Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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 0-15083
CAROLINA FIRST CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 57-0824914
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
----------------
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
The number of outstanding shares of the issuer's $1.00 par value common stock as
of November 10, 1998 was 22,392,063.
<PAGE>
CONSOLIDATED BALANCE SHEETS
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------------------------------------------------
Assets 1998 1997 1997
--------------------------------- --------------------------------
<S> <C> <C> <C>
Cash and due from banks........................................... $ 79,512 $ 64,674 $ 73,326
Interest-bearing bank balances.................................... 51,365 20,602 34,703
Federal funds sold and resale agreements.......................... 115,050 -- --
Securities
Trading........................................................ 2,514 3,484 2,349
Available for sale............................................. 356,086 236,869 262,329
Held for investment (market value $49,026, $33,524 and
$34,494, respectively)......................................... 47,639 33,001 33,855
------------------ -------------- -----------------
Total securities............................................. 406,239 273,354 298,533
------------------ -------------- -----------------
Loans held for sale............................................... 88,055 28,372 235,151
Loans held for investment......................................... 1,677,880 1,289,994 1,379,039
Less unearned income........................................... (8,536) (12,754) (11,775)
Less allowance for loan losses................................. (17,627) (13,925) (16,211)
------------------ -------------- -----------------
Net loans.................................................... 1,739,772 1,291,687 1,586,204
------------------ -------------- -----------------
Premises and equipment............................................ 44,683 31,501 39,682
Accrued interest receivable....................................... 18,067 12,408 15,484
Intangible assets................................................. 117,476 23,119 58,228
Other assets...................................................... 60,510 45,329 50,186
------------------ -------------- -----------------
$ 2,632,674 $ 1,762,674 $ 2,156,346
================== ============== =================
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing........................................... $ 252,706 $ 187,817 $ 206,938
Interest-bearing.............................................. 1,816,434 1,208,985 1,539,604
------------------ -------------- -----------------
Total deposits.............................................. 2,069,140 1,396,802 1,746,542
Borrowed funds.................................................. 163,238 194,237 153,369
Subordinated notes.............................................. 25,586 25,457 25,489
Accrued interest payable........................................ 16,113 10,849 13,518
Other liabilities............................................... 21,163 10,828 15,769
------------------ -------------- -----------------
Total liabilities............................................ 2,295,240 1,638,173 1,954,687
------------------ -------------- -----------------
Shareholders' Equity
Preferred stock-no par value; authorized 10,000,000 shares;
issued and outstanding none................................... -- -- --
Common stock-par value $1 per share; authorized 100,000,000
shares; issued and outstanding 21,728,599, 12,150,453 and
15,659,338 shares, respectively............................... 21,729 12,150 15,659
Surplus......................................................... 285,668 97,846 164,517
Retained earnings............................................... 31,323 16,989 20,059
Guarantee of employee stock ownership plan debt and
nonvested restricted stock.................................. (3,182) (3,489) (3,129)
Accumulated other comprehensive income, net of tax................ 1,896 1,005 4,553
------------------ -------------- -----------------
Total shareholders' equity................................... 337,434 124,501 201,659
------------------ -------------- -----------------
$ 2,632,674 $ 1,762,674 $ 2,156,346
================== ============== =================
</TABLE>
1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Interest Income
<S> <C> <C> <C> <C>
Interest and fees on loans .......................... $ 37,790 $ 31,054 $109,969 $ 86,325
Interest and dividends on securities ................ 6,000 3,599 16,945 10,224
Interest on short-term investments .................. 1,439 266 3,945 712
-------- ------- ------- ------
Total interest income ............................. 45,229 34,919 130,859 97,261
-------- ------- ------- ------
Interest Expense
Interest on deposits ................................ 20,178 14,770 59,462 40,076
Interest on borrowed funds .......................... 2,599 3,197 7,369 8,920
-------- ------- ------- ------
Total interest expense ............................ 22,777 17,967 66,831 48,996
-------- ------- ------- ------
Net interest income ............................... 22,452 16,952 64,028 48,265
Provision for Loan Losses ............................. 3,103 3,610 8,686 9,603
-------- ------- ------- ------
Net interest income after provision for loan losses 19,349 13,342 55,342 38,662
-------- ------- ------- ------
Noninterest Income
Service charges on deposit accounts ................. 2,102 1,758 6,236 5,120
Mortgage banking income ............................. 1,009 994 3,284 2,346
Loan securitization income .......................... 887 (146) 920 (310)
Fees for trust services ............................. 529 300 1,250 1,058
Gain on sale of securities .......................... 128 1,571 451 2,453
Gain on sale of branches ............................ -- -- -- 2,250
Sundry .............................................. 1,509 1,049 3,719 2,305
-------- ------- ------- ------
Total noninterest income .......................... 6,164 5,526 15,860 15,222
-------- ------- ------- ------
Noninterest Expenses
Personnel expense ................................... 7,842 6,734 22,645 19,436
Occupancy ........................................... 1,569 1,337 4,402 3,809
Furniture and equipment ............................. 1,195 982 3,339 2,853
Amoritzation of intangibles ......................... 1,043 504 2,735 917
Sundry .............................................. 4,866 3,616 12,876 11,263
-------- ------- ------- ------
Total noninterest expenses ........................ 16,515 13,173 45,997 38,278
-------- ------- ------- ------
Income before income taxes ........................ 8,998 5,695 25,205 15,606
Income taxes ........................................ 3,359 2,057 9,336 5,590
-------- ------- ------- ------
Net income ........................................ $ 5,639 $ 3,638 $ 15,869 $ 10,016
========= ======== ======== ======
Net Income per Common Share:
Basic ............................................. $ 0.31 $ 0.31 $ 0.91 $ 0.87
Diluted ........................................... 0.31 0.30 0.89 0.86
Average Common Shares Outstanding:
Basic ............................................. 18,052,647 11,855,443 17,446,512 11,510,575
Diluted ........................................... 18,371,205 12,059,301 17,799,710 11,672,269
Cash Dividends Declared per Common Share .............. $ 0.08 $ 0.07 $ 0.24 $ 0.21
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands, except share data)
<TABLE>
<CAPTION>
Retained Accumulated
Shares of Earnings Other
Common Preferred Common and Comprehensive
Stock Stock Stock Surplus Other* Income Total
----- ----- ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ........................... 11,225,568 $ 943 $11,226 $ 83,598 $ 8,714 $483 $104,964
Net income ......................................... -- -- -- -- 10,016 -- 10,016
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding gains arising during
period, net of taxes of $1,214 ............. -- -- -- -- -- 2,067 --
Less: reclassification adjustment for gains
included in net income, net of taxes of $908 -- -- -- -- -- (1,545) --
-------
Other comprehensive income ..................... -- -- -- -- -- 522 522
-------- -------
Comprehensive income ............................. -- -- -- -- -- -- 10,538
-------
Common stock issued pursuant to:
Purchase accounting acquisition .................. 508,435 -- 508 9,311 -- -- 9,819
Dividend reinvestment plan ....................... 43,602 -- 44 647 -- -- 691
Employee stock purchase plan ..................... 7,382 -- 7 110 -- -- 117
Employee stock ownership plan .................... 176,471 -- 176 2,824 (3,000) 0
Exercise of stock options and stock warrants ..... 80,654 -- 81 521 -- -- 602
Conversion and redemption of preferred stock ..... 108,341 (943) 108 835 -- -- --
Cash dividends paid/accrued:
Common stock ..................................... -- -- -- -- (2,573) -- (2,573)
Miscellaneous ..................................... -- -- -- -- 343 -- 343
---------------------------------------------------------------------------
Balance, September 30, 1997 .......................... 12,150,453 -- $12,150 $ 97,846 $13,500 $1,005 $124,501
===========================================================================
Balance, December 31, 1997 ........................... 15,659,338 -- $15,659 $ 164,517 $16,930 $4,553 $201,659
Net income ......................................... -- -- -- -- 15,869 -- 15,869
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during
period, net of taxes of $1,394 ............. -- -- -- -- -- (2,373) --
Less: reclassification adjustment for gains
included in net income, net of taxes of $167 -- -- -- -- -- (284) --
-------
Other comprehensive income ..................... -- -- -- -- -- (2,657) (2,657)
-------- -------
Comprehensive income ............................. -- -- -- -- -- -- 13,212
-------
Common stock issued pursuant to:
Stock offering ................................... 2,000,000 -- 2,000 36,374 -- -- 38,374
Purchase accounting acquisitions ................. 3,969,670 -- 3,970 82,919 -- -- 86,889
Dividend reinvestment plan ....................... 41,787 -- 42 938 -- -- 980
Restricted stock plan ............................ 28,945 -- 29 594 623
Employee stock purchase plan ..................... 6,509 -- 7 146 -- -- 153
Exercise of stock options and stock warrants ..... 22,350 -- 22 109 -- -- 131
Cash dividends paid/accrued:
Common stock ..................................... -- -- -- -- (4,606) -- (4,606)
Miscellaneous ..................................... -- -- -- 71 (52) -- 19
---------------------------------------------------------------------------
Balance, September 30, 1998 .......................... 21,728,599 -- $21,729 $ 285,668 $28,141 $1,896 $337,434
===========================================================================
</TABLE>
* Other includes guarantee of employee stock ownership plan debt and nonvested
restricted stock.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Carolina First Corporation and Subsidiaries
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income ................................................................ $ 15,869 $ 10,016
Adjustments to reconcile net income to net cash provided by
(used for) operations
Depreciation........................................................... 2,813 2,061
Amortization of intangibles............................................ 2,735 917
Provision for loan losses.............................................. 8,686 9,603
Gain on sale of branches............................................... -- (2,250)
Gain on sale of securities............................................. (451) (2,453)
Gain on sale of mortgage servicing rights.............................. -- (222)
Unrealized loss (gain) on trading securities........................... 13 (13)
Originations of mortgage loans held for sale........................... (368,843) 210,193)
Sale of mortgage loans held for sale................................... 443,417 138,223
Sale of consumer loans................................................. -- 15,798
Proceeds from sale of trading securities............................... 1,131,501 659,113
Proceeds from maturity of trading securities........................... 32,310 10,165
Purchase of trading securities......................................... (1,163,700) 670,529)
(Increase) decrease in accrued interest receivable..................... (904) 95
Increase in accrued interest payable................................... 2,356 985
Increase in other assets............................................... (6,971) (2,362)
(Decrease) increase in other liabilities............................... (1,594) 1,594
--------------------------
Net cash provided by (used for) operating activities...................... 97,237 (39,452)
--------------------------
Cash Flows From Investing Activities
Net increase in interest-earning deposits with banks....................... (16,662) 5,435
Net increase in federal funds sold and resale agreements................... (118,100) --
Proceeds from sale of securities available for sale........................ 34,499 21,203
Proceeds from maturity of securities available for sale.................... 305,267 130,422
Proceeds from maturity of securities held for investment................... 5,968 1,596
Purchase of securities available for sale.................................. (398,446) 171,332)
Purchase of securities held for investment................................. (9,136) (5,132)
Purchase of loans.......................................................... -- (20,182)
Net increase in loans...................................................... (110,025) (54,614)
Capital expenditures....................................................... (3,169) (1,511)
Proceeds from sale of mortgage servicing rights............................ -- 277
Net cash acquired in transactions accounted for under the
purchase method of accounting........................................... 28,451 4,259
Net cash outflow from sale of branches..................................... (38,480) (35,656)
--------------------------
Net cash used for investing activities .................................. (319,833) 125,235)
--------------------------
Cash Flows From Financing Activities
Net increase in deposits................................................... 188,535 106,838
Increase in borrowed funds................................................. 4,208 39,967
Cash dividends paid........................................................ (4,121) (2,378)
Issuance of common stock .................................................. 38,374 --
Other common stock activity................................................ 1,786 (1,388)
--------------------------
Net cash provided by financing activities................................ 228,782 143,039
--------------------------
Net change in cash and due from banks........................................ 6,186 (21,648)
Cash and due from banks at beginning of period............................... 73,326 86,322
--------------------------
Cash and due from banks at end of period..................................... $ 79,512 $ 64,674
==========================
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of these policies is included in the 1997 Annual Report to
Shareholders.
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting comprehensive income and its components in a full set of
general purpose financial statements. The objective of SFAS 130 is to
report a measure of all changes in equity of an enterprise that
result from transactions and other economic events during the period
other than transactions with owners. Comprehensive income is divided
into net income and other comprehensive income. Adoption of SFAS 130
will not change total shareholders' equity as previously reported. In
accordance with the provisions of SFAS 130, comparative financial
statements presented for earlier periods have been reclassified to
reflect the provisions of this statement.
(2) STATEMENTS OF CASH FLOWS
Cash includes currency and coin, cash items in process of collection
and due from banks. Interest paid, net of interest capitalized as a
part of the cost of construction, amounted to approximately
$64,475,000 for the nine months ended September 30, 1998. Income tax
payments of $9,352,000 and $5,049,000 were made for the nine months
ended September 30, 1998 and September 30, 1997, respectively.
(3) BUSINESS COMBINATIONS
On June 1, 1998, the Company completed the acquisition of Resource
Processing Group, Inc. ("RPGI"), a credit card origination and
servicing company headquartered in Columbia, South Carolina. In
connection with such acquisition, RPGI became a wholly-owned
subsidiary of the Company. The RPGI transaction was accounted for as
a purchase and resulted in the issuance of 398,610 shares of the
Company's common stock for the outstanding shares of RPGI common
stock. Additional shares of the Company's common stock may become
issuable in the event that certain performance related criteria are
met. The excess of the purchase price over the fair market value of
the net identifiable assets acquired of approximately $3.4 million
has been recorded as goodwill and is being amortized on a
straight-line basis over 25 years. At September 30, 1998, RPGI
operated through one location, had approximately $15.4 million is
assets and was servicing approximately $131 million in credit card
receivables.
On September 29, 1998, Carolina First Bank acquired First National
Bank of Pickens County ("First National"), a national bank
headquartered in Easley, South Carolina. The First National
transaction was accounted for as a purchase and resulted in the
issuance of 2,817,350 shares of the Company's common stock in
exchange for all the outstanding common shares of First National.
This transaction was valued at approximately $60 million as of the
closing date of the acquisition. The excess of the purchase price
over the fair market value of the net identifiable assets acquired of
approximately $45 million has been recorded as goodwill and core
deposit premium. First National operated through four
5
<PAGE>
locations and had total assets, loans, deposits and shareholders'
equity of approximately $120.6 million, $62.0 million, $95.2 million
and $16.4 million, respectively.
On September 30, 1998, the Company acquired Poinsett Financial
Corporation ("Poinsett"), the thrift holding company for Poinsett
Bank, a federal savings bank headquartered in Travelers Rest, South
Carolina. Poinsett Bank operated through three locations with total
assets, loans, deposits and shareholders' equity of approximately
$88.9 million, $67.0 million, $82.5 million and $4.9 million,
respectively. Poinsett Bank changed its name to Carolina First Bank,
F.S.B. and operates as a wholly-owned subsidiary of the Company. In
connection with such acquisition, 753,530 shares of the Company's
common stock valued at approximately $16 million (as of the closing
date of the acquisition) were exchanged for all outstanding shares of
Poinsett common stock. This transaction was accounted for using the
purchase method of accounting. The excess of the purchase price over
the fair market value of the net identifiable assets acquired of
approximately $12 million has been recorded as goodwill and core
deposit premium.
The following unaudited pro forma financial information presents the
combined results of operations of the Company, RPGI, First National
and Poinsett as if the mergers had occurred as of the beginning of
1998 and 1997, after giving effect to certain adjustments, including
amortization of intangible assets and payouts under employment
contracts. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the
Company, RPGI, First National and Poinsett constituted a single
entity during such periods. In addition, the pro forma financial
information does not reflect any potential cost savings or synergies
expected to be achieved following the merger.
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
($ in thousands, except share data)
<S> <C> <C>
Total revenue.............................. $168,875 $140,528
Net income................................. 11,704 7,512
Earnings per share (diluted)............... 0.54 0.48
</TABLE>
On June 12, 1998, Carolina First Bank completed the sale of three
branches located in Belton, Calhoun Falls and Honea Path, South
Carolina to two bank subsidiaries of Community Capital Corporation.
All three branches were former locations of First Federal Savings
and Loan Association of Anderson, a subsidiary of First Southeast
Financial Corporation ("First Southeast"), which was acquired by the
Company in November 1997. The deposit premium received of
approximately $2.7 million was used to reduce intangible asset
balances (recorded in connection with the First Southeast
acquisition), and accordingly no gain was recorded. In connection
with the sale, Carolina First Bank sold loans of approximately $2.2
million and transferred deposits of approximately $43.6 million.
(4) SECURITIES
The net unrealized gain on securities available for sale decreased
$2.7 million for the nine months ended September 30, 1998. The
majority of the decrease is attributable to the decline in the market
value of the Affinity Technology Group, Inc. shares.
6
<PAGE>
(5) COMMON STOCK
Basic earnings per share is based on the weighted average number of
common shares outstanding during each period. Basic earnings per
share also reflects provisions for dividend requirements on all
outstanding shares of preferred stock.
Diluted earnings per share is based on the weighted average number of
common shares outstanding during each period, including the assumed
conversion of convertible preferred stock into common stock and the
assumed exercise of dilutive stock options using the treasury stock
method.
On September 28, 1998, the Company announced its intention to
repurchase shares of common stock for reissue in connection with the
acquisition of First National. The Company anticipates repurchasing
up to 1.4 million shares to effect the transaction.
(6) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is subject to various legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of
management based on consultation with legal counsel, any outcome of
such pending litigation would not materially affect the Company's
consolidated financial position or results of operations.
On November 4, 1996, a derivative shareholder action was filed in
Greenville County Court of Common Pleas against the Company, the
majority of the Company's and Carolina First Bank's directors and
certain executive and other officers. The named plaintiffs are the
Company by and through certain minority shareholders. The Company
filed a motion to dismiss with respect to all claims in this
complaint, which was granted in December 1997. Plaintiffs have filed
a motion for reconsideration and have the right to appeal the grant
of the motion to dismiss. Plaintiffs allege as causes of action the
following: conversion of corporate opportunity; fraud and
constructive fraud; and negligent management. The factual basis upon
which these claims are made generally involves the payment to Company
officers and other individuals of a bonus in stock held by the
Company in Affinity Technology Group, Inc. (as reward for their
efforts in connection with the Company's procurement of stock in
Affinity Technology Group, Inc.), statements to former shareholders
of Midlands National Bank in connection with the Company's
acquisition of that bank, and alleged mismanagement by certain
executive officers involving financial matters. The complaint seeks
damages for the benefit of the Company aggregating $41 million and
recision of the Affinity Technology Group, Inc. bonus.
In an action brought by the same attorneys who brought the
above-mentioned derivative action, on December 31, 1996, certain
individuals filed a class action lawsuit against the Company,
Carolina First Bank, and a number of officers and directors of the
Company and Carolina First Bank. In connection with the judge's
granting the motion to dismiss in the above-referenced derivative
action, the plaintiffs' attorneys withdrew this lawsuit, without
prejudice.
7
<PAGE>
(7) SUBSEQUENT EVENT
On October 19, 1998, the Company acquired all the outstanding common
shares of Colonial Bank of South Carolina, Inc. ("Colonial Bank"), a
state-chartered banking corporation headquartered in Camden, South
Carolina, in exchange for 651,455 shares of the Company's common
stock. This transaction was accounted for using the purchase method
of accounting and was valued at approximately $14 million (as of the
closing date of the acquisition). Colonial Bank operated through
three locations and had total assets, loans, deposits and
shareholders' equity of approximately $61.4 million, $50.7 million,
$43.0 million and $5.3 million, respectively.
(8) MANAGEMENT'S OPINION
The financial statements in this report are unaudited. In the opinion
of management, all adjustments necessary to present a fair statement
of the results for the interim periods have been made. All such
adjustments are of a normal, recurring nature.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND WITH THE
STATISTICAL INFORMATION AND FINANCIAL DATA APPEARING IN THEIS REPORT AS WELL AS
THE ANNUAL REPORT OF CAROLINA FIRST CORPORATION (THE "COMPANY") ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 997. RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1998 ARE NOT NECESSARILY INDICATIVE OF RESULTS TO BE
ATTAINED FOR ANY OTHER PERIOD.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include, but are not limited to, the
following: risks from changes in economic and industry conditions; changes in
interest rates; risks inherent in making loans including repayment risks and
value of collateral; dependence on senior management; recently-enacted or
proposed legislation; and year 2000 readiness. Statements contained in this
filing regarding expected levels of past due credit cards may be forward-looking
statements and are subject to uncertainties and risks, including, but not
limited to, the demand for the Company's products and services, changing
economic conditions, interest rates, consumer spending and numerous other
factors.
OVERVIEW
The Company, a South Carolina corporation headquartered in
Greenville, South Carolina, is a financial institutions holding company, which
commenced banking operations in December 1986, and currently conducts business
through 73 locations in South Carolina. The Company operates through five
principal subsidiaries: Carolina First Bank, a state-chartered commercial bank;
Carolina First Mortgage Company ("CF Mortgage"), a mortgage banking company;
Carolina First Bank, F.S.B., a federal savings bank; Blue Ridge Finance Company,
Inc. ("Blue Ridge"), a consumer finance company; and Resource Processing Group,
Inc. ("RPGI"), a credit card servicing company. Through its subsidiaries, the
Company provides a full range of banking services, including mortgage, trust and
investment services, designed to meet substantially all of the financial needs
of its customers. At September 30, 1998, the Company had approximately $2.6
billion in assets, $1.8 billion in loans, $2.1 billion in deposits and $337.4
million in shareholders' equity.
Net income for the third quarter of 1998 increased to $5.6 million,
or $0.31 per diluted share, compared with $3.6 million, or $0.30 per diluted
share, for the same time period of 1997. Net income increased 55% from year to
year while earnings per diluted share increased 3%. The smaller increase in
earnings per diluted share was a result of a 52% increase in average common
shares outstanding, principally from the completion of two bank mergers in the
second half of 1997 and a secondary stock offering in 1998. The increase in net
income in the third quarter of 1998 was a
9
<PAGE>
result of an increase in net interest income and noninterest income partially
offset by an increase in noninterest expenses. The increase in net interest
income was attributable to a 33% increase in average earning assets. Net income
for the first nine months of 1998 increased $5.9 million to $15.9 million, or
$0.89 per diluted share, compared with $10.0 million, or $0.86 per diluted
share, for the same period of 1997. Net income for the first nine months of 1997
included a $1.5 million, or $0.13 per diluted share, after-tax gain on the sale
of branches.
On February 13, 1998, the Company completed the sale of 2.0 million
shares of its $1.00 par common stock ("Common Stock") to certain overseas
investors (the "Regulation S Offering"). The shares were offered and sold only
to non-U.S. persons under an exemption from registration provided by Regulation
S under the Securities Act of 1933. In connection with this offering, the
Company received net proceeds of approximately $39 million which is being used
to support internal growth, acquisitions and general corporate purposes.
Subsequent to the consummation of the Regulation S Offering, the Company filed a
registration statement with the Securities and Exchange Commission registering
the further sale of such shares by the institutional investors which purchased
the shares in the Regulation S Offering. This registration statement became
effective on March 11, 1998.
On June 1, 1998, the Company completed the acquisition of Resource
Processing Group, Inc. ("RPGI"), a credit card origination and servicing company
headquartered in Columbia, South Carolina. In connection with this acquisition,
RPGI became a wholly-owned subsidiary of the Company. The RPGI transaction was
accounted for as a purchase and resulted in the issuance of 398,610 shares of
the Company's Common Stock for the outstanding shares of RPGI common stock.
Additional shares of the Company's Common Stock may become issuable in the event
that certain performance related criteria are met. The excess of the purchase
price over the fair market value of the net identifiable assets acquired of
approximately $3.4 million has been recorded as goodwill and is being amortized
on a straight-line basis over 25 years. At September 30, 1998, RPGI operated
through one location, had approximately $15.4 million is assets and was
servicing approximately $131 million in credit card receivables.
On June 12, 1998, Carolina First Bank completed the sale of three
branches located in Belton, Calhoun Falls and Honea Path, South Carolina to two
bank subsidiaries of Community Capital Corporation. All three branches were
former locations of First Federal Savings and Loan Association of Anderson, a
subsidiary of First Southeast Financial Corporation ("First Southeast"), which
was acquired by the Company in November 1997. The deposit premium received of
approximately $2.7 million was used to reduce intangible asset balances
(recorded in connection with the First Southeast acquisition), and accordingly
no gain was recorded. In connection with the sale, Carolina First Bank sold
loans of approximately $2.2 million and transferred deposits of approximately
$43.6 million.
On September 28, 1998, the Company announced its intention to
repurchase shares of common stock for reissue in connection with the acquisition
of First National Bank of Pickens County ("First National"). The Company
anticipates repurchasing up to 1.4 million shares to effect the transaction.
On September 29, 1998, Carolina First Bank acquired First National, a
national bank headquartered in Easley, South Carolina. The First National
transaction was accounted for as a purchase and resulted in the issuance of
2,817,350 shares of the Company's common stock in exchange for all the
outstanding common shares of First National. This transaction was valued at
approximately $60 million as of the closing date of the acquisition. The excess
of the purchase price
10
<PAGE>
over the fair market value of the net identifiable assets acquired of
approximately $45 million has been recorded as goodwill and core deposit
premium. First National operated through four locations and had total assets,
loans, deposits and shareholders' equity of approximately $120.6 million, $62.0
million, $95.2 million and $16.4 million, respectively. The former First
National branches currently operate as branches of Carolina First Bank.
On September 30, 1998, the Company acquired Poinsett Financial
Corporation ("Poinsett"), the thrift holding company for Poinsett Bank, a
federal savings bank headquartered in Travelers Rest, South Carolina. Poinsett
Bank operated through three locations with total assets, loans, deposits and
shareholders' equity of approximately $88.9 million, $67.0 million, $82.5
million and $4.9 million, respectively. Poinsett Bank changed its name to
Carolina First Bank, F.S.B. and operates as a wholly-owned subsidiary of the
Company. In connection with such acquisition, 753,530 shares of the Company's
common stock valued at approximately $16 million (as of the closing date of the
acquisition) were exchanged for all outstanding shares of Poinsett common stock.
This transaction was accounted for using the purchase method of accounting. The
excess of the purchase price over the fair market value of the net identifiable
assets acquired of approximately $12 million has been recorded as goodwill and
and core deposit premium.
Carolina First Bank, F.S.B. has filed an application with the Office
of Thrift Supervision to open a branch location in Jacksonville, Florida. The
Company's strategy is to serve customers in markets where banking relationships
are in a state of flux due to bank mergers. The planned expansion to
Jacksonville, Florida represents an extension of the Company's existing
strategy, which has proven to be successful in South Carolina, to other
southeastern markets with similar market conditions.
On October 19, 1998, the Company acquired all the outstanding common
shares of Colonial Bank of South Carolina, Inc. ("Colonial Bank"), a
state-chartered banking corporation headquartered in Camden, South Carolina, in
exchange for 651,455 shares of the Company's common stock. This transaction was
accounted for using the purchase method of accounting and was valued at
approximately $14 million (as of the closing date of the acquisition). Colonial
Bank operated through three locations and had total assets, loans, deposits and
shareholders' equity of approximately $61.4 million, $50.7 million, $43.0
million and $5.3 million, respectively.
EQUITY INVESTMENTS
Investment in Net.B@nk, Inc.
At September 30, 1998, the Company owned 1,175,000 shares of
Net.B@nk, Inc. ("Net.B@nk") common stock, or approximately 18% of the
outstanding shares. These shares are carried on the Company's books (as
securities available for sale) at a basis of approximately $979,000. Net.B@nk
owns and operates Net.B@nk, FSB (which recently changed its name from Atlanta
Internet Bank, FSB), a FDIC-insured federal savings bank that provides banking
services to consumers utilizing the Internet for their commercial and financial
services. Under the terms of the Office of Thrift Supervision's approval,
certain affiliates of Net.B@nk, including the Company, may not sell their shares
in Net.B@nk until July 31, 2000.
11
<PAGE>
Investment in Affinity Technology Group, Inc.
At September 30, 1998, the Company (through its subsidiary Blue
Ridge) owned 2,528,366 shares of common stock of Affinity Technology Group, Inc.
("Affinity") and a warrant to purchase an additional 3,471,340 shares for
approximately $0.0001 per share ("Affinity Warrant"). These Affinity shares and
the shares represented by the Affinity Warrant constitute approximately 17% of
Affinity's outstanding common stock. The investment in Affinity's common stock,
which is included in securities available for sale and has a basis of
approximately of $301, was recorded at its market value of approximately $1.3
million. During the first nine months in 1998, the market value of Affinity's
common stock declined substantially decreasing the net unrealized gain on
securities available for sale by approximately $4.7 million. The Affinity
Warrant was not reported on the Company's balance sheet as of September 30,
1998.
The Company's shares in Affinity and the shares issuable upon the
exercise of the Affinity Warrant are "restricted" securities, as that term is
defined in federal securities laws.
Investments in Community Banks
As of September 30, 1998, the Company had equity investments in the
following community banks located in the Southeast: Capital Bank in Raleigh,
North Carolina; Carolina Savings Bank, Incorporated, S.S.B. in Greensboro, North
Carolina; Community Capital Corporation in Greenwood, South Carolina;
FirstSpartan Financial Corporation in Spartanburg, South Carolina; Florida
Banks, Incorporated in Jacksonville, FLorida; Heritage Bancorp, Incorporated in
Laurens, South Carolina; and People's Community Capital Corporation in Aiken,
South Carolina. In each case, the Company owns less than 5% of the community
bank's outstanding common stock. The Company has made these investments to
develop correspondent banking relationships and to promote community banking
in the Southeast.
CF Investment Company
In September 1997, the Company's subsidiary, CF Investment Company,
became licensed through the Small Business Administration to operate as a Small
Business Investment Company. CF Investment Company is a wholly-owned subsidiary
of Blue Ridge. CF Investment Company's principal focus is on companies where the
Company and its subsidiaries can both use and invest in a bank-related
technology or service. In 1997, the Company capitalized CF Investment Company
with a contribution of $3.0 million. CF Investment Company has invested
approximately $2 million in companies specializing in electronic document
management, Internet development and credit decision systems.
EARNINGS REVIEW
Net Interest Income
The largest component of the Company's net income is Carolina First
Bank's net interest income. Net interest income is the difference between the
interest earned on assets and the interest paid for the liabilities used to
support such assets. Fully tax-equivalent net interest income adjusts the yield
for assets earning tax-exempt income to a comparable yield on a taxable basis.
Fully tax equivalent net interest income increased $15.6 million, or 32%, to
$64.5 million for the first nine
12
<PAGE>
months of 1998 from $48.9 million for the first nine months of 1997. The
increase resulted principally from a higher level of average earning assets
partially offset by a lower net interest margin. The growth in average earning
assets, which increased $552.8 million, or 37%, to approximately $2.0 billion in
the first nine months of 1998 from $1.5 billion in the first nine months of
1997, resulted from an increase in both loans and investment securities
primarily from two acquisitions completed during the second half of 1997.
Average loans and average investment securities increased $336.1 million and
$137.3 million, respectively, in the first nine months of 1998 compared with the
first nine months of 1997.
The net interest margin for the nine months ended September 30, 1998
of 4.24% was lower than the margin of 4.40% for the same period of 1997. The
lower net interest margin for the first nine months of 1998 resulted from lower
earning asset yields and higher deposit costs. The yield on loans was lower in
the first nine months of 1998 as a result of a change in the mix of loans and a
higher level of investments. Approximately $246 million, or 89%, of the loans
acquired in the First Southeast acquisition (which closed in November 1997) were
mortgage loans which typically have a lower yield than commercial or consumer
loans. During the first nine months of 1998, the Company made significant
progress in restructuring the balance sheet through mortgage loan sales.
Approximately $153 million of the First Southeast mortgage loans were sold in
the first quarter of 1998. The Company is redeploying the proceeds from these
mortgage loan sales into higher yielding commercial and consumer loans. During
the second and third quarter of 1998, the Company's average investments
increased due to temporarily investing proceeds from First Southeast mortgage
loans sales. Going forward, the Company plans to continue to redeploy balances
currently invested in securities and in other temporary, short-term investments
into loans. Average investments, including temporary investments, as a
percentage of average earning assets were 23.0% and 16.9% for the nine months
ended September 30, 1998 and September 30, 1997, respectively. The earning asset
yield was enhanced somewhat by higher credit card loan yields from repricing the
credit card portfolio as well as higher loan fee income.
The higher deposit costs in 1998 resulted from the large number of
certificates of deposit acquired from First Southeast. Approximately 73% of
First Southeast's total deposits were certificates of deposit or individual
retirement accounts. Certificates of deposit typically have higher rates than
transaction accounts. The Company is currently focusing on shifting the deposit
mix to more closely resemble a commercial bank by increasing deposit transaction
accounts. The Company's cost of deposits has been decreasing with the declining
interest rate environments and the Company's rate reductions.
The net interest margin of 4.29% for the third quarter of 1998 showed
improvement over the net interest margins of 4.17% and 4.26% for the first and
second quarters of 1998, respectively. The increase during 1998 resulted from
redeploying the proceeds from First Southeast mortgage loan sales into higher
yielding assets and repricing the credit card portfolio. The net interest margin
also increased as a result of improving the mix of deposits by adding more
transaction accounts.
Provision for Loan Losses
The provision for loan losses was $8.7 million for the first nine
months of 1998 and $9.6 million for the first nine months of 1997. The higher
1997 provision for loan losses reflected higher levels of net credit card
charge-offs. During the first nine months of 1998, credit card charge-offs
totaled $2.8 million compared with $4.3 million in the first nine months of
1997.
13
<PAGE>
Management currently anticipates that loan growth will continue in
1998 and into 1999. New market areas are expected to contribute to 1998 and 1999
portfolio growth. Management intends to closely monitor economic trends and the
potential effect on the banking subsidiaries' loan portfolios. In addition,
management is discussing year 2000 readiness with loan customers to assess the
related loan collection risk.
Noninterest Income
Noninterest income increased 4% to $15.9 million for the nine months
ended September 30, 1998 from $15.2 million for the nine months ended September
30, 1997. During the second quarter of 1997, the Company recorded a gain on the
sale of five branches of $2,250,000. The Company recognized gains on the sale of
securities of $451,000 and $2.5 million in the first nine months of 1998 and
1997, respectively. The securities gain in 1997 included $745,000 from the sale
of ComSouth Bankshares, Inc. stock and approximately $1.5 million from the sale
of NetB@nk stock. See "EQUITY INVESTMENTS -- Investment in NetB@nk, Inc."
Excluding the asset sale and securities transactions discussed above,
noninterest income increased $4.9 million to $15.4 million for the nine months
ended September 30, 1998 from $10.5 million for the same period of 1997. This
increase was primarily attributable to higher service charges on deposit
accounts, loan securitization income and sundry income.
Service charges on deposit accounts, the largest contributor to
noninterest income, rose 22% to $6.2 million in the first nine months of 1998
from $5.1 million in the first nine months of 1997. Average deposits for the
same period increased 39.3%. The increase in service charges was attributable to
attracting new transaction accounts and improved collection results. In
addition, effective June 1, 1998, Carolina First Bank implemented a new service
charge on accounts with overdraft protection.
Mortgage banking income includes origination fees, gains from the
sale of loans and servicing fees (which are net of the related amortization for
the mortgage servicing rights and subservicing payments). Mortgage banking
income in the first nine months of 1998 increased 40% to $3.3 million, compared
with $2.3 million in the first nine months of 1997. The increase is attributable
to higher origination fees and gains on the sale of loans partially offset by
lower servicing income.
Income from originations and sales of mortgage loans, including sales
of loans originated by Carolina First Bank, totaled $3.1 million in the first
nine months of 1998, up significantly from $1.8 million for the first nine
months of 1997. The increase in the first nine months of 1998 resulted from
increased origination volumes primarily from exceptionally high refinancing
volumes related to lower mortgage interest rates and higher gains on mortgage
loans sold. Mortgage originations totaled approximately $369 million in the
first nine months of 1998 compared with approximately $210 million in the same
period in 1997. Mortgage loans totaling approximately $251 million and $80
million were sold in the first nine months of 1998 and 1997, respectively. In
1998, mortgage loans sold included approximately $153 million in First Southeast
mortgage loans sold in connection with the Company's plan to redeploy these
loans into higher yielding assets.
CF Mortgage's mortgage servicing operations consist of servicing
loans that are owned by Carolina First Bank and subservicing loans, to which the
rights to service are owned by Carolina First Bank or other non-affiliated
financial institutions. At September 30, 1998, CF Mortgage was servicing or
subservicing 22,589 loans having an aggregate principal balance of approximately
$2.0
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<PAGE>
billion.
Servicing income from non-affiliated companies, net of the related
amortization for the mortgage servicing rights and subservicing payments, was
$150,000 in the first nine months of 1998, compared with $505,000 for the first
nine months of 1997. Although the volume of loans serviced increased to $2.0
billion at September 30, 1998 from $1.5 billion at September 30, 1997, the
related amortization for the mortgage servicing rights increased due to
accelerated prepayments leading to a decline in servicing income. The servicing
income does not include the benefit of interest-free escrow balances related to
mortgage loan servicing activities.
Fees for trust services in the first nine months of 1998 of $1.3
million were 18% above the $1.1 million earned in the same period of 1997. At
September 30, 1998, Carolina First Bank's trust department had assets under
management of approximately $303 million. The trust department is continuing to
concentrate on improving the profitability of its accounts and has elected to
terminate some relationships and certain trust products. In addition, the trust
department has experienced increased sales in personal trust products.
During the first nine months of 1998, the Company had income of
$920,000 from its interests in the credit card and commercial real estate loan
trusts, compared to a loss of $310,000 for the same period in 1997. Loan
securitization income is net of charge-offs associated with the loans in the
trusts. Loan securitization income related to credit cards increased to $946,000
for the first nine months of 1998, compared with a loss of $696,000 for the
first nine months of 1997. The loan securitization income in 1997 was negatively
impacted by greater than expected charge-offs in the credit card securitization.
During the first nine months of 1998, credit card charge-offs showed improvement
over the previous year. Effective June 1, 1998 with the acquisition of RPGI,
fees that RPGI receives for servicing credit cards, which totaled $537,000, were
included in loan securitization income. The commercial real estate loan trust
showed a loss of $26,000 during the first nine months of 1998 compared with
income of $386,000 during the first nine months of 1997. Total balances in the
commercial real estate loan trust decline as loans are paid off, resulting in
lower income. At September 30, 1998, the off-balance sheet balance in the
commercial real estate loan trust was approximately $16 million. In addition,
expenses related to the formation of this trust are being amortized over the
life of the loans. As a result, the Company expects the loss associated with the
commercial real estate loan trust to increase as the amortization of formation
expenses exceeds trust income, which is declining due to lower loan balances in
the trust.
Sundry noninterest income was $3.7 million in the first nine months
of 1998 compared with $2.3 million in the first nine months of 1997. This
increase was due to higher insurance commissions, increased merchant processing
fees and servicing fee income received from Net.B@nk related to loans purchased
from Carolina First Bank during 1997 which continue to be serviced by Carolina
First Bank.
During the second quarter of 1998, the Company expanded its brokerage
service offerings through Carolina First Securities, Inc. ("CF Securities"), a
subsidiary of Carolina First Bank. CF Securities offers a complete line of
investment products and services, including mutual funds, stocks, bonds and
annuities. Income from these investment activities is not expected to be
significant in 1998.
15
<PAGE>
Noninterest Expenses
Noninterest expenses increased $7.7 million, or 20%, to $46.0 million
in the first nine months of 1998 from $38.3 million in the first nine months of
1997. This increase resulted principally from significant increases in
intangible amortization and moderate increases in other categories of
noninterest expenses. Excluding intangible amortization, noninterest expenses on
a cash basis increased $5.9 million, or 16%, to $43.3 million for the first nine
months of 1998 from $37.4 million for the first nine months of 1997. The
increase in expenditures reflects operational costs associated with acquired
branches, new markets and additional automated teller machines ("ATMs").
Salaries and wages and employee benefits increased $3.2 million to
$22.6 million in the first nine months of 1998 compared with $19.4 million in
the first nine months of 1997. Full-time equivalent employees increased to 766
at September 30, 1998 from 621 at September 30, 1997. The staffing cost
increases were primarily due to the costs of expanding in existing and new
markets (including Lowcountry and First Southeast acquisitions) and back office
support functions to support growth.
Occupancy and furniture and equipment expenses increased $1.1
million, or 16%, to $7.7 million for the nine months ended September 30, 1998
from $6.6 million for the nine months ended September 30, 1997. This increase
resulted principally from additional costs associated with the Lowcountry and
First Southeast branches and the operating costs associated with additional
ATMs.
Amortization of intangibles increased to $2.7 million for the first
nine months of 1998 from $917,000 for the first nine months of 1997. The
increase is due to the acquisitions of Lowcountry Savings Bank, Inc.
("Lowcountry") and First Southeast in the third and fourth quarters of 1997,
respectively. The Company expects intangible amortization to increase by
approximately $800,000 beginning with the fourth quarter of 1998 in connection
with the purchase acquisitions of First National, Poinsett Bank and Colonial
Bank.
Sundry noninterest expenses increased $1.6 million, or 14%, to $12.9
million in the first nine months of 1998 from $11.3 million in the first nine
months of 1997. The overall increase in sundry noninterest expenses was
principally attributable to the overhead and operating expenses associated with
higher lending and deposit activities. The largest items of sundry noninterest
expense were telephone, servicing fees, stationery, supplies, printing, and
postage.
Comparison for the Quarters Ended September 30, 1998 and September 30, 1997
Net income increased in the third quarter of 1998 to $5.6 million
from $3.6 million in the third quarter of 1997. Diluted earnings per share
increased to $0.31 in the second quarter of 1998, compared with $0.30 in the
second quarter of 1997. The increase in net income in the third quarter of 1998
is a result of an increase in net interest income and noninterest income
partially offset by an increase in noninterest expenses.
Net interest income increased $5.5 million to $22.5 million for the
three months ended September 30, 1998 from $17.0 million for the comparable
period in 1997. This increase was attributable to a higher level of average
earning assets. Earning assets averaged $2.1 billion and $1.6 billion in the
third quarters of 1998 and 1997, respectively. The net interest margin was
slightly lower in 1998 at 4.29% for the third quarter, compared with 4.32% for
the third quarter of 1997. The lower net interest margin in the third quarter of
1998 resulted from lower earning asset yields
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<PAGE>
associated with the change in the mix of earning assets (see "EARNINGS REVIEW -
Net Interest Income").
Noninterest income, excluding gains on the sale of securities,
increased $2.0 million to $6.0 million for the third quarter of 1998 compared
with $4.0 million for the third quarter of 1997. Gains on the sale of securities
were $128,000 and $1.6 million in the third quarters of 1998 and 1997,
respectively. Service charges on deposit accounts increased to $2.1 million in
the third quarter of 1998 compared with $1.8 million in the third quarter of
1997. This increase was due to attracting new transaction accounts, improved
collection results and the implementation of a new service charge on accounts
with overdraft protection. Mortgage banking income increased 2% to $1.0 million
in the third quarter of 1998. Fees for trust services increased $229,000 to
$529,000 in the third quarter of 1998 from $300,000 in the third quarter of
1997. Loan securitization income was $887,000 compared to a loss of $146,000 for
the third quarter of 1997. This increase was attributable to an improvement in
net charge-offs for credit card loans in the credit card securitization trust
and to the addition of credit card servicing fees received by RPGI.
Noninterest expenses increased $3.3 million, or 25%, to $16.5 million
for the three months ended September 30, 1998 from $13.2 million for the three
months ended September 30, 1997. Personnel expense increased from $6.7 million
for the third quarter of 1997 to $7.8 million for the third quarter of 1998 due
to the hiring of additional employees as a result of expansion in existing and
new markets. Occupancy and furniture and equipment expense increased slightly to
$2.8 million during third quarter 1998 from $2.3 million during third quarter
1997. Amortization of intangibles increased from $504,000 in the third quarter
of 1997 to $1.0 million in the third quarter of 1998 as a result of the
Lowcountry and First Southeast acquisitions, which were completed in the second
half of 1997. Sundry noninterest expenses increased 35% from third quarter 1997
to third quarter 1998, largely because of increases in servicing fees, legal
fees and credit card processing expenses.
Year 2000
The Company recognizes that there is a business risk in computerized
systems as the calendar rolls over into the next century. Some computer
programs, particularly older ones, use two digits rather than four digits for
dates. Such programs might recognize "00" as the year 1900 rather than the year
2000 causing interest calculations to be incorrect or possibly even causing the
program or computer system on which it runs to cease functioning altogether.
This problem can arise in any system containing a computer chip, such as a
telephone system, not just an actual computer system. This problem is commonly
called the "Year 2000 Problem." Computer systems used by the Company in its
day-to-day operations could be affected by this problem.
Management has established a committee (the "Y2K Project Team") which
has identified affected systems and is currently working to ensure that this
event will not disrupt operations. A full-time staff member has been assigned to
the Y2K Project Team to assist in record keeping and disseminating information.
The Y2K Project Team reports regularly to the Audit Committee of the Company's
Board of Directors who report to the Board of Directors on a quarterly basis on
year 2000 compliance. At its June 1998 meeting, the Company's Board of Directors
approved a year 2000 project plan and members of the Y2K Project Team. The
Company is also working closely with outside vendors to ensure that all software
corrections and warranty commitments are obtained and to arrange mock conversion
testing.
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<PAGE>
The testing phase on software applications began during the second
quarter of 1998, and the testing phase on the core operating system began in
the fourth quarter of 1998. The testing phase on the core operating system and
software applications is expected to be completed by the end of the first
quarter of 1999. All third-party providers of non-information technology systems
which include elevators, alarm systems and utilities have been contacted. While
responses have been received from many of the larger vendors, the Company is
still waiting for responses from some of the smaller companies.
The estimated cost to the Company for these corrective actions is
$250,000 in both 1998 and 1999 as well as an additional $250,000 for software
upgrades in 1999. All costs associated with correcting the year 2000 problem are
included in the Company's budget. Incomplete or untimely compliance, however,
would have a material adverse effect on the Company, the dollar amount of which
cannot be accurately quantified at this time because of the inherent variables
and uncertainties involved.
If testing during the first quarter of 1999 indicates that the
Company's core banking systems are not year 2000 compliant and there is no
reasonable assurance that they can be year 2000 compliant by the end of 1999,
the Company will convert its core banking system to a new version that is year
2000 compliant at a cost of several million dollars. In the event the Company
learns on January 1, 2000, that its systems are not year 2000 compliant, the
Company has an agreement with an outside provider to use its off-site facilities
for core banking systems.
Year 2000 surveys have been sent to all commercial loan customers
with relationships greater than $1 million to assist in assessing their year
2000 compliance. In addition, an analysis is being performed on the entire loan
portfolio based on Standard Industry Codes to determine if the Company has any
concentrations of loans in industries which are considered to be of greater risk
based on their year 2000 exposure. In the fourth quarter of 1998, the Company is
hosting customer seminars to educate customers in the Company's three major
markets.
BALANCE SHEET REVIEW
Loans
The Company's loan portfolio consists of commercial mortgage loans,
commercial loans, consumer loans and one-to-four family residential mortgage
loans. A substantial majority of these borrowers are located in South Carolina
and are concentrated in the Company's market areas. The Company has no foreign
loans or loans for highly leveraged transactions. The loan portfolio does not
contain any industry concentrations of credit risk exceeding 10% of the
portfolio. At September 30, 1998, the Company had total loans outstanding of
$1.8 billion which equaled approximately 85% of the Company's total deposits and
approximately 67% of the Company's total assets. The composition of the
Company's loan portfolio at September 30, 1998 follows: commercial and
commercial mortgage 63%, residential mortgage 17%, consumer 11%, credit card 4%,
construction 3% and lease receivables 2%.
The Company's loans increased $451.8 million, or 35%, to
approximately $1.8 billion at September 30, 1998 from $1.3 billion at September
30, 1997 and increased $155.0 million from approximately $1.6 billion at
December 31, 1997. This increase was net of 1998 loan sales of approximately
$253 million and loan purchases of approximately $129 million. Adjusting for the
1998 loan sales and purchases, internal loan growth was approximately $279.6
million, or an annualized
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rate of 23.3%, during the first nine months of 1998.
The Company had loans to 72 borrowers having principal amounts
ranging from $2 million to $5 million, which loans accounted for $226.8 million,
or 13%, of the Company's loan portfolio in 1998. The Company had loans to 24
borrowers having principal amounts in excess of $5 million, which loans
accounted for $161.6 million, or 9%, of the Company's loan portfolio in 1998.
For the same time period in 1997, the Company had loans to 60 borrowers with
principal amounts ranging from $2 million to $5 million, which accounted for
$177.4 million, or 13%, of the Company's loan portfolio. The Company had loans
to 13 borrowers having principal amounts in excess of $5 million, which loans
accounted for $86.1 million, or 7%, of the Company's loan portfolio in 1997. Any
material deterioration in the quality of any of these larger loans could have a
significant impact on the Company's earnings.
For the first nine months of 1998, the Company's loans averaged $1.6
billion with a yield of 9.37%, compared with $1.2 billion and a yield of 9.36%
for the same period of 1997. The increase in loan yield was attributable to an
increase in the credit card yield and in loan fee income. The credit card yield
increased as a result of a first quarter 1997 credit card solicitation teaser
rate that expired in August 1997 and as a result of repricing credit card rates
upward in 1998. The interest rates charged on loans vary with the degree of risk
and the maturity and amount of the loan. Competitive pressures, money market
rates, availability of funds and government regulations also influence interest
rates.
Allowance for Loan Losses
Management maintains an allowance for loan losses which it believes
is adequate to cover possible losses in the loan portfolio. However,
management's judgment is based upon a number of assumptions about future events
which are believed to be reasonable, but which may or may not prove valid. Thus,
there can be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for loan
losses will not be required.
The allowance for loan losses is established through charges in the
form of a provision for loan losses. Loan losses and recoveries are charged or
credited directly to the allowance. The amount charged to the provision for loan
losses by the Company is based on management's judgment as to the amount
required to maintain an allowance adequate to provide for potential losses in
the Company's loan portfolio. The level of this allowance is dependent upon the
total amount of past due loans, general economic conditions and management's
assessment of potential losses.
The allowance for loan losses totaled $17.6 million, or 1.00% of
loans net of unearned income at the end of September 1998, compared with $13.9
million, or 1.07% of loans net of unearned income at the end of September 1997.
At December 31, 1997, the allowance for loan losses was $16.2 million, or 1.01%
of loans net of unearned income. The allowance for loan losses as a percentage
of nonperforming loans was 903% and 499% as of September 30, 1998 and 1997,
respectively.
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The following table presents changes in the allowance for loan
losses.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
<TABLE>
<CAPTION>
At and for
At and for the nine months the year ended
ended September 30, December 31,
-------------------------- --------------------
1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 16,211 $ 11,290 $ 11,290
Allowance of acquired loans 1,679 1,243 4,208
Provision for loan losses 8,686 9,603 11,646
Charge-offs:
Credit cards 3,278 4,267 5,325
Bank loans, leases & Blue Ridge 6,731 4,939 6,794
Recoveries 1,060 995 1,186
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs 8,949 8,211 10,933
- -------------------------------------------------------------------------------------------------------------------
Allowance at end of period $ 17,627 $ 13,925 $ 16,211
===================================================================================================================
</TABLE>
At September 30, 1998, the recorded investment in loans that were
considered to be impaired under Statement of Financial Accounting Standards 114,
"Accounting by Creditors for Impairment of a Loan", was $669,000. The related
allowance for these impaired loans was $652,000. The average recorded investment
and foregone interest on impaired loans during the nine months ended September
30, 1998 was approximately $751,000 and $73,000, respectively. For the nine
months ended September 30, 1998, the Company recognized interest income on
impaired loans of $125,000.
Securities
At September 30, 1998, the Company's total investment portfolio had a
book value of $412.8 million and a market value of $407.0 million for an
unrealized net loss of approximately $5.8 million. The investment portfolio had
a weighted average maturity of approximately 5.3 years. Securities (i.e.,
securities held for investment, securities available for sale and trading
securities) averaged $371.5 million in the first nine months of 1998, 59% above
the first nine month 1997 average of $234.2 million. The increase in the
securities balance was primarily attributable to proceeds from the sale of First
Southeast mortgage loans. The average portfolio yield increased to 6.32% for the
first nine months of 1998 from 6.16% for the first nine months of 1997. The
portfolio yield increased as a result of changing the mix of securities. As
securities matured, they were reinvested in higher yielding agencies and
mortgage-backed securities. At September 30, 1998, securities totaled $406.2
million, up $132.8 million from the $273.4 million invested as of the third
quarter end 1997 and up $107.7 million from the December 31, 1997 balance of
$298.5 million.
At September 30, 1998, the Company owned 2,528,366 shares of common
stock of Affinity and the Affinity Warrant entitling the Company to purchase an
additional 3,471,340 shares of common stock at a purchase price of $0.0001 per
share, all of which, in the aggregate, constituted approximately 17% of
Affinity's outstanding common stock. The investment in Affinity's common
20
<PAGE>
stock, included in securities available for sale, was recorded at its market
value of approximately $1.3 million. The Affinity Warrant was not included in
securities at September 30, 1998.
At September 30, 1998, the Company owned 1,175,000 shares of common
stock of Net.B@nk, or approximately 18% of the outstanding shares. The
investment in Net. B@nk's common stock, included in securities available for
sale, was recorded at its basis of approximately $979,000. The Net.B@nk
investment is not marked to market value since regulators have precluded certain
affiliates of Net.B@nk, including the Company, from selling their shares until
July 31, 2000.
At September 30, 1998, federal funds sold and resale agreements
increased to $115.1 million. This increase is related to the proceeds received
from the sale of mortgage loans acquired from First Southeast.
Intangible Assets and Other Assets
The intangible assets balance at September 30, 1998 of $117.5 million
was attributable to goodwill of $105.6 million, core deposit balance premiums of
$8.2 million and credit card intangibles of $3.7 million. The intangible assets
balance at September 30, 1997 of $23.1 million was attributable to goodwill of
$14.3 million, core deposit balance premiums of $8.6 million and credit card
intangibles of $156,000. The Company recorded approximately $7.8 million in
intangible assets related to its July 1997 acquisition of Lowcountry and $31.7
million in intangible assets (net of adjustments related to mortgage loans and
branch sales) related to its November 1997 acquisition of First Southeast. In
September 1998, the Company recorded approximately $45.4 million and $11.7
million in intangible assets related to the acquisitions of First National and
Poinsett Bank, respectively. In connection with the pending acquisition of
Colonial Bank, the Company expects to record approximately $10.6 million in
intangible assets.
At September 30, 1998, other assets included other real estate owned
of $2.6 million and mortgage servicing rights of $25.7 million. At September 30,
1997, other assets included other real estate owned of $2.1 million and mortgage
servicing rights of $19.3 million.
Interest-Bearing Liabilities
During the first nine months of 1998, interest-bearing liabilities
averaged $1.8 billion, compared with $1.3 billion for the comparable period of
1997. This increase resulted principally from internal deposit growth related to
account promotions and sales efforts and acquisitions. The average interest
rates were 5.05% and 5.01% for the first nine months of 1998 and 1997,
respectively. At September 30, 1998, interest-bearing deposits comprised
approximately 88% of total deposits and 91% of interest-bearing liabilities. For
the first nine months of 1998, average borrowed funds, which included Federal
Home Loan Bank ("FHLB") advances and other short-term borrowings, totaled $130.9
million, compared with $167.8 million for the first nine months of 1997. This
decrease was attributable to average advances from the FHLB which declined to
$12.8 million for the first nine months of 1998 from $59.0 million for the
comparable period a year earlier. FHLB advances are a source of funding which
the Company uses depending on the current level of deposits and management's
willingness to raise deposits through market promotions.
Carolina First Bank's primary source of funds for loans and investments is its
deposits which
21
<PAGE>
are gathered through Carolina First Bank's branch network. Deposits grew 48% to
$2.1 billion at September 30, 1998 from $1.4 billion at September 30, 1997. At
December 31, 1997, deposits totaled $1.7 billion. Approximately $44 million in
deposits were sold as part of the sale of branch offices during the second
quarter of 1998. The Company acquired approximately $285 million in deposits
from the First Southeast acquisition during the fourth quarter of 1997. During
the third quarter of 1998, the Company acquired approximately $95.2 million in
deposits from the First National acquisition and approximately $82.5 million in
deposits from the Poinsett Bank acquisition. Internal growth, particularly from
account promotions, generated the remainder of the new deposits. During the
first nine months of 1998, total interest-bearing deposits averaged $1.6 billion
with a rate of 4.94%, compared with $1.1 billion with a rate of 4.81% in 1997.
The increased rate paid on deposits during the first nine months of 1998
reflects the large number of CDs and IRAs acquired from First Southeast. The
Company focused on increasing deposit transaction accounts during the first half
of 1998 and will continue this effort going forward. During the first nine
months of 1998, deposit pricing continued to be very competitive in Carolina
First Bank's market areas. The Company expects this competitive deposit
environment to continue. The Company does not believe that it has any brokered
deposits.
The Company has filed applications with the appropriate regulatory
agencies to open a branch in the Cayman Islands. The branch is to be a "shell"
branch of Carolina First Bank, and accordingly, will involve minimal start-up
costs. The primary function of the branch will be to obtain deposits from the
Eurocurrency interbank markets, which will be utilized in funding Carolina First
Bank's domestic loan portfolio. The bank views this branch primarily as a
vehicle for entrance into a funds market in which it is not currently active.
Average noninterest-bearing deposits, which increased 9% during the
year, decreased to 12.0% of average total deposits in the first nine months of
1998 from 15.2% in the first nine months of 1997. During the first half of 1997,
noninterest-bearing deposits included deposits of Net.B@nk, FSB (formerly known
as Atlanta Internet Bank) which were transferred to Net.B@nk on July 31, 1997
resulting in a $43 million reduction in Carolina First Bank's total deposits.
The decrease in noninterest-bearing deposits as a percentage of total deposits
also reflects the change in the mix of deposits related to the Lowcountry and
First Southeast acquisitions.
The Company's core deposit base consists of consumer time deposits,
savings, NOW accounts, money market accounts and checking accounts. Although
such core deposits are becoming increasingly interest sensitive for both the
Company and the industry as a whole, such core deposits continue to provide the
Company with a large and stable source of funds. Core deposits as a percentage
of average total deposits averaged approximately 87% for the first nine months
of 1998. The Company closely monitors its reliance on certificates of deposit
greater than $100,000, which are generally considered less stable and less
reliable than core deposits.
Capital Resources and Dividends
Total shareholders' equity amounted to $337.4 million, or 12.82% of
total assets, at September 30, 1998, compared with $124.5 million, or 7.06% of
total assets, at September 30, 1997. At December 31, 1997, shareholders' equity
totaled $201.7 million, or 9.35% of total assets. The $135.8 million increase in
total shareholders' equity since December 31, 1997 resulted principally from the
Regulation S Offering of the Company's Common Stock, shares issued related to
the RPGI, First National and Poinsett mergers and retention of earnings less
cash dividends paid.
The Company's capital needs have been met principally through public
offerings of common stock, preferred stock and subordinated notes and through
the retention of earnings. In addition, the
22
<PAGE>
Company issued capital stock in connection with acquisitions. During the first
quarter of 1998, the Company raised approximately $39 million in new capital
through the sale of 2.0 million shares of its Common Stock to certain overseas
investors in the Regulation S offering.
Book value per share at September 30, 1998 and 1997 was $15.53 and
$10.25, respectively. Tangible book value per share at September 30, 1998 and
1997 was $10.12 and $8.34, respectively. At December 31, 1997, book value and
tangible book value were $12.88 and $9.17, respectively. Tangible book value was
below book value as a result of the purchase premiums associated with branch
acquisitions and the acquisitions of CF Mortgage and four banks (all of which
were accounted for as purchases).
At September 30, 1998, the Company, Carolina First Bank and Carolina
First Bank, F.S.B. were in compliance with each of the applicable regulatory
capital requirements. The table below sets forth various capital ratios for the
Company, Carolina First Bank and Carolina First Bank, F.S.B.
CAPITAL RATIOS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
As of Well Capitalized Adequately Capitalized
9/30/98 Requirement Requirement
<S> <C> <C> <C>
Company:
Total Risk-based Capital 13.67% 10.0% 8.0%
Tier 1 Risk-based Capital 11.43 6.0 4.0
Leverage Ratio 8.76 5.0 4.0
Carolina First Bank:
Total Risk-based Capital 10.84 10.0 8.0
Tier 1 Risk-based Capital 10.04 6.0 4.0
Leverage Ratio 7.70 5.0 4.0
Carolina First Bank, F.S.B.
Total Risk-based Capital 9.10 10.0 8.0
Tier 1 Risk-based Capital 7.85 6.0 4.0
Leverage Ratio 4.98 5.0 4.0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company and its subsidiaries are subject to certain regulatory
restrictions on the amount of dividends they are permitted to pay. The Company
has paid a cash dividend each quarter since the initiation of cash dividends on
February 1, 1994. At the December 17, 1997 meeting, the Board of Directors
approved an $0.08 per share cash dividend on the common stock, which represents
an effective annual increase of approximately 14%. The Company presently intends
to pay a quarterly cash dividend on the Common Stock; however, future dividends
will depend upon the Company's financial performance and capital requirements.
On September 28, 1998, the Company announced its intention to
repurchase shares of common stock for reissue in connection with the acquisition
of First National Bank of Pickens County ("First National"). The Company
anticipates repurchasing up to 1.4 million shares to effect the transaction.
23
<PAGE>
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, such as credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and could potentially have the largest material effect
on the Company's financial condition and results of operations. Other types of
market risks, such as foreign currency exchange risk and commodity price risk,
do not arise in the normal course of the Company's business activities.
Achieving consistent growth in net interest income is the primary
goal of the Company's asset/liability function. The Company attempts to control
the mix and maturities of assets and liabilities to achieve consistent growth in
net interest income despite changes in market interest rates. The Company seeks
to accomplish this goal while maintaining adequate liquidity and capital. The
Company's asset/liability mix is sufficiently balanced so that the effect of
interest rates moving in either direction is not expected to be significant over
time.
The Company's Asset/Liability Committee uses a simulation model to
assist in achieving consistent growth in net interest income while managing
interest rate risk. The model takes into account interest rate changes as well
as changes in the mix and volume of assets and liabilities. The model simulates
the Company's balance sheet and income statement under several different rate
scenarios. The model's inputs (such as interest rates and levels of loans and
deposits) are updated on a monthly basis in order to obtain the most accurate
forecast possible. The forecast presents information over a twelve month period.
It reports a base case in which interest rates remain flat and reports
variations that occur when rates increase and decrease 200 basis points.
According to the model as of September 30, 1998, the Company is positioned so
that net interest income will increase $10.1 million if interest rates rise in
the next twelve months and will decrease $9.6 million if interest rates decline
in the next twelve months.
As of September 30, 1998, there was no substantial change from the
interest rate risk sensitivity analysis for various changes in interest rates
calculated as of December 31, 1997. The foregoing disclosures related to the
market risk of the Company should be read in conjunction with the Company's
audited consolidated financial statements, related notes and management's
discussion and analysis of financial condition and results of operations for the
year ended December 31, 1997 included in the Company's 1997 Annual Report on
Form 10K.
The static interest sensitivity gap position, while not a complete
measure of interest sensitivity, is also reviewed periodically to provide
insights related to the static repricing structure of assets and liabilities. At
September 30, 1998, on a cumulative basis through twelve months, rate-sensitive
liabilities exceeded rate-sensitive assets, resulting in a liability sensitive
position of $209.6 million.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of
the Company both at the holding company level as well as at the subsidiary
level. The holding company and non-banking subsidiaries of the Company require
cash for various operating needs including general operating expenses, payment
of dividends to shareholders, interest on borrowing, extensions of credit at
Blue Ridge, business combinations and capital infusions into subsidiaries.
Sources of liquidity for the Company's holding company and non-banking
subsidiaries include dividends from Carolina First Bank, Carolina First Bank,
F.S.B. and non-banking subsidiaries to the holding company, existing cash
24
<PAGE>
reserves and earnings.
The Company's banking subsidiaries, Carolina First Bank and Carolina
First Bank, F.S.B., have cash flow requirements involving withdrawals of
deposits, extensions of credit and payment of operating expenses. The principal
sources of funds for liquidity purposes for the banking subsidiaries are
customers' deposits, principal and interest payments on loans, loan sales or
securitizations, securities available for sale, maturities of securities,
temporary investments and earnings. Carolina First Bank's and Carolina FIrst
Bank, F.S.B.'s liquidity is also enhanced by the ability to acquire new deposits
through its established branch network of 69 branches in South Carolina. The
liquidity ratio is an indication of a company's ability to meet its short-term
funding obligations. At September 30, 1998, Carolina First Bank's liquidity
ratio was approximately 24% and Carolina First Bank, F.S.B.'s liquidity ratio
was approximately 20%. The liquidity needs of the banking subsidiaries are a
factor in developing their deposit pricing structure; deposit pricing may be
altered to retain or grow deposits if deemed necessary. Carolina First Bank and
Carolina First Bank, F.S.B. have access to borrowing from the FHLB and maintain
unused short-term lines of credit from unrelated banks. At September 30, 1998,
the banking subsidiaries had unused short-term lines of credit totaling
approximately $55 million (which are withdrawable at the lender's option). At
September 30, 1998, unused borrowing capacity from the FHLB totaled
approximately $155 million with an outstanding balance of $35 million.
Management believes that these sources are adequate to meet its liquidity needs.
ASSET QUALITY
Prudent risk management involves assessing risk and managing it
effectively. Certain credit risks are inherent in making loans, particularly
commercial, real estate and consumer loans. The Company attempts to manage
credit risks by adhering to internal credit policies and procedures. These
policies and procedures include a multi-layered loan approval process, officer
and customer limits, periodic documentation examination and follow-up procedures
for any exceptions to credit policies. Loans are assigned a grade and those that
are determined to involve more than normal credit risk are placed in a special
review status. Loans that are placed in special review status are required to
have a plan under which they will be either repaid or restructured in a way that
reduces credit risk. Loans in this special review status are reviewed monthly by
the Loan Committee of the Board of Directors.
As demonstrated by the following analytical measures of asset
quality, management believes the Company has effectively managed its credit
risk. Net loan charge-offs, including credit card receivables, totaled $8.9
million and $8.2 million in the first nine months of 1998 and 1997,
respectively, or 0.76% and 0.89%, respectively, as an annualized percentage of
average loans. Excluding credit card receivables, annualized net loan
charge-offs as a percentage of average loans were 0.52% and 0.45% during the
first nine months of 1998 and 1997, respectively. In the first nine months of
1998, net charge-offs for credit cards totaled $2.8 million compared with $4.3
million for the same period in 1997. Credit card charge-offs improved during the
first nine months of the year, and the Company hopes to achieve greater control
over credit card collections through the acquisition of RPGI. The majority of
the increase in accruing loans past due 90 days is attributable to one-to-four
family residential loans acquired from First Southeast.
25
<PAGE>
NONPERFORMING ASSETS AND PAST DUE LOANS
($ in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
---------------------- -------------
1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 669 $ 1,508 $ 1,165
Restructured loans 1,283 1,283 1,283
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 1,952 2,791 2,448
Other real estate 2,560 2,130 1,319
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 4,512 $ 4,921 $ 3,767
====================================================================================================================================
Nonperforming assets as a % of loans
and foreclosed property 0.26% 0.38% 0.23%
Accruing loans past due 90 days $ 4,949 $ 4,033 $ 4,125
====================================================================================================================================
</TABLE>
INDUSTRY DEVELOPMENTS
Certain recently-enacted and proposed legislation could have an effect on
both the costs of doing business and the competitive factors facing the
financial institutions industry. The Company is unable at this time to assess
the impact of this legislation on its financial condition or operations.
26
<PAGE>
PART II
ITEM 1 LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time parties to
various legal actions arising in the normal course of business. Such
items are not expected to have any material adverse effect on the
business or financial position of the Company or any of its
subsidiaries.
On November 4, 1996, a derivative shareholder action was filed in
Greenville County Court of Common Pleas against the Company, the
majority of the Company's and Carolina First Bank's directors and
certain executive and other officers. The named plaintiffs are the
Company by and through certain minority shareholders. The Company
filed a motion to dismiss with respect to all claims in this
complaint, which was granted in December 1997. Plaintiffs have filed
a motion for reconsideration and have the right to appeal the grant
of the motion to dismiss. Plaintiffs allege as causes of action the
following: conversion of corporate opportunity; fraud and
constructive fraud; and negligent management. The factual basis upon
which these claims are made generally involves the payment to Company
officers and other individuals of a bonus in stock held by the
Company in Affinity (as reward for their efforts in connection with
the Company's procurement of stock in Affinity), statements to former
shareholders of Midlands National Bank in connection with the
Company's acquisition of that bank, and alleged mismanagement by
certain executive officers involving financial matters. The complaint
seeks damages for the benefit of the Company aggregating $41 million
and recision of the Affinity bonus.
In an action brought by the same attorneys who brought the
above-mentioned derivative action, on December 31, 1996, certain
individuals filed a class action lawsuit against the Company,
Carolina First Bank, and a number of officers and directors of the
Company and Carolina First Bank. In connection with the judge's
granting the motion to dismiss in the above-referenced derivative
action, the plaintiffs' attorneys withdrew this lawsuit, without
prejudice.
ITEM 2 CHANGE IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
27
<PAGE>
PART II
(Continued)
ITEM 5 OTHER INFORMATION
Subsequent Events
On October 19, 1998, the Company acquired all the outstanding common
shares of Colonial Bank of South Carolina, Inc. ("Colonial Bank"), a
state-chartered banking corporation headquartered in Camden, South
Carolina, in exchange for 651,455 shares of the Company's common
stock. This transaction was accounted for using the purchase method
of accounting and was valued at approximately $14 million (as of the
closing date of the acquisition). Colonial Bank operated through
three locations and had total assets, loans, deposits and
shareholders' equity of approximately $61.4 million, $50.7 million,
$43.0 million and $5.3 million, respectively.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Carolina First Corporation Directors' Stock Option Plan
11.1 Computation of Primary and Fully Diluted Earnings Per Share.
12.1 Computation of Earnings to Fixed Charges Ratio.
27.1 Financial Data Schedules.
(b) Reports on Form 8-K
None.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Carolina First Corporation
/s/ William S. Hummers, III
---------------------------
William S. Hummers, III
Executive Vice President
EXHIBIT 10.1
CAROLINA FIRST CORPORATION
AMENDED AND RESTATED DIRECTORS' STOCK OPTION PLAN
(Amended and Restated as of May 1, 1998)
1.PURPOSE. The purpose of the Carolina First Corporation Directors' Stock
Option Plan (the "Plan") is to promote the growth and profitability of Carolina
First Corporation (the "Company") and its subsidiaries from time to time by
increasing the personal participation of directors in the financial performance
of the Company, by enabling the Company to attract and retain directors of
outstanding competence and by providing such directors with an equity
opportunity in the Company. This purpose will be achieved through the grant of
stock options ("Options") to purchase shares of common stock of the Company,
$1.00 par value per share ("Common Stock").
2.ADMINISTRATION. The Plan shall be administered by the Company's Board of
Directors (the "Board"); provided, however, that if applicable law precludes or
restricts the Board from acting in such capacity, then the Board shall have the
authority to appoint a committee of individuals (the "Committee") to administer
the Plan, all in accordance with applicable law. Subject to applicable law, the
Board or Committee shall have complete authority to: (i) interpret all terms and
provisions of the Plan; (ii) prescribe the form of instrument(s) evidencing
Options granted under this Plan; (iii) adopt, amend and rescind general and
special rules and regulations for the Plan's administration; and (iv) make all
other determinations necessary or advisable for the administration of this Plan.
Any action which the Board or Committee is authorized to take may be taken
without a meeting if all the members of the Board or Committee sign a written
document authorizing such action to be taken, unless different provision is made
by the By-Laws of the Company or by resolution of the Board or Committee.
The Board or Committee may designate selected Board or Committee members or
certain employees of the Company to assist the Board or Committee in the
administration of the Plan and may grant authority to such persons to execute
documents, including Options, on behalf of the Board or Committee, subject in
each such case to applicable law. No member of the Board or Committee or
employee of the Company assisting the Board or Committee pursuant to the
preceding paragraph shall be liable for any action taken or determination made
in good faith.
3.STOCK SUBJECT TO PLAN. The stock to be offered under this Plan shall be
authorized but unissued shares of Common Stock. An aggregate of 500,000 shares
are reserved for the grant under this Plan of Options (which shall include
Options outstanding under the Directors Stock Option Plan outstanding
immediately prior to May 1, 1998). The numbers of shares of Common Stock which
may be granted under this Plan may be adjusted to reflect any change in the
capitalization of the Company as contemplated by Section 9 of the Plan and
occurring after the adoption of this Plan. The Board or Committee will maintain
records showing the cumulative total of all shares subject to Options
outstanding under this Plan.
4.OPTIONS FOR DIRECTORS WHO ARE NEITHER OFFICERS NOR EMPLOYEES. The grant
of Options under this Plan shall be limited to those directors of the Company
and/or a Company subsidiary who:
(1) on the date of grant, are neither officers nor employees of the
Company or any Company subsidiary and
(2) who are directors of either the Company or a Company subsidiary
designated from time to time by the Board of Directors as a
"Principal Subsidiary."
Each of such persons is hereinafter referred to as an "Eligible Director".
Initially, Carolina First Bank, Carolina First Mortgage Company, and Blue Ridge
Finance Company, Inc. are designated as "Principal Subsidiaries," subject to
change by the Board of Directors.
<PAGE>
(a) On May 1 of each calendar year (or, if May 1 is not a business day,
the immediately preceding business day) (the "Grant Date"), each Eligible
Director who is not a Company Director (a "Non-corporate Director") shall
automatically receive from the Company an option to acquire 1,000 shares of
Common Stock at an exercise price equal to the average of the high and low sales
prices of the Common Stock (the "Fair Market Value") on the Grant Date. Each
such Option shall be exercisable after ten months from the Grant Date and at any
time and from time to time thereafter (subject to Section 6 hereof) until and
including the date which is the business day immediately preceding the tenth
anniversary of the Grant Date. Notice of each such Option granted on a Grant
Date shall be given to each Non-corporate Director within a reasonable time
after the Grant Date.
(b) On May 1 of each calendar year (or, if May 1 is not a business day,
the immediately preceding business day) (the "Grant Date"), each Eligible
Director who is a Company Director (a "Corporate Director") shall automatically
receive from the Company an option to acquire shares of Common Stock, valued
based on the Black-Scholes valuation method, equal to 60% of the Corporate
Director's total compensation as a Company director for that particular twelve
month period (assuming 100% attendance at all schedule Board and committee
meetings). Each such Option shall have an exercise price equal to the Fair
Market Value of the Common Stock on the Grant Date. Each such Option shall
become exercisable immediately after the Grant Date and at any time and from
time to time thereafter until and including the date which is the business day
immediately preceding the tenth anniversary of the Grant Date. Notice of each
such Option granted on a Grant Date shall be given to each Corporate Director
within a reasonable time after the Grant Date.
(c) Corporate Directors will not be eligible to receive Options under
Section 4(a) above, irrespective of whether they serve as directors of any
Principal Subsidiary. Non-corporate Directors who serve as directors of more
than one Principal Subsidiary shall receive only the Options to acquire 1,000
shares of Common Stock as provided in the preceding paragraph (and shall not
receive additional Options based on the multiple directorships).
(d) This Section 4 may not be amended more frequently than once every
six months, other than to comport with change in the Internal Revenue Code of
1986, as amended (the "Code"), the Employee Retirement Income Security Act of
1972, as amended, ("ERISA") or the rules thereunder.
(e) It is intended that Options granted hereunder shall not qualify as
incentive stock options under Section 422 of the Code.
5.NON-TRANSFERABILITY. An Option granted to a participant under this Plan
shall not be transferable by him except: (i) by will; (ii) by the laws of
descent and distribution; or (iii) pursuant to a qualified domestic relations
order as defined by the Code or in Title I of ERISA, or the rules thereunder.
6. EXERCISABILITY OF OPTIONS. Options granted hereunder shall be
exercisable in accordance with the provisions hereof.
Any Option granted to a Non-corporate Director under this Plan shall
terminate in full (whether or not previously exercisable and prior to the
expiration of its term) one year following the date on which the Optionee ceases
to be an Eligible Director; provided that in the one year period following the
date on which the Optionee ceased to be an Eligible Director, such Optionee may
exercise the Option only to the extent that he could have exercised the Option
at the time he ceased being an Eligible director, unless the Optionee shall (a)
die while a director of the Company, in which case the Optionee's legatee(s)
under his last will or the Optionee's personal representative or representatives
may exercise all or part of the previously unexercised portion of such Option at
any time within two years after the Optionee's death to the extent the Optionee
could have exercised the Option immediately prior to his death, or (b) become
permanently or totally disabled within the meaning of Section 22(e)(3) of the
Code (or any successor provision) while a director of the
Company, in which case the Optionee or his personal representative may exercise
the previously unexercised portion of such Option at any time within two years
after termination of his directorship to the extent the Optionee could have
exercised the Option immediately prior to such termination.
2
<PAGE>
Any Option granted to a Corporate Director under this Plan shall terminate
in full on the tenth anniversary of its Grant Date. In the event that a
Corporate Director shall die while a director of the Company, such Optionee's
legatee(s) under his last will or such Optionee's personal representative or
representatives may exercise all or part of the previously unexercised portion
of such Option at any time prior to expiration of its term.
In no event may an Option be exercised after the expiration of its fixed
term.
All vesting of Options shall cease when a person ceases (for whatever
reason) to serve as an Eligible Director.
A "Person" shall mean any individual, corporation, limited liability
Company, bank, partnership, joint venture, association, joint-stock Company,
trust, unincorporated organization or other entity. When determining a Person's
Common Stock ownership, such Person's Common Stock ownership shall be aggregated
with any other Person with whom he/it is acting in concert or as a group for the
purpose of acquiring, holding or disposing of the Common Stock.
7. METHOD OF EXERCISE. Each Option granted under the Plan shall be deemed
exercised when the holder (a) shall indicate the decision to do so in writing
delivered to the Company, (b) shall at the same time tender to the Company
payment in full of the exercise price for the shares for which the Option is
exercised, (c) shall tender to the Company payment in full in cash of the amount
of all federal and state withholding or other employment taxes applicable to the
taxable income, if any, of the holder resulting from such exercise, and (d)
shall comply with such other reasonable requirements as the Board or Committee
may establish. The exercise price may be paid either in cash or by surrender to
the Company of Common Stock having a Fair Market Value on the date of exercise
equal to the exercise price.
No person, estate or other entity shall have any of the rights of a
shareholder with reference to shares subject to an Option until a certificate
for the shares has been delivered.
An Option granted under this Plan may be exercised for any lesser
number of shares than the full amount for which it could be exercised. Such a
partial exercise of an Option shall not affect the right to exercise the Option
from time to time in accordance with this Plan for the remaining shares subject
to the Option.
8. TERMINATON OF OPTIONS. An Option granted under this Plan shall be
considered terminated in whole or part, to the extent that, in accordance with
the provisions of this Plan and such Option, it can no longer be exercised for
any shares originally subject to the Option. The shares subject to any Option or
portion thereof, which terminates, shall no longer be charged against the
applicable limitation or limitations provided in Section 3 of this Plan and may
again become shares available for the purposes, and subject to the same
applicable limitations, of this Plan.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any change
in the outstanding Common Stock of the Company by reason of a stock dividend,
stock split, stock consolidation, recapitalization, reorganization, merger,
split up or the like, the shares available for purposes of this Plan, the shares
to be covered by subsequent grants under Section 4 hereof and the number and
kind of shares under option in outstanding option agreements pursuant to this
Plan and the option price under such agreements shall be appropriately adjusted
so as to preserve, but not increase, the benefits of this Plan to the Company
and the benefits to the holders of such Options. Adjustments under this Section
shall be made by the Board or Committee, whose determination as to what
adjustments shall be made and the extent thereof shall be final, binding and
conclusive.
10. COMPLIANCE WITH SECURITIES LAWS AND OTHER REQUIREMENTS. No
certificate(s) for shares shall be executed and delivered upon exercise of an
Option until the Company shall have taken such action, if any, as is then
required to comply with the provisions of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, the South Carolina
Uniform Securities Act, as amended, any other applicable state securities
law(s) and the requirements of any exchange on which the Common Stock may, at
the time, be listed.
3
<PAGE>
In the case of the exercise of an Option by a person or estate acquiring
the right to exercise the Option by bequest or inheritance, the Board or
Committee may require reasonable evidence as to the ownership of the Option and
may require such consents and releases of taxing authorities as it may deem
advisable.
11. NO RIGHT TO DIRECTORSHIP. Neither the adoption of the Plan nor its
operation, nor any document describing or referring to the Plan, or any part
thereof, shall confer upon any director participant under the Plan any right to
continue as a director of the Company, or shall in any way affect the right and
power of the Company to terminate the position with the Company of any
participant under this Plan at any time with or without assigning a reason
therefor, to the same extent as the Company might have done if this Plan had not
been adopted.
12. AMENDMENT AND TERMINATION. Except as provided otherwise herein and
subject to applicable law, the Board or Committee may at any time suspend, amend
or terminate this Plan. Notwithstanding the foregoing, no amendment, suspension
or termination shall, without the consent of the holder of an Option, alter or
impair any rights or obligations under any Option theretofore granted under the
Plan.
In addition to Board or Committee approval of an amendment, if the
amendment would: (i) materially increase the benefits accruing to participants;
(ii) increase the number of securities issuable under this Plan (other than an
increase pursuant to Section 9 hereof); (iii) change the class or classes of
individuals eligible to receive Options; or (iv) otherwise materially modify the
requirements for eligibility, then such amendment must be approved by the
holders of a majority of the Company's outstanding capital stock present or
represented by proxy and entitled to vote at a meeting duly held of the
stockholders of the Company.
13. USE OF PROCEEDS. The proceeds received by the Company from the sale of
shares pursuant to Options granted under the Plan shall be used for general
corporate purposes as determined by the Board.
14. INDEMNIFICATION OF BOARD OR COMMITTEE. In addition to such other rights
of indemnification as they may have as members of the Board, the members of the
Board or Committee shall, to the fullest extent permitted by law, be indemnified
by the Company against the reasonable expenses, including attorney's fees,
actually and necessarily incurred in connection with the defense of any action,
suit or proceeding, or in connection with any appeal therein, to which they or
any of them may be a party by reason of any action taken or failure to act under
or in connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided the settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding the such Board member or Committee member is liable for gross
negligence or willful misconduct in the performance of his duties; provided that
within 30 days after institution of any such action, suit or proceeding the
Board member or Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
15. EFFECTIVE DATE OF THE PLAN. This Plan shall become effective as of May
1, 1998, assuming the requisite shareholder approval is received at the
Company's 1998 annual meeting of shareholders.
16. DURATION OF THE PLAN. Unless previously terminated by the Board or
Committee, this Plan shall terminate at the close of business on May 1, 2008,
and no Option shall be granted under it thereafter, but such termination shall
not affect any Option theretofore granted under this Plan.
4
<PAGE>
STOCK OPTION GRANT
May 1, ________
Dear [Director]:
In accordance with [Section 4(a)] [Section 4(b)] of the
Directors' Stock Option Plan (the "Plan") of Carolina First Corporation (the
"Company"), and in order to give you an added proprietary interest in the
Company and an additional incentive to advance the interest of the Company, you,
in your capacity as a director of the Company or one of its subsidiaries, are
hereby granted (as of the date above) an option to purchase ____________ shares
of the Common Stock upon the following terms and conditions:
(1) This Option is granted in accordance with the Plan and the terms
of the Plan are incorporated by reference herein. Defined terms
used herein (as indicated by the initial capitalization thereof)
which are defined in the Plan, shall have the meanings ascribed
to such terms in the Plan.
(2) The exercise price shall be $ _________ per share (the average of
the high and low sales prices of the Common Stock on the date of
grant);
(3) This Option shall be exercisable as provided in the Plan.
(4) This Option is not intended to be treated as an "incentive stock
option" for purposes of Section 422 of the Internal Revenue Code
of 1986, as amended.
(5) As used herein, "Plan" shall mean the terms of the Plan in effect
on the date hereof.
Very truly yours,
CAROLINA FIRST CORPORATION
By: ______________________
Title: ______________________
I hereby accept this Stock Option and acknowledge receipt of a copy of the Plan.
Date: _________________________ _____________________
Optionee
COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YTD
1st Quarter 1998 2nd Quarter 1998 3rd Quarter 1998 3rd Quarter 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
BASIC
Net income............................................ $4,694,000 $5,536,000 $5,639,000 $15,869,000
Less dividends on preferred stock..................... 0 0 0 0
----------------- ------------------ ----------------- ---------------
Net income applicable to common
shareholders (numerator)........................... $4,694,000 $5,536,000 $5,639,000 $15,869,000
================= ================== ================= ===============
Average common shares outstanding
(denominator)...................................... 16,588,163 17,682,632 18,052,647 17,446,512
Per share amount...................................... $0.28 $0.31 $0.31 $0.91
================= ================== ================= ===============
DILUTED
Net income (numerator)................................ $4,694,000 $5,536,000 $5,639,000 $15,869,000
Average common shares outstanding..................... 16,588,163 17,682,632 18,052,647 17,446,512
Dilutive average shares outstanding under options..... 802,304 849,096 777,591 800,605
Exercise prices....................................... $4.81 to $21.56 $4.81 to $24.79 $4.81 to $21.75 $4.81 to $24.38
Assumed proceeds on exercise.......................... $10,929,294 $12,133,226 $10,755,150 $11,046,486
Average market value per share........................ $23.34 $27.35 $23.43 $24.69
Less: Treasury stock purchased with the assumed
proceeds from exercise of options.................. 468,265 443,628 459,033 447,407
----------------- ------------------ ----------------- ---------------
Adjusted average shares............................... 16,922,202 18,088,100 18,371,205 17,799,710
----------------- ------------------ ----------------- ---------------
Convertible preferred stock assumed
converted.......................................... 0 0 0 0
Average diluted shares outstanding
----------------- ------------------ ----------------- ---------------
(denominator)...................................... 16,922,202 18,088,100 18,371,205 17,799,710
----------------- ------------------ ----------------- ---------------
Per share amount...................................... $0.28 $0.31 $0.31 $0.89
================= ================== ================= ===============
</TABLE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Carolina First Corporation and Subsidiaries
($ in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
--------------------- --------------------
<S> <C> <C>
EARNINGS:
Income from continuing operations
before income taxes............................... $ 8,998 $ 25,205
ADD:
(a) Fixed charges.................................... 23,046 67,605
DEDUCT:
(a) Interest capitalized during year................. ------ ------
--------------------- --------------------
Earnings, for computation purposes..................... $ 32,044 $ 92,810
===================== ====================
FIXED CHARGES:
Interest on indebtedness, expensed or capitalized.... $ 22,777 $ 66,831
Portion of rents representative of the
interest factor................................... 237 678
Amortization of debt expense......................... 32 97
--------------------- --------------------
Fixed charges, for computation purposes................ $ 23,046 $ 67,605
===================== ====================
Ratio of earnings to fixed charges..................... x 1.39 x 1.37 x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000797871
<NAME> CAROLINA FIRST CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 79,512
<INT-BEARING-DEPOSITS> 51,365
<FED-FUNDS-SOLD> 115,050
<TRADING-ASSETS> 2,514
<INVESTMENTS-HELD-FOR-SALE> 356,086
<INVESTMENTS-CARRYING> 47,639
<INVESTMENTS-MARKET> 49,026
<LOANS> 1,757,399
<ALLOWANCE> 17,627
<TOTAL-ASSETS> 2,632,674
<DEPOSITS> 2,069,140
<SHORT-TERM> 124,227
<LIABILITIES-OTHER> 37,276
<LONG-TERM> 64,597
0
0
<COMMON> 21,729
<OTHER-SE> 315,705
<TOTAL-LIABILITIES-AND-EQUITY> 2,632,674
<INTEREST-LOAN> 109,969
<INTEREST-INVEST> 16,945
<INTEREST-OTHER> 3,945
<INTEREST-TOTAL> 130,859
<INTEREST-DEPOSIT> 59,462
<INTEREST-EXPENSE> 66,831
<INTEREST-INCOME-NET> 64,028
<LOAN-LOSSES> 8,686
<SECURITIES-GAINS> 451
<EXPENSE-OTHER> 45,997
<INCOME-PRETAX> 25,205
<INCOME-PRE-EXTRAORDINARY> 25,205
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,869
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 9.37
<LOANS-NON> 669
<LOANS-PAST> 4,949
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 16,211
<CHARGE-OFFS> 10,009
<RECOVERIES> 1,060
<ALLOWANCE-CLOSE> 17,627
<ALLOWANCE-DOMESTIC> 17,627
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
