FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998 Commission file number 0-18460
------------- -------
M&M FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0771433
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
307 N. Main Street Marion, S. C. 29571
-------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (843) 431-1000
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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 14, 1998
- --------------------------------------------- ------------------------------
(Common stock, $5 par value) 1,006,116
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
M&M FINANCIAL CORPORATION
INDEX
PAGE NO.
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - June 30, 1998
and December 31, 1997 1
Condensed Consolidated Statement of Income - Three months
and Six months ended June 30, 1998 and 1997 2
Condensed Consolidated Statement of Changes in
Stockholders' Equity and Comprehensive Income -
Six months ended June 30, 1998 and 1997 3
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 15
Part II - Other Information
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 16
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to a Vote
of Security-Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
<PAGE>
ITEM 1. Financial Statements (Unaudited)
M&M Financial Corporation
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
June 30, December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------
(Unaudited) *
ASSETS
Cash and cash equivalents
<S> <C> <C>
Cash and due from banks $ 6,487,153 $ 7,822,361
Interest-bearing demand accounts with other banks 258,764 1,519,920
Federal funds sold 4,790,000 0
- ----------------------------------------------------------------------------------------------------------------
11,535,917 9,342,281
Time deposits with other banks 300,000 300,000
Securities held-to-maturity (estimated market value of $1,996,600
in 1998 and $3,031,496 in 1997) 1,974,181 2,973,837
Securities available-for-sale 32,760,876 29,901,275
Loans 116,240,924 105,427,377
Less - allowance for loan losses (1,188,485) (926,635)
- ----------------------------------------------------------------------------------------------------------------
Net loans 115,052,439 104,500,742
- ----------------------------------------------------------------------------------------------------------------
Premises, furniture, and equipment, net 4,434,845 4,355,338
Accrued interest receivable 1,291,656 1,256,335
Other assets 3,658,062 3,640,886
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 171,007,976 $ 156,270,694
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 17,365,532 $ 18,958,066
Interest bearing transaction accounts 42,561,400 32,004,240
Savings deposits 20,306,854 18,281,077
Time deposits 65,501,660 61,238,686
- ----------------------------------------------------------------------------------------------------------------
Total deposits 145,735,446 130,482,069
Short-term borrowings 2,322,311 2,461,432
Advances from the Federal Home Loan Bank 9,500,000 10,000,000
Accrued interest and other liabilities 1,291,402 1,638,835
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 158,849,159 144,582,336
- ----------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, $5.00 par value; 3,000,000 shares
authorized; shares issued and outstanding - 1,006,116
in 1998 and 1997 5,030,580 5,030,580
Surplus 2,483,783 2,483,783
Retained earnings 4,543,723 3,925,274
Accumulated other comprehensive income, net of tax 100,731 248,721
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,158,817 11,688,358
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 171,007,976 $ 156,270,694
================================================================================================================
<FN>
* Obtained from audited financial statements.
</FN>
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
1
<PAGE>
M&M Financial Corporation
Condensed Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 5,407,094 $ 4,266,593 $ 2,822,884 $ 2,181,525
Interest on investment securities:
Taxable 988,577 1,050,853 549,834 528,922
Non-taxable 82,360 119,645 36,752 55,254
Other interest income 216,468 102,605 71,174 60,850
-------------------------------------------------------------------------------------------------------------------------------
Total interest income 6,694,499 5,539,696 3,480,644 2,826,551
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 2,864,644 2,020,353 1,433,434 1,068,949
Interest on short-term borrowings 40,127 253,253 (107,438) 145,895
Interest on Advances from the Federal Home Loan 296,050 255,062 275,026 125,373
Bank
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,200,821 2,528,668 1,601,022 1,340,217
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,493,678 3,011,028 1,879,622 1,486,334
Provision for loan losses 228,000 178,000 114,000 94,000
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,265,678 2,833,028 1,765,622 1,392,334
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 454,886 386,605 200,445 196,476
Other charges, commissions and fees 333,389 392,163 140,228 195,274
Gains on sale of investments 212,392 0 212,392 0
------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,000,667 778,768 553,065 391,750
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,786,152 1,538,132 897,549 798,954
Net occupancy expense 383,520 398,081 193,401 206,429
Other operating expense 896,712 808,453 442,329 438,953
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,066,384 2,744,666 1,533,279 1,444,336
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,199,961 867,130 785,408 339,748
Provision for income taxes 380,289 272,022 260,030 107,470
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 819,672 $ 595,108 $ 525,378 $ 232,278
===============================================================================================================================
Net income per share - basic $ 0.81 $ 0.59 $ 0.52 $ 0.23
===============================================================================================================================
Net income per share - diluted $ 0.80 $ 0.59 $ 0.52 $ 0.23
===============================================================================================================================
Weighted average common shares outstanding - basic 1,006,116 1,006,116 1,006,116 1,006,116
===============================================================================================================================
Weighted average common shares outstanding - diluted 1,018,543 1,006,116 1,019,095 1,006,116
===============================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
2
<PAGE>
M&M Financial Corporation
Condensed Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income
Six Months ended June 30, 1998 and June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated
other Total
Common Stock Retained comprehensive stockholders'
-----------------------------
Shares Amount Surplus earnings income (loss) equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 * 1,006,116 $5,030,580 $2,483,783 $3,166,781 $140,568 $10,821,712
Comprehensive Income
Net income 595,108 595,108
Other comprehensive income,
net of tax
Unrealized losses on
investment securities (210,916) (210,916)
---------------
Comprehensive Income 384,192
---------------
Cash dividends ($0.12 per share) (117,380) (117,380)
--------------------------------------------------------------------------------------------
Balance at June 30, 1997 1,006,116 $5,030,580 $2,483,783 $3,761,889 ($70,348) $11,088,524
============================================================================================
Balance at December 31, 1997 1,006,116 $5,030,580 $2,483,783 $3,925,274 $248,721 $11,688,358
Comprehensive Income
Net income 819,672 819,672
Other comprehensive income,
net of tax
Unrealized losses on
investment securities (147,990) (147,990)
----------------
Comprehensive Income 671,682
----------------
Cash dividends ($0.20 per share) (201,223) (201,223)
--------------------------------------------------------------------------------------------
Balance at June 30, 1998 1,006,116 5,030,580 2,483,783 4,543,723 100,731 12,158,817
============================================================================================
<FN>
* Number of shares of common stock outstanding at December 31, 1996 was restated
to reflect the three-for-one stock split declared on May 7, 1997.
</FN>
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
3
<PAGE>
M&M Financial Corporation
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Six Months ended June 30,
- ------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 819,672 $ 595,108
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of premises and equipment and amortization 233,157 209,132
Provision for loan losses 228,000 178,000
Other,net (327,694) (87,648)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 953,135 894,592
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in loans (10,779,697) (15,448,101)
Purchase of investment securities available-for-sale (7,367,411) (1,587,624)
Proceeds from sales of investment securities available-for-sale 240,417
Proceeds from maturities of investment securities available-for-sale 4,022,121 2,056,330
Proceeds from maturities of investment securities held-to-maturity 995,063 385,504
Purchase of Federal Home Loan Bank stock 0 (735,300)
Net change in time deposits with other banks 0 500,000
Capital expenditures (283,025) (834,976)
- ------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (13,172,532) (15,664,167)
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid (201,223) (117,380)
Net change in deposits 15,253,377 13,604,260
Net change in advances from Federal Home Loan Bank (500,000) 5,000,000
Net change in other short-term borrowings (313,042) 574,495
Net change in federal funds purchased and securities sold under
agreements to repurchase 173,921 (6,136,292)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,413,033 12,925,083
- ------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,193,636 (1,844,492)
Cash and cash equivalents at January 1 9,342,281 7,963,828
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30 $ 11,535,917 $ 6,119,336
============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year
for:
Interest $ 3,200,822 $ 2,740,766
Income taxes 180,900 251,094
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
4
<PAGE>
M&M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared in accordance with the requirements for interim
financial statements and, accordingly, they are condensed and
omit disclosures which would substantially duplicate those
contained in the most recent annual report to stockholders. The
financial statements as of June 30, 1998, and for the interim
periods ended June 30, 1998, and 1997 are unaudited and in the
opinion of management, include all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation. The financial information as of December 31, 1997,
has been derived from the audited financial statements as of that
date. For further information, please refer to the financial
statements and the notes included in the Company's 1997 Annual
Report.
The results of operations for the three and six month periods
ended June 30, 1998, are not necessarily indicative of the
results to be expected for the full year.
NOTE 2: PER SHARE DATA
Net income per share - basic is computed by dividing net income
by the weighted average number of shares outstanding. Net income
per share - diluted is computed by dividing net income by the
weighted average number of common shares outstanding and dilutive
common share equivalents using the treasury stock method.
Dilutive common share equivalents include common shares issuable
upon exercise of outstanding stock options.
In accordance with SFAS No. 128, the calculation of net income
per share - basic and net income per share - diluted at June 30
is presented below:
<TABLE>
<CAPTION>
For the six months ended June 30, 1998
----------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) amount
----------------------------------------------------
Net income per share - basic
<S> <C> <C> <C>
Income available to common
shareholders $819,672 1,006,116 $0.81
===============
Effect of dilutive securities
Stock options - 12,427
-------------------------------------
Net income per share - diluted
Income available to common
shareholders plus assumed
conversions $819,672 1,018,543 $0.80
====================================================
</TABLE>
5
<PAGE>
M&M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30, 1997
---------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) amount
---------------------------------------------------
<S> <C> <C> <C>
Net income per share - basic
Income available to common
shareholders $595,180 1,006,116 $0.59
================
Effect of dilutive securities
Stock options - 0
-----------------------------------
Net income per share - diluted
Income available to common
shareholders plus assumed
conversions $595,180 1,006,116 $0.59
===================================================
</TABLE>
NOTE 3: COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." This statement establishes standards for
reporting the components of comprehensive income and requires
that all items that are required to be recognized under
accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive
income includes net income as well as certain items that are
reported directly within a separate component of stockholders'
equity and bypass net income. Prior periods have been
reclassified to reflect the application of the provisions of
SFAS 130. The following table sets forth the amounts of other
comprehensive income included in equity along with the related
tax effect for the six months ended June 30, 1998, and 1997:
<TABLE>
<CAPTION>
For the six months ended June 30, 1998
-----------------------------------------------------
Pre-tax amount (Expense) Benefit Net of tax Amount
-----------------------------------------------------
<S> <C> <C> <C>
Net unrealized gains on securities
available for sale arising in 1998 $240,633 ($92,643) $147,990
-----------------------------------------------------
Other comprehensive income $240,633 ($92,643) $147,990
=====================================================
</TABLE>
6
<PAGE>
M&M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30, 1997
-------------------------------------------------------
Pre-tax amount (Expense) Benefit Net of tax Amount
-------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gains on securities
available for sale arising in 1997 $342,953 ($132,037) $210,916
-------------------------------------------------------
Other comprehensive income $342,953 ($132,037) $210,916
=======================================================
</TABLE>
All of the Company's other comprehensive income relates to net
unrealized gains on investment securities available for sale,
net of tax.
NOTE 4: STOCK OPTIONS
Effective January 12, 1998, the Company granted options to
purchase up to 7,000 shares of the Company's common stock at a
price of $15 per share, which was the fair market value on the
date of grant.
On April 16, 1998, the Company granted options to purchase up to
5,000 shares of the Company's common stock at a price of $17 per
share, which was the fair market value on the date of grant.
NOTE 5: PENDING MERGER
On May 15, 1998, the Company entered into a definitive agreement
to merge with Anchor Financial Corporation ("Anchor"), parent
company of The Anchor Bank, headquartered in Myrtle Beach, South
Carolina. Based on Anchor's closing stock price of $40.50 on
April 28, 1998, the merger would have a value of $35.5 million.
The merger is expected to be accounted for as a pooling of
interests and provides for a tax-free exchange of 0.87 shares of
Anchor common stock for each outstanding share of M&M Financial
common stock. The merger is subject to approval of shareholders
of both companies and regulatory approvals. The merger is
expected to be completed in the third quarter of 1998.
Under the terms of the Company's Salary Continuation Plan, which
provides certain officers with salary continuation benefits upon
retirement, the officers become immediately vested in the
benefits upon a change of control in the Company. Upon
completion of the merger, approximately $500,000 to $525,000
additional pretax expense related to these benefits will be
recorded.
The Company's Incentive Stock Option Plan of 1997 (the Stock
Plan) provides that officers and employees become fully vested
in stock options granted under
7
<PAGE>
M&M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the Stock Plan upon a change in control of the Company.
Accordingly, upon completion of the merger all 66,000 options
granted under the Stock Plan will be fully vested.
8
<PAGE>
ITEM 2. Management's Discussion and Analysis
The following is a discussion of the Company's financial condition at June 30,
1998, compared to December 31, 1997, and the results of operations for the three
and six months ended June 30, 1998, compared to the three and six months ended
June 30, 1997. These comments should be read in conjunction with the Company's
condensed consolidated financial statements and accompanying footnotes appearing
in this report.
Forward Looking Statements
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be, and are hereby identified as 'forward looking statements' for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. The Company cautions readers that forward looking
statements, including without limitation, those relating to the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, and income, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements, due to several important factors herein identified,
among others, and other risks and factors identified from time to time in the
Company's reports filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Net Interest Income
For the second quarter of 1998, net interest income increased $393,288 or 26.5%,
over the same period of 1997. For the six months ended June 30, 1998, net
interest income increased $482,650 or 16.0%, over the same period of 1997. The
improvement in net interest income for the quarter is related to increases
in the volume of interest-earning assets and the tax equivalent net yield on
earning assets. The improvement in net interest income for the six-month period
is related to an increase in the volume of interest-earning assets since the tax
equivalent net yield on earning assets decreased.
The tax equivalent net yield on earning assets increased from 4.56% for the
second quarter of 1997 to 4.76% for the same period in 1998. Average interest
earning assets increased 15.0% to $156,146,000 when compared to the same quarter
of 1997. The yield on interest earning assets increased from 8.51% in 1997 to
8.87% in 1998. Most of the growth was in loan volume, which averaged
$113,916,000 during the quarter ended June 30, 1998, compared to $92,986,000 for
the quarter ended June 30, 1997. The yields on loans were 9.94% and 9.41% for
the quarters ended June 30, 1998, and 1997, respectively.
The tax equivalent net yield on earning assets decreased from 4.80% for the
first six months of 1997 to 4.58% for the same period in 1998. Average interest
earning assets for the six months ended June 30, 1998, increased 18.2% to
$155,335,000 when compared to the same period in 1997. The yield on interest
earning assets increased from 8.68% in 1997 to 8.73% in 1998. Most of the growth
was in loan volume, which averaged $111,339,000 during the six month period
ended June
9
<PAGE>
30, 1998, compared to $89,197,000 for the same period in 1997. The
yields on loans were 9.79% and 9.65% for the six months ended June 30, 1998, and
1997, respectively.
The growth in assets was primarily funded by interest-bearing liabilities,
particularly certificates of deposit and deposits of local municipalities and
hospitals. Certificates of deposit are typically more expensive funding sources
than transaction and savings accounts. The overall rate paid on interest-bearing
liability accounts was 4.71% for the second quarter of 1998, versus 4.63% in
1997, and 4.75% for the six months ended June 30, 1998, versus 4.56% in 1997.
Provision and Allowance for Loan Losses
The provision for loan losses is the charge to operating earnings that
management feels is necessary to maintain the allowance for possible loan losses
at an adequate level. For the second quarter of 1998, the provision was
$114,000, an increase of $20,000 from the same period a year ago. For the first
six months of 1998, the provision was $228,000, an increase of $50,000 from the
same period in 1997. The increases for the quarter and the six months ended June
30, 1998, do not reflect a negative trend in nonperforming or classified assets
but are indicative of management's decision to attain a target ratio for the
allowance for loan losses to total loans above 1.0%. Based on present
information, management believes the allowance for loan losses is adequate at
June 30, 1998, to meet presently known and inherent risks in the loan portfolio.
Noninterest Income
Noninterest income for the second quarter of 1998 was $553,065, an increase of
$161,315 or 41.2% from the same period in 1997. Noninterest income excluding
investment securities gains was $340,763 for the second quarter of 1998, a
decrease of $51,077 or 13.0%. The primary factor attributing to this decrease is
a change in the classification of certain business receivables income from a
noninterest income category to a loan interest income category.
Noninterest income for the first six months of 1998 was $1,000,667, an increase
of $221,899 or 28.5% from the same period in 1997. Noninterest income excluding
investment securities gains was $788,275 for the six months ended June 30, 1998,
an increase of $9,507 or 1.2%.
Noninterest Expense
Noninterest expense for the second quarter of 1998 was $1,533,279, an increase
of $88,943 or 6.2% from the same period in 1997. Noninterest expense for the
first six months of 1998 was $3,066,384, an increase of $321,718 or 11.7% from
the same period a year ago.
The growth for the quarter and six months ended June 30, 1998, was primarily due
to the continuing growth of the Company. The primary component of noninterest
expense is salaries and employee benefits, which for the second quarter
increased $98,595 or 12.3% from the same period of 1997. For the six months
ended June 30, 1998, salaries and employee benefits rose $248,020 or 16.1% from
the same period a year ago.
10
<PAGE>
Income Taxes
The income tax provision for the quarter ended June 30, 1998, was $260,030, up
from $107,470 for the same period in 1997. The effective income tax rate for the
second quarter of 1998 was approximately 33.1% compared to 31.6% for the same
period in 1997.
For the six months ended June 30, 1998, the provision was $380,289, up from
$272,022 for the same period in 1997. The effective income tax rate for the
first six months of 1998 was approximately 31.7% compared to 31.4% for the same
period in 1997. The provision for income taxes increased in 1998 primarily due
to higher income before taxes since tax rates remained approximately the same as
1997.
Net Income
The combination of the factors described above resulted in net income for the
quarter ended June 30, 1998, of $525,378 or $0.52 per diluted share, compared to
$232,278 or $0.23 for the second quarter of 1997.
Net income for the first six months of 1998 totaled $819,672 or $0.80 per
diluted share, up from $595,108 or $0.59 per diluted share for the same period
in 1997.
FINANCIAL CONDITION
Assets and Liabilities
At June 30, 1998, total assets increased $14,737,282 or 9.4% from December 31,
1997. The primary factor attributing to this growth was an increase in loans
from $105,427,377 at December 31, 1997, to $116,240,924 at June 30, 1998. The
increase in total assets was substantially funded by an increase in deposits of
$15,253,377 during the period.
Investment Securities
Investment securities increased by $1,898,724 since December 31, 1997. The
increase resulted from the investment of available liquid funds into
higher-yielding earning assets that also have a low risk weighting and from the
need for additional collateral to secure public funds deposits.
Loans
The Company's loan portfolio has continued to grow due to management's continued
emphasis on loan growth. Loan demand in the Florence and Myrtle Beach markets
remains strong.
Management believes that the loan portfolio is adequately diversified; however a
concentration does exist in the hotel/motel industry. Loans to borrowers in this
industry comprise approximately 9.30% of the total loan portfolio. These loans
total approximately 80.5% of total capital. There have been no adverse economic
developments that have affected these customers' repayment capability. Loans in
this industry are performing as agreed.
11
<PAGE>
Management believes that commercial loan demand will remain strong in Horry and
Florence Counties for the foreseeable future. Construction and tourism
activities continue to increase in the Horry Count market. Management
evaluates consumer loan demand in the Horry, Florence, and Marion County markets
as being moderate. Balances within the major loan receivable categories
as of June 30, 1998, and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
6/30/98 12/31/97
---------------------------------------
<S> <C> <C>
Commercial and agricultural $92,583,010 $88,119,492
Real estate - construction 7,878,994 4,012,807
Consumer and other 15,778,920 13,295,078
---------------------------------------
$116,240,924 $105,427,377
=======================================
</TABLE>
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
<TABLE>
<CAPTION>
6/30/98 12/31/97
-----------------------------------
<S> <C> <C>
Nonaccrual loans $639,247 $473,103
Loans past due ninety days or more 16,904 0
-----------------------------------
Total nonperforming assets $656,151 $473,103
===================================
</TABLE>
Loans identified by the internal review mechanism:
<TABLE>
<S> <C> <C>
Criticized $5,676,118 $3,425,674
Classified $1,421,002 $1,478,809
</TABLE>
<TABLE>
<CAPTION>
Allowance for loan losses: 1998 1997
-----------------------------------
<S> <C> <C>
Balance, January 1, 1998 and 1997 $926,635 $1,027,355
Provision charged to operations 228,000 178,000
Recoveries of charged off loans 85,510 30,593
Loans charged off (51,660) (89,427)
-----------------------------------
Balance, end of period $1,188,485 $1,146,521
===================================
Gross loans outstanding, end of period $116,240,924 $96,312,213
Allowance for loan losses to loans outstanding 1.02% 1.19%
</TABLE>
12
<PAGE>
Deposits
Total deposits increased $15,253,377 or 11.7% from December 31, 1997.
Noninterest-bearing deposits decreased 8.4% and interest-bearing deposits
increased 15.1%. The majority of the increase occurred in public funds deposits,
money market demand accounts, and certificates of deposit.
Balances within the major deposit categories as of June 30, 1998, and December
31, 1997, are as follows:
<TABLE>
<CAPTION>
6/30/98 12/31/97
-----------------------------------------
<S> <C> <C>
Non-interest bearing demand deposits $17,365,532 $18,958,066
Interest bearing demand deposits 42,561,400 32,004,240
Savings deposits 20,306,854 18,281,077
Certificates of deposit 65,501,660 61,238,686
-----------------------------------------
$145,735,446 $130,482,069
=========================================
</TABLE>
Long-term Debt
The Company utilizes long-term advances from the FHLB as part of its funding
strategy. FHLB advances with scheduled principal repayments due in periods
beyond one year totaled $3,500,000 at June 30, 1998, and $4,000,000 at December
31, 1997.
Liquidity
Funding loans and deposit withdrawals are two of the main uses of the Company's
liquidity. Liquidity needs are met by the Company through scheduled maturities
of loans and investments, borrowings, and through pricing policies for
interest-bearing deposit accounts.
The Company has a $20,000,000 line of credit with the Federal Home Loan Bank of
Atlanta. As of June 30, 1998, the Company has borrowed $9,500,000 on this line
of credit. The Company also has $9,500,000 of unused lines of credit with
correspondent banks to purchase federal funds. Additionally, maturities and
sales of securities are a ready source of liquidity. As a secondary source of
liquidity, the Company has securities available for sale with a carrying value
of $34,659,600 as of June 30, 1998.
Capital Resources
Total stockholders' equity increased $470,459 to $12,158,817 since December 31,
1997. The increase is due to earnings for the period ended June 30, 1998, of
$819,672, which was offset by an after tax reduction of $147,990 in the
unrealized gain on securities available-for-sale and a $201,223 cash dividend
payment to stockholders.
The Bank subsidiary and the Company are required by banking regulators to meet
certain minimum levels of capital adequacy, expressed in the form of certain
ratios. Capital is separated into Tier 1 capital (essentially common
stockholders' equity less intangible assets) and Tier 2 capital (essentially the
allowance for loan losses limited to 1.25% of risk-weighted assets). The ratio
of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of
total capital (Tier 1
13
<PAGE>
capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.
The capital leverage ratio supplements the risk-based capital guidelines.
The Bank and the Company are required to maintain a minimum ratio of Tier 1
capital to adjusted quarterly average total assets of 4.0%. The Bank is also
required to meet specific capital guidelines to be well-capitalized under the
regulatory framework for prompt corrective action.
The following table summarizes the Company's and the Bank's capital ratios at
June 30, 1998:
<TABLE>
<CAPTION>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
-------------------------------------------------
Actual ratios:
<S> <C> <C> <C>
The Company 9.86% 10.84% 7.16%
The Bank 9.75% 10.72% 7.08%
Minimum ratios for capital adequacy purposes:
The Company 4.00% 8.00% 4.00%
The Bank 4.00% 8.00% 4.00%
To be well-capitalized under prompt corrective action provisions:
The Bank 6.00% 10.00% 5.00%
</TABLE>
On April 16, 1998, the Company executed a $3,000,000 line of credit with The
Anchor Bank, a wholly-owned subsidiary of Anchor Financial Corporation. The
Company has this line available for the capital needs of the Bank. The line of
credit is collateralized by the Company's investment in its Bank subsidiary. The
debt service, if any, is expected to be paid from dividends from the Bank. There
have been no draws on this line as of June 30, 1998.
Regulatory Matters
The management of the Company is not aware of any current recommendations by
regulatory authorities, which, if they were to be implemented, would have a
material effect on liquidity, capital resources, or operations.
Accounting Rule Changes
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." This statement
establishes standards for reporting the components of comprehensive income and
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be included in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income includes net income as well as certain items
that are reported directly within a separate component of stockholders' equity
and bypass net income. The Company reported comprehensive income in its
condensed consolidated financial statements as of June 30, 1998, and
reclassified prior periods to reflect the application of SFAS 130. All of the
Company's
14
<PAGE>
other comprehensive income relates to net unrealized gains on
investment securities available for sale.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk exposures that affect the
quantitative or qualitative disclosures presented as of the preceding fiscal
year end in the Company's Annual Report on Form 10-K.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On April 16, 1998, the Company held its annual meeting of shareholders.
The Company's shareholders elected the following five persons as
directors, each to serve until the next annual meeting of shareholders
or until his/her successor is elected and qualified. The Company's
shareholders also voted to appoint Tourville, Simpson & Henderson as
the independent auditors for the Company for the year ended
December 31, 1998.
The number of shares voted for or against each item are as follows:
Election of Directors For Against
Chester A. Duke 807,391 7,455
Charles McElveen 810,391 4,455
J.M. McLendon 807,391 7,455
Bruce Siegal 810,391 4,455
Nancy B. Williams 810,391 4,455
Ratify the appointment of Tourville, Simpson & Henderson as the
independent auditors for the Company for the year ended December 31,
1998:
For Against Abstained
813,442 0 1,404
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 2 Agreement and Plan of Merger between Anchor Financial Corporation
and M&M Financial Corporation (incorporated by reference to
Appendix to the Company's Proxy Statement, which is included as
an integral part of the Registration Statement on Form S-4 of
Anchor Financial Corporation, Registration No. 333-57053).
27 Financial Data Schedule (for SEC purposes only)
(b) No reports on Form 8-K have been filed during the quarter ended June
30, 1998.
16
<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.
/s/ Chester A. Duke
Chester A. Duke, President and
Chief Executive Officer
/s/ Richard C. Mathis
Richard C. Mathis, Executive Vice
President and Chief Financial
Officer
Date: August 14, 1998
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Schedule contains summary financial information extracted from the
Consolidated Balance Sheet at June 30, 1998 (unaudited) and the Consolidated
Statement of Operations for the Six Months Ended June 30, 1998 (unaudited) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,487,153
<INT-BEARING-DEPOSITS> 258,764
<FED-FUNDS-SOLD> 4,790,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,659,600
<INVESTMENTS-CARRYING> 1,974,181
<INVESTMENTS-MARKET> 1,996,600
<LOANS> 116,240,924
<ALLOWANCE> 1,188,485
<TOTAL-ASSETS> 171,007,976
<DEPOSITS> 145,735,446
<SHORT-TERM> 8,322,311
<LIABILITIES-OTHER> 1,291,402
<LONG-TERM> 3,500,000
<COMMON> 5,030,580
0
0
<OTHER-SE> 7,128,237
<TOTAL-LIABILITIES-AND-EQUITY> 171,007,976
<INTEREST-LOAN> 5,407,094
<INTEREST-INVEST> 1,070,937
<INTEREST-OTHER> 216,468
<INTEREST-TOTAL> 6,694,499
<INTEREST-DEPOSIT> 2,864,644
<INTEREST-EXPENSE> 3,200,821
<INTEREST-INCOME-NET> 3,493,678
<LOAN-LOSSES> 228,000
<SECURITIES-GAINS> 212,392
<EXPENSE-OTHER> 3,066,384
<INCOME-PRETAX> 1,199,961
<INCOME-PRE-EXTRAORDINARY> 1,199,961
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 819,672
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 4.58
<LOANS-NON> 639,247
<LOANS-PAST> 16,904
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 926,635
<CHARGE-OFFS> 51,660
<RECOVERIES> 85,510
<ALLOWANCE-CLOSE> 1,188,485
<ALLOWANCE-DOMESTIC> 1,188,485
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
