately $505,000 was credited to
stockholders' equity in 1996. There were 124,384 options available for
granting at June 30, 1996 and 1997.
Upon adoption of Statement of Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation", the Association elected
to measure compensation cost using APB Opinion No. 25, "Accounting for
Stock Issued to Employees". The Association made no grants of stock
options during the years ended June 30, 1995, 1996, and 1997, and
therefore no proforma disclosures are required as prescribed by SFAS No.
123.
21
<PAGE>
16. Pension Plan
------------
The Association maintains a Defined Contribution Money Purchase Pension Plan
to supplement its Profit Sharing and Employee Savings Plans. Under this
plan, the Board authorized an annual contribution of 3.5% of eligible
salaries. Eligible employees are the same as those defined in the Profit
Sharing and Employee Savings Plan. The expense for this plan was
approximately $79,000, $76,000 and $84,000 for the years ending June 30,
1995, 1996 and 1997, respectively.
17. Profit Sharing and Employee Savings Plans
-----------------------------------------
The Association established a qualifying noncontributory profit sharing plan
covering substantially all employees who have completed one year of service
and have attained the age of twenty-one. All employer contributions, as
determined by the Board of Directors, are irrevocable and the Association
has reserved the right of amendment and termination of the plan. No
contributions were made to the plan for the years ended June 30, 1995, 1996
and 1997, respectively. Certain officers and other eligible employees are
covered by a non-qualified plan. The expense recognized under this plan was
$58,000 for the years ended June 30, 1995 and 1996, respectively. No expense
was recognized for the year ended June 30, 1997.
The Association also sponsors an employee savings plan under Section 401(k)
of the Internal Revenue Code. This plan covers substantially all full-time
employees who have completed one year of service and have attained the age
of twenty-one. Employees may contribute a percentage of their annual gross
salary as limited by the federal tax laws. The Association matches employee
contributions based on the plan guidelines. The amount charged against
income was $68,000 $84,000 and $124,000 for the years ended June 30, 1995,
1996 and 1997, respectively.
18. Employee Stock Ownership Plan (ESOP)
------------------------------------
For the year ending June 30, 1995, the total contribution to the ESOP used
to fund principal and interest payments on the ESOP debt totaled
approximately $505,000. For the years ending June 30, 1996 and 1997, the
Association was not required to make any contributions to the ESOP Plan for
debt service due to the debt being repaid in June 1996 as a result of the
special dividend as discussed in Note 13.
For the years ending June 30, 1995 and 1996, compensation from the ESOP of
approximately $490,000 and $2,745,000 was expensed, respectively. No
compensation expense was recognized in 1997 since all ESOP shares had been
allocated. Compensation was recognized at the average fair value of the
ratably released shares during the accounting period as the employees
performed services. The ESOP used dividends on allocated and unallocated
shares, as determined by plan administrators, to pay off debt and accrued
interest. Additional compensation expense of approximately $1,967,000 was
recognized in 1996 because of the accelerated debt repayment by the ESOP
Plan as disclosed in Note 13.
For the purpose of computing earnings per share, all ESOP shares committed
to be released have been considered outstanding. All shares were released by
June 30, 1996.
19. Management Development and Recognition Plans
--------------------------------------------
The Association has established four management development and recognition
plans ("MRPs") which purchased 166,400 shares of common stock. The
Association contributed $1.7 million to fund the purchase of the MRP shares.
The shares were awarded to certain officers and directors of the Association
who began vesting on January 1, 1994, and were fully vested on January 1,
1996. Compensation expense in the amount of the fair value of the common
stock at the date of grant to the officer or director was recognized during
the periods the participants become vested. For the years ending June 30,
1995 and 1996, approximately $575,000 and $257,000 of compensation expense
has been recognized, respectively. All of the shares were vested as of June
30, 1996, and therefore no expense was recognized in 1997.
22
<PAGE>
20. Employment and Change of Control Agreements
-------------------------------------------
The Association and the Holding Company entered into employment agreements
with certain key officers. The employment agreements provide for three-year
terms. Commencing on the first anniversary date and continuing each
anniversary date thereafter, the respective boards of directors may extend
the agreements for an additional year so that the remaining terms shall be
three years, unless written notice of termination of the agreement is given
by the executive officer. The agreements provide for severance payments and
other benefits in the event of involuntary termination of employment in
connection with any change in control of the employers. Severance payments
also will be provided on a similar basis in connection with voluntary
termination of employment where, subsequent to a change in control, officers
are assigned duties inconsistent with their positions, duties,
responsibilities and status immediately prior to such change in control. The
severance payments will equal 2.99 times the executive officer's average
annual compensation during the preceding five years. The employment
agreements provide for termination by the Association or the Holding Company
for just cause at any time. The Company has not accrued any benefits under
these postemployment agreements.
21. Commitments
-----------
The Company had outstanding commitments to originate mortgage loans of
approximately $3,600,000 and $4,250,000 at June 30, 1996 and 1997,
respectively. The commitments to originate mortgage loans at June 30, 1996,
were composed of variable-rate loans of $3,240,000 and fixed-rate loans of
$360,000. The fixed-rate loans had interest rates ranging from 7.75% to
7.875% and terms ranging from 10 to 15 years. The commitments to originate
mortgage loans at June 30, 1997, were composed of variable-rate loans of
$3,870,000 and fixed-rate loans of $380,000. The fixed-rate loans had
interest rates ranging from 7.50% to 8.25% and terms ranging from 15 to 30
years.
The Company has executed construction contracts and committed to spend
approximately $720,000 on building branches in leased space. The Company
executed related long-term lease agreements with commencement dates
beginning after June 30, 1997. The leases require one-time advance payments
of approximately $165,000, exclusive of annual rental payments of $75,000.
22. Financial Instruments with Off-Balance-Sheet Risk
-------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and lines of credit. Those instruments involve, to varying degrees, elements
of credit and interest-rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of those instruments reflect
the extent of the Company's involvement in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
lines of credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance- sheet instruments.
Financial instruments, the contract amounts of which represent credit risk
for lines of credit, totaled approximately $14.1 million at June 30, 1997.
23
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness. The amount of collateral obtained, if it
is deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral may include
accounts receivable, inventory, stocks, property, plant, and equipment,
income-producing commercial properties, and first and second mortgages on
single family residences.
The undisbursed advances on customer lines of credit were approximately $7.8
million at June 30, 1997. The Company does not anticipate any losses as a
result of these transactions.
23. Deposit Insurance Premiums
--------------------------
The Association recorded an expense in 1997 for the one-time special
assessment levied by the omnibus appropriation bill to recapitalize the
Savings Association Insurance Fund (SAIF). The special assessment for
deposit insurance premiums of approximately $1,792,000 has been reflected in
income for the year ending June 30, 1997, with an after tax impact on net
income of approximately $1,183,000. Effective January 1, 1997, the
Association began paying reduced premium assessments in accordance with the
new SAIF assessment schedule.
24. Financial Instruments
---------------------
The approximate stated and estimated fair value of financial instruments are
summarized below (in thousands of dollars):
June 30,
--------------------------------------------
1996 1997
--------------------- -------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Cash $ 13,323 $ 13,323 $ 13,651 $ 13,651
Investment securities 50,990 50,233 37,360 36,998
Loans receivable, net 238,337 239,147 272,401 270,794
Mortgage-backed securities 17,598 17,307 14,352 14,298
Federal Home Loan Bank
stock 2,691 2,691 2,691 2,691
Other assets 2,294 2,294 2,342 2,342
--------- --------- --------- ---------
$ 325,233 $ 324,995 $ 342,797 $ 340,774
========= ========= ========= =========
Financial liabilities:
Deposits:
Demand accounts $ 64,468 $ 64,468 $ 62,556 $ 62,556
Certificate accounts 223,749 224,774 222,227 222,077
Reverse repurchase
agreement 5,000 5,000 15,000 14,916
Advances from Federal
Home Loan Bank - - 10,000 10,000
Other liabilities 1,764 1,764 1,784 1,784
--------- --------- --------- ---------
$ 294,981 $ 296,006 $ 311,567 $ 311,333
========= ========= ========= =========
24
<PAGE>
The Company had off-balance sheet financial commitments, which include
approximately $12.1 million of commitments to originate and fund loans and
unused consumer lines and letters of credit. Since these commitments are
based on current market rates, the commitment amount is considered to be a
reasonable estimate of fair market value.
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires disclosure of fair
value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash - The carrying amount of such instruments is deemed to be a reasonable
estimate of fair value.
Investments - Fair values for investment securities are based on quoted
market prices.
Loans - Fair values for loans held for investment are estimated by
segregating the portfolio by type of loan and discounting scheduled cash
flows using interest rates currently being offered for loans with similar
terms, reduced by an estimate of credit losses inherent in the portfolio. A
prepayment assumption is used as an estimate of the portion of loans that
will be repaid prior to their scheduled maturity.
Federal Home Loan Bank Stock - No ready market exists for this stock and it
has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amount is deemed
to be a reasonable estimate of fair value.
Deposits - The fair values disclosed for demand deposits are, as required by
SFAS 107, equal to the amounts payable on demand at the reporting date
(i.e., their stated amounts). The fair value of certificates of deposit are
estimated by discounting the amounts payable at the certificate rates using
the rates currently offered for deposits of similar remaining maturities.
Securities Sold with Agreement to Repurchase - The estimated fair value of
this short-term debt is based on discounting amounts payable at the
contractual rates using current market rates for debt with a similar
maturity.
Advances from the FHLB - The estimated fair value of advances from the FHLB
is based on discounting amounts payable at contractual rates using current
market rates for advances with similar maturities.
Other Assets and Other Liabilities - Other assets represent accrued interest
receivable; other liabilities represent advances from borrowers for taxes
and insurance and accrued interest payable. Since these financial
instruments will typically be received or paid within three months, the
carrying amounts of such instruments are deemed to be a reasonable estimate
of fair value.
Fair value estimates are made at a specific point of time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale the Company's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
current interest rates and prepayment trends, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in any
of these assumptions used in calculating fair value also would affect
significantly the estimates. Further, the fair value estimates were
calculated as of June 30, 1996 and 1997. Changes in market interest rates
and prepayment assumptions could change significantly the estimated fair
value.
25
<PAGE>
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, the Company has
significant assets and liabilities that are not considered financial assets
or liabilities including deposit franchise value, loan servicing portfolio,
real estate, deferred tax liabilities, and office properties and equipment.
In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
25. Condensed Parent Company Only Financial Statements
--------------------------------------------------
The following condensed balance sheets as of June 30, 1996 and 1997, and
condensed statements of income and cash flows for the years ended June 30,
1995, 1996, and 1997 for First Southeast Financial Corporation should be
read in conjunction with the consolidated financial statements and the notes
thereto.
Parent Company Only June 30,
-----------------------
Balance Sheets (in thousands) 1996 1997
---- ----
Assets:
Cash and due from banks $ 5 $ 30
Equity in net assets of Association 34,274 34,678
Other 785 424
--------- ---------
Total assets $ 35,064 $ 35,132
========= =========
Liabilities:
Accrued liabilities $ 1,561 $ 86
--------- ---------
Stockholders' equity:
Common stockholders' equity 33,503 35,046
--------- ---------
Total liabilities and stockholders' equity $ 35,064 $ 35,132
========= =========
Parent Company Only Year Ending June 30,
----------------------------------
Statements of Income (in thousands) 1995 1996 1997
---- ---- ----
Equity in earnings of Association $ 2,971 $ 901 $ 2,583
Interest income 1,145 906 -
Loss on sale of investment securities (11) (593) -
Other expense (183) (259) (391)
Income tax (expense) benefit (345) (16) 133
--------- --------- ---------
Net income $ 3,577 $ 939 $ 2,325
========= ========= =========
The Association subsidiary paid the parent company cash dividends of
$1,100,000, $21,470,000 and $2,275,000 during the years ending June 30,
1995, 1996 and 1997, respectively.
26
<PAGE>
Parent Company Only Year Ending June 30,
----------------------------------
Statements of Cash Flows (in 1995 1996 1997
thousands) ---- ---- ----
Operating activities:
Net income $ 3,577 $ 939 $ 2,325
Adjustments to reconcile net
income to net cash provided
by operating activities:
Undistributed equity earnings of
Association (2,971) (901) (2,583)
Distribution of equity earnings
of Association 1,100 5,140 2,275
Realized losses on securities 11 593 -
Amortization of premiums on
mortgage-backed securities 49 38 -
Deferred income tax benefit (11) (219) -
(Increase) decrease in interest
receivable (12) 65 -
Decrease in other assets - 54 361
Increase (decrease) in accrued
liabilities (177) 1,549 (1,475)
Net cash provided by operating
activities 1,566 7,258 903
-------- -------- --------
Investing activities:
Principal repayment by ESOP 333 2,662 -
Purchase of investment securities (1,621) - -
Proceeds from sale of investment
securities 250 8,498 -
Principal payments on mortgage-
backed securities 1,597 1,606 -
Proceeds from sale of mortgage-
backed securities - 6,430 -
Return of capital from Association - 16,330 -
-------- -------- --------
Net cash provided by investing
activities 559 35,526 -
-------- -------- --------
Financing activities:
Proceeds from issuance of common
stock and treasury stock - 2,916 -
Purchase of treasury stock (1,074) - -
Dividends paid (1,018) (45,729) (878)
Net cash used by financing -------- -------- --------
activities (2,092) (42,813) (878)
-------- -------- --------
Net increase (decrease) in cash 33 (29) 25
Cash at beginning of year 1 34 5
-------- -------- --------
Cash at end of year $ 34 $ 5 $ 30
======== ======== ========
Supplemental disclosures:
------------------------
Cash paid during the period for
income taxes $ 532 $ 306 $ -
======== ======== ========
Non-cash investing and financing activities:
Transfer of investment securities
from held to maturity to available
for sale $ - $ 1,000 $ -
Transfer of mortgage-backed
securities from held to maturity
to available for sale - 6,681 -
Tax benefit from stock options
exercised - 505 -
Unrealized gains on securities,
net of taxes 241 180 96
27
<PAGE>
26. First Southeast Financial Corporation and Subsidiary Quarterly Results of
Operations (unaudited)
--------------------------------------------------------------------------
(In thousands)
Year Ended June 30, 1996 Year Ended June 30, 1997
------------------------------- -------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Interest
income $6,419 $6,454 $6,442 $ 6,462 $6,209 $6,122 $6,232 $6,375
Interest
expense 3,622 3,641 3,573 3,521 3,652 3,560 3,572 3,633
------ ------ ------ ------- ------ ------ ------ ------
Net interest
income 2,797 2,813 2,869 2,941 2,557 2,562 2,660 2,742
Provision
for loan
losses 45 45 45 45 45 45 45 45
------ ------ ------ ------- ------ ------ ------ ------
Net interest
income after
provision for
loan losses 2,752 2,768 2,824 2,896 2,512 2,517 2,615 2,697
Noninterest
income 244 244 251 (629) 310 294 297 280
Noninterest
expense 1,835 1,941 1,809 3,805 3,346 1,537 1,474 1,516
------ ------ ------ ------- ------ ------ ------ ------
Income (loss)
before income
tax expense 1,161 1,071 1,266 (1,538) (524) 1,274 1,438 1,461
Income tax
expense
(benefit) 405 344 446 (174) (230) 476 539 539
------ ------ ------ ------- ------ ------ ------ ------
Net income
(loss) $ 756 $ 727 $ 820 $(1,364) $ (294) $ 798 $ 899 $ 922
====== ====== ====== ======= ====== ====== ====== ======
Fourth quarter 1996 results include additional expense of approximately
$1,967,000 related to ESOP compensation that was recognized upon the release
of the remaining unallocated shares due to ESOP debt repayment. Realized
losses on securities of $891,000 were recognized upon the liquidation of
investments to fund the Holding Company's special dividend of $10 per share.
First quarter 1997 results reflect the special SAIF assessment, net of tax,
of approximately $1,183,000.
27. Subsequent Event
----------------
The Company announced on July 1, 1997, its signing of a definitive agreement
by which the Company will merge with a commercial bank. Under the agreement,
the Company's shareholders will receive one share of the commercial bank's
common stock subject to an exchange ratio as defined in the merger
agreement. The completion of the transaction is subject to regulatory and
shareholder approval of the reorganization agreement.
The pending change in control, when approved and consummated, would result
in the payment of certain employee severance benefits, the payment of
employment contract settlements, and the acceleration of certain benefit
payments from nonqualified retirement plans. At June 30, 1997, the Company
has not accrued any liabilities with regard to these potential benefit
payments that would only result upon approval and completion of the merger.
28
<PAGE>
Unaudited Pro Forma Combined Condensed Balance Sheet
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------- Purchase
First Accounting Pro Forma
CFC Southeast Adjustments Combined
--------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Assets: (Dollars in thousands, except share data and footnotes)
Cash and due from banks $64,674 $5,081 ($329)(a) $69,426
Interest-earning deposits 20,602 8,762 -- 29,364
Investment securities 273,354 53,045 (207)(b) 326,192
Loans 1,318,366 290,072 1,220 (c) 1,609,658
Less unearned income (12,754) (13,340) -- (26,094)
Less allowance for loan losses (13,925) (1,389) -- (15,314)
-------- ------- ------ --------
Net loans 1,291,687 275,343 1,220 1,568,250
Premises and equipment 31,501 4,468 447 (d) 36,416
Intangible assets 12,408 -- 38,410 (e) 50,818
Other assets 68,448 3,339 500 (d) 72,287
------ ----- ------- ------
Total assets $1,762,674 $350,038 $40,041 $2,152,753
========== ======== ======= ==========
Liabilities and Shareholders' equity:
Liabilities
Deposits
Noninterest-bearing $187,817 $276,092 $ -- $463,909
Interest-bearing 1,208,985 8,762 -- 1,217,747
--------- ----- ------- ---------
Total deposits 1,396,802 284,854 -- 1,681,656
Borrowed funds 219,694 25,000 -- 244,694
Other liabilities 21,677 4,206 1,921 (f) 31,156
------ ----- ------
1,164 (g)
1,438 (h)
750 (i)
Total liabilities 1,638,173 314,060 5,273 1,957,506
--------- ------- ----- ---------
Total shareholders' equity 124,501 35,978 (750)(i) 195,247
------- ------ 35,518 (j) -------
-------
Total liabilities and shareholders' equity $1,762,674 $350,038 $40,041 $2,152,753
========== ======== ======= ==========
</TABLE>
(a) To record the payment of transaction fees.
(b) To adjust the investment securities of First Southeast to estimated market
value.
(c) To adjust the loan portfolio of First Southeast to estimated market value.
(d) To adjust the fixed assets and property of First Southeast to estimated
market value.
(e) To record the excess cost of acquisition over the estimated market value of
the net assets acquired (goodwill of $32,713,000) and the core deposit
premium ($5,697,000).
(f) To adjust the deferred tax liabilities as a result of the purchase
accounting adjustments using Carolina First's statutory tax rate of 38%.
(g) To record the liability for a benefit plan for First Southeast's directors.
(h) To record the buyout of employment contracts and severance payments.
(i) To record estimated merger costs related to the Merger.
(j) To give effect to the acquisition of First Southeast, and the issuance of
3,497,859 shares of CFC common stock, $1.00 par per share, based on an
average market price of $20.44 per share of CFC common stock and the
exchange ratio of .7971. The total value of CFC common stock exchanged
would be $71,496,236.53.
29
<PAGE>
(b) Pro Forma Financial Information.
Unaudited Pro Forma Combined Condensed Statement of Earnings
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
--------------------------------------- Purchase
First Accounting Pro Forma
CFC Southeast Adjustments Combined
------------------ ----------------- --------------- -------------
<S> <C> <C> <C> <C>
(Dollars in thousands, except share data)
Interest income $97,261 $19,204 ($109)(a) $116,356
Interest expense 48,996 11,069 -- 60,065
------ ------ ------ ------
Net interest income 48,265 8,135 (109) 56,291
Provision for loan losses 9,603 135 -- 9,738
----- --- ------ -----
Net interest income after
provision for loan losses 38,662 8,000 (109) 46,553
Noninterest income 15,222 880 -- 16,102
Noninterest expenses 38,278 4,499 777 (b) 44,547
------ ----- ------
981 (c)
12 (d)
Income before income taxes 15,606 4,381 (1,879) 18,108
Income taxes 5,590 1,634 (341)(e) 6,883
----- ----- ----- -----
Net income 10,016 2,747 (1,538) 11,225
Dividends on preferred stock -- -- -- --
Net income applicable to
common shareholders......................... $10,016 $2,747 ($1,538) $11,225
======= ====== ======== =======
Net income per common share
Primary............................................$0.86 $0.64 $ -- $0.74
Fully diluted.......................................0.86 0.64 -- 0.74
Average shares outstanding
Primary.......................................11,662,194 4,388,231 -- 15,160,053
Fully diluted.................................11,693,326 4,388,231 -- 15,191,185
</TABLE>
(a) To amortize the securities and loan mark-to-market adjustment over a period
of seven years.
(b) To amortize the core deposit premium based on a sum-of-the-year's digits
method over 10 years.
(c) To amortize goodwill over a 25-year period using the straight-line method.
(d) To increase depreciation expense from mark-up of Lowcountry premises and
equipment to an estimated market value.
(e) To show impact of taxes at 38% tax rate.
30
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Earnings
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-------------------------------------- Purchase
Carolina First First Accounting Pro Forma
Corporation Southeast Adjustments Combined
-------------- --------- ----------- ---------
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C>
Interest income $116,872 $ 25,235 $ (144) (a) $141,963
Interest expenses 59,802 14,306 -- 74,108
-------- -------- ------------- --------
Net interest income 57,070 10,929 (144) 67,855
Provision for loan losses 10,263 180 -- 10,443
-------- -------- ------------- --------
Net interest income after
provision for loan losses 46,807 10,749 (144) 57,412
Noninterest income 21,341 226 -- 21,567
Noninterest expenses 51,675 10,497 1,028 (b) 64,493
-------- -------- --------
1,278 (c)
15 (d)
-------------
Income before income taxes 16,473 478 (2,465) 14,486
Income taxes 5,999 518 ( 451) (e) 6,066
Net income 10,474 (40) (2,014) 8,420
Dividends on preferred stock 63 -- -- 63
-------- -------- -------------- --------
Net income applicable to
common shareholders $ 10,411 $ (40) $ (2,014) $ 8,357
======== ======== ============== ========
Net income per common share
Primary $ 0.96 $ (0.01) $ -- $ 0.59
Fully diluted 0.92 (0.01) -- 0.57
Average shares outstanding
Primary 10,839,708 4,263,730 -- 14,238,327
Fully diluted 11,371,547 4,263,730 -- 14,770,166
</TABLE>
- ----------------------------
(a) To amortize the securities and loan market-to-market adjustment over a
period of seven years.
(b) To amortize the core deposit premium based on a sum-of-the-year's
digits method over 10 years.
(c) To amortize goodwill over a 25-year period using the straight-line
method.
(d) To increase depreciation expense from mark-up of First Southeast
premises and equipment to an estimated market value.
(e) To show impact of taxes at 38% tax rate.
31
<PAGE>
(c) Exhibits.
2.1 Reorganization Agreement dated as of July 1, 1997 by and among
Carolina First Corporation, Carolina First Bank, First
Southeast Financial Corporation and First Federal Savings and
Loan Association of Anderson. Incorporated by reference to
Exhibit 2.1 of Carolina First Corporation's Registration
Statement on Form S-4, Commission File No. 33-32459.
23.1 Consent of Crisp Hughes Evans LLP
27.1 Financial Data Schedule
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CAROLINA FIRST CORPORATION
December 5, 1997 By: /s/ William S. Hummers III
--------------------------
William S. Hummers III
Executive Vice President, Chief Financial
Officer and Secretary of the Company
and Carolina First Bank
33
<PAGE>
Exhibit Index
EXHIBIT
2.1 Reorganization Agreement dated as of July 1, 1997 by and among
Carolina First Corporation, Carolina First Bank, First
Southeast Financial Corporation and First Federal Savings and
Loan Association of Anderson. Incorporated by reference to
Exhibit 2.1 of Carolina First Corporation's Registration
Statement on Form S-4, Commission File No. 33-32459.
23.1 Consent of Crisp Hughes Evans LLP
27.1 Financial Data Schedule
34
<PAGE>
Exhibit 23.1
[FIRM LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated July 31, 1997, accompanying the consolidated
financial statements of First Southeast Financial Corporation and Subsidiary and
schedules included in their Annual Report on Form 10-K for the year ending June
30, 1997. We consent to the inclusion of this report in the Report on Form 8-K
of Carolina First Corporation reporting the acquisition by merger of First
Southeast Financial Corporation on November 21, 1997.
/s/ Crisp Hughes Evans LLP
CRISP HUGHES EVANS LLP
Asheville, North Carolina
December 4, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 64,674
<INT-BEARING-DEPOSITS> 20,602
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 3,484
<INVESTMENTS-HELD-FOR-SALE> 236,869
<INVESTMENTS-CARRYING> 33,001
<INVESTMENTS-MARKET> 33,524
<LOANS> 1,305,612
<ALLOWANCE> 13,925
<TOTAL-ASSETS> 1,762,674
<DEPOSITS> 1,396,802
<SHORT-TERM> 193,155
<LIABILITIES-OTHER> 21,677
<LONG-TERM> 26,539
0
0
<COMMON> 12,150
<OTHER-SE> 112,351
<TOTAL-LIABILITIES-AND-EQUITY> 1,762,674
<INTEREST-LOAN> 31,054
<INTEREST-INVEST> 3,599
<INTEREST-OTHER> 266
<INTEREST-TOTAL> 34,919
<INTEREST-DEPOSIT> 14,770
<INTEREST-EXPENSE> 17,967
<INTEREST-INCOME-NET> 16,952
<LOAN-LOSSES> 3,610
<SECURITIES-GAINS> 1,571
<EXPENSE-OTHER> 13,173
<INCOME-PRETAX> 5,695
<INCOME-PRE-EXTRAORDINARY> 5,695
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,638
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 8.85
<LOANS-NON> 1,508
<LOANS-PAST> 4,033
<LOANS-TROUBLED> 1,283
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,175
<CHARGE-OFFS> 2,877
<RECOVERIES> 138
<ALLOWANCE-CLOSE> 13,925
<ALLOWANCE-DOMESTIC> 13,925
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
