UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-17939
CAROLINA FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-165582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
236 East Main Street
Lincolnton, North Carolina 28092
(Address of principal executive office) (Zip Code)
704-732-2222
(Registrant's telephone number, including area code)
N/A
(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
5,981,722 SHARES OF COMMON STOCK, PAR VALUE $2.50
PER SHARE, OUTSTANDING AS OF July 29, 1999
<PAGE>
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1999
and 1998 4
Consolidated Statements of Changes in
Shareholder's Equity and Comprehensive Income -
Six Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9 -15
Item 3. Quantitative and Qualitative Disclosures about 16
Market Risk
PART II. OTHER INFORMATION 17
Signatures 18
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CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- - - - --------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- - - - --------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- --------------
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks ...................................... $24,719,815 $28,611,146
Federal funds sold ........................................... 1,174,551 13,220,957
-------------- --------------
Total cash and cash equivalents ............................ 25,894,366 41,832,103
Interest bearing deposits in other banks ..................... 1,213,440 777,346
Investment securities held to maturity (market value of
$39,826,873 in 1999 and $33,609,910 in 1998) ............... 40,561,067 33,306,113
Securities available for sale (cost of $175,097,181 in
1999 and $153,255,268 in 1998) ........................... 172,709,205 154,384,075
Loans, net of unearned income ( $686,006 in 1999 and
$565,714 in 1998) ........................................ 498,296,225 476,109,833
Allowance for loan losses .................................. (7,095,699) (6,723,516)
-------------- --------------
Loans, net ................................................. 491,200,526 469,386,317
Premises and equipment, net .................................. 13,224,748 13,662,738
Other real estate owned ...................................... 223,873 326,206
Other assets ................................................. 17,659,480 17,951,346
-------------- --------------
Total Assets ................................................. $762,686,705 $731,626,244
============== ==============
Liabilities and Shareholders' Equity
Deposits:
Demand .................................................... $96,870,403 $89,666,447
Interest bearing transaction accounts ..................... 172,880,722 167,131,413
Savings ................................................... 68,462,496 63,833,667
Time, $100,000 and over ................................... 87,260,418 87,947,784
Other time ................................................ 241,440,492 244,023,259
-------------- --------------
Total deposits ............................................ 666,914,531 652,602,570
Borrowed funds ............................................... 30,117,415 10,399,634
Other liabilities ............................................ 2,241,999 6,646,309
-------------- --------------
Total Liabilities ............................................ 699,273,945 669,648,513
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized --- 5,000,000
shares; none issued and outstanding; Common stock, $2.50
par value; authorized --- 20,000,000 shares; issued and
outstanding - 5,438,225 shares in 1999, and 5,396,736
shares in 1998 ............................................. 13,595,562 13,491,840
Additional paid-in capital ................................. 22,841,299 22,758,001
Retained earnings .......................................... 28,433,775 25,031,771
Accumulated other comprehensive income ..................... (1,457,876) 696,119
-------------- --------------
Total Shareholders' Equity ................................. 63,412,760 61,977,731
Commitments and Contingent Liabilities ....................... ----- -----
Total Liabilities and Shareholders' Equity ................... $762,686,705 $731,626,244
============== ==============
</TABLE>
3
<PAGE>
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
1999 1998 1999 1998
---------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans ................................ $11,124,699 $9,966,919 $21,886,795 $19,600,162
Interest and dividends on securities:
Taxable income ........................................ 2,836,505 2,501,534 5,387,848 4,771,468
Non-taxable income .................................... 96,886 64,018 198,469 161,645
Other interest income ..................................... 67,290 311,912 309,678 505,360
------------ ------------ ------------ ------------
Total interest income .................................. 14,125,380 12,844,383 27,782,790 25,038,635
Interest Expense:
Interest on deposits ...................................... 5,521,629 5,353,888 11,089,038 10,455,906
Interest on borrowed funds ................................ 188,794 109,989 336,951 232,224
------------ ------------ ------------ ------------
Total interest expense ................................. 5,710,423 5,463,877 11,425,989 10,688,130
Net Interest Income ....................................... 8,414,957 7,380,506 16,356,801 14,350,505
Provision for Loan Losses ................................. 347,200 301,000 730,200 510,000
------------ ------------ ------------ ------------
Net Interest Income after Provision for Loan Losses ....... 8,067,757 7,079,506 15,626,601 13,840,505
Other Income:
Charges on deposit accounts ............................... 1,008,149 988,060 1,958,849 1,888,180
Insurance commissions ..................................... 160,225 199,352 260,879 354,841
Other service fees and commissions ........................ 378,323 353,815 743,389 679,723
Mortgage banking income ................................... 149,500 157,508 335,539 303,307
Securities gains, net ..................................... -- 42,708 40,162 42,708
Other income .............................................. 356,980 330,440 668,483 609,123
------------ ------------ ------------ ------------
Total other income ..................................... 2,053,177 2,071,883 4,007,301 3,877,882
Operating Expenses:
Salaries and benefits ..................................... 3,036,446 3,178,388 6,262,832 6,236,837
Occupancy and equipment ................................... 931,799 831,560 1,823,111 1,589,039
Federal and other insurance premiums ...................... 38,679 52,141 85,711 105,379
Office supplies ........................................... 259,384 256,945 471,616 488,378
Data processing ........................................... 306,284 161,930 544,063 313,548
Other expenses ............................................ 2,155,102 1,541,120 3,960,053 3,094,347
------------ ------------ ------------ ------------
Total operating expenses ............................... 6,727,694 6,022,084 13,147,386 11,827,528
Income Before Income Taxes ................................ 3,393,240 3,129,305 6,486,516 5,890,859
Income Taxes .............................................. 1,003,061 1,086,025 1,996,590 2,012,175
============ ============ ============ ============
Net Income ................................................ $2,390,179 $2,043,280 $4,489,926 $3,878,684
============ ============ ============ ============
Net Income Per Common Share - Basic ....................... $0.40 $0.34 $0.75 $0.65
============ ============ ============ ============
Net Income Per Common Share - Diluted ..................... $0.39 $0.33 $0.73 $0.64
============ ============ ============ ============
Cash Dividend Per Common Share ............................ $0.10 $0.08 $0.20 $0.16
============ ============ ============ ============
</TABLE>
4
<PAGE>
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
---------- ---------- ----------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 5,325,769 $13,314,423 $22,335,466 $19,980,565 $580,346 56,210,800
Exercise of stock options 53,194 132,985 146,133 279,118
Cash dividend ($.16 per share) (862,918) (862,918)
Retirement of stock (1,264) (3,160) (34,732) (37,892)
Dividend Reinvestment Plan 4,432 11,080 110,049 121,129
Net income 3,878,684 3,878,684
Other comprehensive income:
Unrealized gain on securities
available for sale 98,430 98,430
---------------
Total comprehensive income 3,977,114
---------- ---------- ----------- ----------- ------------- ---------------
Balance, June 30, 1998 5,382,131 13,455,328 22,556,916 22,996,331 678,776 59,687,351
Balance, December 31, 1998 5,396,736 13,491,840 22,758,001 25,031,771 696,119 61,977,731
Exercise of stock options 44,467 111,167 156,952 268,119
Cash dividend ($.20 per share) (1,087,922) (1,087,922)
Retirement of stock (3,819) (9,548) (95,941) (105,489)
Dividend reinvestment plan 841 2,103 22,287 24,390
Net income 4,489,926 4,489,926
Other comprehensive income:
Unrealized loss on securities
available for sale (2,153,995) (2,153,995)
---------------
Total comprehensive income 2,335,931
========== =========== =========== =========== ============= ===============
Balance, June 30, 1999 5,438,225 $13,595,562 $22,841,299 $28,433,775 ($1,457,876) $63,412,760
========== =========== =========== =========== ============= ===============
</TABLE>
5
<PAGE>
Carolina First BancShares, Inc. and Subsidiary Companies
- - - - ------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- - - - ------------------------------------------------------------------------
For the Six Months Ended June 30, 1999 and 1998
- - - - ------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Operating Activities:
Net Income ................................................................. 4,489,926 3,878,684
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ......................................... 1,314,906 896,899
Accretion and amortization of securities discounts and premiums, net .. (721,747) (192,950)
Provision for loan losses ............................................. 730,200 510,000
Losses on sales of equipment, net ..................................... 5,514 -
Gains (losses) on sales of real estate, net ........................... (16,499) 500
Decrease (increase) in other assets ................................... 1,316,236 (91,851)
Decrease in other liabilities ......................................... (3,633,854) (387,461)
------------ ------------
Net cash provided by operating activities ........................ 3,484,682 4,613,821
------------ ------------
Investing Activities:
Proceeds from maturities of securities available for sale .................. 56,575,745 22,080,386
Proceeds from sales of securities available for sale ....................... 12,511,647 366,539
Purchases of securities available for sale .................................(90,176,421) (41,954,951)
Proceeds from calls and maturities of securities held to maturity .......... 6,699,651 5,465,103
Purchases of securities held to maturity ...................................(13,985,742) (1,088,423)
Purchases and maturities of certificates of deposit, net ................... (436,094) (48,760)
Originations of loans, net .................................................(22,599,166) (16,822,009)
Proceeds from sale of real estate .......................................... 182,144 247,865
Proceeds from sale of premises and equipment ............................... 29,772 -
Capital expenditures ....................................................... (582,339) (817,876)
------------ ------------
Net cash used in investing activities ............................(51,780,803) (32,572,126)
------------ ------------
Financing Activities:
Increase (decrease) in time deposits ....................................... (3,270,133) 26,252,513
Net increase in other deposits ............................................. 17,582,094 24,013,352
Net increase (decrease) in borrowed funds .................................. 19,717,781 (462,783)
Repayment of notes payable ................................................. (770,456) 89,697
Repurchase of stock ........................................................ (105,489) (37,892)
Payment of cash dividends and fractional shares ............................ (1,087,922) (862,918)
Issuance of stock .......................................................... 292,509 400,247
------------ ------------
Net cash provided by financing activities ....................... 32,358,384 49,392,216
------------ ------------
Net Increase in Cash and Cash Equivalents ..................................(15,937,737) 21,433,911
Cash and Cash Equivalents, Beginning of Year ............................... 41,832,103 29,946,377
============ ============
Cash and Cash Equivalents, End of Year ..................................... 25,894,366 51,380,288
============ ============
Supplemental disclosures of cash flow information:
Interest paid ......................................................... 11,050,669 10,614,864
Income taxes paid ..................................................... 2,616,300 1,808,100
============ ============
Supplemental disclosure of noncash investing and financing activities:
Increase (decrease) in net unrealized loss ............................ (2,153,995) 98,430
Assets transferred to other real estate ............................... 55,313 203,100
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of Management, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Carolina First
BancShares, Inc. and Subsidiary Companies as of June 30, 1999 and December 31,
1998 the results of operations for the three and six-month periods ended June
30, 1999 and 1998, and cash flows for the six-month periods ended June 30, 1999
and 1998.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's audited consolidated financial statements for the year ended December
31, 1998.
2. The consolidated financial statements include the accounts and results of
operations of the holding company, and its wholly owned subsidiaries, Cabarrus
Bank of North Carolina, ("Cabarrus Bank"), Lincoln Bank of North Carolina,
("Lincoln Bank") and Community Bank & Trust Co., ("Community Bank"),
collectively, the "Banks". Jointly, Lincoln Bank and Cabarrus Bank own a
mortgage company, Carolina First Mortgage Corporation and a financial services
company, Carolina First Financial Services Corporation. The consolidated
financial statements also include the accounts and results of operations of
Lincoln Bank's wholly-owned Delaware holding company subsidiary of Lincoln Bank,
CFBI Corp. and wholly-owned subsisiary, CFBI Mortgage, Inc.. All significant
intercompany items and transactions have been eliminated in consolidation. The
Company operates as one business segment.
3. The results of operations for the three and six-month periods ended June 30,
1999 and 1998 are not necessarily indicative of the results that might be
expected for the full year ending December 31, 1999 and 1998.
4. The Company adopted the provisions of SFAS No. 128, "Earnings Per Share",
during 1997. The Statement establishes standards for computing and presenting
earnings per share (EPS). Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects potential dilution that could occur if the Company's dilutive stock
options were exercised. The numerator of the basic EPS computation is the same
as the numerator of the diluted EPS computation for all periods presented. A
reconciliation of the denominator of the basic EPS computation is as follows.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Basic EPS denominator: weighted average number of
common shares outstanding ................................... 5,440,487 5,369,804 5,435,206 5,351,917
Dilutive effect arising from assumed exercise of
stock options ............................................... 75,174 151,856 80,291 144,832
------ ------- ------ -------
Diluted EPS denominator ..................................... 5,515,661 5,521,660 5,515,497 5,496,749
========= ========= ========= =========
</TABLE>
5. On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components (revenues, expense, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that an enterprise
(a) classify items of other comprehensive income by their nature in the
financial statement and (b) display the accumulated balance of other
comprehensive income separately form retained earnings and additional
paid-in-capital in the equity section of a statement of financial position. In
accordance with the provisions of SFAS No. 130, comparative financial statements
presented for earlier periods have been reclassified to reflect the provisions
of the statement.
Comprehensive income is the change in equity of a Corporation during the period
from transactions and other events and circumstances from non-owner sources.
Comprehensive income is divided into net income and other comprehensive income.
The Company's other comprehensive income for the three and six-months ended June
30, 1999 and 1998 consists of unrealized gains and losses on securities
available for sale. Comprehensive income for the three and six-months ended June
30, 1999 is $872,895 and $2,335,931, respectively and for the three and
six months ended June 30, 1998 is $1,839,836 and $3,977,114, respectively.
7
<PAGE>
Information concerning the Company's other comprehensive income for the three
and six months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Unrealized holdings gains (losses arising
during the period ............................... $(2,153,995) $124,909 $(2,129,095) $124,909
Less: reclassification adjustment for
realized gains (losses), net of taxes ........... --- 26,479 24,900 26,479
============ ========= ============ ==========
Unrealized gains (losses) on securities
available for sale, net of applicable
income taxes .................................... $(2,153,995) $98,430 $(2,153,995) $98,430
============ ========= ============ ==========
</TABLE>
6. On December 23, 1998, the Company merged with Community Bank, a $110 million
community bank headquartered in Rutherfordton, North Carolina. The merger was
effected through a tax-free exchange of stock whereby each outstanding share of
Community Bank was exchanged for .72716 of a share of the Company's common
stock. Consequently, the Company issued and reserved for issuance pursuant to
stock options, approximately 1,021,202 shares of common stock and cash in-lieu
of fractional shares for all of the outstanding shares of Community Bank.
Community Bank is continuing to operate as a wholly-owned subsidiary of the
Company. The merger with Community Bank has been accounted for as a
pooling-of-interests.
In connection with the Community Bank merger, the Company incurred restructuring
and merger related expenses. At December 31, 1998, accruals related to such
restructuring charges totaled approximately $563,000, consisting mainly of
severance payments and payments under employment contracts. During the six
months ended June 30, 1999, the Company paid $476,000 in connection with
severance payments and payments under employment contracts which has been
charged to the restructuring accrual. The remaining restructuring accrual of
approximately $87,000 relates to amounts due to former Community Bank executive
officers under existing employment contracts and will be paid out over the next
year pursuant to the terms of the contracts.
7. Subsequent event. On June 23, 1999, the Company declared a 10% stock dividend
to be paid on July 23, to shareholders on record as of July 9, 1999. All per
share amounts, shown herein, have been restated to reflect the stock dividend
for all periods presented.
8
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis sets forth the major factors which
affected the Company's results of operations and financial condition reflected
in the unaudited financial statements for the three and six-month periods ended
June 30, 1999 and 1998. On June 23 1999, the Company declared a 10% stock
dividend to be paid on July 23, 1999. All per share data has been restated to
reflect the stock dividend.
Year 2000 Readiness Disclosure
The Company is aware of and is making every effort to address the potentially
severe implications of the Year 2000. The "Year 2000 Issue" is a general term
used to describe problems that may arise as a result of improper processing of
dates and date-sensitive calculations as the Year 2000 approaches. The issue is
due to the fact that many of the world's existing computer programs use only two
digits to identify the year in a date field. When these programs were developed
there was a lack of consideration on the impact of the upcoming century date
change. These programs could experience malfunctions when the last two digits of
the year change to "00" and are interpreted it as 1900 rather than 2000. This
misinterpretation could result in disruption to normal business operations. Due
to these possible ramifications, the Company is taking the Year 2000 Issue very
serious.
The Company's Year 2000 Preparedness Team is comprised of a representative from
all major areas of the Company. The Company's Board of Directors has approved a
plan submitted by the Year 2000 team. The plan was developed in accordance with
the guidelines set by the Federal Financial Institutions Examination Council.
The first phase of the plan required the Company to assess or inventory all
known processes that could be impacted by the Year 2000 Issue and their vendors,
if applicable. The inventory included not only typical computer processes, but
also all systems and equipment that could be impacted by embedded micro-chip
malfunctions. These include but are not limited to the Company's alarm systems,
telephone systems, elevators, and ATM machines. This assessment phase is
complete, yet updated as needed.
The second phase of the plan required the Company to contact all third party
vendors and service providers to obtain documentation regarding their Year 2000
efforts. This is significant for the Company due to its dependence on external
sources. This is an ongoing phase to track the vendors and service providers
continuous efforts.
Additionally, the Company's plan deals with the assessment of its significant
borrowers and depositors and their Year 2000 readiness. Through letters,
questionnaires, and personal contacts, the Company has assessed the Year 2000
risk associated with these customers. The Year 2000 Issue is being addressed as
an addendum to the Company's loan policy. New and renewed loans will be subject
to Year 2000 assessment as part of the approval process.
The Company's Board of Directors approved a Year 2000 three-year budget of
$58,100 in 1998, $58,100 in 1999, and $25,000 in 2000. This budget was set to
cover costs associated with the Year 2000. Some areas include but are not
limited to software and hardware upgrades, customer awareness materials,
necessary testing, and employee training and education.
The third and fourth required phases deal with renovation and validation. To
cover these phases, the testing of our hardware and all mission-critical
applications has been completed. All upgrades to software and test scripts have
been received from the vendors and service providers and have been tested. We
have completed our testing of lower priority systems.
9
<PAGE>
The Company believes that the potential effects on internal operations of the
Year 2000 Issue can and will be addressed prior to the Year 2000.
The fifth phase is implementation, whereby the Company introduces its
successfully tested systems into use within the Company (a.k.a. "put into
production environment"). This has been an ongoing process, as we have made
efforts to replace and upgrade older systems with newer technology. All required
modifications and conversions have been completed. Even after tests have been
completed and results are satisfactory, the Company must consider the fact that
systems could still fail when the actual date arrives. Therefore, the Company
has completed a Board approved Business Resumption Contingency Plan that
addresses all areas of operations, such as power, telecommunications, etc. and
how we will resume business if any or all areas experiences difficulties, until
the Year 2000 problems are fixed.
The costs associated with the Year 2000 project and the date the Company plans
to complete Year 2000 compliance are based on management's best estimates.
However, there can be no guarantee that these estimates will be achieved or
within the time frame indicated. The Company will make every effort to do
whatever is necessary to correct all relevant problems in an attempt to
eliminate any possibility of business disruptions.
General
Net income for the quarter ended June 30, 1999 was $2,390,179, or $.40 per basic
share, compared to net income of $2,043,280, or $.34 per basic share, for the
same period in 1998. Net income for the six-months ended June 30, 1999 was
$4,489,923, or $.76 per basic share, compared to net income of $3,878,684, or
$.65 per basic share, for the same period in 1998.
Net Interest Income/Margins
Net interest income of $16,356,801 during the first six-months of 1999 resulted
from a net interest margin of 5.05% on average earning assets of $652.0 million.
This compares with a net interest margin of 4.89% on average earning assets of
$587.5 million generating net interest income of $14,350,505 for the same period
in 1998. The interest rate earned on taxable securities has been reduced as the
Company continues to invest in relatively short-term government securities. The
Company has, however, been able to sustain the strong net interest margin as
average interest bearing liabilities have decreased slightly as a percentage of
total liabilities and capital. This is the result of both increased capital and
increases in noninterest bearing deposits. Interest rates have remained
relatively stable and thus the change in the net interest margin is more a
function of competition and investment options than changes in interest rates.
The increase in loan demand experienced by the Company positively affects the
net interest margin, as noted by the large volume related increase, and is an
indicator of the continued strong local economy. The increase in net interest
income consists of an increase of $965,000 relative to rate and an increase of
$1,143,000 relative to volume.
Management reviews asset/liability volumes and rates on a regular basis. As
Carolina First's loans have continued to grow, the funds have been obtained
primarily through customer deposits and the maturing of investment securities.
Deposit and loan rates are adjusted as market conditions and Company needs
allow.
Analysis of average balances and interest rates for the six-months ended June
30, 1999 and 1998 is presented on pages 14 and 15 of this report. Such analysis
is presented on a fully-taxable equivalent basis at the federal statutory rate
of 34 %.
Loan Loss Allowance/Provision
The allowance for loan losses represents management's determination as to an
adequate amount in relation to the risk of likely losses in the loan portfolio.
In evaluating the allowance and its adequacy, management considers the Company's
loan loss experience, the amount of past due and non-performing loans, current
economic conditions and other appropriate information. Because these risks are
continually changing in response to facts beyond the control of the Company,
such as the state of the economy, management's judgment as to the adequacy of
the provision is approximate and imprecise. It is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as methodology used to calculate the allowance for loan losses and the
size of the loan loss allowance in comparison to a group of peer banks
identified by the regulatory agencies.
10
<PAGE>
In assessing the adequacy of the allowance, management reviews the loan
portfolio, to both ascertain whether there are probable losses and to assess the
risk characteristics of the portfolio in the aggregate. This review considers
the judgments of management, and also those of bank regulatory agencies that
review the loan portfolio as part of their regular bank examination process.
There are no loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that the Company reasonably expects will
materially impact future operating results, liquidity, or capital resources. The
Company has no concentrations or credit risks by type of credit or industry
group within its loan or investment portfolio.
On a monthly basis, the Company reviews the adequacy of its allowance for loan
losses. The Company has both an allocated and unallocated allowance for loan
losses. The allocated portion of the allowance for loan losses represents
specific allowances related to loans identified by management These loans are
rated as to the presumed collectibility, and a statistical loss factor is
assigned to each category of loans that directly relates to the associated risk.
The allocated portion of the allowance also includes a component that is
computed by applying a factor based on historical loss experience to all other
loans by type. The unallocated portion of the allowance for loan losses is
determined by assigning a factor to the entire portfolio to cover probable
losses inherent in the loan portfolio. This final component reflects the
economic conditions of the market areas served. These factors are multiplied by
the balances in each category and totaled to determine the required allowance
for loan losses. The actual allowance for loan losses (after charge-offs) is
compared with the required level to determine if an additional provision should
be made in the current period. The allowance for loan losses was $7,095,699 or
1.42% of outstanding loans, at June 30, 1999 and $6,723,516 or 1.41% of
outstanding loans, at December 31, 1998.
The provision for loan losses charged to operations during the first six months
was $730,200 in 1999 and $510,000 in 1998. This increase in the provision is due
to the increase in non-performing assets and loan growth. Charge-offs, net of
recoveries, were approximately $358,000 or 0.2% (annualized) of average loans
outstanding, during the six months ended June 30, 1999, as compared to
approximately $204,000 or 0.1% (annualized) of average loans outstanding, during
the same period in 1998. Non-accrual loans and loans grater than 90 days past
due and still accruing were $1,947,427 and $127,412, respectively, at June 30,
1999, $1,432,086 and $111,272, respectively, at December 31, 1998 and $881,510
and $325,843, respectively, at June 30, 1998. The ratio of non-accrual loans to
total loans was 0.40% at June 30, 1999, 0.31% at December 31, 1998, and 0.20% at
June 30, 1998. The ratio of loans greater than 90 days and still accruing to
total loans was 0.03% at June 30, 1999, 0.02% at December 31, 1998, and 0.08% at
June 30, 1998. The ratio of non-performing assets to total assets was 0.30% at
June 30, 1999, 0.26% at December 31, 1998, and 0.26% at June 30, 1998. The
increase in nonperforming assets is primarily due to two commercial loans for
which the Company has significant collateral. Management believes that reserves
and asset values are adequate to facilitate the timely disposition of these
assets.
The following table depicts the change in the allowance for loan losses for the
periods ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balance at beginning of year ................................................ $6,723,516 $5,837,328
Charge-offs ................................................................. (448,427) (298,419)
Recoveries .................................................................. 90,410 94,055
Provision for loan losses ................................................... 730,200 510,000
---------- ----------
Balance at June 30, ......................................................... $7,095,699 $6,142,964
========== ==========
</TABLE>
11
<PAGE>
Non-Interest Income
Non-interest income increased $129,419 or 3.34% for the six-month period ended
June 30, 1999, as compared to the same period a year earlier. Non-interest
income from core operations continues to increase as the Company expands fee
income areas such as trust services and credit cards. The Company also
recognized a gain of $15,764 on the sale of other real estate. Also, the
deposits acquired from the 1998 branch acquisitions and branch openings have
positively impacted deposit-related income.
Non-interest expense increased $1,319,858 or 11.16% for the six-month period
ended June 30, 1999, as compared to the same period a year earlier. Non-interest
expense increased in relation to the 1998 branch acquisitions, and 1998 branch
openings and the completed acquisition of Community Bank in late December 1998.
Specifically, occupancy and data processing were directly affected as well as
other expenses, including the amortization of the premium paid to acquire the
deposits. Additionally, the expenses related to technology expenditures are
reflected in the increase in occupancy and equipment expense of $234,000.
The effective income tax rate was 30.78% for the six months ended June 30, 1999
compared to 34.16% for the same period in 1998. The decrease in effective rate
was due to an increase in holdings of municipal securities and state tax
strategy.
Financial Condition
The Company's total assets at June 30, 1999 and 1998, were $762,686,705 and
$671,058,615 respectively, and $731,626,244 at December 31, 1998. Average
earning assets for the first six months of 1999 were $652,028,000 versus
$587,509,000 for the same period a year earlier, an increase of 10.98%. This
growth is the result of the strong local economy and the Company's continued
expansion of its customer base. In 1998, the Company opened three new full
service branches during the second and third quarters of the year and acquired
the deposits of a former Central Carolina Bank branch in the fourth quarter. The
Company will continue to look for ways to acquire business and increase market
share in the existing markets.
Average loans of $441,565,000 represented 67.72% of average earning assets
during the first six months of 1999. During the same period in 1998, average
loans totaled $404,431,000, or 68.84% of average earning assets. Gross loans
increased to $498,296,225 at June 30, 1999, an 18.47% increase over loans a year
ago at June 30, 1998 and a 4.66% increase over December 31, 1998. It is
anticipated that general loan growth will continue to mirror the economy.
However, competition for quality loans may adversely effect the net interest
margins.
Securities averaged $195,967,000 during the six months ended June 30, 1999
versus $165,425,000 for the same period a year ago. The securities portfolio
represented 30.05% of earning assets during the six months ended June 30, 1999
and 28.16% at June 30, 1998. At June 30, 1999, the securities portfolio had an
unrealized loss of approximately $2,387,976 for securities available for sale. A
gain of $40,162 was realized during the first 6 months of 1999. Securities held
to maturity with a carrying value of approximately $9.1 million were scheduled
to mature within the next five years. Of this amount, $3.4 million were
scheduled to mature within one year. Securities available for sale with a
carrying value of $155.2 million were scheduled to mature within the next five
years. Of this amount, $44.7 million were scheduled to mature within one year.
The Company currently has the ability and intent to hold its investment
securities held to maturity to their contractual maturity. Certain securities
are designated by management as available for sale and are carried at the fair
value with the unrealized gain (loss), net of taxes, included in other
comprehensive income. The Company's securities portfolio has shifted toward the
available for sale category due to the added flexibility allowed over the
securities held to maturity.
Average interest bearing liabilities rose 16.19%, to $585,601,000 in the first
six months of 1999, from an average of $503,986,000 in the first six months of
1998. Total deposits increased 12.03% from June 30, 1998 to June 30, 1999, and
2.19% from December 31, 1998 to June 30, 1999. The acquisitions of 1998 resulted
in large growth rates. As the Company capitalizes on these acquisitions and
gains market share, deposits will continue to increase.
12
<PAGE>
Liquidity
The liquidity position of the Company's subsidiaries, Lincoln Bank ("Lincoln"),
Cabarrus Bank of North Carolina ("Cabarrus"), and Community Bank & Trust Co.
("Community Bank") is primarily dependent upon their need to respond to
withdrawals from deposit accounts and upon the liquidity of their assets.
Primary liquidity sources include cash and due from banks, federal funds sold,
short-term investment securities and loan repayments. At June 30, 1999, the
Company had a liquidity ratio of 35.80%. Management believes the liquidity
sources are adequate to meet operating needs. Except as discussed above, there
are no known trends, events or uncertainties that will have or that are
reasonably likely to have a material effect on the Company's liquidity, capital
resources or operations.
Capital Resources
Banks and bank holding companies, as regulated institutions, must meet required
levels of capital. The primary Federal regulators for the Banks and the Company
have adopted minimum capital regulations or guidelines that categorize
components and the level of risk associated with various types of assets.
Financial institutions are expected to maintain a level of capital commensurate
with the risk profile assigned to its assets in accordance with the guidelines.
The current capital standards call for a minimum total capital of 8% of
risk-adjusted assets, including 4% Tier I capital, and minimum leverage ratio of
Tier I capital to total tangible assets of at least 4-5%. The Company, Lincoln
Bank, Cabarrus Bank and Community Bank all maintain capital levels exceeding the
minimum levels for well capitalized banks and bank holding companies as follows.
<TABLE>
<CAPTION>
Well Adequately Carolina Lincoln Cabarrus Community
Capitalized Capitalized First Bank Bank Bank
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk adjusted assets 6.00% 4.00% 11.99% 10.78% 10.41% 12.66%
Total capital to risk adjusted assets 10.00% 8.00% 13.24% 12.03% 11.66% 13.91%
Leverage ratio 5.00% 4.00% 8.01% 7.65% 7.42% 6.62%
</TABLE>
13
<PAGE>
The following table summarizes net interest income and average yields and rates
paid for the years indicated. For purposes of this analysis, the interest on
non-taxable investment securities has been adjusted to a taxable-equivalent
amount to facilitate comparison with other asset yields. The adjustment gives
effect to the exemption from federal income taxes for earnings on obligations
of state and political subdivision and assumes a marginal tax rate of 34%.
Non-accrual loans are excluded from the interest-earning loan balances shown.
<TABLE>
<CAPTION>
As of June 30,
-------------------------------------------------------------------------------------------
(Thousands)
1999 1998
--------------------------------------------- -------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
--------------- ----------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing deposits in other banks ... $939 $26 5.54% 685 $19 5.55%
Taxable securities ......................... 188,152 5,388 5.73% 160,550 4,771 5.94%
Non-taxable securities ..................... 7,815 300 7.68% 4,875 162 6.65%
Federal funds sold and securities
purchased with agreements to
resell .................................. 13,557 283 4.17% 16,968 455 5.36%
Loans ...................................... 441,565 21,887 9.91% 404,431 19,631 9.71%
----------- ----------- ------------- ------------- ------------ -----------
Interest earning assets ................. 652,028 27,884 8.55% 587,509 25,038 8.52%
----------- ----------- ------------- ------------- ------------ -----------
Cash and due from banks .................... 26,052 23,796
Other assets ............................... 67,546 28,390
----------- -------------
Total assets ............................... $745,626 $639,695
=========== =============
Liabilities and Shareholders' Equity
Interest bearing deposits
Demand ................................... $168,502 $1,735 2.06% $140,040 $1,702 2.43%
Savings .................................. 66,907 692 2.07% 60,061 744 2.48%
Time ..................................... 334,295 8,662 5.18% 294,285 8,010 5.44%
Other borrowings ........................... 15,897 337 4.24% 9,600 232 4.83%
----------- ----------- ------------- ------------- ------------ -----------
Interest bearing liabilities ............ 585,601 11,426 3.90% 503,986 10,688 4.24%
----------- ----------- ------------- ------------- ------------ -----------
Other liabilities .......................... 96,114 81,559
Shareholders' equity ....................... 63,911 54,150
----------- -------------
Total liabilities and shareholders'
equity .................................. $745,626 $639,695
=========== =============
Interest rate spread 4.65% 4.28%
============= ===========
Net interest earned and net
yield on earning assets $16,458 5.05% $14,350 4.89%
=========== ============= ============ ===========
</TABLE>
14
<PAGE>
The following table presents the dollar amount of changes in interest income and
interest expense on a taxable-equivalent basis. The table distinguishes between
the changes related to average outstanding (volume) of interest earning assets
and interest-bearing liabilities, as well as the changes related to average
interest rates (rate) on such assets and liabilities. Changes attributable to
both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
As of June 30,
-------------------------------------------------------------------
(Thousands)
1999 1998
Income/ Income/
Expense Volume Rate Expense
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest Income:
Loans 21,887 1,841 415 19,631
Securities - tax - exempt 300 113 25 162
Securities - taxable 5,388 790 (173) 4,771
Federal funds sold & interest bearing
balances in other banks 309 (67) (98) 474
---------------- -------------- --------------- ---------------
Total Interest Income 27,884 2,677 169 25,038
Interest Expense:
Interest Bearing Demand 1,735 293 (260) 1,702
Savings 692 71 (123) 744
Time 8,662 1,037 (385) 8,010
Other Borrowings 337 133 (28) 232
---------------- -------------- --------------- ---------------
Total Interest Expense 11,426 1,534 (796) 10,688
---------------- -------------- --------------- ---------------
Net Interest Income 16,458 1,143 965 14,350
================ ============== =============== ===============
</TABLE>
15
<PAGE>
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk is inherent to all industries, but perhaps more prevalent to the banking
industry. The Company considers credit to be the most significant, however,
interest rate risk is a close second. There are eight risks that must be
considered in managing the Company. These risks are listed in order of the
perceived level of risk imposed upon the Company. Another risk associated with
some banks is foreign exchange risk. The Company does not consider this a
significant risk and thus, does not address it in this assessment.
Credit Risk. Credit risk is the risk to the bank's earnings or capital from the
potential of an obligor or related group of obligators failing to fulfill its or
their contractual commitments to the Bank. Credit risk is most closely
associated with a bank's lending. It encompasses the potential of loss on a
particular loan as well as the potential for loss from a group of related loans,
i.e., a credit concentration. Credit risk extends also to less traditional bank
activities. It includes the credit risk inherent in the Banks' investment
portfolio, the counterparties to interest rate contracts, and the stockbrokers
holding the bank's investment portfolio in street name.
Interest Rate Risk. Interest rate risk is the risk to earnings or capital from
the potential of movement in interest rates. It is the sensitivity of the Banks'
future earnings to interest rate changes. Interest rate risk is generally
measured on the basis of duration analysis or gap analysis. Duration analysis
measures the degree of risk in a particular instrument or portfolio and gap
analysis defines the timing when loss may occur. The Company is willing to
accept a modified duration of 5% and a one-year cumulative gap or +/- 5% and a
one to five cumulative gap of +/- 8%. As of June 30, 1999, the Company had a
modified duration of less than 2.40%.
Price Risk. Price risk is the risk to earnings or capital from changes in the
value of portfolios of financial instruments. Frequently this is referred to as
market risk. Price risk is generally reflected as the risk of a decline in
market value of its securities portfolio and the Company is willing to accept a
7.5% change in value after experiencing a 300 basis point rate shock, either
positive or negative. At June 30, 1999, the price change was 5.8% for a negative
rate shock and (7.6%) for a positive rate shock.
Liquidity Risk. Liquidity risk is the risk to earnings or capital from a bank's
inability to meet its obligations when they come due without incurring
unacceptable losses or costs. Depositors withdraw their deposits and a bank does
not have the liquid assets to fund the withdrawals and to meet its loan funding
obligations. The risk is particularly great with brokered deposits of which the
Company currently has none.
Transaction Risk. Transaction risk is the risk to earnings or capital arising
from problems with service or product delivery. Transaction risk is the risk of
a failure in a bank's operating processes. It is a risk of failure in a bank's
automation, its employee integrity, or its internal controls.
Compliance Risk. Compliance risk is the risk to earnings or capital from
noncompliance with laws, rules, and regulations.
Strategic Risk. Strategic risk is the risk to earnings or capital arising from
adverse business decisions or improper implementation of those decisions.
Reputation Risk. Reputation risk is the risk to earnings or capital from
negative public opinion.
Most of these risks are interrelated and thus all must be considered by
management regardless of the implied risk. Management reviews the performance
against these ranges on a quarterly basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 4 through 15
of the Company's Annual Report to Shareholders. There have been no significant
changes in these risks since December 31, 1998.
16
<PAGE>
PART II - OTHER INFORMATION
Item
1 - Legal Proceedings
The Company understands that it's former Chairman and Chief Executive
Officer, D. Mark Boyd, III, entered a negotiated plea of guilty upon the advice
of counsel pursuant to the principles of North Carolina v. Alford, 400 U.S. 25,
to two Misdemeanor Statements of Charges regarding his solicitation of the
Company and one of his sons to violate the antifraud provisions of the North
Carolina Securities Act, ending the pending criminal indictments against him.
The SEC informal inquiry into trading in Community Bank stock prior to the
public announcement of Community Bank's merger with a Company subsidiary
continues. See the Company's Annual Report on Form 10-K for the period ended
December 31, 1998 for additional information.
2 - Changes in Securities and Use of Proceeds
Not applicable
3 - Defaults upon Senior Securities
Not applicable
4 - Results of Votes of Security Holders
The Annual Meeting of Shareholders of the Company was held April 20, 1999
with 4,542,054 shares represented in person and/or by proxy, or approximately
83.54% of the outstanding shares on March 1, 1999. The following matters were
voted upon by the shareholders of the Company:
1. To elect Harold D. Alexander, James E. Burt, III, Charles A.
James, Walter H. Jones, Jr., Jack L. Lutz, Samuel C. King,
Jr., Harry D. Ritchie, Thomas M. Robbins, L.D. Warlick, Jr.,
and Estus B. White to serve as Directors of the Company for a
one year term or until their successors are elected and
qualified. All directors were elected with 4,498,254 shares or
99.04% of the shares represented at the meeting voting for the
proposal and 43,798 or .96% voting against.
<TABLE>
<CAPTION>
Director For Against
--------- --- -------
<S> <C> <C>
Harold D. Alexander 4,499,132 42,922
James E. Burt, III 4,502,717 39,337
Charles A. James 4,498,257 43,797
Walter H. Jones, Jr. 4,499,812 42,242
Jack L. Lutz 4,499,643 42,411
Samuel C. King, Jr. 4,503,887 38,166
Harry D. Ritchie 4,504,814 37,240
Thomas M. Robbins 4,499,796 42,258
L.D. Warlick, Jr. 4,503,887 38,166
Estus B. White 4,504,338 37,716
</TABLE>
2. To approve and adopt the Carolina First BancShares, Inc. 1999
Long-Term Incentive Plan. The proposal was approved with
3,334,069 shares or 61.32% of the shares represented at the
meeting voting for the proposal and 325,901 shares or 38.68%
voting against or abstaining.
5 - Other Information
Not applicable
6 - Exhibits and Reports on Form 8-K
(a) Exhibits
21 - Subsidiaries
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter for which this report is filed.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAROLINA FIRST BANCSHARES, INC.
(Registrant)
Date: August 13, 1999 By: /s/ James E. Burt, III
--------------------- --------------------------------------------
James E. Burt, III
Chief Executive Officer
Date: August 13, 1999 By: /s/ Jan H.Hollar
---------------------- --------------------------------------------
Jan H. Hollar
Chief Financial Officer
18
Exhibit 21
Subsidiaries of Carolina First BancShares, Inc. Jurisdiction of
Incorporation
- - - - --------------------------------------------------------------------------------
Cabarrus Bank of North Carolina North Carolina
Concord, North Carolina
Carolina First Financial Services Corp. North Carolina
Mooresville, North Carolina
Carolina First Mortgage Corp. North Carolina
Mooresville, North Carolina
Community Bank & Trust Co. North Carolina
Marion, North Carolina
Lincoln Bank of North Carolina North Carolina
Lincolnton, North Carolina
CFBI Corp. Delaware
Wilmington, Delaware
CFBI Mortgage, Inc. Maryland
Lincolnton, North Carolina
(100% owned by CFBI Corp.)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000846465
<NAME> CAROLINA FIRST BANCSHARES, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 24,719,815
<INT-BEARING-DEPOSITS> 1,213,440
<FED-FUNDS-SOLD> 1,174,551
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 172,709,205
<INVESTMENTS-CARRYING> 40,561,067
<INVESTMENTS-MARKET> 39,826,873
<LOANS> 498,296,225
<ALLOWANCE> 7,095,699
<TOTAL-ASSETS> 762,686,705
<DEPOSITS> 666,914,531
<SHORT-TERM> 30,117,415
<LIABILITIES-OTHER> 2,241,999
<LONG-TERM> 0
0
0
<COMMON> 13,595,562
<OTHER-SE> 51,275,074
<TOTAL-LIABILITIES-AND-EQUITY> 762,686,705
<INTEREST-LOAN> 21,886,795
<INTEREST-INVEST> 5,586,317
<INTEREST-OTHER> 309,678
<INTEREST-TOTAL> 27,782,790
<INTEREST-DEPOSIT> 11,089,038
<INTEREST-EXPENSE> 336,951
<INTEREST-INCOME-NET> 16,356,801
<LOAN-LOSSES> 730,200
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 13,147,386
<INCOME-PRETAX> 6,486,516
<INCOME-PRE-EXTRAORDINARY> 6,486,516
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42489,926
<EPS-BASIC> 0.87
<EPS-DILUTED> 0.85
<YIELD-ACTUAL> 5.05
<LOANS-NON> 1,976,909
<LOANS-PAST> 127,412
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,723,516
<CHARGE-OFFS> 448,427
<RECOVERIES> 90,140
<ALLOWANCE-CLOSE> 7,095,699
<ALLOWANCE-DOMESTIC> 7,095,699
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
