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, 2000
___ 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
-------
THE SOUTH FINANCIAL GROUP, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0824914
-------------------------------- -----------------
(State or other jurisdiction of (IRS 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
--------------
Carolina First Corporation
--------------------------
(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 $1.00 par value common stock as
of November 10, 2000 was 43,225,072.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
The South Financial Group and Subsidiaries
($ in thousands, except share data) (Unaudited)
September 30, December 31,
---------------------------- ----------------
ASSETS 2000 1999 1999
------------- --------------- ----------------
<S> <C> <C> <C>
Cash and due from banks......................................... $ 127,707 $ 132,536 $ 138,829
Interest-bearing bank balances.................................. 61,206 15,715 28,972
Federal funds sold and resale agreements........................ 425 13,205 3,625
Securities
Trading...................................................... 4,918 4,026 4,668
Available for sale........................................... 832,902 697,228 887,718
Held for investment (market value $65,609, $64,713 and
$71,291, respectively)....................................... 66,339 65,939 71,760
----------- -------------- -----------
Total securities........................................... 904,159 767,193 964,146
----------- -------------- -----------
Loans
Loans held for sale.......................................... 9,098 50,694 45,591
Loans held for investment.................................... 3,667,895 3,098,314 3,251,894
Less unearned income...................................... (2,190) (6,774) (5,765)
Less allowance for loan losses............................ (42,847) (32,476 (33,756)
---------- -------------- -----------
Net loans............................................... 3,631,956 3,109,758 3,257,964
---------- -------------- -----------
Premises and equipment, net..................................... 119,615 83,124 84,863
Accrued interest receivable..................................... 35,251 28,439 31,176
Intangible assets............................................... 108,962 117,851 113,960
Other assets.................................................... 138,834 125,011 145,121
---------- -------------- -----------
$ 5,128,115 $ 4,392,832 $ 4,768,656
========== ============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing......................................... $ 498,885 $ 498,143 $ 496,428
Interest-bearing............................................ 3,260,072 2,854,030 2,985,223
---------- -------------- -----------
Total deposits............................................ 3,758,957 3,352,173 3,481,651
---------- -------------- -----------
Borrowed funds................................................ 800,089 432,926 696,236
Subordinated notes............................................ 36,790 36,715 36,672
Accrued interest payable...................................... 33,755 19,062 23,108
Other liabilities............................................. 21,607 51,707 30,399
---------- -------------- -----------
Total liabilities.......................................... 4,651,198 3,892,583 4,268,066
---------- -------------- -----------
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 43,134,578, 43,237,067
and 43,326,754 shares, respectively......................... 43,135 43,237 43,327
Surplus....................................................... 340,349 342,249 345,309
Retained earnings............................................. 86,232 94,050 100,298
Guarantee of employee stock ownership plan debt and nonvested
restricted stock............................................. (3,823) (4,445) (4,445)
Accumulated other comprehensive income, net of tax............ 11,024 25,158 16,101
---------- -------------- -----------
Total shareholders' equity.................................. 476,917 500,249 500,590
---------- -------------- -----------
$ 5,128,115 $ 4,392,832 $ 4,768,656
========== ============== ===========
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
The South Financial Group and Subsidiaries
($ in thousands, except share data) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans................ $ 85,904 $ 69,759 $ 242,556 $ 202,509
Interest and dividends on securities...... 14,617 10,561 43,664 30,400
Interest on short-term investments........ 528 786 1,560 3,286
---------- ---------- ---------- ----------
Total interest income................... 101,049 81,106 287,780 236,195
---------- ---------- ---------- ----------
Interest Expense
Interest on deposits...................... 43,306 31,317 116,716 91,773
Interest on borrowed funds................ 13,459 5,224 37,006 14,138
--------- ---------- ---------- ----------
Total interest expense.................. 56,765 36,541 153,722 105,911
--------- ---------- ---------- ----------
Net interest income..................... 44,284 44,565 134,058 130,284
Provision for Loan Losses................... 6,709 4,362 19,136 12,979
--------- ---------- ---------- ----------
Net interest income after
provision for loan losses............. 37,575 40,203 114,922 117,305
--------- ---------- ---------- ----------
Noninterest Income
Service charges on deposit accounts....... 5,062 4,109 13,401 11,561
Fees for investment services.............. 1,288 1,326 4,154 3,776
Mortgage banking income................... 953 1,162 3,965 3,501
Gain (loss) on sale of securities......... (5,327) 86 (5,164) 404
Gain on disposition of assets and liabilities 2,013 2,223 2,119 2,223
Gain (loss) on disposition of equity investments (332) - 2,133 15,471
Gain (loss) on sale of credit cards....... 135 (3) 135 2,359
Loan securitization income................ - 43 - 1,646
Other..................................... 2,636 2,740 9,089 7,986
--------- ---------- ---------- ----------
Total noninterest income................ 6,428 11,686 29,832 48,927
--------- ---------- ---------- ----------
Noninterest Expenses
Personel expense.......................... 18,290 16,729 56,290 51,541
Occupancy................................. 4,039 2,743 11,474 7,987
Furniture and equipment................... 3,670 2,597 8,988 7,133
Amortization of intangibles............... 1,600 1,674 4,824 5,329
Restructuring and merger-related costs.... 7,851 3,157 27,775 6,559
Impairment loss from write-down of assets. 3,869 - 3,869 -
System conversion costs................... 1,327 - 2,166 -
Charitable contribution to foundation..... - - - 11,890
Other..................................... 10,051 10,256 30,388 29,745
--------- ---------- ---------- ----------
Total noninterest expenses.............. 50,697 37,156 145,774 120,184
--------- ---------- ---------- ----------
Income (loss) before income taxes....... (6,694) 14,733 (1,020) 46,048
Income taxes................................ (3,612) 5,071 609 15,710
--------- ---------- ---------- ----------
Net income (loss)....................... $ (3,082) $ 9,662 $ (1,629)$ 30,338
========= ========== ========== ==========
Net Income (loss) per Common Share:
Basic................................... $ (0.07) $ 0.23 $ (0.04)$ 0.71
Diluted................................. (0.07) 0.22 (0.04) 0.70
Average Common Shares Outstanding:
Basic................................... 42,901,829 42,920,722 42,896,266 42,570,466
Diluted................................. 43,577,447 43,867,473 43,579,040 43,544,718
Cash Dividends Declared per Common Share.... $ 0.10 $ 0.09 $ 0.30 $ 0.27
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
The South Financial Group and Subsidiaries
($ in thousands, except share data) (Unaudited)
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>
Balance, December 31, 1998................... 42,372,190 $ -- $42,373 $ 338,281 $ 68,081 $ 2,254 $ 450,989
Net income................................. -- -- -- -- 30,338 -- 30,338
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during
period, net of tax benefit of $12,444 -- -- -- -- -- 23,111
Less: reclassification adjustment for
gains included in net income, net
of taxes of $19 -- -- -- -- -- (36)
-------------
Other comprehensive income................ -- -- -- -- -- 23,075 23,075
-------------
---------
Comprehensive income........................ -- -- -- -- -- 23,075
---------
Cash dividends declared ($0.27 per common share) -- -- -- -- (10,990) -- (10,990)
Common stock issued pursuant to:
Sale, conversion, acquisition, retirement of (13) -- (1) -- (1)
stock
Repurchase of stock....................... (40,000) -- (40) (816) -- -- (856)
Acquisition............................... 505,851 -- 506 1,734 1,445 (171) 3,514
Dividend reinvestment plan................ 43,314 -- 43 937 -- -- 980
Employee stock purchase plan.............. 8,371 -- 8 181 -- -- 189
Restricted stock plan..................... 44,735 -- 45 1,046 -- -- 1,091
Exercise of stock options and stock warrants 440,344 -- 441 2,294 -- -- 2,735
Miscellaneous............................... (137,725) -- (139) (1,407) 731 -- (815)
------------------------------------------------------------------------
Balance, September 30, 1999................... 43,237,067 $ -- $43,237 $ 342,249 $ 89,605 $ 25,158 $ 500,249
========================================================================
BALANCE, DECEMBER 31, 1999.................... 43,326,754 $ -- $43,327 $ 345,309 $ 95,853 $ 16,101 $ 500,590
Net loss.................................... -- -- -- -- (1,629) -- (1,629)
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during
period, net of tax benefit of $4,204. -- -- -- -- -- (5,983)
Less: reclassification adjustment for
losses included in net income, net of
tax benefit of $556 -- -- -- -- -- 906
-------------
Other comprehensive loss.................. -- -- -- -- -- (5,077) (5,077)
-------------
---------
Comprehensive loss.......................... -- -- -- -- -- (6,706)
---------
Cash dividends declared ($0.30 per common share) -- -- -- -- (12,457) -- (12,457)
Common stock issued pursuant to:
Sale, conversion, acquisition, retirement of
stock.................................. -- -- -- -- -- -- --
Repurchase of stock....................... (524,600) -- (525) (7,783) -- -- (8,308)
Dividend reinvestment plan................ 102,504 -- 103 1,310 -- -- 1,413
Employee stock purchase plan.............. 13,885 -- 14 176 -- -- 190
Restricted stock plan..................... 89,792 -- 90 1,269 (1,359) -- --
Exercise of stock options and stock warrants 126,277 -- 126 404 -- -- 530
Miscellaneous............................... (34) -- -- (336) 2,001 -- 1,665
------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000................... 43,134,578 $ -- $43,135 $ 340,349 $82,409 $11,024 $476,917
========================================================================
* Other includes guarantee of employee stock ownership plan debt and nonvested restricted stock.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
The South Financial Group and Subsidiaries
(in thousands, except share data)
(unaudited)
Nine Months Ended September 30,
-------------------------------
2000 1999
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................................. $ (1,629) $ 30,338
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operations
Depreciation............................................................... 6,277 3,858
Amortization of intangibles................................................ 4,824 5,329
Charitable contribution to foundation...................................... - 11,890
Provision for loan losses.................................................. 19,136 12,979
Gain (loss) on sale of securities.......................................... 5,164 (404)
Gain on disposition of equity investments.................................. (2,133) (15,471)
Gain on sale of assets and liabilities..................................... (2,119) (2,223)
Gain on sale of credit cards............................................... (135) (2,362)
Gain on sale of mortgage loans............................................. (45) (969)
Trading account assets, net................................................ (18) (215)
Originations of mortgage loans held for sale............................... (242,652) (388,809)
Sale of mortgage loans held for sale....................................... 279,190 322,037
Other assets, net.......................................................... 3,372 (22,405)
Other liabilities, net..................................................... 3,762 6,668
---------- -----------
Net cash provided by (used for) operating activities..................... 72,994 (39,759)
---------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Interest-bearing bank balances............................................. (32,234) 47,355
Federal funds sold and resale agreements .................................. 3,200 12,961
Sale of securities available for sale...................................... 106,263 145,054
Maturity of securities available for sale.................................. 73,215 155,710
Maturity of securities held for investment................................. 14,086 23,875
Purchase of securities available for sale.................................. (141,346) (309,684)
Purchase of securities held for investment................................. (8,665) (8,256)
Origination of loans, net.................................................. (461,014) (282,990)
Sale of credit cards....................................................... 5,483 65,624
Capital expenditures, net.................................................. (42,030) (6,130)
Acquisitions accounted for under the purchase method of accounting......... - 13,256
Disposition of equity investments.......................................... 6,495 4,389
Disposition of assets and liabilities, net................................. (17,690) (35,160)
----------- -----------
Net cash used for investing activities................................... (494,237) (173,996)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Increase in deposits, net.................................................. 321,493 55,758
Borrowed funds, net........................................................ 103,853 133,631
Cash dividends paid........................................................ (10,715) (10,660)
Repurchase of common stock................................................. (8,308) (856)
Other common stock activity................................................ 3,798 2,832
----------- ----------
Net cash provided by financing activities................................ 410,121 180,705
----------- ----------
Net change in cash and due from banks.......................................... (11,122) (33,050)
Cash and due from banks at beginning of period................................. 138,829 165,586
----------- ----------
Cash and due from banks at end of period....................................... $ 127,707 $ 132,536
============= ============
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of these policies is included in the 1999 Annual Report on
Form 10-K.
(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,
amounted to approximately $143.1 million and $108.2 million for the
nine months ended September 30, 2000 and 1999, respectively. Income tax
payments of $16.8 million and $9.0 million were made for the nine
months ended September 30, 2000 and 1999, respectively.
(3) BUSINESS COMBINATIONS
On June 6, 2000, the Company completed the merger with Anchor Financial
Corporation ("Anchor Financial"), headquartered in Myrtle Beach, South
Carolina. The Company acquired all the outstanding common shares of
Anchor Financial in exchange for 17,674,208 shares of the Company's
common stock. Each share of Anchor Financial stock was exchanged for
2.175 shares of the Company's common stock. At March 31, 2000, Anchor
Financial had total assets of approximately $1.2 billion, loans of
approximately $873 million, and deposits of approximately $1.0 billion
with 33 branch locations in South Carolina and North Carolina.
The Anchor Financial transaction has been accounted for as a
pooling-of-interests combination and, accordingly, the Company's
consolidated financial statements for all prior periods have been
restated to include the accounts and results of operations of Anchor
Financial, except for cash dividends declared per common share.
The results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying
consolidated financial statements are summarized below.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31, SEPT 30, SEPT. 30,
2000 1999 1999
-------------------- ------------------- --------------------
($ in thousands, except per share data)
<S> <C> <C> <C>
Net interest income:
The Company $ 31,505 $ 31,102 $ 90,532
Anchor Financial 12,914 13,463 39,752
------ ------ ------
Combined $ 44,419 $ 44,565 $ 130,284
Net income:
The Company $ 6,568 $ 5,730 $ 20,005
Anchor Financial 3,834 3,932 10,333
----- ----- ------
Combined $ 10,402 $ 9,662 $ 30,338
</TABLE>
5
<PAGE>
Per share data previously reported by the separate enterprises and the
combined amounts presented in the accompanying consolidated financial
statements are summarized below.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31, SEPT 30, SEPT 30,
2000 1999 1999
-------------------- -------------------- --------------------
($ in thousands, except per share data)
<S> <C> <C> <C>
Basic income per common share:
The Company $ 0.26 $ 0.22 $ 0.80
Anchor Financial 0.48 0.49 1.29
Combined 0.24 0.23 0.71
Diluted income per common share:
The Company $ 0.26 $ 0.22 $ 0.78
Anchor Financial 0.46 0.48 1.25
Combined 0.24 0.22 0.70
</TABLE>
(4) RESTRUCTURING AND MERGER-RELATED COSTS
In connection with the Anchor Financial merger, the Company recorded
restructuring and merger-related costs of approximately $27.8 million.
The restructuring costs were recorded in accordance with the applicable
literature. The merger-related costs were recorded as incurred. The
following table indicates the primary components of these charges,
including the amounts paid through September 30, 2000, and the amounts
remaining as accrued expenses in other liabilities at September 30,
2000.
<TABLE>
<CAPTION>
Total
Restructuring Paid Remaining
And Merger- Through Accrual at
Related Costs Sept. 30, 2000 Sept. 30, 2000
-------------------- ------------------- -------------------
($ in thousands, except per share data)
<S> <C> <C> <C>
Contract termination costs $ 7,299 $ 7,160 $ 139
Investment banking fees 7,026 7,026 --
Severence costs 3,455 2,565 890
Impairment of abandoned facilities 3,117 2,333 784
Professional fees 1,980 1,878 102
System conversion and
write-off of obsolete assets 1,974 1,974 --
Other merger costs 2,924 1,924 1,000
----------------- ------------------- ----------------
Total $ 27,775 $ 24,860 $ 2,915
</TABLE>
The severance costs include payments and accruals for payments made in
connection with the involuntary termination of approximately 88
employees who had been notified that their positions were redundant
within the combined organizations. Management expects payments for the
6
<PAGE>
remaining accrual to be substantially made during 2000. The contract
termination costs are primarily comprised of payments required to be
made to certain executives of Anchor Financial pursuant to their
employment contracts.
The impairment of abandoned facilities relates to the write-down of
assets, the write-off of leasehold improvements and the estimated lease
buyouts associated with properties, which were abandoned in connection
with the merger. The Company is currently trying to sell certain former
branch locations associated with the July 2000 consolidation of
offices.
(5) SECURITIES
The net unrealized gain on securities available for sale, net of tax
decreased $5.1 million for the nine months ended September 30, 2000.
The Company began recording its investment in Net.B@nk, Inc. at market
value effective July 31, 1999, or one year prior to the termination of
restrictions on the sale of these securities.
(6) COMMON STOCK
Basic earnings per share are computed by dividing net income applicable
to common shareholders by the weighted average number of common shares
outstanding.
Diluted earnings per share are computed by dividing net income by the
weighted average number of shares of common shares outstanding during
each period, plus the assumed exercise of dilutive stock options using
the treasury stock method.
(7) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is subject to various legal proceedings and claims that
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 February 28, 2000, plaintiff John W. Dickens filed a breach of
contract lawsuit against Anchor Financial Corporation, subsequently
acquired by the Company, in the Court of Common Pleas for the Fifth
Judicial Circuit. The plaintiff's complaint based on an employment
agreement sought compensation, other benefits, and actual and punitive
damages for defamation in excess of $5 million. The plaintiff was an
employee of Bailey Financial Corporation, which merged with Anchor
Financial Corporation on April 9, 1999. Following the merger, the
plaintiff worked for Anchor Financial Corporation until the termination
of his employment on December 16, 1999. The Company has filed
counterclaims denying the allegations and citing parachute payment
limitations as specified in Section 280G of the Internal Revenue Code.
On October 3, 2000, the lawsuit became subject to court ordered
arbitration/mediation that must be completed within sixty (60) days of
the order appointing the mediator. The Company's exposure should be
limited to the largest severance payments permitted under the Internal
Revenue Code.
7
<PAGE>
(8) IMPAIRMENT OF ASSETS
Based on the Company's acquisition activity, internal growth, and
realignment plans, certain properties will not be used for future
growth. Accordingly, the Company reviewed for impairment long-lived
assets related to abandoned properties in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." As a
result of this review, in the third quarter of 2000, the Company
recorded a pre-tax impairment loss from the write-down of assets
totaling $3.9 million. The impairment loss consisted of $2.6 million
for the write-off of leasehold improvements related to seven abandoned
locations, including the former operations center in Columbia, South
Carolina. In addition, the impairment loss included $768,000 for
estimated lease buyout costs related to nine abandoned locations and
$500,000 for the write-down to record land at fair value.
(9) BUSINESS SEGMENTS
The Company has seven wholly-owned operating subsidiaries which are
evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and assess performance. Two of these
subsidiaries, Carolina First Bank and Carolina First Bank, F.S.B.
(collectively, the "Carolina Banks"), qualify as separately reportable
operating segments, which have been aggregated into a single operating
segment due to the similar markets, products and services. In addition,
during the fourth quarter of 2000, Carolina First Bank, F.S.B. will
merge into Carolina First Bank. The Carolina Banks offer products and
services primarily to customers in South Carolina and North Carolina.
Revenues for Carolina First Bank are derived primarily from interest
and fees on loans, interest on investment securities and service
charges on deposits.
8
<PAGE>
The following table summarizes certain financial information concerning
the Company's reportable operating segments at and for the nine months
ended September 30, 2000 ($ in thousands):
<TABLE>
<CAPTION>
CAROLINA ELIMINATING
BANKS OTHER ENTRIES (1) TOTAL
SEPTEMBER 30, 2000
<S> <C> <C> <C> <C>
Income Statement Data
Total revenue $ 279,703 $ 73,343 $ (35,434) $ 317,612
Net interest income 117,386 16,672 -- 134,058
Provision for loan losses 15,981 3,155 -- 19,136
Noninterest income 20,448 40,449 (31,065) 29,832
Mortgage banking income (1,536) 5,501 -- 3,965
Noninterest expense 126,746 49,262 (30,234) 145,774
Amortization 4,657 167 -- 4,824
Net income (5,303) 2,842 832 (1,629)
Balance Sheet Data
Total assets $ 4,592,314 $ 1,084,060 $ (548,259) $ 5,128,115
Loans - net of unearned income 3,225,579 449,224 -- 3,674,803
Allowance for loan losses 36,492 6,355 -- 42,847
Intangibles 107,289 1,673 -- 108,962
Deposits 3,341,818 425,053 (7,914) 3,758,957
CAROLINA ELIMINATING
BANKS OTHER ENTRIES (1) TOTAL
SEPTEMBER 30, 1999
Income Statement Data
Total revenue $ 242,991 $ 48,566 $ (6,435) $ 285,122
Net interest income 117,567 12,717 -- 130,284
Provision for loan losses 11,785 1,194 -- 12,979
Noninterest income 27,903 25,526 (4,502) 48,927
Mortgage banking income (1,754) 5,255 -- 3,501
Noninterest expense 90,800 33,886 (4,502) 120,184
Amortization 4,888 441 -- 5,329
Net income 26,488 3,850 -- 30,338
Balance Sheet Data
Total assets $ 4,005,118 $ 859,994 $ (472,280) $ 4,392,832
Loans - net of unearned income 2,859,822 282,412 -- 3,142,234
Allowance for loan losses 27,263 5,213 -- 32,476
Intangibles 115,955 1,896 -- 117,851
Deposits 3,037,534 329,817 (15,178) 3,352,173
</TABLE>
(1) The majority of the eliminating entries relate to intercompany accounts.
9
<PAGE>
(10) 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.
10
<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 this report as well as
the Annual Report of The South Financial Group, Inc. (the "Company") on Form
10-K for the year ended December 31, 1999. Results of operations for the nine
month period ended September 30, 2000 are not necessarily indicative of results
to be attained for any other period.
The Company, a South Carolina corporation headquartered in Greenville,
South Carolina, is a financial institution holding company, which commenced
banking operations in December 1986, and currently conducts business through 81
locations in South Carolina and North Carolina and 15 locations in northern and
central Florida. The Company operates through the following principal
subsidiaries: Carolina First Bank, a South Carolina state-chartered commercial
bank; Citrus Bank, a Florida state-chartered commercial bank; Carolina First
Mortgage Company ("CF Mortgage"), a mortgage banking company; and Carolina First
Bank, F.S.B., a Federal savings bank which operates Bank CaroLine (an Internet
bank). 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.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements (as defined in
the Private Securities Litigation Reform Act of 1995) to assist in the
understanding of anticipated future operating and financial performance, growth
opportunities, growth rates, and other similar forecasts and statements of
expectations. These forward-looking statements reflect current views, but are
based on assumptions and are subject to risks, uncertainties and other
factors, which may cause actual results to differ materially from those in such
statements. Those factors include, but are not limited to, the following: risks
from changes in economic, monetary policy and industry conditions; changes in
interest rates, deposit rates, and the net interest margin; inflation; risks
inherent in making loans including repayment risks and value of collateral; loan
growth; adequacy of the allowance for loan losses and the assessment of problem
loans; fluctuations in consumer spending; the demand for the Company's
products and services; dependence on senior management; technological changes;
ability to increase market share; expense projections; system conversion costs;
costs associated with new buildings; acquisitions; risks, realization of costs
savings, and total financial performance associated with the Company's merger
with Anchor Financial Corporation; changes in accounting policies and practices;
costs and effects of litigation; and recently-enacted or proposed legislation.
Such forward-looking statements speak only as of the date on which such
statements are made. The Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
In addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, in press releases and in oral and written
statements made by or with the approval of the Company which are not statements
of historical fact constitute forward-looking statements.
11
<PAGE>
MERGER WITH ANCHOR FINANCIAL CORPORATION
On June 6, 2000, the Company completed the merger with Anchor Financial
Corporation ("Anchor Financial"), a South Carolina corporation headquartered in
Myrtle Beach, South Carolina, whose principal operating subsidiary was The
Anchor Bank. The Company acquired all the outstanding common shares of Anchor
Financial in exchange for 17,674,208 shares of the Company's common stock. Each
share of Anchor Financial stock was exchanged for 2.175 shares of the Company's
common stock. The Anchor Financial transaction has been accounted for as a
pooling-of-interests combination and, accordingly, the Company's historical
financial information for all prior periods has been restated to include the
accounts and results of operations of Anchor Financial, except for cash
dividends declared per common share.
During the second and third quarters of 2000, the Company incurred
pre-tax restructuring and merger-related costs of $27.8 million in connection
with the Anchor Financial merger. In addition to the $27.8 million, during the
second quarter of 2000, the Company included an additional provision for loan
losses of $3.0 million to apply the Company's reserve analysis methodology to
Anchor Financial's loan portfolio. During the third quarter of 2000, the Company
incurred a $5.3 million loss related to the sale of securities from
restructuring the combined investment portfolio following the completion of the
Anchor Financial merger.
On July 10, 2000, the Company completed the system conversion for
Anchor Financial and its subsidiary, The Anchor Bank. Effective with the system
conversion, The Anchor Bank offices began operating as Carolina First Bank
offices. In addition, the Company consolidated 11 offices and closed Anchor
Financial's operations center.
SALE OF BRANCH OFFICES
During the third quarter 2000, the Company sold offices in Saluda,
South Carolina and Nichols, South Carolina for a $2.0 million gain. In the
second quarter 2000, the Company sold an office in Prosperity, South Carolina
for a $106,000 gain.
MERGER OF SUBSIDIARY BANKS
Effective October 13, 2000, the Federal Deposit Insurance Corporation
approved Carolina First Bank's application to merge with Carolina First Bank,
F.S.B. Following the completion of this merger, which the Company expects to
complete during the fourth quarter 2000, all the banking locations in South
Carolina and North Carolina will operate as Carolina First Bank.
EQUITY INVESTMENTS
Investment in Net.B@nk, Inc.
At September 30, 2000, the Company owned 2,265,000 shares of Net.B@nk,
Inc. ("Net.B@nk") common stock, or approximately 7.6% of the outstanding shares.
The Company's investment in Net.B@nk, which is included in securities available
for sale and has a basis of approximately $629,000, had a pre-tax market value
12
<PAGE>
of approximately $26.8 million as of September 30, 2000. During the second
quarter of 2000, the Company sold 150,000 shares of Net.B@nk stock resulting in
a pre-tax gain of $1.9 million. The Company's shares of Net.B@nk common stock
are "restricted" securities, as that term is defined in federal securities law.
INVESTMENT IN AFFINITY TECHNOLOGY GROUP, INC.
At September 30, 2000, the Company, through its subsidiary Blue Ridge
Finance Company, Inc. ("Blue Ridge"), owned 1,753,366 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"). In March 2000, the Company sold 775,000 shares of Affinity common
stock for a pre-tax gain of approximately $2.3 million.
These Affinity shares and the shares represented by the Affinity
Warrant constitute approximately a 15% ownership in Affinity. As of September
30, 2000, the investment in Affinity's common stock, which is included in
securities available for sale and has a basis of approximately $111,000, was
recorded at its pre-tax market value of approximately $1.3 million. The Affinity
Warrant was not reported on the Company's balance sheet as of September 30,
2000.
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, 2000, the Company had equity investments in the
following 13 community banks located in the Southeast: CNB Florida Bancshares,
Inc.; Capital Bank; Carolina Bank; Coastal Banking Company, Inc.; Community
Capital Corporation; First Reliance Bank; FirstSpartan Financial Corporation;
Florida Banks, Inc.; Greenville First Bancshares, Inc.; High Street Banking
Company; Marine Bancshares; People's Community Capital Corp.; and Trinity Bank.
In each case, the Company owns less than 5% of the community bank's outstanding
common stock. As of September 30, 2000, equity investments in the community
banks listed above, included in securities available for sale with a basis of
approximately $8.5 million, were recorded at pre-tax market value of
approximately $6.5 million. During the third quarter 2000, the Company sold two
of its community bank stock investments, which were being acquired, for a net
loss of $132,000. The Company has made these investments to develop
correspondent banking relationships and to promote community banking in the
Southeast.
As a result of the Company's merger with Anchor Financial, the Company
has an investment in Rock Hill Bank & Trust. The investment, which is included
in securities available for sale and has a basis of approximately $3.1 million,
had a pre-tax market value of approximately $5.4 million as of September 30,
2000. The Company also has an investment in Nexity Financial Corporation, an
Internet bank, which is recorded at its basis of $500,000.
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
13
<PAGE>
Business Investment Company. CF Investment Company is a wholly-owned subsidiary
of Blue Ridge. CF Investment Company's principal focus is investing in companies
that have a bank-related technology or service the Company and its subsidiaries
can use. As of September 30, 2000, CF Investment Company had invested
approximately $3.2 million (principally in the form of loans) in companies
specializing in electronic document management, telecommunications and
Internet-related services.
CF Investment Company's loans represent a higher credit risk to the
Company due to the start up nature of these companies. For the nine months ended
September 30, 2000, the Company incurred a $1.9 million loss related to the
write-off of two investments.
EARNINGS REVIEW
OVERVIEW
Including merger-related charges and other charges, the net loss for
the three months ended September 30, 2000 was $3.1 million, or $0.07 per diluted
share. This loss included merger-related charges, which decreased net income by
$8.7 million (after-tax), and other charges, which decreased net income by $2.1
million (after-tax). See "EARNINGS REVIEW - Comparison for the Quarters Ended
September 30, 2000 and September 30, 1999" for an explanation of the
merger-related charges and other charges. Net income for the three months ended
September 30, 1999 was $9.7 million, or $0.22 per diluted share.
For the first nine months of 2000, the net loss, including
merger-related charges and other charges, totaled $1.6 million, or $0.04 per
diluted share. For the first nine months of 1999, the Company's net income
totaled $30.3 million, or $0.70 per diluted share. The decrease was primarily
attributable to the following pre-tax expenses related to the Anchor Financial
merger: restructuring and merger-related costs of $27.8 million, a $5.3 million
loss associated with restructuring the combined investment portfolio, and an
additional provision for loan losses of $3.0 million to apply the Company's
reserve analysis methodology to Anchor Financial's loan portfolio.
At September 30, 2000, the Company had approximately $5.1 billion in
assets, $3.7 billion in loans, $3.8 billion in deposits and $476.9 million in
shareholders' equity. At September 30, 2000, the Company's ratio of
nonperforming assets to loans and other real estate owned was 0.62%.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on
assets and the interest paid for the liabilities to support such assets as well
as such items as loan fees and dividend income. The net interest margin measures
how effectively a company manages the difference between the yield on earning
assets and the rate paid on funds to support those assets. Fully tax-equivalent
net interest income adjusts the yield for assets earning tax-exempt income to a
comparable yield on a taxable basis. Average earning assets and the net interest
margin exclude the net unrealized gain on securities available for sale because
this gain is not included in net income.
14
<PAGE>
Fully tax-equivalent net interest income increased $4.1 million, or
3.2%, to $135.5 million in the first nine months of 2000 from $131.4 million in
the first nine months of 1999. The increase resulted from a higher level of
average earning assets partially offset by a lower net interest margin. Average
earning assets increased $631.4 million, or 16.7%, to approximately $4.4 billion
in the first nine months of 2000 from $3.8 billion in the first nine months of
1999. This increase resulted from internal loan growth and an increased level of
investment securities. Average loans, net of unearned income, were $3.5 billion
in the first nine months of 2000 compared with $3.0 billion in the first nine
months of 1999. Average investment securities were $881.9 million and $689.2
million in the first nine months of 2000 and 1999, respectively. The majority of
the increase in average investment securities was attributable to the match
funding in December 1999 of approximately $200 million in mortgage-backed
securities with approximately $200 million in Federal Home Loan Bank borrowings.
The net interest margin of 4.11% for the first nine months of 2000 was
lower than the margin of 4.66% for the first nine months of 1999. The net
interest margin remained consistent during the first two quarters of 2000 with
margins of 4.21% and 4.22% for the first and second quarter, respectively. The
net interest margin declined to 3.91% in the third quarter of 2000. The decline
in the net interest margin was due primarily to two factors. First, loan growth
exceeded deposit growth creating the need for alternative funding sources,
including Bank CaroLine. The deposit markets, which have been very competitive,
are expected to remain so going forward. As such, the Company will continue to
use alternative funding sources. These alternative funding sources generally
have higher interest rates. Second, increases in funding costs, particularly
certificates of deposits, have outpaced increases in loan yields. The rise in
the general level of interest rates caused deposits to be repriced at higher
rates upon maturity.
In September 1999, the Company introduced Bank CaroLine, an Internet
bank offered as a service of Carolina First Bank, F.S.B. Deposit rates for Bank
CaroLine are generally higher than those offered by the Company's other
subsidiary banks to reflect the lower cost structure associated with operating
on the Internet. Accordingly, as deposits build for Bank CaroLine, the Company
expects the cost of deposits on a consolidated basis to continue to increase. As
of September 30, 2000, total deposits for Bank CaroLine were approximately
$223.0 million compared with $5.8 million as of September 30, 1999.
Increases in the prime interest rate, which increased 50 basis points
during the second half of 1999 and 100 basis points during the first half of
2000, had a positive impact on the yield on earning assets. Variable rate loans
immediately repriced upward with the increases in the prime interest rate. The
overall yield on commercial loans (including both fixed and variable rate loans)
during the first nine months of 2000 was 9.19% compared with 8.59% for the first
nine months of 1999. The yield on investment securities also increased to 6.80%
for the first three quarters of 2000 from 6.15% for the first nine months of
1999.
During the third quarter of 2000, the Company restructured
approximately $108 million, or 11%, of the combined investment portfolios of the
Company and Anchor Financial, generating a $5.3 million loss. The associated
yield enhancement totaled approximately 150 basis points.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $19.1 million for the first
nine months of 2000 compared with $13.0 million for the first nine months of
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<PAGE>
1999. In the second quarter of 2000, application of the Company's reserve
analysis methodology to the acquired Anchor Financial portfolio resulted in a
provision of approximately $3 million. During the third quarter of 2000, net
charge-offs of $5.5 million included $3.4 million related to a participation in
a shared national credit to Video Update, Inc. ("Video Update"). The provision
for loan losses increased $2.3 million for the three months ended September 30,
2000 from the prior year period. This increase included an incremental provision
of $1.7 million related to Video Update. Third quarter charge-offs were 0.61% of
average loans on a annualized basis. Excluding the Video Update charge-off, the
third quarter charge-off ratio was 0.23%. As a percentage of average loans, the
net charge-off ratio was 0.38% for the first nine months of 2000 compared with
0.34% for the same period last year.
The provision for loan losses is a function of loan growth, charge-off
levels, and portfolio quality trends. Continued loan growth is anticipated,
particularly in northern and central Florida, as well as in the coastal Carolina
markets. Charge-offs are expected to decline slightly from their third quarter
2000 level, and loan portfolio quality trends are expected to remain stable.
However, the current economic outlook implies a less robust business climate
that could affect these expectations. Consequently, while significant change is
not anticipated, management continues to closely monitor economic trends and the
potential impact thereof on the Company's loan portfolio.
NONINTEREST INCOME
Noninterest income, including other gains and losses, decreased to
$29.8 million in the first nine months of 2000 from $48.9 million in the first
nine months of 1999. Noninterest income in the first nine months of 2000
included the following other gains (pre-tax): $2.3 million related to the sale
of 775,000 shares of Affinity stock, $2.1 million related to the sale of three
branch offices, $1.9 million related to the sale of 150,000 shares of Net.B@nk
stock, and $135,000 on the sale of credit cards. These gains were offset by the
following other losses (pre-tax): $5.3 million on the sale of securities
principally from restructuring the combined investment portfolio following
completion of the Anchor Financial merger, $1.9 million in write-offs related to
technology investments, and $132,000 on the sale of two community bank stock
investments. Noninterest income in the first nine months of 1999 included other
gains (pre-tax) of approximately $15.1 million (primarily offset by a
contribution to the Carolina First foundation) related to the sale of Net.B@nk
stock, $2.4 million on the sale of credit cards, $2.2 million principally from
the sale of three branch offices, and $412,000 related to the sale of a
technology investment.
Excluding these other gains and losses, noninterest income increased
$1.7 million to $30.6 million for the first nine months of 2000 from $28.9
million for the first nine months of 1999. This increase was primarily
attributable to higher service charges on deposit accounts, mortgage banking
income and fees for investment services, partially offset by lower loan
securitization income.
Service charges on deposit accounts, the largest contributor to
noninterest income, rose 15.9% to $13.4 million in the first nine months of 2000
from $11.6 million for the same period in 1999. Average deposits for the same
period increased 7.2%. The increase in service charges was attributable to
attracting new transaction accounts and improved collection of fees. Effective
July 1, 1999 and 2000, certain deposit service charges were increased to reflect
competitive pricing.
16
<PAGE>
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 2000 increased 13.3% to $4.0 million from $3.5 million
in the first nine months of 1999.
Mortgage originations totaled $243 million and $389 million in the
first nine months of 2000 and 1999, respectively. The decrease in 2000 resulted
primarily from lower levels of activity due to increases in mortgage loan rates.
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, 2000, CF Mortgage was servicing or
subservicing loans having an aggregate principal balance of approximately $2.4
billion. Fees related to the servicing portfolio from non-affiliated companies
are offset by the related amortization for the mortgage servicing rights and
subservicing payments. Servicing income does not include the benefit of
interest-free escrow balances related to mortgage loan servicing activities.
In November, the Company entered into an agreement with an unrelated
third party to sell mortgage servicing rights for approximately $660 million in
mortgage loans and expects to record a gain associated with this sale. Under the
agreement, the Company will subservice these loans until the first quarter of
2001.
Fees for investment services in the first nine months of 2000 and 1999
were $4.2 million and $3.8 million, respectively. Fees collected by Carolina
First Securities, Inc. ("CF Securities"), a full service brokerage subsidiary,
increased to $1.3 million for the first nine months of 2000, compared with
$314,000 for the first nine months of 1999. In 2000, the Company increased the
number of licensed investment personnel. CF Securities offers a complete line of
investment products and services, including mutual funds, stocks, bonds and
annuities. At September 30, 2000 and 1999, the market value of assets
administered by Carolina First Bank's trust department totaled approximately
$745.9 million and $751.9 million, respectively.
During the first nine months of 1999, the Company had income of $1.6
million from its interests in the credit card and commercial real estate loan
trusts. With the sale of the Company's credit cards and the termination of the
credit card trust on May 17, 1999, loan securitization income related to credit
cards ceased during the second quarter of 1999. The commercial real estate loan
trust was terminated with the pay-off of the loans in the fourth quarter of
1999. Accordingly, no loan securitization income was realized in 2000.
Other noninterest income totaled $9.1 million in the first nine months
of 2000, compared with $8.0 million in the first nine months of 1999. This
increase was primarily due to the establishment of a bank-owned life insurance
program initiated during the second quarter of 1999 as well as higher debit card
income and merchant processing fees.
NONINTEREST EXPENSES
Noninterest expenses, including merger-related charges and other
charges, increased to $145.8 million in the first nine months of 2000 from
$120.2 million in the first nine months of 1999. Noninterest expenses in the
first three quarters of 2000 included $27.8 million in restructuring and
merger-related costs (see "Merger of Anchor Financial Corporation"), $3.9
17
<PAGE>
million impairment loss from the write-down of assets primarily related to
leasehold improvements associated with the former operations center, and $2.2
million in system conversion costs (see "System Conversion"). For details on
restructuring and merger-related costs, see Note 4 to the Consolidated Financial
Statements. For details on the impairment loss, see Note 8 to the Consolidated
Financial Statements. Noninterest expenses in the first three quarters of 1999
included a charitable contribution in the form of Net.B@nk common stock, valued
at approximately $11.9 million, which was made to the Carolina First Foundation,
as well as $6.6 million in merger-related charges. Excluding these
merger-related charges and other charges, noninterest expenses increased $10.3
million to $112.0 million for the first nine months of 2000 from $101.7 million
for the first nine months of 1999. The majority of the increase related to
additional personnel, technology and occupancy expense to support the Company's
current and future growth.
Salaries, wages and employee benefits increased to $56.3 million in the
first nine months of 2000 from $51.5 million in the first nine months of 1999.
Full-time equivalent employees decreased to 1,348 at September 30, 2000 from
1,492 at September 30, 1999. During 2000, particularly in the third quarter, the
number of full-time equivalent employees declined with the elimination of
redundant positions associated with the Anchor Financial merger. The majority of
the reduction in staffing levels occurred during the third quarter 2000. The
staffing cost increases were primarily due to the costs of expanding in existing
and new markets, operational support to promote growth, restricted stock awards,
additional management and technical expertise, and costs associated with
employment agreements in connection with the Anchor Financial merger.
Occupancy and furniture and equipment expenses increased $5.3 million
to $20.5 million in the first nine months of 2000 from $15.1 million in the
first nine months of 1999. This increase resulted principally from lease
payments associated with three new buildings and the transition to a common
computer platform and new core operating system. Based on the Company's
acquisition activity, internal growth, and realignment plans, certain properties
will not be used for future growth. During the third quarter of 2000, the
Company reviewed all abandoned real estate properties including leasehold
improvements for impairment. Based upon this review, the Company recorded
a $3.9 million impairment loss, the majority of which related to leasehold
improvements associated with the former operations center in Columbia.
Amortization of intangibles decreased to $4.8 million in the first
three quarters of 2000 from $5.3 million in the first three quarters of 1999.
The decrease was due to the sale of four branches, previously acquired through
mergers accounted for as purchase transactions, in the last half of 1999. Upon
completion of these branch sales, the related intangible assets were written off
resulting in lower amortization of intangibles. This lower level of amortization
is expected to continue.
Other noninterest expenses increased $0.7 million to $30.4 million in
the first nine months of 2000 from $29.7 million in the first nine months of
1999. The overall increase in other noninterest expenses was principally
attributable to the overhead and operating expenses associated with higher
lending and deposit activities. The largest items of other noninterest expense
were telecommunications, advertising, professional and servicing fees, travel,
stationery, supplies and printing. During the third quarter of 2000, the Company
recorded an $877,000 accrual related to other merger-related charges, including
pending litigation.
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COMPARISON FOR THE QUARTERS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Including merger-related charges and other charges, the net loss for
the three months ended September 30, 2000 was $3.1 million, or $0.07 per diluted
share. This loss included pre-tax restructuring and merger-related costs of $7.9
million, a $5.3 million loss related to the sale of certain securities from
restructuring the combined investment portfolio following the completion of the
Anchor Financial merger, and an additional $877,000 in other charges related to
Anchor Financial. These merger-related charges decreased net income by $8.7
million (after-tax), or $0.20 per diluted share. Other charges, on a pre-tax
basis, during the third quarter of 2000 included a $3.9 million impairment loss
from the write-down of assets primarily related to leasehold improvements
associated with the former operations center in Columbia, a $2.0 million gain on
the sale of two branch offices, $1.3 million in system-conversion costs, a
$332,000 loss on disposition of equity investments, and a $135,000 gain on sale
of credit cards. These other charges, excluding the merger-related charges,
decreased net income by $2.1 million (after-tax), or approximately $0.05 per
diluted share. Net income for the three months ended September 30, 1999 was $9.7
million, or $0.22 per diluted share.
Net interest income decreased $281,000 to $44.3 million for the three
months ended September 30, 2000 from $44.6 million for the comparable period in
1999. The third quarter 2000 net interest margin decreased to 3.91% compared
with 4.62% for the third quarter of 1999. The lower net interest income and net
interest margin in the third quarter of 2000 resulted from the higher cost of
funds partially offset by a higher level of average earning assets and higher
earning asset yields (see "EARNINGS REVIEW - Net Interest Income"). The cost of
funds increased from 4.41% in the third quarter of 1999 to 5.66% in the third
quarter of 2000. Earning assets averaged $4.5 billion and $3.9 billion in the
third quarters of 2000 and 1999, respectively with yields of 8.92% and 8.41%,
respectively.
Noninterest income, excluding merger-related charges and other charges,
increased $473,000 to $9.9 million for the third quarter of 2000 compared with
$9.5 million for the third quarter of 1999. This increase was attributable to
higher service charges on deposit accounts, partially offset by small declines
in the other categories of noninterest income. The increase in service charges
on deposit accounts was due to attracting new transaction accounts and improved
collection results.
Noninterest expenses, excluding merger-related charges and other
charges, increased to $36.8 million for the three months ended September 30,
2000 from $34.0 million for the three months ended September 30, 1999. Personnel
expense increased from $16.7 million for the third quarter of 1999 to $18.3
million for the third quarter of 2000. The increase in personnel expense is due
to hiring of additional employees to expand in existing and new markets,
partially offset by the elimination of redundant positions associated with the
Anchor Financial merger. In addition, personnel expense for the three months
ended September 30, 2000 includes costs associated with employment agreements in
connection with the Anchor Financial merger. Occupancy and furniture and
equipment expense increased $2.4 million to $7.7 million during third quarter
2000 from $5.3 million during third quarter 1999. Amortization of intangibles
decreased from $1.7 million in the third quarter of 1999 to $1.6 million in the
third quarter of 2000 due to the sale of four branches, previously acquired
through mergers accounted for as purchase transactions, in the last half of
1999. Other noninterest expenses were $10.1 million, and $10.3 million in the
third quarter of 2000 and 1999, respectively.
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BALANCE SHEET REVIEW
LOANS
Loans are the largest category of earning assets and produce the
highest yields. The Company's loan portfolio consists of commercial real estate
loans, commercial loans, consumer loans (including both direct and indirect
loans) and one-to-four family residential mortgage loans. Substantially all
borrowers are located in South Carolina, Florida and North Carolina with
concentrations in the Company's market areas. At September 30, 2000, the Company
had total loans outstanding of $3.7 billion that equaled approximately 98% of
the Company's total deposits and approximately 72% of the Company's total
assets.
Table 1 provides a summary of loans outstanding, showing the
composition sorted by collateral type. Effective with the system conversion in
June 2000, the Company reclassified certain loans due to the enhanced capability
of analyzing loans by purpose and by collateral. Accordingly, the September 30,
2000 composition presented below may not be comparable with the earlier periods
presented. For example, the construction category as of September 30, 2000
included commercial construction, which was previously included in commercial
and industrial secured by real estate.
<TABLE>
<CAPTION>
TABLE 1
LOAN PORTFOLIO COMPOSITION
(dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
--------------------------------------- ---------------------
2000 1999 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans secured by residential mortgages (1-4 family).... $ 878,196 $ 699,792 $ 729,522
Construction........................................... 529,699 195,902 221,683
Commercial and industrial.............................. 530,706 528,243 536,542
Commercial and industrial secured by real estate (1)... 1,252,159 1,319,468 1,336,491
Consumer............................................... 457,806 317,107 396,358
Credit cards........................................... 13,512 17,324 15,798
Lease financing receivables............................ 5,817 20,478 15,500
----------------- ----------------- ---------------------
Loans held for investment.............................. 3,667,895 3,098,314 3,251,894
Loans held for sale.................................... 9,098 50,694 45,591
----------------- ----------------- ---------------------
Gross loans............................................ 3,676,993 3,149,008 3,297,485
Less unearned income................................... 2,190 6,774 5,765
Less allowance for loan losses......................... 42,847 32,476 33,756
----------------- ----------------- ---------------------
Net loans.............................................. $ 3,631,956 $ 3,109,758 $ 3,257,964
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Approximately 44% are owner-occupied.
The Company's loans, net of unearned income, increased $532.6 million,
or 17%, to approximately $3.7 billion at September 30, 2000 from $3.1 billion at
September 30, 1999 and increased $383.1 million from approximately $3.3 billion
at December 31, 1999. Excluding loans originated by correspondents,
approximately $105.4 million of residential mortgage loans were sold in the
first nine months of 2000. In addition, approximately $23.2 million in loans
were sold in connection with the sale of the Nichols and Saluda branch offices.
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Adjusting for the 2000 loan sales, internal loan growth was approximately $511.6
million, or an annualized rate of 20.7%, during the first three quarters of
2000. Approximately $132 million of the loan growth in the first three quarters
of the year was attributable to the Citrus Bank markets in Florida. In addition,
the Company's consumer loans increased due primarily to indirect lending in
South Carolina and Florida.
For the first three quarters of 2000, the Company's loans averaged $3.5
billion with a yield of 9.29%, compared with $3.0 billion and a yield of 9.03%
for the same period in 1999. This increase in loan yield was due to increases in
the prime interest rate that have occurred since September 30, 1999. This
increase was partially offset by the rapid increase in indirect consumer loan
balances which tend to have a lower yield than commercial loans. The interest
rates charged on loans vary with the degree of risk, 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
The adequacy of the allowance for loan losses (the "Allowance") is
analyzed on a quarterly basis. For purposes of this analysis, adequacy is
defined as a level sufficient to absorb probable losses in the portfolio. The
methodology employed for this analysis is as follows.
The portfolio is segregated into risk-similar segments for which
historical loss ratios are calculated. Loss rates are calculated by product type
for consumer loans and by risk grade for commercial loans. Large problem loans
are individually assessed for loss potential. A range of probable loss
percentages is then derived for each segment based on the relative volatility of
its historical loss ratio. These percentages are applied to the dollar amount of
loans in each segment to arrive at a range of probable loss levels.
The location of the Allowance within this range is then assessed in
light of material changes that may render historical loss levels less predictive
of future results. This assessment addresses issues such as the pace of loan
growth, newly emerging portfolio concentrations, risk management system changes,
entry into new markets, new product offerings, off-balance sheet risk exposures,
loan portfolio quality trends, and uncertainty in economic and business
conditions. To the extent this analysis implies lower or higher risk than that
which shaped historical loss levels, the Allowance is positioned toward the
lower or higher end of the range.
This methodology, first adopted for the March 31, 2000 analysis,
develops a range of probable loss levels rather than a single, best-guess
estimate. This change in methodology did not alter management's conclusion as to
the adequacy of the Allowance.
Assessing the adequacy of the Allowance is a process that requires
considerable judgment. Management's judgments are based on numerous assumptions
about future events which it believes to be reasonable, but which may or may not
be valid. Thus there can be no assurance that loan losses in future periods will
not exceed the Allowance or that future increases in the Allowance will not be
required. No assurance can be given that management's ongoing evaluation of the
loan portfolio in light of changing economic conditions and other relevant
circumstances will not require significant future additions to the Allowance,
thus adversely affecting the operating results of the Company.
21
<PAGE>
The Allowance is also subject to examination and adequacy testing by
regulatory agencies, which may consider such factors as the methodology used to
determine adequacy and the size of the Allowance relative to that of peer
institutions. In addition, such regulatory agencies could require the Company to
adjust its Allowance based on information available to them at the time of their
examination.
The Allowance totaled $42.8 million, or 1.17% of loans held for
investment net of unearned income at September 30, 2000, compared with $32.5
million, or 1.05%, at September 30, 1999. At December 31, 1999, the Allowance
was $33.8 million, or 1.04% of loans held for investment net of unearned income.
During the second quarter of 1999, the Allowance was reduced $3.0 million as a
consequence of the sale of the credit card portfolio. The Allowance was
increased approximately $3.0 million during the second quarter of 2000 to apply
the Company's reserve analysis methodology to Anchor Financial's loan portfolio.
Table 2 presents changes in the allowance for loan losses.
<TABLE>
<CAPTION>
TABLE 2
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
At and for At and for
the nine months ended the year ended
September 30, December 31,
------------- -------------
2000 1999 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 33,756 $ 29,812 $ 29,812
Purchase accounting acquisitions -- 408 408
Allowance adjustment for credit card sale (82) (2,977) (2,977)
Provision for loan losses 19,136 12,979 18,273
Charge-offs:
Credit cards (139) (1,706) (1,852)
Bank loans, leases & other loans (11,533) (7,331) (11,950)
Recoveries 1,709 1,291 2,042
-------------------------------------------------------------------------------------------------------------------
Net charge-offs (9,963) (7,746) (11,760)
-------------------------------------------------------------------------------------------------------------------
Allowance at end of period $ 42,847 $ 32,476 $ 33,756
===================================================================================================================
</TABLE>
The following summarizes impaired loan information as of September 30:
<TABLE>
<CAPTION>
2000 1999
---- -----
($ in thousands)
<S> <C> <C>
Impaired loans.........................................$ 17,699 $ 7,700
Related allowance...................................... 4,306 2,800
Recognized interest income.............................$ 829 492
Foregone interest...................................... 525 86
</TABLE>
The average recorded investment in impaired loans for the nine months
ended September 30, 2000 and September 30, 1999 was approximately $14.5 million
and $2.4 million, respectively. This increase mirrors the increase in nonaccrual
loans (see "Credit Quality") which is the normal consequence of a business
climate characterized by higher interest rates and slower economic growth rates.
22
<PAGE>
SECURITIES
At September 30, 2000, the Company's investment portfolio totaled
$904.2 million, up $137.0 million from the $767.2 million invested as of
September 30, 1999 and down $59.9 million from the $964.1 million invested as of
December 31, 1999. A significant portion of the increase in investment
securities in 1999 was attributable to the match funding in December 1999 of
approximately $200 million in mortgage-backed securities with approximately $200
million in Federal Home Loan Bank borrowings. In addition, effective July 31,
1999, the Company began recording its investment in Net.B@nk at market value,
which was approximately $26.8 million at September 30, 2000, down from $44.7
million as of December 31, 1999 (see "EQUITY INVESTMENTS - Investment in
Net.B@nk, Inc.").
Securities (i.e., securities held for investment, securities available
for sale and trading securities) averaged $881.9 million in the first three
quarters of 2000, 28% above the average of $689.2 million in the first three
quarters of 1999. The average portfolio yield increased to 6.80% in the first
nine months of 2000 from 6.15% in the first nine months of 1999. The portfolio
yield increased as a result of increasing interest rates. The mix of securities
also shifted by reinvesting maturing securities in higher yielding agencies and
mortgage-backed securities and the portfolio restructuring discussed below. The
composition of the investment portfolio as of September 30, 2000 follows:
mortgage-backed securities 56%, treasuries and agencies 25%, other securities
11%, and states and municipalities 8%.
During the third quarter of 2000, the Company restructured
approximately $108 million, or 11%, of the combined investment portfolios of the
Company and Anchor Financial, generating a $5.3 million loss. The associated
yield enhancement totaled approximately 150 basis points.
INTANGIBLE ASSETS AND OTHER ASSETS
The intangible assets balance at September 30, 2000 of $108.9 million
consisted of goodwill of $101.4 million and core deposit balance premiums of
$7.5 million. The intangible assets balance at September 30, 1999 of $117.8
million consisted of goodwill of $108.6 million and core deposit balance
premiums of $9.2 million.
At September 30, 2000, other assets included other real estate owned of
$3.0 million and mortgage servicing rights of $26.7 million. At September 30,
1999, other assets included other real estate owned of $2.5 million and mortgage
servicing rights of $22.1 million.
INTEREST-BEARING LIABILITIES
During the first nine months of 2000, interest-bearing liabilities
averaged $3.9 billion, compared with $3.2 billion in the first nine months of
1999. This increase resulted principally from additional borrowings from the
Federal Home Loan Bank ("FHLB") to fund increased loan activity and to purchase
corporate bonds for leveraging purposes. Internal deposit growth related to
account promotions, sales efforts and the introduction of Internet banking also
contributed to the increase. The average interest rates on interest-bearing
23
<PAGE>
liabilities were 5.29% and 4.43% in the first nine months of 2000 and 1999,
respectively. The increase in average interest rates was primarily due to the
increased funding costs associated with alternative funding sources such as FHLB
borrowings.
The Company's primary source of funds for loans and investments is its
deposits, which are gathered through the banking subsidiaries' branch network.
Deposits grew 12% to $3.8 billion at September 30, 2000 from $3.4 billion at
September 30, 1999. In September 1999, the Company sold approximately $48
million in deposits related to the sale of three branch offices. During the
first three quarters of 2000, approximately $41.1 million in deposits were sold
in relation to the sale of the Nichols, Prosperity and Saluda branch offices. At
September 30, 2000, interest-bearing deposits comprised approximately 87% of
total deposits and 80% of interest-bearing liabilities.
During the first nine months of 2000, total interest-bearing deposits
averaged $3.1 billion with a rate of 5.02%, compared with $2.9 billion with a
rate of 4.30% in the first nine months of 1999. During the first nine months of
2000, deposit pricing remained very competitive, a pricing environment which the
Company expects to continue. Average noninterest-bearing deposits were 15% of
average total deposits for the first nine months of 2000 compared with 16% of
average total deposits for the prior year period.
In September 1999, the Company introduced an Internet bank, which is
marketed as Bank CaroLine and offered as a service of Carolina First Bank,
F.S.B. Deposit rates for Bank CaroLine are generally higher than the rates
offered by the Company's other subsidiary banks due to lower operating costs.
Deposits gathered through Bank CaroLine will be used to fund commercial and
consumer loans generated by the Company's subsidiary banks. At September 30,
2000, total deposits for Bank CaroLine totaled $223.0 million.
Time deposits of $100,000 or more represented 16.2% of total deposits
at September 30, 2000 and 12.6% of total deposits at September 30, 1999. The
Company's large denomination time deposits are generally from customers within
the local market areas of its banks and, therefore, have a greater degree of
stability than is typically associated with this source of funds. As of
September 30, 2000, the Company had $99.2 million in brokered deposits. The
Company considers these funds as an alternative funding source.
In the first nine months of 2000, average borrowed funds, which
includes repurchase agreements and FHLB advances, totaled $738.9 million
compared with $242.1 million for the same period in 1999. This increase was
primarily attributable to a rise in average FHLB advances to $475.2 million in
the first nine months of 2000 from $119.1 million in the first nine months of
1999. Advances from the FHLB increased to $547.4 million as of September 30,
2000 from $212.9 million at September 30, 1999. At December 31, 1999, FHLB
advances totaled $510.6 million. The increase since June 30, 1999 was primarily
due to additional borrowings from FHLB to fund increased loan activity and to
purchase corporate bonds for leveraging purposes. 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.
CAPITAL RESOURCES AND DIVIDENDS
Total shareholders' equity amounted to $476.9 million, or 9.3% of total
assets, at September 30, 2000, compared with $500.2 million, or 11.4% of total
assets, at September 30, 1999. At December 31, 1999, total shareholders' equity
24
<PAGE>
totaled $500.6 million, or 10.5% of total assets. The decrease in total
shareholders' equity since September 30, 1999 resulted principally from the
stock repurchase program and a decline in the net unrealized gain on securities.
In the first quarter of 2000, the Company repurchased 524,600 shares of
common stock, which decreased shareholders' equity by $8.3 million. In March
2000, the Company rescinded its share repurchase program due to the pending
merger with Anchor Financial.
The Company began recording its investment in Net.B@nk at market value
during the third quarter of 1999, which added $16.2 million (net of taxes) to
the September 30, 2000 net unrealized gain on securities, which is a component
of shareholders' equity. The Company's unrealized gain, net of taxes, related to
Net.B@nk declined $10.7 million, from December 31, 1999 to September 30, 2000.
Book value per share at September 30, 2000 and 1999 was $11.06 and
$11.57, respectively. Tangible book value per share at September 30, 2000 and
1999 was $8.53 and $8.84, 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 five banks (all of which were accounted for as
purchases).
At September 30, 2000, the Company and its subsidiary banks were in
compliance with each of the applicable regulatory capital requirements. Table 3
sets forth various capital ratios for the Company and its subsidiary banks.
<TABLE>
<CAPTION>
TABLE 3
CAPITAL RATIOS
----------------------------------------------------------------------------------------------------------
As of Well Capitalized Adequately Capitalized
9/30/00 Requirement Requirement
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Company:
Total Risk-based Capital 10.65% n/a n/a
Tier 1 Risk-based Capital 8.86 n/a n/a
Leverage Ratio 7.11 n/a n/a
Carolina First Bank:
Total Risk-based Capital 9.95% 10.0% 8.0%
Tier 1 Risk-based Capital 8.77 6.0 4.0
Leverage Ratio 7.20 5.0 4.0
Carolina First Bank, F.S.B.:
Total Risk-based Capital 10.99% 10.0% 8.0%
Tier 1 Risk-based Capital 10.53 6.0 4.0
Leverage Ratio 4.32 5.0 4.0
Citrus Bank:
Total Risk-based Capital 10.00% 10.0% 8.0%
Tier 1 Risk-based Capital 8.81 6.0 4.0
Leverage Ratio 8.30 5.0 4.0
--------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
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. 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.
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. 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 periodic 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 immediately increase and decrease 200 basis
points. According to the model as of September 30, 2000, the Company is
positioned so that net interest income will increase $7.2 million if interest
rates rise in the next twelve months and will decrease $3.6 million if interest
rates decline in the next twelve months. Computation of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates and loan prepayments, and should not be
relied upon as indicative of actual results. Further, the computations do not
contemplate any actions the Company could undertake in response to changes in
interest rates.
As of September 30, 2000, there was no significant change from the
interest rate risk sensitivity analysis for various changes in interest rates
calculated as of December 31, 1999. 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, 1999 included in the Company's 1999 Annual Report on
Form 10-K.
Interest sensitivity gap ("GAP position") measures the difference
between rate sensitive assets and rate sensitive liabilities during a given time
frame. The Company's GAP position, while not a complete measure of interest
sensitivity, is reviewed periodically to provide insights related to the static
repricing structure of assets and liabilities. At September 30, 2000, on a
26
<PAGE>
cumulative basis through twelve months, rate-sensitive liabilities exceeded
rate-sensitive assets, resulting in a liability sensitive position of
approximately $165 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, business
combinations and capital infusions into subsidiaries. The primary source of
liquidity for the Company's holding company is dividends from the banking and
non-banking subsidiaries.
The Company's banking subsidiaries 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. The subsidiary banks' liquidity
is also enhanced by the ability to acquire new deposits through the established
branch network. The liquidity needs of the subsidiary banks are a factor in
developing their deposit pricing structure; deposit pricing may be altered to
retain or grow deposits if deemed necessary.
The Company's loan to deposit ratio has increased to 98% as of
September 30, 2000 from 93% as of December 31, 1999 and 94% as of September 30,
1999. This increase reflects greater reliance by the Company on other funding
sources, including borrowing from the FHLB, which is expected to continue.
Carolina First Bank and Carolina First Bank, F.S.B. have access to
borrowing from the FHLB. Each of the Subsidiary Banks maintain unused short-term
lines of credit from unrelated banks. At September 30, 2000, unused borrowing
capacity from the FHLB totaled approximately $86 million with an outstanding
balance of $547.4 million. At September 30, 2000, the subsidiary banks had
unused short-term lines of credit totaling approximately $190 million (which are
withdrawable at the lender's option). Management believes that these sources are
adequate to meet its liquidity needs.
CREDIT QUALITY
Lending is a risk-taking business. Prudent lending requires a sound
risk-taking philosophy, policies and procedures which translate that philosophy
into practices, and a risk management process that ensures effective execution.
The Company's risk-taking philosophy is articulated in credit policies approved
by its Board of Directors annually. Implementing policies and procedures are
promulgated by the Credit Risk Management Group. These policies contain
underwriting standards, risk analysis requirements, loan documentation criteria,
credit approval requirements, and risk monitoring requirements. Credit approval
authority delegated to lending officers is limited in scope to actions that
27
<PAGE>
comply with these policies. In the first quarter of 2000, a Credit Review
function was chartered to independently test for compliance with these policies
and report findings to the Credit Committee of the Company's Board of Directors.
Table 4 presents information pertaining to nonperforming assets.
<TABLE>
<CAPTION>
TABLE 4
NONPERFORMING ASSETS AND PAST DUE LOANS
($ in thousands)
September 30, December 31,
------------- --------------
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 19,846 $ 9,801 $ 11,185
Restructured loans -- 1,283 --
-------------------------------------------------------------------------------------------------------------
Total nonperforming loans 19,846 11,084 11,185
Other real estate 2,977 2,537 2,787
-------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 22,823 $ 13,621 $ 13,972
=============================================================================================================
Nonperforming assets as a % of
loans and other real estate owned 0.62% 0.44% 0.43%
Net loan charge-offs as a % of
average loans (annualized) 0.38 0.34 0.39
Accruing loans past due 90 days $ 9,838 $5,513 $ 5,100
Allowance for loan losses to
nonperforming loans 2.16x 2.93x 3.02x
==============================================================================================================
</TABLE>
Nonaccrual loans increased to $19.8 million as of September 30, 2000
from $11.2 million as of December 31, 1999 and $9.8 million as of September 30,
1999. Of the $17.7 million of commercial nonaccrual loans as of September 30,
2000, $11.4 million was concentrated in seven loans.
Net loan charge-offs totaled $10.0 million and $7.7 million in the
first nine months of 2000 and 1999, respectively, or 0.38% and 0.34%,
respectively, as an annualized percentage of average loans. The loan to Video
Update accounted for $3.4 million of the $5.5 million charged off during the
third quarter of 2000. The Company generally does not participate in the
"shared national credit" market. The Company's Video Update loan resulted from
the Company making a loan to a local company, which was subsequently acquired
by Video Update. Accruing loans past due 90 days or more were primarily
consumer and 1-4 family mortgage loans. Commercial loans in this category were
nominal.
SYSTEM CONVERSION
From March 2000 through July 2000, the Company and its subsidiaries
converted their operating systems to the Fiserv Comprehensive Banking System.
As a result of the system conversions, and the related training
involved with learning a new system, certain outstanding items on general
ledger, loan funding and demand deposit account reconciliations have not been
28
<PAGE>
resolved in a timely manner. Timely reconciliations, as well as the ongoing
resolution of outstanding items, reduces the risk of financial reporting errors
and losses.
The Company has dedicated resources, including the Company's internal
audit staff and professional consultants, to complete these reconciliations. At
this time, based upon the clearance of outstanding items to date, the Company
does not anticipate any material additional changes to the Company's
consolidated financial position or results of operations related to these
reconciliations, however no assurance of this can be given. The Company
continues to dedicate resources to complete these reconciliations and resolve
outstanding items.
System conversion costs for the three months ended September 30, 2000
included a $500,000 accrual for estimated charge-offs associated with these
reconciliations. System conversion costs also include professional fees for the
services of consultants assisting the Company in resolving these items. System
conversion costs totaled $1.3 million and $2.2 million for the three months and
nine months ended September 30, 2000, respectively.
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.
CURRENT ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 required that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. This effective date reflects the deferral provided by SFAS 137,
which defers the earlier effective date specified in SFAS 133. SFAS 138 amends
SFAS 133 to address a limited number of issues causing implementation
difficulties.
The Company will be required to adopt this statement January 1, 2001.
The Company has not yet determined the financial impact of the adoption of SFAS
133.
In September 2000, the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a replacement of FASB Statement No. 125". This statement will become effective
for transfers occurring after March 31, 2001 and for disclosures relating to
securitizations and collateral for fiscal years ending after December 15, 2000.
In addition to replacing SFAS No. 125, this statement will rescind SFAS No. 127
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125". SFAS No. 140 revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
29
<PAGE>
disclosures, but it will carry over most of the provisions of Statement 125
without reconsideration. The Company anticipates that adoption of the standard
will not have a material effect on the Company.
30
<PAGE>
PART II
ITEM 1 LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that
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 February 28, 2000, plaintiff John W. Dickens filed a breach of
contract lawsuit against Anchor Financial Corporation, subsequently
acquired by the Company, in the Court of Common Pleas for the Fifth
Judicial Circuit. The plaintiff's complaint based on an employment
agreement sought compensation, other benefits, and actual and punitive
damages for defamation in excess of $5 million. The plaintiff was an
employee of Bailey Financial Corporation, which merged with Anchor
Financial Corporation on April 9, 1999. Following the merger, the
plaintiff worked for Anchor Financial Corporation until the termination
of his employment on December 16, 1999. The Company has filed
counterclaims denying the allegations and citing parachute payment
limitations as specified in Section 280G of the Internal Revenue Code.
On October 3, 2000, the lawsuit became subject to court ordered
arbitration/mediation that must be completed within sixty (60) days of
the order appointing the mediator. The Company's exposure should be
limited to the largest severance payments permitted under the Internal
Revenue Code.
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.
ITEM 5 OTHER INFORMATION
None.
31
<PAGE>
PART II
(continued)
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated as of July 15, 2000, by and among William
J. Moore, Carolina First Bank and The South Financial Group, Inc.
11.1 Computation of Basic and Diluted Earnings Per Share.
12.1 Computation of Earnings to Fixed Charges Ratio.
27.1 Financial Data Schedules.
(b) Reports on Form 8-K
The Company filed current reports on Form 8-K dated August 23, 2000.
32
<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.
The South Financial Group, Inc.
/s/William S. Hummers III
-------------------------
William S. Hummers III
Executive Vice President
33
