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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSACTION REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15083
CAROLINA FIRST CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0824914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 SOUTH MAIN STREET, GREENVILLE, SOUTH CAROLINA 29601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (864) 255-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE NONE
(Title of Class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates
(shareholders holding less than 5% of an outstanding class of stock, excluding
directors and executive officers), computed by reference to the closing price of
such stock, as of March 1, 2000 was $388,823,000.
The number of shares outstanding of the Registrant's common stock, $1.00
par value was 25,402,587 at March 1, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
INCORPORATED DOCUMENT LOCATION IN FORM 10-K
Portions of Proxy Statement dated March 15, 2000 Part III
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CROSS REFERENCE INDEX
PAGE
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PART I.
Item 1. Business .................................................................. 2
Item 2. Properties ................................................................ 13
Item 3. Legal Proceedings ......................................................... 14
Item 4. Submission of Matters to a Vote of Shareholders ........................... 14
PART II.
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters .. 15
Item 6. Selected Financial Data ................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................. 17
Item 7a. Quantitative and Qualitative Disclosures About Market Risk ................ 43
Item 8. Financial Statements and Supplementary Data ............................... 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ...................................................... 80
PART III.
Item 10. Directors and Executive Officers of the Registrant ........................ 80
Item 11. Executive Compensation .................................................... 80
Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 80
Item 13. Certain Relationships and Related Transactions ............................ 80
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........... 81
PART I
ITEM 1. BUSINESS
THE COMPANY
Carolina First Corporation (the "Company"), a South Carolina corporation
organized in 1986, is a financial institution holding company headquartered in
Greenville, South Carolina. At December 31, 1999, it operated through the
following principal subsidiaries: Carolina First Bank, a South Carolina
state-chartered commercial bank; Citrus Bank, a Florida state-chartered
commercial bank; Carolina First Mortgage Company ("CF Mortgage"), a mortgage
banking company; Carolina First Bank, F.S.B., a Federal savings bank which
operates Bank CaroLine (an Internet Bank); and Blue Ridge Finance Company, Inc.
("Blue Ridge"), an automobile finance company. Through its subsidiaries, the
Company provides a full range of banking services, including mortgage, trust and
investment services, designed to meet substantially all of the financial needs
of its customers. The Company currently conducts business through 62 locations
in South Carolina and 13 locations in northern and central Florida. At December
31, 1999, the Company had approximately $3.6 billion in assets, $2.4 billion in
loans, $2.5 billion in deposits, $409.8 million in shareholders' equity and
$469.5 million in market capitalization.
The Company was formed principally in response to opportunities resulting
from the takeovers of several South Carolina-based banks by large southeastern
regional bank holding companies. A significant number of the Company's executive
officers and management personnel were previously employed by certain of the
larger South Carolina-based banks that were acquired by these southeastern
regional institutions. Consequently, these officers and management personnel
have significant customer relationships and commercial banking experience that
have contributed to the Company's loan and deposit growth.
The Company believes that a very similar opportunity now exists in northern
and central Florida where banking relationships are in a state of flux due to
recent bank mergers. The Company is applying the same strategy, which has proven
to be successful in South Carolina, to these areas of the Florida market.
The Company currently serves four principal market areas in South Carolina:
the Greenville and Anderson metropolitan areas and surrounding counties (located
in the Upstate region of South Carolina); the Columbia metropolitan area and
surrounding counties (located in the Midlands region of South Carolina);
Georgetown and Horry counties (located in the northern Coastal region of South
Carolina); and the Charleston metropolitan area (located in the central Coastal
region of South Carolina). The Company's principal market areas represent the
four largest Metropolitan Statistical Areas in the state. The Company also has
branch locations in other counties in South Carolina. The Company currently
serves two principal market areas in Florida: the Orlando metropolitan area and
the Jacksonville metropolitan area.
The Company began its operations with the de novo opening of Carolina First
Bank in Greenville in December 1986 and has pursued a strategy of growth through
internal expansion and the acquisition of branch locations and financial
institutions in selected market areas. The Company has emphasized internal
growth through the acquisition of market share from the large out-of-state bank
holding companies. It attempts to acquire market share by providing quality
banking services and personal service to individuals and business customers.
Approximately half of the Company's total deposits have been generated through
acquisitions.
CAROLINA FIRST BANK
Carolina First Bank, headquartered in Greenville, South Carolina, engages
in a general banking business through 60 branches in 41 communities in 19 South
Carolina counties. Carolina First Bank's focus is on commercial, consumer and
mortgage lending to customers in its market areas. It also provides demand
transaction accounts and time deposit accounts to businesses and individuals.
Since the acquisition of CF Mortgage in 1993, Carolina First Bank's mortgage
origination and servicing activities have been performed by CF Mortgage.
Carolina First Bank provides a full range of commercial and consumer
banking services, including short and medium-term loans, mortgage loans,
revolving credit arrangements, inventory and accounts receivable financing,
equipment financing, real estate lending, credit card loans, safe deposit
services, savings accounts, interest- and noninterest-bearing checking accounts
and installment and other personal loans. Carolina First Bank also provides
trust services, investment products and various cash management programs. Its
deposits are insured by the Federal
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Deposit Insurance Corporation ("FDIC"). In 1999, Carolina First Bank began
offering on-line Internet banking services through the Carolina First Bank
website.
In December 1998, Carolina First Bank created Carolina First Mortgage Loan
Trust, a real estate investment trust (the "REIT") which holds mortgage-related
assets. Carolina First Bank originally contributed $500 million in commercial
loans in January 1999. As loan payments are received, the REIT uses the cash to
acquire additional loans from Carolina First Bank. These commercial loans
contributed to the REIT constitute substantially all of the REIT's assets.
CITRUS BANK
Citrus Bank, headquartered in Orlando, Florida, engages in general banking
business through 13 branches in 10 communities in 6 Florida counties. Citrus
Bank's focus is on commercial, consumer and mortgage lending to customers in its
market areas. It also provides demand transaction accounts and time deposit
accounts to businesses and individuals.
Citrus Bank provides a full range of commercial and consumer banking
services, including short and medium-term loans, mortgage loans, revolving
credit arrangements, inventory and accounts receivable financing, equipment
financing, real estate lending, credit card loans, safe deposit services,
savings accounts, interest- and noninterest-bearing checking accounts and
installment and other personal loans. Its deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC").
CF MORTGAGE
On September 30, 1993, the Company acquired First Sun Mortgage Corporation
(subsequently renamed Carolina First Mortgage Company). CF Mortgage,
headquartered in Columbia, South Carolina, is engaged primarily in originating,
underwriting and servicing one-to-four family residential mortgage loans. CF
Mortgage also buys and sells mortgage servicing rights to keep its servicing
balances at economically desirable levels or to benefit from favorable terms.
CF Mortgage's mortgage loan origination operation is conducted principally
through eight offices in South Carolina and two in Florida. Mortgage loan
applications are forwarded to CF Mortgage's headquarters in Columbia for
processing in accordance with GNMA, FNMA and other applicable guidelines. During
1999, mortgage loans totaling $404 million were originated by CF Mortgage and
its correspondents. The Company generally sells all conforming fixed rate
mortgage loans into the secondary market.
CF Mortgage's mortgage servicing operations consist of servicing loans that
are owned by Carolina First Bank and Carolina First Bank, F.S.B. In addition, CF
Mortgage subservices loans, to which the right to service is owned by Carolina
First Bank, Carolina First Bank, F.S.B. and other non-affiliated financial
institutions. At December 31, 1999, CF Mortgage was servicing approximately
24,201 loans having an aggregate principal balance of approximately $2.1
billion.
BLUE RIDGE
On December 29, 1995, the Company acquired Blue Ridge, a consumer finance
company headquartered in Greenville, South Carolina. Blue Ridge operates from
one location and, at December 31, 1999, had approximately $21 million in total
assets. Blue Ridge is engaged primarily in indirect automobile lending.
RESOURCE PROCESSING GROUP, INC.
On June 1, 1998, the Company acquired Resource Processing Group, Inc.
("RPGI"), a credit card origination and servicing company headquartered in
Columbia, South Carolina. RPGI is inactive and, at December 31, 1999, was not
servicing credit card receivables due to the sale of the Company's credit card
portfolio on April 30, 1999.
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CAROLINA FIRST BANK, F.S.B.
Carolina First Bank, F.S.B. is a Federal savings bank headquartered in
Travelers Rest, South Carolina. It currently engages in the thrift business
through two branches, which are located in Greenville and York counties in South
Carolina. It also offers Bank CaroLine, an Internet banking product. At December
31, 1999, Carolina First Bank, F.S.B. had total assets of approximately $166
million, total loans of approximately $104 million and total deposits of
approximately $142 million. Its deposits are insured by the FDIC.
CAROLINA FIRST GUARANTY REINSURANCE, LTD.
Carolina First Guaranty Reinsurance, Ltd. ("CFGRL") is a wholly-owned
captive reinsurance subsidiary established to provide insurance services to our
customers. CFGRL was funded in February 1999, by a capital contribution from the
Company in the form of Net.B@nk, Inc. ("Net.B@nk") common stock.
CF TECHNOLOGY SERVICES
CF Technology Services Company, headquartered in Lexington, South Carolina,
was established on January 1, 2000 by the Company. CF Technology's mission is to
create customer and shareholder value by developing and delivering superior,
technology-based products and services that provide competitive advantage,
increase revenue, and produce efficiencies and strong customer relationships
through innovative use of information technology.
In carrying out this mission, principal areas of focus include close
alignment with the Company's business units to assure prioritization of business
opportunities and integration of management systems and the communications
network to assure cost-effective information processing and technology
operations. CF Technology has adopted state-of-the-art security and business
recovery processes to safeguard vital corporate assets and information.
CAROLINA FIRST INVESTMENT LIMITED PARTNERSHIP
Carolina First Investment Limited Partnership ("CFILP") is a South Carolina
limited partnership established on December 17, 1999 by the Company and certain
subsidiaries. CFILP engages in the business of holding and managing investment
assets. CFILP was formed to achieve economies of scale and economic leverage by
centralizing the management of certain investment assets. In conjunction with
the formation of CFILP, several of the Company's subsidiaries transferred a
portion of their existing investment portfolios to CFILP in exchange for a
limited partnership interest.
CF INVESTMENT COMPANY
CF Investment Company ("CF Investment"), headquartered in Greenville, South
Carolina and licensed through the Small Business Administration, operates as a
Small Business Investment Company. CF Investment's principal focus is investing
in companies that have a bank-related technology or service that the Company or
its subsidiaries can use. As of December 31, 1999, CF Investment Company had
invested approximately $2.7 million in companies specializing in electronic
document management and Internet-related services.
COMPETITION
Each of the Company's markets is a highly competitive market in which all
of the largest banks in the state are represented. The competition among the
various financial institutions is based upon a variety of factors including
interest rates offered on deposit accounts, interest rates charged on loans,
credit and service charges, the quality of services rendered, the convenience of
banking facilities and, in the case of loans to large commercial borrowers,
relative lending limits. In addition to banks and savings associations, the
Company competes with other financial institutions including securities firms,
insurance companies, credit unions, leasing companies and finance companies.
Size gives larger banks certain advantages in competing for business from large
corporations. These advantages include higher lending limits and the ability to
offer services in other areas of South Carolina, Florida and the region. As a
result, the Company does not generally attempt to compete for the banking
relationships of large corporations, but concentrates its efforts on small to
medium-sized businesses and on individuals. The Company believes it has competed
effectively in this market segment by offering quality, personal service.
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EMPLOYEES
At December 31, 1999, the Company employed a total of 1,016 full-time
equivalent employees. The Company believes that its relations with its employees
are good.
MONETARY POLICY
The earnings of bank holding companies are affected by the policies of
regulatory authorities, including the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"), in connection with its regulation of the
money supply. Various methods employed by the Federal Reserve Board include open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings and changes in reserve requirements against member bank
deposits. These methods are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
may also affect interest rates charged on loans or paid on deposits. The
monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company's subsidiaries are primarily monetary in
nature. As a result, interest rates generally have a more significant impact on
the performance of a financial institution than the effects of general levels of
inflation. The Company believes that the effects of inflation are generally
manageable through asset/liability management.
SUPERVISION AND REGULATION
GENERAL
The Company and its subsidiaries are extensively regulated under federal
and state law. To the extent that the following information describes statutory
or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws
may have a material effect on the business and prospects of the Company. The
operations of the Company may be affected by possible legislative and regulatory
changes and by the monetary policies of the United States.
THE COMPANY. As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), the Company is subject to
regulation and supervision by the Federal Reserve. Under the BHCA, the Company's
activities and those of its subsidiaries are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The BHCA prohibits the Company from
acquiring direct or indirect control of more than 5% of any class of outstanding
voting stock, or substantially all of the assets of any bank, or merging or
consolidating with another bank holding company without prior approval of the
Federal Reserve. The BHCA also prohibited the Company from acquiring control of
any bank operating outside the State of South Carolina until September 29, 1995
unless such action was specifically authorized by the statutes of the state
where the bank to be acquired was located. See " -- Supervision and Regulation
- -- Interstate Banking."
Additionally, the BHCA prohibits the Company from engaging in or from
acquiring ownership or control of more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking or
managing or controlling banks as to be properly incident thereto. The BHCA
generally does not place territorial restrictions on the activities of such
nonbanking-related entities.
Further, the Federal Deposit Insurance Act, as amended ("FDIA"), authorizes
the merger or consolidation of any Bank Insurance Fund ("BIF") member with any
Savings Association Insurance Fund ("SAIF") member, the assumption of any
liability by any BIF member to pay any deposits of any SAIF member or vice
versa, or the transfer of any assets of any BIF member to any SAIF member in
consideration for the assumption of liabilities of such BIF member or vice
versa, provided that certain conditions are met. In the case of any acquiring,
assuming
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or resulting depository institution which is a BIF member, such institution will
continue to make payment of SAIF assessments on the portion of liabilities
attributable to any acquired, assumed or merged SAIF-insured institution (or, in
the case of any acquiring, assuming or resulting depository institution which is
a SAIF member, that such institution will continue to make payment of BIF
assessments on the portion of liabilities attributable to any acquired, assumed
or merged BIF-insured institution).
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss exposure to the depositors
of such depository institutions and to the FDIC insurance funds in the event the
depository institution becomes in danger of defaulting or in default under its
obligations to repay deposits. For example, under current federal law, to reduce
the likelihood of receivership of an insured depository institution subsidiary,
a bank holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under a policy of the Federal Reserve with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. The Federal Reserve also has the authority under
the BHCA to require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal Reserve's determination that such activity or control
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution of the bank holding company. Further, federal
law grants federal bank regulatory authorities additional discretion to require
a bank holding company to divest itself of any bank or nonbank subsidiary if the
agency determines that divestiture may aid the depository institution's
financial condition.
In addition, the "cross-guarantee" provisions of the FDIA require insured
depository institutions under common control to reimburse the FDIC for any loss
suffered by either the SAIF or the BIF as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the SAIF or the BIF, or
both. The FDIC's claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
The Company is subject to the obligations and restrictions described above.
However, management currently does not expect that any of these provisions will
have any material impact on its operations.
As a bank holding company registered under the South Carolina Bank Holding
Company Act, the Company is also subject to regulation by the State Board.
Consequently, the Company must receive the approval of the State Board prior to
engaging in the acquisitions of banking or nonbanking institutions or assets.
The Company must also file with the State Board periodic reports with respect to
its financial condition and operations, management, and intercompany
relationships between the Company and its subsidiaries.
CAROLINA FIRST BANK. Carolina First Bank is an FDIC-insured, South
Carolina-chartered banking corporation and is subject to various statutory
requirements and rules and regulations promulgated and enforced primarily by the
State Board and the FDIC. These statutes, rules and regulations relate to
insurance of deposits, required reserves, allowable investments, loans, mergers,
consolidations, issuance of securities, payment of dividends, establishment of
branches and other aspects of the business of Carolina First Bank. The FDIC has
broad authority to prohibit Carolina First Bank from engaging in what it
determines to be unsafe or unsound banking practices. In addition, federal law
imposes a number of restrictions on state-chartered, FDIC-insured banks and
their subsidiaries. These restrictions range from prohibitions against engaging
as a principal in certain activities to the requirement of prior notification of
branch closings. Carolina First Bank also is subject to various other state and
federal laws
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and regulations, including state usury laws, laws relating to fiduciaries,
consumer credit and equal credit and fair credit reporting laws. Carolina First
Bank is not a member of the Federal Reserve System.
CITRUS BANK. Citrus Bank is an FDIC-insured, Florida- chartered banking
corporation and is subject to various statutory requirements and rules and
regulations promulgated and enforced primarily by the State of Florida
Department of Banking and Finance and the FDIC. Citrus Bank is subject to
regulation by the FDIC to the same extent as Carolina First Bank. Citrus Bank
also is subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer credit and
equal credit and fair credit reporting laws. Citrus Bank is not a member of the
Federal Reserve System.
CAROLINA FIRST BANK, F.S.B. Carolina First Bank, F.S.B. is a
federally-chartered savings bank and is subject to regulation, supervision and
examination by the Office of Thrift Supervision ("OTS"). Carolina First Bank,
F.S.B. is a member of the Federal Home Loan Bank of Atlanta (the "FHLB"), which
provides a central credit facility primarily for member institutions. Members of
the FHLB are required to acquire and hold shares of capital stock in, and may
obtain advances from, the FHLB. Under current law, long-term advances may
generally be made only for the purpose of providing funds for residential
housing finance and must be secured by first mortgages on improved real estate,
securities representing a whole interest in such mortgages, securities issued,
insured or guaranteed by the federal government or an agency thereof, deposits
of a FHLB, or other real estate related collateral meeting certain criteria and
acceptable to the lending FHLB. Carolina First Bank, F.S.B. is also subject to
loans-to-borrower limits, which are substantially the same as those applicable
to national banks.
Under the Home Owners' Loan Act (the "HOLA"), as amended by Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"), savings associations are
required to maintain a minimum of 65% of their total portfolio assets (as
defined in the statute) in certain investments ("Qualified Thrift Investments")
on a monthly average basis in nine out of every 12 months in order to remain a
"Qualified Thrift Lender." Qualified Thrift Investments generally consist of (i)
loans that were made to purchase, refinance, construct, improve or repair
domestic residential or manufactured housing, (ii) home equity loans, (iii)
securities backed by or representing an interest in mortgages on domestic
residential or manufactured housing, (iv) obligations issued by the federal
deposit insurance agencies, and (v) shares of stock issued by any FHLB. Subject
to a 20% of assets limitation, Qualified Thrift Investments also include
consumer loans, investments in certain subsidiaries, and loans for the purchase
or construction of schools, churches, nursing homes and hospitals. Qualified
Thrift Investments subject to a 200% of assets limitation include investments in
loans for low-to-moderate-income housing and certain other community-oriented
investments and shares of stock issued by the Federal Home Loan Mortgage
Corporation or the Federal National Mortgage Association.
A savings association that fails to become or remain a Qualified Thrift
Lender must either become a bank (other than a savings bank) or become subject
to the following restrictions on its operations: (i) the savings association may
not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from the Federal Home Loan Banking System; and (iv) payment of
dividends by the institution must be subject to the rules regarding payment of
dividends by a national bank. In addition, in the event that Carolina First
Bank, F.S.B. fails to remain a Qualified Thrift Lender, a portion of its bad
debt reserve will be subject to taxation. In addition, a savings and loan
holding company must register as, and will be deemed to be, a bank holding
company with the Federal Reserve Board within one year after the savings
association should have become or ceases to be a Qualified Thrift Lender.
CF INVESTMENT COMPANY. CF Investment is licensed through the Small Business
Administration and operates as a Small Business Investment Company. It is
subject to regulation and supervision by the Small Business Administration.
DIVIDENDS. The holders of the Company's common stock are entitled to
receive dividends when and if declared by the Board of Directors out of funds
legally available therefor. The Company is a legal entity separate and distinct
from its subsidiaries and depends for its revenues on the payment of dividends
from its subsidiaries. Current federal law would prohibit, except under certain
circumstances and with prior regulatory approval, an
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insured depository institution, such as Carolina First Bank, from paying
dividends or making any other capital distribution if, after making the payment
or distribution, the institution would be considered "undercapitalized," as that
term is defined in applicable regulations. In addition, South Carolina's banking
regulations restrict the amount of dividends that Carolina First Bank can pay.
All dividends paid from Carolina First Bank are payable only from the net income
of the current year. Florida Banking Statutes limit the amount of dividends
Citrus Bank can pay without prior approval of Citrus Bank's regulatory agency.
Carolina First Bank, F.S.B. is restricted by the OTS on the amount of dividends
that it can pay to the Company. These restrictions require Carolina First Bank,
F.S.B. to obtain prior approval of the OTS and not pay dividends in excess of
current earnings.
CAPITAL ADEQUACY
THE COMPANY. The Federal Reserve has adopted risk-based capital guidelines
for bank holding companies. Under these guidelines, the minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities,
such as standby letters of credit) is 8%. At least half of the total capital is
required to be "Tier 1 capital," principally consisting of common stockholders'
equity, noncumulative preferred stock, a limited amount of cumulative perpetual
preferred stock, and minority interests in the equity accounts of consolidated
subsidiaries, less certain goodwill items. The remainder (Tier 2 capital) may
consist of a limited amount of subordinated debt and intermediate-term preferred
stock, certain hybrid capital instruments and other debt securities, perpetual
preferred stock, and a limited amount of the general loan loss allowance. In
addition to the risk-based capital guidelines, the Federal Reserve has adopted a
minimum Tier 1 (leverage) capital ratio under which a bank holding company must
maintain a minimum level of Tier 1 capital (as determined under applicable
rules) to average total consolidated assets of at least 3% in the case of bank
holding companies which have the highest regulatory examination ratios and are
not contemplating significant growth or expansion. All other bank holding
companies are required to maintain a ratio of at least 100 to 200 basis points
above the stated minimum. At December 31, 1999, the Company's capital levels
exceeded both the risk-based capital guidelines and the minimum leverage capital
ratio.
CAROLINA FIRST BANK AND CITRUS BANK. As state-chartered, FDIC-insured
institutions which are members of the Federal Reserve System, Carolina First
Bank and Citrus Bank are subject to capital requirements imposed by the FDIC.
The FDIC requires state-chartered nonmember banks to comply with risk-based
capital standards substantially similar to those required by the Federal
Reserve, as described above. The FDIC also requires state-chartered nonmember
banks to maintain a minimum leverage ratio similar to that adopted by the
Federal Reserve. Under the FDIC's leverage capital requirement, state nonmember
banks that (a) receive the highest rating during the examination process and (b)
are not anticipating or experiencing any significant growth are required to
maintain a minimum leverage ratio of 3% of Tier 1 capital to total assets; all
other banks are required to maintain a minimum ratio of 100 to 200 basis points
above the stated minimum, with an absolute minimum leverage ratio of not less
than 4%. As of December 31, 1999, Carolina First Bank and Citrus Bank exceeded
each of the applicable regulatory capital requirements.
CAROLINA FIRST BANK, F.S.B. Savings banks are subject to capital
requirements imposed by the OTS. Under current OTS capital standards, savings
banks must maintain "tangible" capital equal to 1.5% of adjusted total assets,
"core" capital equal to 3% of adjusted total assets and a combination of core
and "supplementary" capital, or total capital, equal to 8% of risk-weighted
assets. Banks are generally expected to maintain a core capital ratio of 1% to
2% above the stated minimum. As of December 31, 1999, Carolina First Bank,
F.S.B. exceeded each of the capital requirements imposed by the OTS.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each federal banking agency to revise its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risk of nontraditional activities, as
well as reflect the actual performance and expected risk of loss on multifamily
mortgages. The Federal Reserve, the FDIC and the OCC have issued a joint advance
notice of proposed rulemaking, and have issued a revised proposal, soliciting
comments on a proposed framework for implementing these revisions. Under the
proposal, an institution's assets, liabilities, and off-balance sheet positions
would be weighted by risk factors that approximate the instrument's price
sensitivity to a 100 basis point change in interest rates. Institutions with
interest rate risk exposure in excess of a threshold
8
level would be required to hold additional capital proportional to that risk.
The notice also asked for comments on how the risk-based capital guidelines of
each agency may be revised to take account of concentration and credit risk and
the risk of nontraditional activities. Carolina First Corporation cannot assess
at this point the impact the proposal would have on the capital requirements of
Carolina First Corporation or its subsidiary depository institutions.
As FDIC-insured institutions, Carolina First Bank and Citrus Bank are
subject to insurance assessments imposed by the FDIC. Under current law, the
insurance assessment to be paid by insured institutions shall be as specified in
a schedule required to be issued by the FDIC that specifies, at semiannual
intervals, target reserve ratios designed to increase the FDIC insurance fund's
reserve ratio to 1.25% of estimated insured deposits (or such higher ratio as
the FDIC may determine in accordance with the statute) in 15 years. Further, the
FDIC is authorized to impose one or more special assessments in any amount
deemed necessary to enable repayment of amounts borrowed by the FDIC from the
United States Department of the Treasury (the "Treasury Department").
Effective January 1, 1993, the FDIC implemented a risk-based assessment
schedule where the actual assessment to be paid by each FDIC-insured institution
is based on the institution's assessment risk classification. This
classification is determined based on whether the institution is considered
"well capitalized," "adequately capitalized" or "undercapitalized," as such
terms have been defined in applicable federal regulations adopted to implement
the prompt corrective action provisions of FDICIA (see " -- Supervision and
Regulation -- Other Safety and Soundness Regulations"), and whether such
institution is considered by its supervisory agency to be financially sound or
to have supervisory concerns.
In connection with Carolina First Bank's assumption of SAIF-insured
deposits in connection with various acquisitions, approximately 36% of Carolina
First Bank's total deposits are subject to SAIF insurance assessments imposed by
the FDIC. As of December 31, 1999, the annual assessment rate was .00212% for
both BIF-insured deposits and SAIF-insured deposits.
ACQUISITIONS OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES,
BANKS AND SAVINGS ASSOCIATIONS
As a result of the Company's ownership of Carolina First Bank, F.S.B., the
Company is also a registered savings and loan holding company under the HOLA.
Accordingly, the Company is subject to regulation and examination by the OTS.
The Company is required to obtain OTS approval prior to acquiring directly or
indirectly more than 10% of the voting shares of, or otherwise obtaining control
(as defined in the relevant OTS regulations) over, another savings association
or holding company thereof. (According to applicable law, the term "savings
association" includes a federally-chartered savings bank.) In considering an
application by a savings and loan holding company such as the Company to acquire
a savings association, the OTS is required to consider the financial and
managerial resources (including the competence, experience and integrity of the
officers, directors and principal shareholders) and future prospects of the
holding company and the savings association, the effect of the acquisition on
the association, the insurance risk to the SAIF or the BIF, the convenience and
needs of the communities to be served, and whether the acquisition would result
in a monopoly or otherwise would substantially lessen competition in the
relevant market.
OTHER SAFETY AND SOUNDNESS REGULATIONS
PROMPT CORRECTIVE ACTION. Current law provides the federal banking agencies
with broad powers to take prompt corrective action to resolve problems of
insured depository institutions. The extent of these powers depends upon whether
the institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under uniform regulations defining such capital levels issued
by each of the federal banking agencies, a bank is considered "well capitalized"
if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1
risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or
greater, and (iv) is not subject to any order or written directive to meet and
maintain a specific capital level for any capital measure. An "adequately
capitalized" bank is defined as one that has (i) a total risk-based capital
ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater,
and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a
bank with a composite CAMELS rating of 1). A bank is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier 1
9
risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than
4% ( or 3% in the case of a bank with a composite CAMELS rating of 1); (B)
"significantly undercapitalized" if the bank has (i) a total risk-based capital
ratio of less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3%,
or (iii) a leverage ratio of less than 3%; and (C) "critically undercapitalized"
if the bank has a ratio of tangible equity to total assets equal to or less than
2%. Carolina First Bank and Carolina First Bank, F.S.B. each currently meet the
definition of well capitalized.
BROKERED DEPOSITS. Current federal law also regulates the acceptance of
brokered deposits by insured depository institutions to permit only a "well
capitalized" depository institution to accept brokered deposits without prior
regulatory approval. Under FDIC regulations, "well capitalized" insured
depository institutions may accept brokered deposits without restriction,
"adequately capitalized" insured depository institutions may accept brokered
deposits with a waiver from the FDIC (subject to certain restrictions on
payments of interest rates) while "undercapitalized" insured depository
institutions may not accept brokered deposits. The regulations provide that the
definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" are the same as the definitions adopted by the agencies to
implement the prompt corrective action provisions of FDICIA (as described in the
previous paragraph). Carolina First Corporation does not believe that these
regulations will have a material adverse effect on its current operations.
OTHER FDICIA REGULATIONS. To facilitate the early identification of
problems, FDICIA required the federal banking agencies to review and, under
certain circumstances, prescribe more stringent accounting and reporting
requirements than those required by generally accepted accounting principles.
The FDIC has issued final regulations implementing those provisions. The rule,
among other things, requires that management report on the institution's
responsibility for preparing financial reporting and compliance with designated
laws and regulations concerning safety and soundness.
FDICIA required each of the federal banking agencies to develop regulations
addressing certain safety and soundness standards for insured depository
institutions (such as Carolina First Bank) and depository institution holding
companies (such as Carolina First Corporation), including operational and
managerial standards, asset quality, earnings and stock valuation standards, as
well as compensation standards (but not dollar levels of compensation). Each of
the federal banking agencies has issued a joint notice of proposed rulemaking,
which requested comment on the implementation of these standards. The proposed
rule sets forth general operational and managerial standards in the areas of
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
compensation fees and benefits. The proposed rule also establishes a maximum
ratio of classified assets to capital, and requires institutions to meet minimum
capital standards as a measure of whether such institutions have minimum
earnings sufficient to absorb losses without impairing capital. Finally, the
proposed rule would define compensation as excessive if it is unreasonable or
disproportionate to the services actually performed. Bank holding companies
would not be subject to the standards on compensation. The proposal contemplates
that each federal agency would determine compliance with these standards through
the examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. Carolina
First Corporation has not yet determined the effect the proposed rule would have
on its operations and the operations of its depository institution subsidiary if
it is adopted substantially as proposed.
In December 1996, the FFIEC adopted a revised Uniform Financial
Institutions Rating System ("CAMELS rating system"). This revised CAMELS rating
system is used by federal and state regulators to assess the soundness of
financial institutions on a uniform basis and to identify those institutions
requiring special supervisory attention. The basic structure of the original
CAMEL rating system was retained with the addition of a sixth component related
to a bank's sensitivity to market risk. The six components of the CAMELS rating
system are: 1) capital adequacy, 2) asset quality, 3) management, 4) earnings,
5) liquidity and 6) sensitivity to market risk. The new component involves
measuring the degree to which changes in interest rates, foreign exchange rates,
commodity prices or equity prices can adversely affect a financial institution's
earnings or capital and management's ability to control this market risk. The
evaluation of these six components is the basis for a composite rating assigned
to each financial institution. The revised CAMELS rating system was used on all
examinations started on or after January 1, 1997.
10
RECENT LEGISLATION
The Gramm-Leach-Bliley Act of 1999 ("GLBA") became law on November 12, 1999
repealing the long-standing separation of the commercial and investment banking
industries. The GLBA creates a new category of holding company called a
"Financial Holding Company". This new type of bank holding company must meet the
following criteria:
(1) all of the depository institution subsidiaries must be well capitalized
and well managed;
(2) the holding company must file with the Federal Reserve Board a
declaration that it elects to be a financial holding company to engage
in activities that would not have been permissible before the GLBA; and
(3) all of the depository institution subsidiaries must have a Community
Reinvestment Act rating of "satisfactory" or better.
Activities in which a Financial Holding Company may engage are those that
(i) are financial in nature or incidental to such financial activity or (ii) are
complementary to a financial activity and do not pose a substantial risk to the
safety and soundness of depository institutions or the financial system
generally. Activities specified as financial in nature within the GLBA include:
o acting as principal, agent or broker for insurance;
o underwriting, dealing in or making a market in securities; and
o providing financial and investment advice.
Both the Federal Reserve Board and the Secretary of the Treasury have
authority to make decisions related to whether or not other activities meet the
criteria of being financial in nature or incidental to financial activity,
taking into account changes in technology, changes in the banking marketplace,
competition for banking services and so on.
The impact of the GLBA has not yet been determined. It is anticipated the
most immediate impact will be felt by the larger regional and national
institutions rather than the community-based institutions engaged primarily in
traditional banking activities. The GLBA permits bank holding companies to
engage in activities which were, until now, severely restricted or prohibited
altogether. Therefore, it is expected that strict safeguards on affiliations
among banking and nonbanking companies in a holding company organization will be
imposed.
COMMUNITY REINVESTMENT ACT
Carolina First Bank and Carolina First Bank, F.S.B. are subject to the
requirements of the Community Reinvestment Act ("CRA"). The CRA requires that
financial institutions have an affirmative and ongoing obligation to meet the
credit needs of their local communities, including low- and moderate-income
neighborhoods, consistent with the safe and sound operation of those
institutions. Each financial institution's efforts in meeting community credit
needs are evaluated as part of the examination process pursuant to three
assessment factors. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility. Carolina First Bank
received a "satisfactory" rating in its most recent evaluation. Carolina First
Bank, F.S.B. has not been evaluated since it was acquired in September 1998.
The current CRA assessment system rates institutions based on their actual
performance (rather than efforts) in meeting community credit needs. Each
institution is evaluated based on the degree to which it is providing loans (the
lending test), branches and other services (the service test) and investments to
low- and moderate-income areas (the investment test). Under the lending test an
institution is evaluated on its loan originations and purchases that help meet
the credit needs of its assessment area. Institutions are also judged on their
community development lending to include loans for affordable housing, community
service facilities, and economic development or revitalization projects,
provided that the loan is directed at the needs of low- to moderate-income
people or geographies. The service test evaluates a retail institution based on
the services that are readily accessible to low- and moderate-income individuals
in the institution's assessment areas. An institution is evaluated under the
investment test based on the amount of investments made that have had a
demonstrable impact on low- and moderate-income areas or persons in the
institution's assessment areas. Each depository institution reports to its
federal supervisory agency
11
and information is made available to the public on the geographic distribution
of its loan applications, denials, originations and purchases. Small
institutions can elect to be evaluated under a streamlined method that does not
require them to report this data. All institutions, however, receive one of four
ratings based on their performance: Outstanding, Satisfactory, Needs to Improve
or Substantial Noncompliance. An institution that receives a rating of
Substantial Noncompliance would be subject to enforcement action. Carolina First
Bank and Carolina First Bank, F.S.B. are strongly committed to providing credit
needs to individuals in the communities that they serve.
TRANSACTIONS BETWEEN THE COMPANY, ITS SUBSIDIARIES AND AFFILIATES
The Company's subsidiaries are subject to certain restrictions on
extensions of credit to executive officers, directors, principal stockholders or
any related interest of such persons. Extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unaffiliated persons;
and (ii) must not involve more than the normal risk of repayment or present
other unfavorable features. Aggregate limitations on extensions of credit also
may apply. The Company's subsidiaries are also subject to certain lending limits
and restrictions on overdrafts to such persons.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or its nonbank subsidiary, on investments in their
securities and on the use of their securities as collateral for loans to any
borrower. Such restrictions may limit the Company's ability to obtain funds from
its bank subsidiary for its cash needs, including funds for acquisitions,
interest and operating expenses. Certain of these restrictions are not
applicable to transactions between a bank and a savings association owned by the
same bank holding company, provided that every bank and savings association
controlled by such bank holding company complies with all applicable capital
requirements without relying on goodwill.
In addition, under the BHCA and certain regulations of the Federal Reserve,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. For example, a subsidiary may not
generally require a customer to obtain other services from any other subsidiary
or the Company, and may not require the customer to promise not to obtain other
services from a competitor, as a condition to an extension of credit to the
customer.
INTERSTATE BANKING
In 1986, South Carolina adopted legislation which permitted banks and bank
holding companies in certain southern states to acquire banks in South Carolina
to the extent that such other states had reciprocal legislation which was
applicable to South Carolina banks and bank holding companies. The legislation
resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies.
South Carolina has enacted legislation which provides that out-of-state
bank holding companies (including bank holding companies in the Southern Region,
as defined under the statute) may acquire other banks or bank holding companies
having offices in South Carolina upon the approval of the South Carolina State
Board of Financial Institutions and assuming compliance with certain other
conditions, including that the effect of the transaction not lessen competition
and that the laws of the state in which the out-of-state bank holding company
filing the applications has its principal place of business permit South
Carolina bank holding companies to acquire banks and bank holding companies in
that state.
In 1996, Congress enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1996 ("Riegle-Neal Act"), which increased the ability of bank
holding companies and banks to operate across state lines. Under the Riegle-Neal
Act, the existing restrictions on interstate acquisitions of banks by bank
holding companies will be repealed one year following enactment, such that the
Company and any other bank holding company located in South Carolina would be
able to acquire a bank located in any other state, and a bank holding company
located outside South Carolina could acquire any South Carolina-based bank, in
either case subject to certain deposit percentages and other restrictions. The
legislation also provides that, unless an individual state elects beforehand
either (i) to accelerate the effective date or (ii) to prohibit out-of-state
banks from operating interstate branches within its territory, on or after June
1, 1997, adequately capitalized and managed bank holding companies will be able
to consolidate their multistate bank operations into a single bank subsidiary
and to branch interstate
12
through acquisitions. De novo branching by an out-of-state bank would be
permitted only if it is expressly permitted by the laws of the host state. The
authority of a bank to establish and operate branches within a state will
continue to be subject to applicable state branching laws. The Company believes
that this legislation may result in increased takeover activity of South
Carolina financial institutions by out-of-state financial institutions. However,
the Company does not presently anticipate that such legislation will have a
material impact on its operations or future plans.
The General Assembly of the State of South Carolina has adopted legislation
designed to implement the Riegle-Neal Act.
OTHER REGULATIONS
Interest and certain other charges collected or contracted for by Carolina
First Bank, CF Mortgage Company, Carolina First Bank, F.S.B. and Blue Ridge are
subject to state usury laws and certain federal laws concerning interest rates.
Carolina First Bank's, CF Mortgage Company's, Carolina First Bank, F.S.B.'s and
Blue Ridge's loan operations are also subject to certain federal laws applicable
to credit transactions, such as the federal Truth-In-Lending Act governing
disclosures of credit terms to consumer borrowers, CRA requiring financial
institutions to meet their obligations to provide for the total credit needs of
the communities they serve, including investing their assets in loans to low-
and moderate-income borrowers, the Home Mortgage Disclosure Act of 1975
requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves, the Equal
Opportunity Act prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit, the Fair Credit Reporting Act of 1978
governing the use and provision of information to credit reporting agencies, the
Fair Debt Collection Act governing the manner in which consumer debts may be
collected by collection agencies, and the rules and regulations of the various
federal agencies charged with the responsibility of implementing such federal
laws. The deposit operations of Carolina First Bank and Carolina First Bank,
F.S.B. are also subject to the Right to Financial Privacy Act, which imposes a
duty to maintain confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial records, and
the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
to implement that act, which govern automatic deposits to and withdrawals from
deposit accounts and customers' rights and liabilities arising from the use of
automated teller machines and other electronic services.
ITEM 2. PROPERTIES
At December 31, 1999, the Company conducted business through 62 branch
locations in South Carolina and 13 branch locations in Florida. Of these
locations, the Company or a subsidiary of the Company owns 35 locations and
leases 40 locations. The rental payments due under the leases approximate market
rates. Leases generally have options for extensions under substantially the same
terms as in the original lease period with certain rate escalations. The leases
generally provide that the lessee pay property taxes, insurance and maintenance
costs. At December 31, 1999, the total net tangible book value of the premises
and equipment and leasehold improvements owned by the Company was $57,751,000.
The Company believes that its physical facilities are adequate for its current
operations.
The Company's headquarters are located on Main Street in Greenville's
downtown commercial area which is also the site of Carolina First Bank's
Greenville main office branch. During the fourth quarter of 1999, the Company
began leasing approximately 110,000 square feet of a newly constructed, twelve
story office building. This building adjoins the Greenville main office branch.
The administrative functions that were temporarily housed in another office
building in downtown Greenville (with approximately 27,000 square feet) moved
into the new building in December. The temporary site was sold to the Company's
primary legal firm for $2.3 million.
During the fourth quarter, the Company began leasing three stories
(approximately 63,000 square feet) of a seven story building located in downtown
Columbia. This building houses the Columbia main office branch, the Midlands
regional executive offices, investments, trust and international banking
departments. The Company currently expects to sublet approximately one-third of
the leased space.
The Company has entered into a lease agreement for a new 100,000 square
foot technology center being constructed in Lexington, South Carolina. The
Company felt that this location would better facilitate existing
13
business and provide for future expansion. This location will house the
technology, operations and mortgage departments upon completion. This lease is
expected to commence in the first half of 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. Any litigation is vigorously defended by
the Company and, in the opinion of management based on consultation with
external legal counsel, any outcome of such litigation would not materially
affect the Company's consolidated financial position or results of operations.
On November 4, 1996, a derivative shareholder action was filed in
Greenville County Court of Common Pleas against the Company, a majority of the
Company's and Carolina First Bank's directors and certain executive and other
officers. The named plaintiffs are the Company by and through certain minority
shareholders. The Company filed a motion to dismiss with respect to all claims
in this complaint, which was granted in December 1997. Plaintiffs have appealed
the grant of the motion to dismiss. Plaintiffs allege as causes of action the
following: conversion of corporate opportunity; fraud and constructive fraud;
and negligent management. The factual basis upon which these claims are made
generally involves the payment to Company officers and other individuals of a
bonus in stock held by the Company in Affinity (as a reward for their efforts in
connection with the Company's procurement of stock in Affinity), statements to
former shareholders of Midlands National Bank in connection with the Company's
acquisition of that bank, and alleged mismanagement by certain executive
officers involving financial matters. The complaint seeks damages for the
benefit of the Company aggregating $41 million and rescission of the Affinity
bonus.
In an action brought by the same attorneys who brought the above-mentioned
derivative action, on December 31, 1996, certain individuals filed a class
action lawsuit against the Company, Carolina First Bank, and a number of
officers and directors of the Company and Carolina First Bank. In connection
with the judge's granting the motion to dismiss in the above-referenced
derivative action, the plaintiffs' attorneys withdrew this lawsuit, without
prejudice.
On May 6, 1999, plaintiff Kimberly C. McFall filed a gender discrimination
lawsuit against the Company in the United States District Court for the District
of South Carolina. The plaintiff's complaint seeks actual and punitive damages
in unspecified amounts. The plaintiff was an employee of The Poinsett Bank,
F.S.B., a subsidiary of Poinsett Financial Corporation. Poinsett Financial
Corporation merged with the Company on September 30, 1998. Following the merger,
the plaintiff worked for Carolina First Bank until October 12, 1998. The
plaintiff alleges she was on an equal organizational level within The Poinsett
Bank, F.S.B. as two males who received more pay and benefits (including change
of control benefits) than she received. She further alleges that after she
complained about the discrimination, the Company refused to provide her with a
job commensurate with her credentials and experience following the merger. The
plaintiff claims she was constructively discharged.
This lawsuit has been vigorously contested. Depositions have been stayed
pending mediation, and discovery has been extended to April 3, 2000. If insurers
contribute to any damages or settlement in accordance with their employment
practices liability policies, the Company's exposure should be limited to
approximately $100,000. The extent of insurance coverage is currently
unresolved, and the outcome can not be predicted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1999.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market under
the ticker symbol CAFC. At December 31, 1999, the Company had 5,417 shareholders
of record and 25,723,444 shares outstanding. See "Table 5 -- Quarterly Financial
Data" in Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Company's stock prices and cash dividends declared during
1999 and 1998. See "Capital Resources and Dividends" in Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 18 and
20 to the Consolidated Financial Statements for a discussion of capital stock
and dividends.
15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and the accompanying notes
presented elsewhere herein. Prior year amounts, except cash dividends declared
per common share, have been restated to reflect the 1999 merger with Citrus
Bank, which was accounted for as a pooling-of-interests. Prior year amounts have
been restated to reflect the six-for-five stock split effected in the form of a
20% common stock dividend issued January 30, 1997.
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
SIX-YEAR FINANCIAL SUMMARY
($ IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
INCOME STATEMENT DATA
Net interest income .................. $ 121,744 $ 99,155 $ 72,231 $ 60,091 $ 52,102 $ 44,042
Provision for loan losses ............ 15,846 12,724 12,108 10,723 7,166 1,234
Noninterest income ................... 48,386 24,389 20,400 21,779 17,607 8,453
Noninterest expenses ................. 113,821 71,978 58,587 53,816 48,340 52,580
Net income (loss) .................... 27,151 24,445 14,040 11,015 9,310 (1,594)
PER COMMON SHARE DATA
Net income (loss) -- basic ........... $ 1.08 $ 1.15 $ 1.00 $ 0.89 $ 0.75 $ (0.53)
Net income (loss) -- diluted ......... 1.06 1.13 0.99 0.85 0.75 (0.53)
Book value (December 31) ............. 15.93 14.60 11.83 8.69 7.07 6.43
Common stock closing market price
(December 31) ....................... 18.25 25.31 21.50 16.15 14.58 11.11
Cash dividends declared .............. 0.37 0.33 0.29 0.25 0.21 0.17
Dividend payout ratio (1) ............ 34.91 29.20 29.29 29.41 28.00 23.29
BALANCE SHEET DATA (YEAR END)
Total assets ......................... $3,561,888 $2,953,292 $2,302,169 $1,651,085 $1,461,094 $1,219,941
Loans -- net of unearned income ...... 2,429,225 2,030,186 1,696,555 1,176,634 1,085,483 932,294
Allowance for loan losses ............ 23,832 20,266 17,369 12,039 8,987 6,124
Nonperforming assets ................. 10,904 5,321 3,767 5,880 4,882 4,886
Total earning assets ................. 3,128,706 2,572,714 2,058,251 1,464,907 1,287,875 1,074,952
Deposits ............................. 2,514,994 2,334,183 1,878,627 1,349,942 1,134,192 1,015,688
Long-term debt ....................... 218,154 63,081 39,119 26,442 26,347 1,162
Shareholders' equity ................. 409,817 361,987 215,213 112,855 102,315 88,056
BALANCE SHEET DATA (AVERAGES)
Total assets ......................... $3,082,224 $2,552,865 $1,805,019 $1,542,221 $1,300,639 $1,072,410
Loans -- net of unearned income ...... 2,199,731 1,769,313 1,354,216 1,123,021 981,657 790,573
Total earning assets ................. 2,693,873 2,293,368 1,634,801 1,374,120 1,157,026 955,761
Deposits ............................. 2,410,993 2,074,338 1,460,095 1,234,548 1,049,350 939,500
Shareholders' equity ................. 391,130 285,617 134,312 106,805 94,703 88,909
FINANCIAL RATIOS (1)
Net interest margin .................. 4.56% 4.36% 4.47% 4.40% 4.55% 4.90%
Return on average assets ............. 0.89 0.96 0.78 0.71 0.72 0.73
Return on average equity ............. 7.13 8.64 10.65 10.34 9.79 8.74
Return on average common equity ...... 7.13 8.64 10.98 10.76 15.34 13.18
Average equity as a % of average
assets .............................. 12.69 11.19 7.44 6.93 7.28 8.29
ASSET QUALITY RATIOS
Nonperforming assets as a % of
loans and other real estate owned.... 0.46% 0.28% 0.26% 0.50% 0.51% 0.52%
Net charge-offs to average loans ..... 0.44 0.66 0.81 0.79 0.51 0.37
Allowance for loan losses times
nonperforming loans ................. 2.82 x 9.41 x 7.10 x 4.20 x 3.79 x 2.12 x
OPERATIONS DATA
Branch offices ....................... 75 76 68 56 54 50
Employees (full-time equivalent) ..... 1,016 955 772 643 613 568
FIVE-YEAR
COMPOUND
GROWTH RATE(1)
---------------
INCOME STATEMENT DATA
Net interest income .................. 22.6%
Provision for loan losses ............ 66.6
Noninterest income ................... 41.8
Noninterest expenses ................. 16.7
Net income (loss) .................... 28.3
PER COMMON SHARE DATA
Net income (loss) -- basic ........... 8.2%
Net income (loss) -- diluted ......... 7.7
Book value (December 31) ............. 19.9
Common stock closing market price
(December 31) ....................... 10.4
Cash dividends declared ..............
Dividend payout ratio (1) ............
BALANCE SHEET DATA (YEAR END)
Total assets ......................... 23.9%
Loans -- net of unearned income ...... 21.1
Allowance for loan losses ............ 31.2
Nonperforming assets ................. 17.4
Total earning assets ................. 23.8
Deposits ............................. 19.9
Long-term debt ....................... 184.9
Shareholders' equity ................. 36.0
BALANCE SHEET DATA (AVERAGES)
Total assets ......................... 23.5%
Loans -- net of unearned income ...... 22.7
Total earning assets ................. 23.0
Deposits ............................. 20.7
Shareholders' equity ................. 34.5
FINANCIAL RATIOS (1)
Net interest margin ..................
Return on average assets .............
Return on average equity .............
Return on average common equity ......
Average equity as a % of average
assets ..............................
ASSET QUALITY RATIOS
Nonperforming assets as a % of
loans and other real estate owned....
Net charge-offs to average loans .....
Allowance for loan losses times
nonperforming loans .................
OPERATIONS DATA
Branch offices .......................
Employees (full-time equivalent) .....
- --------
(1) Excludes 1994 restructuring charges of $9,415 (after-tax).
TOTAL ASSETS AND SHAREHOLDERS' EQUITY INCLUDE THE NET UNREALIZED SECURITIES
GAIN. HOWEVER, EARNING ASSETS AND THE FINANCIAL RATIOS EXCLUDE THIS GAIN
BECAUSE IT IS NOT INCLUDED IN NET INCOME.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS ARE PRESENTED TO ASSIST IN
UNDERSTANDING THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CAROLINA
FIRST CORPORATION AND ITS SUBSIDIARIES (THE "COMPANY," EXCEPT WHERE THE CONTEXT
REQUIRES OTHERWISE). THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES PRESENTED IN
ITEM 8 OF THIS REPORT AND THE SUPPLEMENTAL FINANCIAL DATA APPEARING THROUGHOUT
THIS REPORT.
THE COMPANY HAS THREE WHOLLY-OWNED SUBSIDIARY BANKS, CAROLINA FIRST BANK,
CITRUS BANK AND CAROLINA FIRST BANK, F.S.B., WHICH ARE COLLECTIVELY REFERRED TO
AS THE "SUBSIDIARY BANKS".
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995) to assist in the understanding
of anticipated future operating and financial performance, growth opportunities,
growth rates, and other similar forecasts and statements of expectations. These
forward-looking statements reflect current views, but are based on assumptions
and are subject to risks, uncertainties and other factors, which may cause
actual results to differ materially from those in such statements. Those factors
include, but are not limited to, the following: risks from changes in economic,
monetary policy and industry conditions; changes in interest rates and deposit
rates; inflation; risks inherent in making loans including repayment risks and
value of collateral; loan growth; adequacy of the allowance for loan losses and
the assessment of problem loans; fluctuations in consumer spending; the demand
for the Company's products and services; dependence on senior management;
technological changes; ability to increase market share; expense projections;
system conversion costs; costs associated with new buildings; acquisitions;
risks, realization of cost savings, and total financial performance associated
with the Company's proposed acquisition of Anchor Financial Corporation; changes
in accounting policies and practices; costs and effects of litigation; and
recently-enacted or proposed legislation.
Such forward-looking statements speak only as of the date on which such
statements are made. The Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
In addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, in press releases and in oral and written
statements made by or with the approval of the Company which are not statements
of historical fact constitute forward-looking statements.
MERGERS
The following table summarizes mergers and acquisitions completed during
the past three years. All of the acquisitions completed in 1998 and 1997, except
for Resource Processing Group, Inc. ("RPGI"), a credit card servicing company,
were bank acquisitions which expanded the Company's presence in or gained access
to South Carolina markets. Both acquisitions completed in 1999 gained access to
Florida markets where banking relationships were in a state of flux due to bank
mergers. The Company applied the same "super community bank" strategy to these
Florida markets that it uses in South Carolina to meet the needs of customers.
The merger with Citrus Bank, completed on July 1, 1999, was accounted for
as a pooling-of-interests and accordingly, the Company's historical consolidated
financial statements have been restated to include the accounts and results of
operations of Citrus Bank as if the merger had been effective as of the earliest
period presented. The merger with Citizens First National Bank ("Citizens"),
completed on April 21, 1999, was also accounted for as a pooling-of-interests,
but historical consolidated financial statements have not been restated due to
immateriality.
The Company's acquisitions are discussed in further detail in Note 3 of the
Financial Statements.
17
TABLE 1
- --------------------------------------------------------------------------------
ACQUISITIONS
- --------------------------------------------------------------------------------
TOTAL ASSETS SHARES METHOD OF INTANGIBLE
COMPLETED ACQUISITIONS DATE ACQUIRED ISSUED ACCOUNTING RECORDED
- ---------------------------------------- ------------- ----------------- -------------- ------------ --------------
Citrus Bank Pooling of
Orlando, Florida 7/99 $ 285 million 3,086,478 interests n/a
Citizens First National Bank
(Citizens) Pooling of
Crescent City, Florida 4/99 $ 59 million 505,851 interests n/a
Colonial Bank of South Carolina,
Inc. (Colonial Bank)
Camden, South Carolina 10/98 $ 61 million 651,455 Purchase $10.4 million
Poinsett Financial Corporation
(Poinsett)
Travelers Rest, South Carolina 9/98 $ 89 million 753,530 Purchase $11.7 million
First National Bank of Pickens
County (First National)
Easley, South Carolina 9/98 $ 121 million 2,817,350 Purchase $45.4 million
Resource Processing Group, Inc.
(RPGI)
Columbia, South Carolina 6/98 $ 15 million 398,610 Purchase $3.4 million
First Southeast Financial Corporation
(First Southeast)
Anderson, South Carolina 11/97 $ 350 million 3,497,400 Purchase $34.6 million
Lowcountry Savings Bank, Inc.
(Lowcountry)
Mt. Pleasant, South Carolina 7/97 $ 80 million 508,415 Purchase $7.2 million
2000 PENDING ACQUISITION
- ----------------------------------------
Anchor Financial Corporation Expected 2nd Approximately Pooling of
Myrtle Beach, South Carolina Qtr 2000 $ 1.2 billion 17.6 million interests n/a
In December 1999, Carolina First Bank, F.S.B. applied to the Office of
Thrift Supervision ("OTS") to sell its two branch offices to Carolina First Bank
in a purchase and assumption transaction. Upon completion of the sale, the two
branch offices would function as branches of Carolina First Bank and the name of
Carolina First Bank, F.S.B. would be changed to Bank CaroLine, F.S.B. ("Bank
CaroLine"). Bank CaroLine would operate as an Internet-only bank offering its
products and services only over the Internet and telephone.
On January 10, 2000, the Company signed a definitive agreement to merge
with Anchor Financial Corporation ("Anchor Financial"), a $1.2 billion
institution headquartered in Myrtle Beach, South Carolina. The resulting holding
company will have approximately $4.8 billion in assets and 108 branch offices in
South Carolina, Florida and North Carolina. The stock-for-stock merger was
valued at approximately $300 million as of the announcement date. The merger
agreement provides that Anchor Financial shareholders receive 2.1750 shares of
the Company's common stock for each Anchor Financial share. The Company expects
to issue approximately 17.6 million shares in connection with this merger. This
transaction, which is subject to regulatory approvals and the shareholder
approval of both companies, will be accounted for using the pooling-of-interests
method of accounting and is expected to close in the second quarter of 2000. For
more information on the proposed merger with Anchor Financial, see the Company's
Current Report on Form 8-K dated January 13, 2000.
EQUITY INVESTMENTS
INVESTMENT IN NET.B@NK, INC.
At December 31, 1999, the Company owned 2,415,000 shares of Net.B@nk, Inc.
("Net.B@nk") common stock, or approximately 8.4% of the outstanding shares.
Net.B@nk owns and operates Net.B@nk, F.S.B., an FDIC-insured federal savings
bank that provides banking services to consumers utilizing the Internet. Under
the terms of the Office of Thrift Supervision's regulatory ruling on Net.B@nk in
1997, certain affiliates of Net.B@nk, including the Company, may not sell their
shares in Net.B@nk until July 31, 2000. Effective July 31, 1999, or
18
one year prior to the termination of the restriction, the Company began
recording its investment in Net.B@nk at market value. As of December 31, 1999,
the Company's investment in Net.B@nk, which is included in securities available
for sale, had a pre-tax market value of approximately $45 million. In prior
periods, these shares were recorded at the Company's book basis, which was
approximately $671,000 as of December 31, 1999. The Company's shares of Net.B@nk
common stock are "restricted" securities, as that term is defined in federal
securities laws.
On January 8, 1999, the OTS granted the Company permission to sell or
transfer 1,110,000 shares (adjusted for the stock split) in order to reduce its
ownership to less than 10%. In January 1999, the Company contributed 870,000
shares (adjusted for the stock split) of Net.B@nk common stock to Carolina First
Foundation, a non-profit corporation organized for charitable purposes, which
established an endowment to fund future charitable contributions. In February
1999, the Company contributed capital in the form of 90,000 shares (adjusted for
the stock split) of Net.B@nk common stock to its wholly-owned subsidiary,
Carolina First Guaranty Reinsurance, Ltd., a company engaged in the reinsurance
of credit insurance to customers of the Company's banking subsidiaries. On
February 10, 1999, the Company and Carolina First Guaranty Reinsurance, Ltd.
sold 150,000 shares (adjusted for the stock split) and 90,000 shares (adjusted
for the stock split), respectively, of Net.B@nk's common stock at a net price of
$14.46 (adjusted for the stock split) per share in connection with Net.B@nk's
secondary public offering. In addition, Carolina First Foundation sold 870,000
shares (adjusted for the stock split) of Net.B@nk common stock at a net price of
$14.46 per share (adjusted for the stock split).
INVESTMENT IN AFFINITY TECHNOLOGY GROUP, INC.
At December 31, 1999, the Company (through its subsidiary CF Investment
Company) owned 2,528,366 shares of common stock of Affinity Technology Group,
Inc. ("Affinity") and a warrant to purchase an additional 3,471,340 shares for
approximately $0.0001 per share ("Affinity Warrant").
These Affinity shares and the shares represented by the Affinity Warrant
constitute approximately an 18% ownership interest in Affinity. As of December
31, 1999, the investment in Affinity's common stock, which is included in
securities available for sale and has a basis of approximately of $160,000, was
recorded at its pre-tax market value of approximately $1.7 million. The Affinity
Warrant was not reported on the Company's balance sheet as of December 31, 1999.
The Company's shares in Affinity and the shares issuable upon the exercise
of the Affinity Warrant are "restricted" securities, as that term is defined in
federal securities laws.
INVESTMENTS IN COMMUNITY BANKS
As of December 31, 1999, the Company had equity investments in the
following community banks located in the Southeast: CNB Florida Bancshares,
Inc.; Capital Bank; Carolina Bank; Coastal Banking Company, Inc.; Community
Capital Corporation; First Reliance Bank; FirstSpartan Financial Corporation;
Florida Banks, Inc.; Greenville First Bancshares, Inc.; Heritage Bancorp, Inc.;
High Street Banking Company; Marine Bancshares, Inc.; People's Community
Capital Corp.; and Trinity Bank. In each case, the Company owns less than 5% of
the community bank's outstanding common stock. As of December 31, 1999, equity
investments in the community banks listed above, included in securities
available for sale with a basis of approximately $10.8 million, were recorded
at pre-tax market value of approximately $9.1 million. The Company made these
investments to develop correspondent banking relationships and to promote
community banking in the Southeast.
CF INVESTMENT COMPANY
The principal focus of CF Investment Company, licensed through the Small
Business Administration to operate as a Small Business Investment Company, is
investing in companies that have a bank-related technology or service the
Company or its subsidiaries can use. As of December 31, 1999, CF Investment
Company had invested approximately $2.7 million (principally in the form of
loans) in companies specializing in electronic document management and
Internet-related services. In March 1999, CF Investment Company sold its
investment in Corporate Solutions International, a company that develops
automated credit decision systems, for a pre-tax gain of approximately $412,000.
19
CAROLINA FIRST INVESTMENT LIMITED PARTNERSHIP
On December 17,1999, the Company and certain subsidiaries established a
South Carolina limited partnership, Carolina First Investment Limited
Partnership ("CFILP"), to engage in the business of holding and managing
investment assets. CFILP was formed to achieve economies of scale and economic
leverage by centralizing the management of certain investment assets. In
conjunction with the formation of CFILP, several of the Company's subsidiaries
transferred a portion of their existing investment portfolios to CFILP in
exchange for a limited partnership interest.
EARNINGS REVIEW
OVERVIEW
Net income in 1999 increased to $27.2 million from $24.4 million in 1998
and $14.0 million in 1997. On a diluted per share basis, earnings for 1999
totaled $1.06 compared with $1.13 in 1998 and $0.99 in 1997. In 1999, net income
increased 11% while the average number of shares outstanding increased 18% over
the same time period resulting in a decline in earnings per diluted share
compared to net income. The increase in the number of shares outstanding
resulted principally from the completion of three bank mergers in the fall of
1998, which were accounted for under the purchase method of accounting. At
December 31, 1999, the Company had approximately $3.6 billion in assets, $2.4
billion in loans, $2.5 billion in deposits and $409.8 million in shareholders'
equity. At December 31, 1999, the Company's ratio of nonperforming assets to
loans and other real estate owned was 0.46%.
During 1999, the Company engaged in a number of actions that produced
unusual gains or charges to strengthen the Company strategically and enhance its
competitive position. These actions included the entry into Florida, the
introduction of the Company's Internet bank, the sale of the credit card
portfolio, the sale of four branches, and the establishment of a charitable
foundation and a captive reinsurance subsidiary funded by the sale of Net.B@nk
stock. Unusual gains or charges, which are nonrecurring, associated with these
actions are summarized below:
o During the first quarter of 1999, the Company realized a $15.5 million
pre-tax gain related to transferring and selling shares of Net.B@nk stock
in Net.B@nk's secondary public offering and the disposition of a bank
technology investment. The gain from the sale of Net.B@nk stock was largely
offset by an $11.9 million charitable contribution made to fund the
Carolina First Foundation. The Net.B@nk, Inc. gain also funded the capital
contribution to form Carolina First Guaranty Reinsurance, Ltd., a company
engaged in the reinsurance of credit insurance to customers of the
Company's Banking Subsidiaries.
o On April 30, 1999, the Company sold its consumer credit card receivables
totaling approximately $112 million to First USA, N.A. The sale resulted in
a gain of approximately $3.3 million and a reduction in the allowance for
loan losses of approximately $3.0 million (see "BALANCE SHEET REVIEW --
Allowance for Loan Losses"). The credit cards sold included approximately
$58 million owned by the Company's off-balance-sheet credit card trust. In
connection with the sale, the Company's credit card trust was terminated
effective May 17, 1999. The Company continued to service these credit cards
until the end of August 1999. In addition, the Company entered into a
partnership agreement with an affiliate of the purchaser to offer credit
card products to its retail customers.
o In connection with mergers completed in 1999 and 1998, the Company incurred
pre-tax merger-related costs of approximately $5.5 million, substantially
all of which had been paid as of December 31, 1999.
o During the last half of 1999, Carolina First Bank completed the sale of
four branch offices located in Abbeville, Hardeeville, Johnston and
Ridgeland, South Carolina. In connection with the sale of these branches,
the Company recorded a pre-tax gain of approximately $2.5 million, sold
loans of approximately $13.1 million and transferred deposits of
approximately $54.4 million.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on assets
and the interest paid for the liabilities used to support such assets as well as
such items as loan fees and dividend income. Net interest margin measures how
effectively a company manages the difference between the yield on earning assets
and the rate
20
paid on funds used to support those assets. Table 2 presents average balance
sheets and a net interest income analysis on a taxable equivalent basis for each
of the years in the three-year period ended December 31, 1999. Average earning
assets and the net interest margin exclude the net unrealized gain on securities
available for sale because this gain is not included in net income. Table 3
provides additional analysis of the effects of volume and rate on net interest
income.
TABLE 2
- --------------------------------------------------------------------------------
COMPARATIVE AVERAGE BALANCES -- YIELDS AND COSTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
AVERAGE/ INCOME/ YIELD/ AVERAGE/ INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------- ----------- ---------- ------------- ----------- ----------
ASSETS
Earning assets
Loans (net of unearned income)(1) ............. $2,199,731 $199,679 9.08% $1,769,313 $166,182 9.39%
Investment securities (taxable) ............... 377,919 23,213 6.14 351,328 21,826 6.21
Investment securities (nontaxable) (2) ........ 49,636 3,362 6.77 37,038 2,556 6.90
Unrealized securities gain or loss ............ (16,284) (4,145)
Federal funds sold and resale
agreements ................................... 46,573 1,802 3.87 101,342 5,224 5.15
Interest-bearing bank balances ................ 36,298 1,989 5.48 38,492 2,166 5.63
---------- -------- ---------- --------
Total earning assets ......................... 2,693,873 230,045 8.54% 2,293,368 197,954 8.63%
---------- -------- ---------- --------
Non-earning assets ............................ 388,351 259,497
---------- ----------
Total assets ................................. $3,082,224 $2,552,865
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities
Interest-bearing deposits
Interest checking .......................... $ 511,334 16,467 3.22% $ 397,768 $ 13,950 3.51%
Savings .................................... 99,454 2,625 2.64 80,121 2,073 2.59
Money market ............................... 283,054 11,495 4.06 253,722 10,576 4.17
Certificates of deposit .................... 1,074,360 55,978 5.21 963,241 54,524 5.66
Other ...................................... 114,495 6,284 5.49 109,982 6,476 5.89
---------- -------- ---------- --------
Total interest-bearing deposits ........... 2,082,697 92,849 4.46 1,804,834 87,599 4.85
Short-term borrowings ........................ 184,837 9,049 4.90 121,868 6,488 5.32
Long-term borrowings ......................... 77,380 5,226 6.75 48,719 3,818 7.84
---------- -------- ---------- --------
Total interest-bearing liabilities ......... 2,344,914 107,124 4.57% 1,975,421 97,905 4.96%
---------- -------- ---------- --------
Non-interest bearing liabilities
Non-interest bearing deposits .............. 328,296 269,504
Other non-interest liabilities ............. 17,884 22,323
---------- ----------
Total liabilities .......................... 2,691,094 2,267,248
----------
Shareholders' equity ........................... 391,130 285,617
---------- ----------
Total liabilities and shareholders' equity..... $3,082,224 $2,552,865
========== ==========
Net interest margin ............................ $122,921 4.56% $100,049 4.36%
======== ========
YEARS ENDED DECEMBER 31,
------------------------------------
1997
------------------------------------
AVERAGE/ INCOME/ YIELD/
BALANCE EXPENSE RATE
------------- ----------- ----------
ASSETS
Earning assets
Loans (net of unearned income)(1) ............. $1,354,216 $127,528 9.42%
Investment securities (taxable) ............... 216,501 13,182 6.09
Investment securities (nontaxable) (2) ........ 31,165 2,225 7.14
Unrealized securities gain or loss ............ (3,874)
Federal funds sold and resale
agreements ................................... 18,783 1,030 5.48
Interest-bearing bank balances ................ 18,010 1,051 5.84
---------- --------
Total earning assets ......................... 1,634,801 145,016 8.87%
---------- --------
Non-earning assets ............................ 170,218
----------
Total assets ................................. $1,805,019
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities
Interest-bearing deposits
Interest checking .......................... $ 222,437 $ 6,752 3.04%
Savings .................................... 60,299 1,679 2.78
Money market ............................... 213,561 8,934 4.18
Certificates of deposit .................... 682,789 38,789 5.68
Other ...................................... 63,230 3,772 5.97
---------- --------
Total interest-bearing deposits ........... 1,242,316 59,926 4.82
Short-term borrowings ........................ 169,220 9,488 5.61
Long-term borrowings ......................... 27,550 2,592 9.41
---------- --------
Total interest-bearing liabilities ......... 1,439,086 72,006 5.00%
---------- --------
Non-interest bearing liabilities
Non-interest bearing deposits .............. 217,779
Other non-interest liabilities ............. 13,842
----------
Total liabilities .......................... 1,670,707
Shareholders' equity ........................... 134,312
----------
Total liabilities and shareholders' equity..... $1,805,019
==========
Net interest margin ............................ $ 73,010 4.47%
========
- --------
(1) Nonaccrual loans are included in average balances for yield computations.
(2) Fully tax-equivalent basis at a 35% tax rate.
Note: Average balances are derived from daily balances.
21
TABLE 3
- --------------------------------------------------------------------------------
RATE/VOLUME VARIANCE ANALYSIS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1999 COMPARED TO 1998 1998 COMPARED TO 1997
-------------------------------------- ------------------------------------
TOTAL CHANGE IN CHANGE IN TOTAL CHANGE IN CHANGE IN
CHANGE VOLUME RATE CHANGE VOLUME RATE
---------- ---------- ------------ ---------- ---------- ----------
Earning assets
Loans, net of unearned income .............. $ 33,497 $ 39,235 $ (5,738) $ 38,654 $ 38,989 $ (335)
Securities, taxable ........................ 1,387 1,636 (249) 8,644 8,371 273
Securities, nontaxable ..................... 806 854 (48) 331 407 (76)
Federal funds sold ......................... (3,422) (2,341) (1,081) 4,194 4,260 (66)
Interest-bearing bank balances ............. (177) (121) (56) 1,115 1,154 (39)
-------- -------- -------- -------- -------- ------
Total interest income ................... 32,091 39,263 (7,172) 52,938 53,181 (243)
-------- -------- -------- -------- -------- ------
Interest-bearing liabilities
Interest-bearing deposits
Interest checking ......................... 2,517 3,730 (1,213) 7,198 6,013 1,185
Savings ................................... 552 509 43 394 520 (126)
Money market .............................. 919 1,197 (278) 1,642 1,674 (32)
Certificates of deposit ................... 1,454 5,994 (4,540) 15,735 15,875 (140)
Other ..................................... (192) 259 (451) 2,704 2,753 (49)
-------- -------- -------- -------- -------- ------
Total interest-bearing deposits ......... 5,250 11,689 (6,439) 27,673 26,835 838
Short-term borrowings ........................ 2,561 3,119 (558) (3,000) (2,542) (458)
Long-term borrowings ......................... 1,408 1,995 (587) 1,226 1,718 (492)
-------- -------- -------- -------- -------- ------
Total interest expense ................. 9,219 16,803 (7,584) 25,899 26,011 (112)
-------- -------- -------- -------- -------- ------
Net interest income ................... $ 22,872 $ 22,460 $ 412 $ 27,039 $ 27,170 $ (131)
======== ======== ======== ======== ======== ======
- --------
Note: Changes which are not solely attributable to volume or rate have been
allocated to volume and rate on a pro-rata basis.
Tax equivalent net interest income increased $22.9 million, or 23%, to
$122.9 million in 1999 from $100.0 million in 1998 and increased $27.0 million,
or 37%, from $73.0 million in 1997. The increase resulted principally from a
higher level of average earning assets and a higher net interest margin. The
growth in average earning assets, which increased $400.5 million, or 17%, to
$2.7 billion in 1999 from $2.3 billion in 1998 and $1.6 billion in 1997 resulted
from an increase in both loans and investment securities. Average loans, net of
unearned income, were $2.2 billion in 1999, $1.8 billion in 1998 and $1.4
billion in 1997. The increase in loans was primarily related to acquisitions
completed in the second half of 1998 and internal loan growth. Average
investment securities, excluding the average net unrealized securities gains,
were $411.3 million, $384.2 million and $243.8 million in 1999, 1998 and 1997,
respectively. A portion of the increase in average investment securities in 1999
was attributable to the match funding in December 1999 of approximately $200
million in mortgage-backed securities with approximately $200 million in Federal
Home Loan Bank borrowings.
The net interest margin of 4.56% in 1999 was higher than the margin of
4.36% in 1998 and 4.47% in 1997. The higher net interest margin in 1999 resulted
from lower deposit costs, partially offset by lower earning asset yields. During
the first half of 1999, the Company kept deposit rates relatively stable and
lowered costs by repricing certificates of deposits downward upon maturity.
During the last half of 1999, however, interest rates began to rise, causing the
Company to increase rates on certain deposit products. In addition, in September
1999, the Company introduced Bank CaroLine, an Internet bank offered as a
service of Carolina First Bank, F.S.B. Deposit rates for Bank CaroLine are
generally higher than those offered by the Company's other subsidiary banks to
reflect the lower cost structure associated with operating on the Internet.
Accordingly, as deposits build for Bank CaroLine, the Company expects the cost
of deposits on a consolidated basis to increase.
The yield on earning assets was lower in 1999 primarily as a result of the
second quarter sale of the credit card loans, which were higher-yielding earning
assets (see "EARNINGS REVIEW -- Overview"). This decrease
22
was partially offset by increases in the prime interest rate during the last
half of 1999. In 1999, approximately 57% of the commercial loan portfolio was
variable and immediately repriced upward with the increases in the prime
interest rate.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $15.8 million in 1999, $12.7 million in
1998 and $12.1 million in 1997. The higher 1999 provision for loan losses
reflected a higher level of outstanding loans, which increased 20% during 1999.
As a percentage of average loans, the net charge-off ratio was 0.44% in 1999,
compared with 0.66% in 1998 and 0.81% in 1997. This decrease was partially
attributable to the sale of the credit card portfolio completed on April 30,
1999.
Management currently anticipates loan growth to continue in 2000. The
Company's newer market areas, such as northern and central Florida, are expected
to contribute to 2000 portfolio growth. Management intends to closely monitor
economic trends and the potential effect on the Subsidiary Banks' loan
portfolios.
NONINTEREST INCOME
Noninterest income increased $24.0 million to $48.4 million in 1999 from
$24.4 million in 1998 and $20.4 million in 1997. Noninterest income in 1999
included several nonrecurring items, which are shown on a pre-tax basis: a $15.5
million gain on disposition of equity investments (primarily attributable to the
sale of Net.B@nk stock which was largely offset by a contribution to the
Carolina First Foundation), a $3.3 million gain on sale of credit cards, a $2.5
million gain on disposition of assets/liabilities (primarily associated with the
sale of branches, buildings, and disposition of equipment) and a $399,000 gain
on sale of securities. (See "EARNINGS REVIEW -- Overview".) The $2.5 million
gain on disposition of assets and liabilities included a $2.5 million pre-tax
gain on sale of four branches, a $776,000 pre-tax gain on sale of premises and
equipment and a $782,000 pre-tax loss on disposition of obsolete equipment.
Noninterest income, excluding the nonrecurring items listed above, was $26.7
million in 1999, a $2.9 million increase over 1998 excluding securities
transactions. This increase was primarily attributable to higher service charges
on deposit accounts, the establishment of a bank-owned life insurance program,
fees for investment services, and merchant processing fees, offset by lower
mortgage banking income.
Service charges on deposit accounts, the largest contributor to noninterest
income, rose 22% to $11.5 million in 1999 from $9.4 million in 1998 and $7.5
million in 1997. Average deposits increased 16.2% from 1998 to 1999. The
increase in service charges was attributable to attracting new transaction
accounts and improved collection of fees. In addition, effective July 1, 1999,
certain deposit service charges were increased to reflect competitive pricing.
Mortgage banking income includes origination fees, gains from the sale of
loans and servicing fees (which are net of the related amortization for the
mortgage servicing rights and subservicing payments). Mortgage banking income in
1999 decreased to $3.7 million compared with $4.8 million in 1998 and $3.7
million in 1997. The decrease in 1999 resulted from lower gains on the sale of
loans, primarily due to a lower volume of sales. Mortgage loans totaling
approximately $133 million, $316 million and $132 million were sold in 1999,
1998 and 1997, respectively. Approximately $153 million of the loans sold in
1998 were First Southeast loans. The gain on the sale of these loans was not
included in the gain on sale of mortgage loans but instead reduced the goodwill
associated with the First Southeast acquisition.
Mortgage originations totaled approximately $404 million in 1999 compared
with approximately $511 million in 1998 and $246 million in 1997. These mortgage
originations are net of mortgage loans acquired through acquisition. Mortgage
origination volumes declined in 1999 due to higher mortgage loan rates.
CF Mortgage's servicing operations consist of servicing mortgage loans that
are owned by Carolina First Bank and subservicing loans, to which the rights to
service are owned by Carolina First Bank or other non-affiliated financial
institutions. At December 31, 1999, CF Mortgage was servicing or subservicing
24,201 loans having an aggregate principal balance of approximately $2.1
billion. In 1999, fees related to the servicing portfolio from non-affiliated
companies were mostly offset by the related amortization for the mortgage
servicing rights and subservicing payments resulting in income of $14,000,
compared with $100,000 in 1998 and $586,000 in 1997.
23
The servicing income does not include the benefit of interest-free escrow
balances related to mortgage loan servicing activities.
Fees for investment services in 1999 of $2.0 million were 25% above the
$1.6 million earned in 1998 and $1.4 million in 1997. The increase resulted from
an increase in the fees collected by Carolina First Securities, Inc. ("CF
Securities"), a full service brokerage subsidiary of Carolina First Bank. In
1999, CF Securities collected $533,000, compared with $168,000 in 1998 and none
in 1997. CF Securities offers a complete line of investment products and
services, including mutual funds, stocks, bonds and annuities. At December 31,
1999 and 1998, the market value of assets administered by Carolina First Bank's
trust department totaled approximately $336 million and $357 million,
respectively.
During 1999, the Company had income of $1.6 million from its interests in
the credit card and commercial real estate loan trusts, compared with income of
$1.6 million in 1998 and a loss of $545,000 in 1997. Loan securitization income
is net of charge-offs associated with the loans in the trusts. Loan
securitization income related to credit cards decreased to $1.4 million in 1999
compared with income of $1.6 million in 1998 and a loss of $992,000 in 1997.
Loan securitization income in 1997 was negatively impacted by greater than
expected charge-offs in the credit card securitization. With the sale of the
Company's credit cards and the termination of the credit card trust on May 17,
1999, loan securitization income related to credit cards ceased during the
second quarter of 1999. The commercial real estate loan trust provided income of
$221,000, $6,000 and $447,000 in 1999, 1998 and 1997, respectively. The
commercial real estate loan trust was terminated with the pay-off of the loans
in the trust in the fourth quarter of 1999. Accordingly, no commercial real
estate loan trust income was recognized in the fourth quarter of 1999.
Other noninterest income was $7.9 million in 1999 compared with $6.4
million in 1998 and $3.1 million in 1997. Approximately $1.2 million of the
increase was due to the establishment of a bank-owned life insurance program
initiated during the second quarter of 1999. The remaining increase was due to
higher debit card income, lease fee income due to higher terminations from a
more aged portfolio and merchant processing fees. Recoveries of $500,000 and
$440,000 are included in other noninterest income in 1999 and 1998,
respectively. These recoveries relate to a loss recognized by Citrus Bank in
1998 in connection with a deposit customer's account. See "EARNINGS REVIEW --
Noninterest Expenses" for further details.
NONINTEREST EXPENSES
Noninterest expenses increased to $113.8 million in 1999 from $72.0 million
in 1998 and $58.6 million in 1997. Noninterest expenses in 1999 included several
non-recurring items, which are shown on a pre-tax basis: an $11.9 million
charitable contribution in the form of Net.B@nk common stock made to the
Carolina First Foundation and $5.5 million for merger-related costs. Noninterest
expenses, excluding the items listed above, totaled $96.4 million in 1999, $24.4
million higher than 1998. The increase was largely attributable to higher
operational costs and intangible amortization association with three mergers
completed in the last four months of 1998. In addition, higher noninterest
expenses were related to new personnel and technology costs to support the
Company's current and future growth.
Salaries, wages and employee benefits increased $7.9 million to $43.6
million in 1999 compared with $35.7 million in 1998 and $28.4 million in 1997.
Full-time equivalent employees increased to 1,016 at December 31, 1999 from 955
at December 31, 1998. The staffing cost increases were primarily due to the
costs of expanding in existing and new markets (including the 1998 mergers),
operational support to promote growth and additional management and technical
expertise. Salaries, wages and employee benefits in 1999 did not include bonus
payments to management. In the fourth quarter of 1999, approximately $1.8
million related to bonus accruals for the first nine months of 1999 were
reversed out of salaries, wages and employee benefits. These accruals were
reversed when it was determined that bonuses would not be paid because of
financial performance. Salaries, wages and employee benefits are expected to
increase in 2000 in connection with an anticipated reinstatement of the bonus
accruals.
Occupancy and furniture and equipment expenses increased $4.2 million to
$15.9 million in 1999 from $11.7 million in 1998 and $9.7 million in 1997. This
increase resulted principally from costs associated with the branches acquired
through acquisitions in 1998, costs associated with developing a common computer
platform and the
24
operating costs associated with additional ATMs. The Company began making lease
payments on two new buildings in the fourth quarter of 1999. Occupancy and
furniture and equipment expenses are expected to increase in 2000 related to
these lease payments as well as those associated with a third new building and
plans for a new core operating system (see "LIQUIDITY").
Amortization of intangibles increased to $6.7 million in 1999 from $4.5
million in 1998 and $1.5 million in 1997. The increase is due to the
acquisitions completed in 1998. This level of amortization is expected to
continue in 2000.
In connection with the mergers completed in 1999 and 1998, the Company
incurred pre-tax merger-related costs of approximately $5.5 million,
substantially all of which had been paid as of December 31, 1999. Table 4 shows
the breakdown of these expenses.
TABLE 4
- --------------------------------------------------------------------------------
MERGER-RELATED COSTS
- --------------------------------------------------------------------------------
Severance payments and contracts .................................... $ 1,018,000
System conversion costs and write-off of obsolete equipment ......... 1,358,000
Professional fees ................................................... 1,948,000
Legal fees .......................................................... 309,000
Other ............................................................... 871,000
-----------
Total ............................................................... $ 5,504,000
===========
Other noninterest expenses increased $10.0 million to $30.1 million in 1999
from $20.1 million in 1998 and $18.9 million in 1997. The overall increase in
other noninterest expenses was principally attributable to the overhead and
operating expenses associated with higher lending and deposit activities. In
addition, other significant increases included advertising related to the
creation and introduction of the Internet banking product, imaging system costs
from imaging documents including loan files and Year 2000 expenses. The largest
items of other noninterest expense were telephone, stationery, supplies and
printing, mail and courier services, advertising, imaging system costs and
professional fees.
REO and other losses of $3.1 million in 1997 included approximately $2.6
million related to the return by another bank of checks comprising earlier
deposits into a Citrus Bank customer account. Citrus Bank incurred this loss.
Recoveries of $500,000 and $440,000 in 1999 and 1998, respectively, are included
in noninterest income.
YEAR 2000
Management believes it has adequately addressed the Year 2000 issue and has
successfully executed its Year 2000 Plan. The Company and its subsidiaries have
processed transactions in the year 2000 and have experienced no significant
interruptions in customer service or processing ability. The Company has not
identified any additional credit losses related to any customer due to Year 2000
issues nor does it anticipate that any will be identified going forward. The
cost incurred for Year 2000 expenses during 1999 was $976,000 (included in other
noninterest expenses) and consisted of expenses related to contract programming,
software upgrades and Year 2000 testing. Year 2000 expenses during 1998 totaled
$250,000. Management is not aware of any trends, events or uncertainties related
to the Year 2000 issues that it believes may result in a significant adverse
effect on the Company's financial position.
25
FOURTH QUARTER RESULTS
During the fourth quarter of 1999, the Company recorded net income of $7.1
million, or $0.28 per diluted share, compared with $6.8 million, or $0.27 per
diluted share, in the fourth quarter of 1998. The Company recorded several
non-recurring items in the fourth quarter of 1999. These pre-tax items included
a $890,000 gain on the sale of credit cards; a $765,000 gain related to the sale
of a branch office, the Company's Greenville administration building and
equipment; and $221,000 of merger-related costs.
In the fourth quarter of 1999, approximately $1.8 million related to bonus
accruals for the first nine months of 1999 were reversed out of salaries, wages
and benefits. These accruals were reversed when it was determined that bonuses
would not be paid because of financial performance. The net interest margin in
the fourth quarter of 1999 was 4.36% compared with 4.35% for the same time
period in 1998. Average earning assets were $2.8 million in the fourth quarter
of 1999 compared with $2.6 million in the fourth quarter of 1998. Table 5
presents a summary of the consolidated quarterly financial data for the years
ended December 31, 1999 and December 31, 1998.
26
TABLE 5
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
- --------------------------------------------------------------------------------
($ IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED
--------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
-------------- --------------- --------------- ---------------
1999
For the Quarter
Interest income ................... $ 60,982 $ 57,753 $ 56,142 $ 53,991
Interest expense .................. 29,770 26,651 25,688 25,015
------------ ------------ ------------ ------------
Net interest income ............... 31,212 31,102 30,454 28,976
Provision for loan losses ......... 4,094 3,986 3,559 4,207
Noninterest income ................ 8,381 8,753 9,562 21,690
Noninterest expense ............... 24,898 27,146 25,473 36,304
Income taxes ...................... 3,455 2,993 3,744 3,120
------------ ------------ ------------ ------------
Net income ........................ $ 7,146 $ 5,730 $ 7,240 $ 7,035
============ ============ ============ ============
Shares outstanding:
Average -- basic ................. 25,566,304 25,519,678 25,285,903 24,623,715
Average -- diluted ............... 25,848,986 25,872,028 25,982,295 25,115,545
At quarter end ................... 25,723,444 25,695,083 25,593,045 24,765,256
Per Common Share
Net income -- basic ............... $ 0.28 $ 0.22 $ 0.29 $ 0.29
Net income -- diluted ............. 0.28 0.22 0.28 0.28
Cash dividend declared ............ 0.10 0.09 0.09 0.09
Common stock price:
High ............................. 22.00 25.50 30.81 26.00
Low .............................. 14.88 19.38 21.44 20.25
Close ............................ 18.25 19.81 24.38 22.00
Volume traded ..................... 5,255,283 2,464,908 7,955,001 3,969,931
1998
For the Quarter
Interest income ................... $ 54,965 $ 49,598 $ 47,309 $ 45,188
Interest expense .................. 26,772 24,434 23,588 23,111
------------ ------------ ------------ ------------
Net interest income ............... 28,193 25,164 23,721 22,077
Provision for loan losses ......... 3,193 3,342 3,832 2,357
Noninterest income ................ 7,197 6,656 5,561 4,975
Noninterest expense ............... 21,335 18,226 15,690 16,727
Income taxes ...................... 4,016 3,831 3,601 2,949
------------ ------------ ------------ ------------
Net income ........................ $ 6,846 $ 6,421 $ 6,159 $ 5,019
============ ============ ============ ============
Shares outstanding:
Average -- basic ................. 24,683,695 20,816,324 20,441,711 19,202,388
Average -- diluted ............... 25,152,752 21,232,259 20,896,305 19,606,295
At quarter end ................... 24,785,621 24,508,829 20,901,633 20,469,014
Per Common Share
Net income -- basic ............... $ 0.28 $ 0.31 $ 0.30 $ 0.26
Net income -- diluted ............. 0.27 0.30 0.29 0.26
Cash dividend declared ............ 0.09 0.08 0.08 0.08
Common stock price:
High ............................. 26.25 27.13 30.63 26.00
Low .............................. 16.81 19.88 25.00 19.88
Close ............................ 25.31 22.13 25.38 25.38
Volume traded ..................... 3,656,410 4,612,822 4,598,827 4,333,100
27
BALANCE SHEET REVIEW
LOANS
Loans are the largest category of earning assets and produce the highest
yields. The Company's loan portfolio consists principally of commercial mortgage
loans, commercial loans, consumer loans and one-to-four family residential
mortgage loans. A substantial majority of these borrowers are located in South
Carolina and Florida with concentrations in the Company's market areas. The
Company has no foreign loans or loans for highly leveraged transactions. The
loan portfolio does not contain any industry concentrations of credit risk
exceeding 10% of the portfolio. At December 31, 1999, the Company had total
loans outstanding of $2.4 billion which equaled approximately 96% of the
Company's total deposits and approximately 68% of the Company's total assets.
During 1999, the Company's consumer loans increased significantly to $312.3
million at December 31, 1999 from $198.4 million a year earlier due primarily to
the expansion of indirect lending to new markets in South Carolina and Florida.
Table 6 summarizes loans outstanding and mix percentages.
TABLE 6
- --------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Commercial, financial and agricultural..... $ 407,228 $ 344,335 $ 262,176 $ 209,909 $ 195,396
Real Estate
Construction ............................ 126,791 89,383 65,588 49,826 38,243
Mortgage
Residential ............................ 569,031 431,209 328,987 249,591 220,492
Commercial and multifamily (1) ......... 950,369 756,276 536,657 397,593 237,560
Consumer .................................. 312,274 198,413 148,026 141,840 152,267
Credit cards .............................. 8,243 65,266 52,525 40,480 86,901
Lease financing receivables ............... 15,500 40,450 79,597 91,321 36,740
---------- ---------- ---------- ---------- ----------
Loans held for investment ............... 2,389,436 1,925,332 1,473,556 1,180,560 967,599
Loans held for sale ....................... 45,316 112,918 235,151 10,449 125,000
---------- ---------- ---------- ---------- ----------
Total gross loans ....................... 2,434,752 2,038,250 1,708,707 1,191,009 1,092,599
Unearned income ........................... 5,527 8,064 12,152 14,375 7,116
Allowance for loan losses ................. 23,832 20,266 17,369 12,039 8,987
---------- ---------- ---------- ---------- ----------
Total net loans ......................... $2,405,393 $2,009,920 $1,679,186 $1,164,595 $1,076,496
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------
PERCENTAGE OF LOANS IN CATEGORY
- --------------------------------------------------------------------------------
DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
LOANS HELD FOR INVESTMENT
Commercial, financial and agricultural ......... 17.04% 17.88% 17.79% 17.78% 20.19%
Real Estate
Construction .................................. 5.31 4.64 4.45 4.22 3.95
Mortgage
Residential ................................. 23.82 22.40 22.33 21.14 22.79
Commercial and multifamily (1) .............. 39.77 39.28 36.42 33.68 24.55
Consumer ....................................... 13.07 10.31 10.05 12.01 15.74
Credit cards ................................... 0.34 3.39 3.56 3.43 8.98
Lease financing receivables .................... 0.65 2.10 5.40 7.74 3.80
------ ------ ------ ------ ------
Total ......................................... 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
- --------
(1) The majority of these loans are made to operating businesses where real
property has been taken as additional collateral.
28
Table 7 reflects the amount of commercial, financial, agriculture and
construction loans included in Table 6 broken down by contractual maturity date.
The table also provides the breakdown between those loans with a predetermined
interest rate and those loans with a floating interest rate.
TABLE 7
- --------------------------------------------------------------------------------
LOAN MATURITY AND INTEREST SENSITIVITY
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OVER ONE BUT OVER
ONE YEAR LESS THAN FIVE
OR LESS FIVE YEARS YEARS TOTAL
----------- --------- ------ -------------
Commercial, financial, agricultural and commercial real
estate .............................................. $440,092 $689,031 $228,474 $1,357,597
Real estate -- construction ........................... 109,040 17,751 -- 126,791
Total of loans with:
Predetermined interest rates ........................ 101,165 380,142 150,893 632,200
Floating interest rates ............................. 447,967 326,640 77,581 852,188
The Company's loans increased $399.0 million, or 20%, to approximately $2.4
billion at December 31, 1999 from $2.0 billion at December 31, 1998.
Approximately $133.1 million of residential mortgage loans were sold in 1999
excluding loans originated by correspondents. In addition, approximately $53.6
million of credit card balances were sold during the second quarter of 1999. An
additional $13.1 million of loans were sold in connection with branch sales
during the last half of the year. Approximately $37.0 million in loans were
purchased in connection with the merger with Citizens. Adjusting for the 1999
loan sales and purchases, internal loan growth was approximately $561.8 million,
or an annualized rate of 27.7%, during 1999.
Table 8 summarizes the loan relationships of the Company that are greater
than $5 million.
TABLE 8
- --------------------------------------------------------------------------------
LOAN RELATIONSHIPS GREATER THAN $5 MILLION
- --------------------------------------------------------------------------------
PERCENTAGE OF
NUMBER PRINCIPAL PORTFOLIO
OF BORROWERS BALANCE TOTAL LOAN
-------------- ------------------- -------------
December 31, 1999 ......... 34 $ 238.3 million 10%
December 31, 1998 ......... 25 $ 170.4 million 8%
In 1999, the Company's loans averaged $2.2 billion with a yield of 9.08%,
compared with $1.8 billion and a yield of 9.39% in 1998. Selling the credit card
portfolio in the second quarter of 1999 lowered the average loan yield. This
decrease was partially offset by increases in variable rate loans related to
prime interest rate increases in the last half of 1999. The interest rates
charged on loans vary with the degree of risk, maturity and amount of the loan.
Competitive pressures, money market rates, availability of funds and government
regulations also influence interest rates.
ALLOWANCE FOR LOAN AND LEASE LOSSES
Management maintains the allowance for loan and lease losses
(the"Allowance") at a level it considers adequate to cover probable losses
inherent in the loan portfolio. The adequacy of the Allowance is tested
quarterly in the following manner.
Reserve allocation percentages are developed for major portfolio segments.
For consumer loans, these percentages are based on historical losses by product
type. For commercial loans other than problem loans, they are based on
historical losses by risk grade. These percentages are multiplied by the dollar
amount of outstanding loans in each portfolio segment. The sum of these
calculations is added to the sum of specific allocations for problem loans, to
generate a first approximation of required reserves.
Additional allocations are then considered for each specific portfolio
segment based on any changes in circumstances that render historical loss
percentages less predictive of future results. Finally, an unallocated portion
is added
29
for estimating error, based on then-prevailing uncertainties that shape the
future outlook for loss levels. Issues such as portfolio concentrations, entry
into new markets, asset quality trends, off-balance sheet risk exposures, and
the outlook for change in economic conditions are considered.
This process for testing the adequacy of the Allowance requires
considerable judgment. Management's judgements are based on numerous assumptions
about future events which it believes to be reasonable, but which may or may not
be valid. Thus there can be no assurance that loan losses in future periods will
not exceed the Allowance or that future increases in the Allowance will not be
required. No assurance can be given that management's ongoing evaluation of the
loan portfolio in light of changing economic conditions and other relevant
circumstances will not require significant future additions to the Allowance,
thus adversely affecting the operating results of the Company.
The Allowance is also subject to examination and adequacy testing by
regulatory agencies, which may consider such factors as the methodology used to
determine adequacy and the size of the Allowance relative to that of peer
institutions. In addition, such regulatory agencies could require the Company to
adjust its Allowance based on information available to them at the time of their
examination.
The Allowance totaled $23.8 million, or 1.00% of loans held for investment
net of unearned income, at December 31, 1999, compared to $20.3 million, or
1.06%, at December 31, 1998. During the second quarter of 1999, the Allowance
was decreased $3.0 million as a consequence of the sale of the credit card
portfolio. The amount of the decrease equaled that portion of the Allowance
allocated to the credit card portfolio in the Allowance model. Following the
sale of the credit card portfolio, credit card receivables comprised 0.34% of
the Company's December 31, 1999 loan portfolio, down from 3.39% on December 31,
1998.
The Allowance as a percentage of nonperforming loans was 282% and 941% as
of December 31, 1999 and 1998, respectively. Nonperforming loans increased to
$8.5 million as of December 31, 1999 from $2.2 million at December 31, 1998
primarily due to the transfer of a $4.0 million loan to nonaccrual status in the
third quarter of 1999. See "Asset Quality."
Table 9, which summarizes the changes in the Allowance, and Table 10, which
reflects the allocation of the Allowance at the end of each year, provide
additional information with respect to the activity in the Allowance.
30
TABLE 9
- --------------------------------------------------------------------------------
SUMMARY OF LOAN LOSS EXPERIENCE
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- --------------- --------------- --------------- --------------
Loan loss reserve at beginning of period ...... $ 20,266 $ 17,369 $ 12,039 $ 8,987 $ 6,125
Purchase accounting acquisitions .............. 408 1,822 3,550 -- 128
Valuation allowance for loans purchased or
sold ........................................ (2,977) -- 658 1,236 567
Charge-offs:
Commercial, financial and agricultural ...... 2,917 1,810 472 347 1,201
Real estate -- construction ................. -- -- -- 115 --
Real estate -- mortgage ..................... 590 85 362 1,475 85
Consumer .................................... 5,987 6,572 6,017 3,463 1,489
Credit cards ................................ 1,683 4,309 5,325 4,072 2,536
---------- ----------- ----------- ----------- -----------
Total loans charged-off ................... 11,177 12,776 12,176 9,472 5,311
---------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial and agricultural ...... 482 49 116 67 180
Real estate -- mortgage ..................... 37 -- 1 7 14
Consumer .................................... 859 1,037 1,073 95 115
Credit cards ................................ 88 41 -- 396 3
---------- ----------- ----------- ----------- -----------
Total loans recovered ..................... 1,466 1,127 1,190 565 312
---------- ----------- ----------- ----------- -----------
Net charge-offs ............................... 9,711 11,649 10,986 8,907 4,999
Provision charged to expense ................ 15,846 12,724 12,108 10,723 7,166
---------- ----------- ----------- ----------- -----------
Loan loss reserve at end of period ............ $ 23,832 $ 20,266 $ 17,369 $ 12,039 $ 8,987
========== =========== =========== =========== ===========
Average loans ................................. $2,199,731 $ 1,769,313 $ 1,354,216 $ 1,123,021 $ 981,657
Total loans, net of unearned income (period
end) ........................................ 2,429,225 2,030,186 1,696,555 1,176,634 1,085,483
Net charge-offs as a percentage of average
loans ....................................... 0.44% 0.66% 0.81% 0.79% 0.51%
Allowance for loan losses as a percentage
of loans excluding loans held for sale ...... 1.00 1.06 1.19 1.03 0.94
31
TABLE 10
- --------------------------------------------------------------------------------
COMPOSITION OF ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Commercial, financial and agricultural ......... $ 7,467 $ 4,114 $ 3,083 $ 2,628 $2,380
Real Estate
Construction ................................. 1,658 1,126 617 437 253
Mortgage:
Residential ................................. 2,070 861 387 286 241
Commercial and multifamily .................. 4,464 2,222 1,594 1,370 1,012
Consumer ....................................... 5,855 5,442 5,066 2,926 1,551
Credit cards ................................... 135 4,526 5,426 3,157 2,643
Unallocated (1) ................................ 2,183 1,975 1,196 1,235 907
------- ------- ------- ------- ------
Total ...................................... $23,832 $20,266 $17,369 $12,039 $8,987
======= ======= ======= ======= ======
- --------
(1) The unallocated allowance represents amounts that have been provided by the
Company for probable losses which are inherent in the loan portfolio at
various points in time. These amounts have not been allocated in the
Company's allowance model to the specific loan categories provided.
The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations.
32
SECURITIES
At December 31, 1999, the Company's investment portfolio totaled $701.6
million, up $240.8 million from the $460.8 million invested at the end of 1998.
A significant portion of the increase in investment securities in 1999 was
attributable to the match funding in December 1999 of approximately $200 million
in mortgage-backed securities with approximately $200 million in Federal Home
Loan Bank borrowings. In addition, effective July 31, 1999, the Company began
recording its investment in Net.B@nk at market value, which was approximately
$45 million as of December 31, 1999 (see "EQUITY INVESTMENTS -- Investment in
Net.B@nk, Inc.").
Securities (i.e., securities held for investment, securities available for
sale and trading securities) averaged $411.3 million in 1999, 7% above the 1998
average of $384.2 million. The average portfolio yield increased slightly to
6.34% in 1999 from 6.29% in 1998.
Table 11 shows the composition of the investment portfolio.
TABLE 11
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
DECEMBER 31, (AT AMORTIZED COST)
---------------------------------------
1999 1998 1997
----------- ----------- -----------
SECURITIES HELD FOR INVESTMENT
U.S. Treasury securities ......................................... $ -- $ -- $ 1,997
Obligations of U.S. Government agencies and corporations ......... 1,484 2,730 --
Obligations of states and political subdivisions ................. 61,909 49,047 37,533
Other securities ................................................. 402 300 352
-------- -------- --------
$ 63,795 $ 52,077 $ 39,882
======== ======== ========
DECEMBER 31, (AT FAIR VALUE)
--------------------------------------
1999 1998 1997
---------- ----------- -----------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities ......................................... $ 12,884 $ 8,409 $102,261
Obligations of U.S. Government agencies and corporations ......... 477,644 353,411 140,197
Other securities ................................................. 142,580 43,317 19,871
-------- -------- --------
$633,108 $405,137 $262,329
======== ======== ========
DECEMBER 31, (AT FAIR VALUE)
-------------------------------------
1999 1998 1997
--------- ----------- -----------
TRADING ACCOUNT
U.S. Treasury and Government agencies ......... $3,758 $ 3,411 $ 2,196
State and political subdivisions .............. 910 132 153
------ -------- --------
$4,668 $ 3,543 $ 2,349
====== ======== ========
At December 31, 1999, securities available for sale included the following
equity investments: 2,528,366 shares of common stock of Affinity (recorded at
its pre-tax market value of approximately $1.7 million), 2,415,000 shares of
common stock of Net.B@nk (recorded at its pre-tax market value of approximately
$45 million), and investments in fourteen community banks (recorded at their
pre-tax market value of approximately $9.1 million). The Affinity Warrant, which
entitles the Company to purchase an additional 3,471,340 shares of common stock
at a purchase price of $0.0001 per share, was not included in securities at
December 31, 1999.
33
Table 12 shows the contractual maturity schedule for securities held for
investment and securities available for sale. Expected maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations. The table also reflects the weighted average yield of the
investment securities.
TABLE 12
- --------------------------------------------------------------------------------
INVESTMENT MATURITY SCHEDULE
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
HELD FOR INVESTMENT -- AMORTIZED COST
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER NO CONTRACTUAL
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS MATURITY TOTAL
------------ ---------- ---------- ----------- --------------- ------------
U.S. Government agencies and
corporations ............................ $ 1,484 $ -- $ -- $ -- $ -- $ 1,484
States and political subdivisions ......... 8,756 31,477 18,935 2,741 -- 61,909
Other securities .......................... -- 53 -- 49 300 402
-------- -------- -------- ------- ------ --------
$ 10,240 $ 31,530 $ 18,935 $ 2,790 $ 300 $ 63,795
======== ======== ======== ======= ====== ========
WEIGHTED AVERAGE YIELD
U.S. Government agencies and
corporations ............................ 6.36% --% --% --% --% 6.36%
States and political subdivisions ......... 4.19 4.45 4.63 4.90 -- 4.49
Other securities .......................... -- 7.33 -- 6.75 3.75 4.59
-------- -------- -------- ------- ------ --------
4.50% 4.46% 4.63% 4.93% 3.75% 4.53%
======== ======== ======== ======= ====== ========
AVAILABLE FOR SALE -- FAIR VALUE
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER NO CONTRACTUAL
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS MATURITY TOTAL
------------ ---------- ----------- ------------- --------------- -------------
U.S Treasury ................. $ 5,921 $ 5,017 $ 1,946 $ -- $ -- $ 12,884
U.S. Government agencies and
corporations ................ 11,919 108,968 157,006 199,751 -- 477,644
Other securities (1) ......... 501 248 42,006 23,146 76,679 142,580
-------- --------- --------- --------- -------- ---------
$ 18,341 $ 114,233 $ 200,958 $ 222,897 $ 76,679 $ 633,108
======== ========= ========= ========= ======== =========
WEIGHTED AVERAGE YIELD
U.S Treasury ................. 4.59% 6.04% 5.92% --% --% 5.35%
U.S. Government agencies and
corporations ................ 5.16 6.14 6.39 7.49 -- 6.76
Other securities (1) ......... 5.41 5.13 6.14 6.57 -- 6.28
-------- --------- --------- --------- -------- ---------
4.98% 6.13% 6.33% 7.40% --% 6.67%
======== ========= ========= ========= ========= =========
- --------
(1) Other securities are made up primarily of investments in community banks,
the investment in Net.B@nk common stock, Federal Home Loan Bank stock and
corporate bonds. Approximately $77 million of these securities, which have
no contractual maturity, have no yield and accordingly are excluded from the
"Other Securities" yield calculation as well as the overall "Available for
Sale" yield calculation.
34
INTANGIBLE ASSETS AND OTHER ASSETS
The intangible assets balance at December 31, 1999 of $113.4 million was
attributable to goodwill of $105.0 million and core deposit balance premiums of
$8.4 million. The intangible assets balance at December 31, 1998 of $130.4
million was attributable to goodwill of $116.3 million, core deposit balance
premiums of $10.6 million and credit card intangibles of $3.5 million.
At December 31, 1999, other assets included other real estate owned of $2.4
million and mortgage servicing rights of $24.9 million. At December 31, 1998,
other assets included other real estate owned of $3.2 million, which was
primarily attributable to one-to-four family residential mortgages associated
with the acquisition of Poinsett Financial Corporation, and mortgage servicing
rights of $25.1 million.
INTEREST-BEARING LIABILITIES
During 1999, interest-bearing liabilities averaged $2.3 billion, compared
with $2.0 billion in 1998. This increase resulted principally from acquisitions
and internal deposit growth related to account promotions, sales efforts and the
introduction of Internet banking. The average interest rates were 4.57% and
4.96% in 1999 and 1998, respectively. At December 31, 1999, interest-bearing
deposits comprised approximately 87% of total deposits and 79% of
interest-bearing liabilities.
The Company's primary source of funds for loans and investments is its
deposits which are gathered through the banking subsidiaries' branch network.
Deposits grew 9% to $2.5 billion at December 31, 1999 from $2.3 billion at
December 31, 1998. The Company added approximately $53 million in deposits from
the April 1999 purchase of Citizens First. In the last half of 1999, the Company
sold approximately $54.4 million in deposits related to the sale of four branch
offices. The lower deposit growth rate reflects the Company's focus on reducing
the cost of deposits. During 1999, total interest-bearing deposits averaged $2.1
billion with a rate of 4.46%, compared with $1.8 billion with a rate of 4.85% in
1998. During 1999, deposit pricing remained very competitive. The Company
expects this pricing environment to continue. Average noninterest-bearing
deposits as a percentage of average total deposits increased slightly to 14% in
1999 from 13% in 1998. Average noninterest-bearing deposits increased 22% during
1999.
Table 13 shows the breakdown of total deposits by type of deposit and the
respective percentage of total deposits.
TABLE 13
- --------------------------------------------------------------------------------
TYPES OF DEPOSITS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
BALANCE AS OF DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Demand deposit accounts ................... $ 331,865 $ 332,531 $ 239,700 $ 209,365 $ 168,283
NOW accounts .............................. 479,251 493,991 322,276 189,039 137,234
Savings accounts .......................... 91,629 95,311 78,273 61,030 69,234
Money market accounts ..................... 318,028 255,305 213,982 198,405 188,764
Time deposits ............................. 874,847 822,540 763,138 490,978 413,808
Time deposits of $100,000 and over......... 419,374 334,505 261,258 201,125 156,869
---------- ---------- ---------- ---------- ----------
Total deposits ......................... $2,514,994 $2,334,183 $1,878,627 $1,349,942 $1,134,192
========== ========== ========== ========== ==========
35
TABLE 13 (CONTINUED)
- --------------------------------------------------------------------------------
PERCENTAGE OF DEPOSITS
- --------------------------------------------------------------------------------
AS OF DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Demand deposit accounts ................... 13.20% 14.25% 12.76% 15.51% 14.84%
NOW accounts .............................. 19.06 21.16 17.15 14.00 12.10
Savings accounts .......................... 3.64 4.08 4.17 4.52 6.10
Money market accounts ..................... 12.65 10.94 11.39 14.70 16.64
Time deposits ............................. 34.78 35.24 40.62 36.37 36.48
Time deposits of $100,000 and over......... 16.67 14.33 13.91 14.90 13.84
------ ------ ------ ------ ------
Total deposits ......................... 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
In September 1999, the Company introduced an Internet bank, Bank CaroLine,
which is offered as a service of Carolina First Bank, F.S.B. Bank CaroLine
serves customers exclusively through the web and phone support. Deposit rates
for Bank CaroLine are generally higher than the rates offered by the Company's
other subsidiary banks due to lower operating costs. Deposits gathered through
Bank CaroLine will be deployed by purchasing commercial and consumer loans
generated by the Company's other subsidiary banks. At December 31, 1999, total
deposits for Bank CaroLine were approximately $70 million.
During the first quarter of 1999, the Company opened a branch in the Cayman
Islands. The branch is a "shell" branch of Carolina First Bank and, accordingly,
involved minimal start-up costs. The primary function of the branch is to obtain
deposits from the Eurocurrency interbank markets, which will be utilized in
funding Carolina First Bank's domestic loan portfolio. The bank views this
branch primarily as a vehicle for entrance into a funds market in which it is
not currently active.
Time deposits of $100,000 or more represented 17% and 14% of total deposits
at December 31, 1999 and 1998, respectively. The Company's large denomination
time deposits are generally from customers within the local market areas of its
banks and, therefore, provide a greater degree of stability than is typically
associated with this source of funds. The Company does not have any brokered
deposits.
Table 14 shows a maturity schedule for time deposits greater than $100,000.
TABLE 14
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT GREATER THAN $100,000
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Maturing in three months or less ................... $138,442
Maturing in over three through six months .......... 75,501
Maturing in over six through twelve months ......... 136,387
Maturing in over twelve months ..................... 69,044
--------
Total ..................................................... $419,374
========
In 1999, average short-term borrowings, which includes repurchase
agreements and Federal Home Loan Bank ("FHLB") advances, totaled $184.8 million
compared with $121.9 million in 1998. This increase was primarily attributable
to a rise in average short-term FHLB advances to $54.2 million in 1999 from
$397,000 in 1998 to fund increased loan activity. Short-term FHLB advances are a
source of funding which the Company uses depending on the current level of
deposits and management's willingness to raise deposits through market
promotions.
36
Table 15 shows balance and interest rate information on the Company's short
term borrowings.
TABLE 15
- --------------------------------------------------------------------------------
SHORT TERM BORROWINGS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
MAXIMUM
OUTSTANDING AVERAGE INTEREST
AT ANY AVERAGE INTEREST ENDING RATE AT
YEAR ENDED DECEMBER 31, MONTH END BALANCE RATE BALANCE YEAR END
- -------------------------------------- ------------ --------- -------- -------- ---------
1999
Federal funds purchased and repurchase
agreements ......................... $152,622 $130,303 4.74% $137,618 4.78%
Advances from the FHLB ............... 235,990 54,212 5.26 235,990 5.01
Other short-term borrowings .......... 326 322 7.45 317 7.08
-------- ---- -------- ----
$184,837 4.90% $373,925 4.93%
======== ==== ======== ====
1998
Federal funds purchased and repurchase
agreements ......................... $154,065 $116,908 5.26% $154,065 4.22%
Advances from the FHLB ............... 920 397 5.82 920 5.82
Commercial paper and other short-term
borrowings ......................... 22,036 4,563 6.93 838 7.79
-------- ---- -------- ----
$121,868 5.32% $155,823 4.25%
======== ==== ======== ====
1997
Federal funds purchased and repurchase
agreements ......................... $113,421 $ 91,289 5.32% $112,161 5.22%
Advances from the FHLB ............... 115,000 57,407 5.84 -- --
Commercial paper and other short-term
borrowings ......................... 27,578 20,524 6.21 27,578 6.34
-------- ---- -------- ----
$169,220 5.61% $139,739 5.44%
======== ==== ======== ====
Long-term FHLB advances increased to $189.4 million at December 31, 1999
from $34.2 million at December 31, 1998. This increase was primarily to match
fund mortgage-backed securities with FHLB borrowings (see "BALANCE SHEET REVIEW:
Securities").
CAPITAL RESOURCES AND DIVIDENDS
Total shareholders' equity amounted to $409.8 million, or 11.51% of total
assets, at December 31, 1999, compared with $362.0 million, or 12.26% of total
assets, at December 31, 1998. The increase in total shareholders' equity
resulted principally from the retention of earnings less cash dividends paid and
stock repurchased. In addition, the recording of the Company's investment in
Net.B@nk at market value during the third quarter of 1999 added $25.8 million
(net of taxes) to the Company's unrealized gain on securities, which is a
component of shareholders' equity. In the fourth quarter of 1998, the Company
repurchased 394,874 shares of common stock, which decreased shareholders' equity
$9.8 million, in connection with the acquisition of First National Bank of
Pickens County. In the first quarter of 1999, the Company repurchased 40,000
shares of common stock. In March 1999, the Company rescinded its share
repurchase program due to the planned purchase of Citizens and Citrus Bank.
Book value per share at December 31, 1999 and 1998 was $15.93 and $14.60,
respectively. Recording the Company's Net.B@nk investment at market value during
the third quarter of 1999 added approximately $1.00 to book value. Tangible book
value per share at December 31, 1999 and 1998 was $11.52 and $9.34,
respectively. Tangible book value was below book value as a result of the
purchase premiums associated with branch acquisitions and the acquisitions of CF
Mortgage, RPGI and five banks (all of which were accounted for as purchases).
37
The Company and its Subsidiary Banks continue to maintain higher capital
ratios than required under regulatory guidelines and exceeded the well
capitalized requirements at December 31, 1999. The Table 16 below sets forth
various capital ratios for the Company and its Subsidiary Banks.
TABLE 16
- --------------------------------------------------------------------------------
CAPITAL RATIOS
- --------------------------------------------------------------------------------
AS OF WELL CAPITALIZED
12/31/99 REQUIREMENT
---------- -----------------
THE COMPANY
Total risk-based capital .......... 11.80% n/a
Tier 1 risk-based capital ......... 10.00 n/a
Leverage ratio .................... 7.98 n/a
CAROLINA FIRST BANK
Total risk-based capital .......... 10.28% 10.0%
Tier 1 risk-based capital ......... 9.47 6.0
Leverage ratio .................... 8.33 5.0
CITRUS BANK
Total risk-based capital .......... 10.02% 10.0%
Tier 1 risk-based capital ......... 8.91 6.0
Leverage ratio .................... 7.95 5.0
CAROLINA FIRST BANK, FSB
Total risk-based capital .......... 11.98% 10.0%
Tier 1 risk-based capital ......... 11.16 6.0
Leverage ratio .................... 6.10 5.0
The Subsidiary Banks also have the highest rating in regards to Federal
Deposit Insurance Corporation insurance assessments and, accordingly, pay the
lowest insurance premium rates.
The Company and its subsidiaries are subject to certain regulatory
restrictions on the amount of dividends they are permitted to pay. South
Carolina's banking regulations restrict the amount of dividends that Carolina
First Bank can pay. All dividends paid from Carolina First Bank are payable only
from the net income of the current year. Florida banking statutes limit the
amount of dividends that Citrus Bank can pay without prior approval of Citrus
Bank's regulatory agency. The portion of retained earnings of Citrus Bank which
may be paid as dividends without prior approval totaled approximately $4,195,000
at December 31, 1999, subject to the minimum capital requirements. The Office of
Thrift Supervision restricts the amount of dividends that Carolina First Bank,
F.S.B. can pay to the Company. These restrictions require Carolina First Bank,
F.S.B. to obtain prior approval of the Office of Thrift Supervision and not pay
dividends in excess of current earnings.
The Company has paid a cash dividend each quarter since the initiation of
cash dividends on February 1, 1994. At the December 15, 1999 meeting, the Board
of Directors approved a $0.10 per share cash dividend on the common stock, which
represents an effective annual increase of approximately 11%. The Company
presently intends to pay a quarterly cash dividend on the Common Stock; however,
future dividends will depend upon the Company's financial performance and
capital requirements.
In January and February 2000, the Company adopted a share repurchase
program to better manage its capital position. The Board of Directors authorized
the repurchase of up to 1,000,000 shares of the Company's common stock. The
Company intends to reissue the repurchased shares in connection with its
proposed merger with Anchor Financial Corporation, which is expected to be
accounted for as a pooling-of-interests.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management
38
actively monitors and manages its interest rate risk exposure. Although the
Company manages other risks, such as credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be its
most significant market risk and could potentially have the largest material
effect on the Company's financial condition and results of operations. Other
types of market risks, such as foreign currency exchange risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
Table 17 shows the Company's financial instruments that are sensitive to
changes in interest rates as well as the Company's interest sensitivity gap. The
Company uses certain assumptions to estimate fair values and expected
maturities. For assets, expected maturities are based upon contractual maturity,
projected repayments, prepayment of principal and potential calls. For core
deposits without contractual maturity (i.e., interest checking, savings and
money market accounts), the table presents principal cash flows based on
management's judgement concerning their most likely runoff. The actual
maturities and runoff could vary substantially if future prepayments, runoff and
calls differ from the Company's historical experience and management's
judgement. Interest sensitivity gap ("GAP position") measures the difference
between rate sensitive assets and rate sensitive liabilities during a given time
frame. The Company's GAP position, while not a complete measure of interest
sensitivity, is reviewed periodically to provide insights related to the static
repricing structure of assets and liabilities. At December 31, 1999, on a
cumulative basis through twelve months, rate-sensitive liabilities exceeded
rate-sensitive assets, resulting in a liability sensitive position of $187.5
million.
39
TABLE 17
- --------------------------------------------------------------------------------
MARKET RISK SENSITIVITY
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
AVERAGE 0-3 4-6 7-12
YIELD MONTHS MONTHS MONTHS 2001
---------- ------------- ------------- ------------- -------------
INTEREST-SENSITIVE ASSETS
Earning assets
Loans, net of unearned income .......... 9.08% $ 334,855 $ 212,506 $ 401,408 $ 445,968
Investment securities (1) .............. 6.22 13,629 7,759 18,830 29,778
Federal funds sold ..................... 3.87 925 -- -- --
Interest bearing balances with other
banks ................................. 5.48 500 250 250 --
----------- ---------- ---------- ----------
Total earning assets ................. 8.54% $ 349,909 $ 220,515 $ 420,488 $ 475,746
=========== ========== ========== ==========
INTEREST-SENSITIVE LIABILITIES
Liabilities
Interest-sensitive liabilities
Interest-bearing deposits
Interest Checking .................... 3.22% $ 67,096 $ 28,755 $ 95,850 $ 91,057
Savings .............................. 2.64 49,612 24,806 8,269 66,786
Money Market ......................... 4.06 24,053 3,207 4,811 21,991
Certificates of Deposit .............. 5.24 369,749 239,391 433,986 224,445
----------- ---------- ---------- ----------
Total interest-bearing
deposits ............................ 4.46 510,510 296,159 542,916 404,279
----------- ---------- ---------- ----------
Short-term borrowings ................. 4.90 347,937 329 25,659 --
Long-term borrowings .................. 6.75 -- -- -- 1,399
----------- ---------- ---------- ----------
Total interest-sensitive
liabilities ......................... 4.57% $ 858,447 $ 296,488 $ 568,575 $ 405,678
=========== ========== ========== ==========
Net contractual interest sensitive
position ............................... (508,538) (75,973) (148,087) 70,068
Adjustments for repricing
characteristics of variable rate
loans (2) .............................. 855,089 (106,128) (203,911) (127,296)
----------- ---------- ---------- ----------
Interest sensitive gap .................. $ 346,551 $ (182,101) $ (351,998) $ (57,228)
=========== ========== ========== ==========
Cumulative interest sensitive gap ....... $ 346,551 $ 164,450 $ (187,548) $ (244,776)
CARRYING FAIR
2002 2003 2004 AFTER 2004 VALUE VALUE
------------- -------------- ------------- ------------- ------------- -------------
INTEREST-SENSITIVE ASSETS
Earning assets
Loans, net of unearned income .......... $ 239,323 $ 201,400 $ 259,186 $ 334,579 $2,429,225 $2,417,552
Investment securities (1) .............. 16,985 44,416 90,454 447,885 669,736 669,261
Federal funds sold ..................... -- -- -- -- 925 925
Interest bearing balances with other
banks ................................. -- -- -- 27,820 28,820 28,820
---------- ---------- --------- ----------- ---------- ----------
Total earning assets ................. $ 256,308 $ 245,816 $ 349,640 $ 810,284 $3,128,706 $3,116,558
========== ========== ========= =========== ========== ==========
INTEREST-SENSITIVE LIABILITIES
Liabilities
Interest-sensitive liabilities
Interest-bearing deposits
Interest Checking .................... $ 57,510 $ 43,133 $ 33,547 $ 62,303 $ 479,251 $ 479,251
Savings .............................. 60,425 44,524 34,983 28,623 318,028 318,028
Money Market ......................... 16,493 8,247 7,330 5,497 91,629 91,629
Certificates of Deposit .............. 12,639 8,540 5,430 41 1,294,221 1,293,211
---------- ---------- --------- ----------- ---------- ----------
Total interest-bearing
deposits ............................ 147,067 104,444 81,290 96,464 2,183,129 2,182,119
---------- ---------- --------- ----------- ---------- ----------
Short-term borrowings ................. -- -- -- -- 373,925 373,925
Long-term borrowings .................. 7,742 1,245 50,328 157,440 218,154 217,204
---------- ---------- --------- ----------- ---------- ----------
Total interest-sensitive
liabilities ......................... $ 154,809 $ 105,689 $ 131,618 $ 253,904 $2,775,208 $2,773,248
========== ========== ========= =========== ========== ==========
Net contractual interest sensitive
position ............................... 101,499 140,127 218,022 556,380 353,498
Adjustments for repricing
characteristics of variable rate
loans (2) .............................. (102,266) (62,447) (68,112) (184,929) --
---------- ---------- --------- ----------- ----------
Interest sensitive gap .................. $ (767) $ 77,680 $ 149,910 $ 371,451 $ 353,498
========== ========== ========= =========== ==========
Cumulative interest sensitive gap ....... $ (245,543) $ (167,863) $ (17,953) $ 353,498 $ --
- ------
(1) Investment securities exclude the unrealized gain on the sale of securities
of $31.8 million.
(2) The adjustment for repricing characteristics of variable rate loans adjusts
the net contractual interest sensitive position for the immediate repricing
of variable rate loans. The contractual maturities are used for the net
contractual interest sensitive position.
40
Achieving consistent growth in net interest income is the primary goal of
the Company's asset/liability function. The Company attempts to control the mix
and maturities of assets and liabilities to achieve consistent growth in net
interest income despite changes in market interest rates. The Company seeks to
accomplish this goal while maintaining adequate liquidity and capital. The
Company's asset/liability mix is sufficiently balanced so that the effect of
interest rates moving in either direction is not expected to have a significant
impact on net interest income over time.
The Company's Asset/Liability Committee uses a simulation model to assist
in achieving consistent growth in net interest income while managing interest
rate risk. The model takes into account interest rate changes as well as changes
in the mix and volume of assets and liabilities. The model simulates the
Company's balance sheet and income statement under several different rate
scenarios. The model's inputs (such as interest rates and levels of loans and
deposits) are updated on a periodic basis in order to obtain the most accurate
forecast possible. The forecast presents information over a twelve-month period.
It reports a base case in which interest rates remain flat and reports
variations that occur when rates increase and decrease 200 basis points.
According to the model as of December 31, 1999, the Company is positioned so
that net interest income will increase $10.1 million if interest rates rise in
the next twelve months and will decrease $5.9 million if interest rates decline
in the next twelve months. The larger increase in net interest income when
interest rates are increased 200 basis points is due to the assumptions made
regarding deposit repricings based on the Company's experience. In an increasing
rate environment, the Company assumes that deposits will not increase the full
200 basis points whereas in a declining rate environment, it is assumed that
deposit rates will decline the entire 200 basis points. Computation of
prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates and loan
prepayments, and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate any actions the Company could
undertake in response to changes in interest rates.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company both at the holding company level as well as at the subsidiary level.
The holding company and non-banking subsidiaries of the Company require cash for
various operating needs, including general operating expenses, payment of
dividends to shareholders, interest on borrowings, extensions of credit,
business combinations and capital infusions into subsidiaries. The primary
source of liquidity for the Company's holding company is dividends from the
banking and non-banking subsidiaries.
The Company's Subsidiary Banks have cash flow requirements involving
withdrawals of deposits, extensions of credit and payment of operating expenses.
The principal sources of funds for liquidity purposes for the Subsidiary Banks
are customers' deposits, principal and interest payments on loans, loan sales or
securitizations, securities available for sale, maturities of securities,
temporary investments and earnings. The Subsidiary Banks' liquidity is also
enhanced by the ability to acquire new deposits through its established branch
network of 62 branches in South Carolina and 13 branches in Florida as of
December 31, 1999. The liquidity ratio is an indication of a company's ability
to meet its short-term funding obligations. At December 31, 1999, the liquidity
ratios for Carolina First Bank, Carolina First Bank, F.S.B., and Citrus Bank
were approximately 12.7%, 14.8% and 10.9%, respectively. The liquidity needs of
the Subsidiary Banks are a factor in developing their deposit pricing structure;
deposit pricing may be altered to retain or grow deposits if deemed necessary.
The Subsidiary Banks have access to borrowing from the FHLB and maintain
short-term lines of credit from unrelated banks. At December 31, 1999, unused
borrowing capacity from the FHLB totaled approximately $40 million with an
outstanding balance of $425.4 million. At December 31, 1999, the Subsidiary
Banks had unused short-term lines of credit totaling approximately $75 million
(which are withdrawable at the lender's option). Management believes that these
sources are adequate to meet its liquidity needs.
The Company has entered into lease agreements for three new buildings
located in Columbia and Greenville, South Carolina. Payments began during the
fourth quarter of 1999 on two of the buildings and payments will begin in the
first half of 2000 on the third building. Aggregate annual lease payments
associated with these
41
buildings are expected to total approximately $5.8 million. In addition, the
Company anticipates related leasehold improvements of approximately $18.6
million and capitalized furniture and equipment of approximately $6.0 million.
The Company signed a contract in December 1999 with Fiserv, Inc. for a new
core operating system called the Comprehensive Banking System ("CBS") to provide
the infrastructure for existing and future growth plans. The associated
investment is expected to total approximately $4.6 million for capitalized
expenses and $1.1 million for annual service agreements. The system conversion
began during the first quarter of 2000.
ASSET QUALITY
A willingness to take credit risk is inherent in the decision to grant
credit. Prudent risk-taking requires a credit risk management system based on
sound policies and control processes that ensure compliance with those policies.
The Company's credit risk management system is defined by policies approved by
the Board of Directors that govern the risk underwriting, portfolio monitoring,
and problem loan administration processes. Adherence to underwriting standards
is managed through a multi-layered credit approval process and immediate
after-the-fact review by credit risk management of loans approved by lenders.
Compliance with loan monitoring policies is managed through daily review by
credit risk managers, monthly reviews of exception reports, and ongoing analysis
of asset quality trends. The administration of problem loans is driven by
policies that require written plans for resolution and quarterly meetings with
credit risk management to review progress. Credit risk management activities,
including specific reviews of new large credits, are reviewed by the Directors
Credit Committees of each banking subsidiary, which meet monthly.
Subsequent to year-end, a new credit audit function was launched to provide
management and the Board of Directors a more comprehensive independent review of
compliance with credit policy both at the city office level and at the credit
risk management level. The results of these credit audits, which focus on
testing for compliance with credit policies and procedures, are reported to the
Directors Credit Committees of the banking subsidiaries.
Nonperforming assets as a percentage of loans and foreclosed property
totaled 0.46% and 0.28% as of December 31, 1999 and 1998, respectively.
Nonperforming assets increased to $10.9 million as of December 31, 1999 from
$5.3 million at December 31, 1998 primarily due to the transfer of a $4.0
million loan to nonaccrual status in the third quarter of 1999. This loan is a
3.2% participation in a shared national credit. It is not delinquent and, based
on current facts and circumstances, management believes repayment in full is
possible. However, recent developments justify this change in status, and
reserves sufficient to absorb potential loss have been allocated to the loan.
In connection with this syndicated national credit, Carolina First Bank
filed a lawsuit in August 1999 in U.S. District Court in the Southern District
on New York against Banque Paribas, the lead bank on this syndicated credit.
This lawsuit seeks, among other things, an order requiring Banque Paribas to
purchase Carolina First Bank's participation in the credit. Carolina First
Bank's claim is based on agreements between Carolina First Bank and Banque
Paribas which require Carolina First Bank's participation to be purchased under
certain circumstances, which Carolina First Bank believes have occurred.
Although Carolina First Bank believes it should prevail in this lawsuit, the
outcome cannot be predicted.
As discussed under "Equity Investments", the Company makes loans to
companies that have a bank-related technology or service the Company or its
subsidiaries can use. These loans represent a higher credit risk to the Company
due to the start up nature of these companies.
As demonstrated by the following analytical measures of asset quality,
management believes the Company has effectively managed its credit risk. Net
loan charge-offs, including credit card receivables, totaled $9.7 million and
$11.6 million in 1999 and 1998, respectively, or 0.44% and 0.66%, respectively,
as an annualized percentage of average loans. Excluding credit card charge-offs
and balances, annualized net loan charge-offs as a percentage of average loans
were 0.37% and 0.43% during 1999 and 1998, respectively.
42
Table 18 presents information pertaining to nonperforming assets for the
years indicated.
TABLE 18
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
Nonaccrual loans ....................................... $ 8,464 $ 870 $ 1,165 $ 960 $ 1,289
Restructured loans ..................................... -- 1,283 1,283 1,909 1,085
-------- ------- ------- ------- -------
Total nonperforming loans ............................. 8,464 2,153 2,448 2,869 2,374
Other real estate owned ................................ 2,440 3,168 1,319 3,011 2,508
-------- ------- ------- ------- -------
Total nonperforming assets ............................ $ 10,904 $ 5,321 $ 3,767 $ 5,880 $ 4,882
======== ======= ======= ======= =======
Loans past due 90 days still accruing interest ......... $ 5,100 $ 7,080 $ 4,125 $ 2,371 $ 2,748
======== ======= ======= ======= =======
Total nonperforming assets as a percentage of loans and
other real estate owned (1) ........................... 0.46% 0.28% 0.26% 0.50% 0.51%
======== ======= ======= ======= =======
Allowance for loan losses as a percentage of
nonperforming loans ................................... 2.82x 9.41x 7.10x 4.20x 3.79x
======== ======= ======= ======= =======
- --------
(1) Calculated using loans held for investment net of unearned income.
CURRENT ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. This
effective date reflects the deferral provided by SFAS 137, which defers the
earlier effective date specified in SFAS 133. The Company has not yet determined
the financial impact of the adoption of SFAS 133.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Asset/Liability Management and Market Risk" in Management's Discussion
and Analysis of Financial Condition and Results of Operations for quantitative
and qualitative disclosures about market risk.
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS, CAROLINA FIRST CORPORATION
We have audited the consolidated balance sheets of Carolina First
Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of income, changes in shareholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Carolina
First Corporation and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
Greenville, South Carolina
January 25, 2000
STATEMENT OF FINANCIAL RESPONSIBILITY
Management of Carolina First Corporation (the "Company") is committed to
quality customer service, enhanced shareholder value, financial stability and
integrity in all dealings. Management has prepared the accompanying consolidated
financial statements in conformity with generally accepted accounting
principles. The statements include amounts that are based on management's best
estimates and judgements. Other financial information contained in this report
is presented on a basis consistent with financial statements.
To ensure the integrity, objectivity and fairness of data in these
statements, management of the Company has established and maintains an internal
control structure that is supplemented by a program of internal audits. The
internal control structure is designed to provide reasonable assurance that
assets are safeguarded and transactions are executed, recorded and reported in
accordance with management intentions and authorizations. The financial
statements have been audited by KPMG LLP, independent auditors, in accordance
with generally accepted auditing standards. KPMG LLP reviews the results of its
audit with both management and the Audit Committee of the Board of Directors of
the Company. The Audit Committee, composed entirely of outside directors, meets
periodically with management, internal auditors and KPMG LLP (separately and
jointly) to determine that each is fulfilling its responsibilities and to
consider recommendations for enhancing internal controls. The financial
statements have not been reviewed, or confirmed for accuracy or relevance, by
the Federal Deposit Insurance Corporation.
/s/ Mack I. Whittle, Jr. /s/ William S. Hummers III /s/ Edward R. Matthews
Mack I. Whittle, Jr. William S. Hummers III Edward R. Matthews
President and Executive Vice President Chief Financial Officer
Chief Executive Officer
44
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
ASSETS
Cash and due from banks ...................................................... $ 102,986 $ 116,239
Interest-bearing bank balances ............................................... 28,820 54,988
Federal funds sold and resale agreements ..................................... 925 28,041
Securities
Trading ..................................................................... 4,668 3,543
Available for sale .......................................................... 633,108 405,137
Held for investment (market value $63,320 in 1999 and $52,940 in 1998)....... 63,795 52,077
---------- ----------
Total securities .......................................................... 701,571 460,757
---------- ----------
Loans
Loans held for sale ......................................................... 45,316 112,918
Loans held for investment ................................................... 2,389,436 1,925,332
Less unearned income ...................................................... 5,527 8,064
Less allowance for loan losses ............................................ 23,832 20,266
---------- ----------
Net loans ................................................................ 2,405,393 2,009,920
---------- ----------
Premises and equipment, net .................................................. 57,751 54,630
Accrued interest receivable .................................................. 21,651 19,787
Intangible assets ............................................................ 113,431 130,415
Other assets ................................................................. 129,360 78,515
---------- ----------
$3,561,888 $2,953,292
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing ....................................................... $ 331,865 $ 332,531
Interest-bearing .......................................................... 2,183,129 2,001,652
---------- ----------
Total deposits ........................................................... 2,514,994 2,334,183
Federal funds purchased and repurchase agreements ........................... 137,618 154,065
Other short-term borrowings ................................................. 236,307 1,758
Long-term debt .............................................................. 218,154 63,081
Accrued interest payable .................................................... 18,307 16,530
Other liabilities ........................................................... 26,691 21,688
---------- ----------
Total liabilities ......................................................... 3,152,071 2,591,305
---------- ----------
Commitments and Contingencies
Shareholders' Equity
Preferred stock -- no par value; authorized 10,000,000 shares; issued and
outstanding none .......................................................... -- --
Common stock -- par value $1 per share; authorized 100,000,000 shares; issued
and outstanding 25,723,444 shares in 1999 and 24,785,621 shares in 1998 ... 25,723 24,786
Surplus ..................................................................... 308,765 301,215
Retained earnings ........................................................... 58,625 38,113
Guarantee of employee stock ownership plan debt and nonvested restricted
stock ..................................................................... (3,532) (2,963)
Accumulated other comprehensive income, net of tax .......................... 20,236 836
---------- ----------
Total shareholders' equity ................................................ 409,817 361,987
---------- ----------
$3,561,888 $2,953,292
========== ==========
See Notes to Consolidated Financial Statements which are an integral part of
these statements.
45
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------- ------------- --------------
INTEREST INCOME
Interest and fees on loans ..................................... $ 199,679 $ 166,182 $ 127,528
Interest and dividends on securities
Taxable ...................................................... 23,213 21,826 13,182
Exempt from Federal income taxes ............................. 2,185 1,662 1,446
----------- ----------- -----------
Total interest and dividends on securities .................. 25,398 23,488 14,628
Interest on short-term investments ........................... 3,791 7,390 2,081
----------- ----------- -----------
Total interest income ....................................... 228,868 197,060 144,237
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits ........................................... 92,849 87,599 59,926
Interest on short-term borrowings .............................. 9,049 6,488 9,488
Interest on long-term debt ..................................... 5,226 3,818 2,592
----------- ----------- -----------
Total interest expense ...................................... 107,124 97,905 72,006
----------- ----------- -----------
Net interest income ......................................... 121,744 99,155 72,231
PROVISION FOR LOAN LOSSES ...................................... 15,846 12,724 12,108
----------- ----------- -----------
Net interest income after provision for loan losses ......... 105,898 86,431 60,123
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts............................. 11,519 9,385 7,502
Mortgage banking income ........................................ 3,688 4,808 3,656
Fees for investment services ................................... 1,984 1,570 1,407
Loan securitization income ..................................... 1,646 1,635 (545)
Gain on sale of securities ..................................... 399 580 3,011
Gain on disposition of equity investments ...................... 15,471 -- --
Gain on sale of credit cards ................................... 3,252 -- --
Gain on disposition of assets and liabilities .................. 2,523 -- 2,250
Other .......................................................... 7,904 6,411 3,119
----------- ----------- -----------
Total noninterest income .................................... 48,386 24,389 20,400
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and wages ............................................. 34,815 29,227 23,187
Employee benefits .............................................. 8,818 6,434 5,259
Occupancy ...................................................... 8,347 6,613 5,560
Furniture and equipment ........................................ 7,580 5,124 4,137
Amortization of intangibles .................................... 6,749 4,468 1,541
Charitable contribution to foundation .......................... 11,890 -- --
Merger-related costs ........................................... 5,504 -- --
Other .......................................................... 30,118 20,112 18,903
----------- ----------- -----------
Total noninterest expenses .................................. 113,821 71,978 58,587
----------- ----------- -----------
Income before income taxes .................................. 40,463 38,842 21,936
Income taxes ................................................... 13,312 14,397 7,896
----------- ----------- -----------
Net income .................................................. $ 27,151 $ 24,445 $ 14,040
=========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic ....................................................... $ 1.08 $ 1.15 $ 1.00
Diluted ..................................................... 1.06 1.13 0.99
AVERAGE COMMON SHARES OUTSTANDING:
Basic ....................................................... 25,248,900 21,284,266 14,046,599
Diluted ..................................................... 25,597,573 21,684,732 14,232,643
See Notes to Consolidated Financial Statements which are an integral part of
these statements.
46
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
($ IN THOUSANDS, EXCEPT SHARE DATA)
SHARES OF
COMMON PREFERRED COMMON
STOCK STOCK STOCK
-------------- ---------- ----------
BALANCE, DECEMBER 31, 1996 .......................... 12,867,883 $ 943 $12,868
Net income .......................................... -- -- --
Other comprehensive income, net of tax of $2,193..... -- -- --
Comprehensive income ................................ -- -- --
Cash dividends declared ($0.29 per common
share) ............................................. -- -- --
Common stock activity:
Stock offering ..................................... 895,800 -- 896
Purchase accounting acquisitions ................... 4,005,815 -- 4,006
Dividend reinvestment plan ......................... 52,495 -- 53
Employee stock purchase plan ....................... 9,226 -- 9
Employee stock ownership plan ...................... 176,471 -- 176
Exercise of stock options and stock warrants ....... 81,422 -- 81
Conversion and redemption of preferred stock ....... 108,341 (943) 108
Miscellaneous ....................................... -- -- --
---------- ------- -------
BALANCE, DECEMBER 31, 1997 .......................... 18,197,453 -- 18,197
Net income .......................................... -- -- --
Other comprehensive income (loss), net of tax of
$2,019.............................................. -- -- --
Comprehensive income ................................ -- -- --
Cash dividends declared ($0.33 per common
share) ............................................. -- -- --
Common stock activity:
Stock offering ..................................... 2,242,115 -- 2,242
Repurchase of stock ................................ (394,874) -- (395)
Acquisitions ....................................... 4,569,706 -- 4,570
Dividend reinvestment plan ......................... 56,455 -- 57
Restricted stock plan .............................. 30,457 -- 31
Employee stock purchase plan ....................... 9,376 -- 9
Exercise of stock options and stock warrants ....... 74,933 -- 75
Miscellaneous ....................................... -- -- --
---------- ------- -------
BALANCE, DECEMBER 31, 1998 .......................... 24,785,621 -- 24,786
Net income .......................................... -- -- --
Other comprehensive income, net of tax of
$11,026............................................. -- -- --
Comprehensive income ................................ -- -- --
Cash dividends declared ($0.37 per common
share) ............................................. -- -- --
Common stock activity:
Repurchase of stock ................................ (40,000) -- (40)
Acquisition ........................................ 505,851 -- 506
Dividend reinvestment plan ......................... 65,856 -- 65
Restricted stock plan .............................. 43,291 -- 43
Employee stock purchase plan ....................... 11,926 -- 12
Exercise of stock options and stock warrants ....... 350,899 -- 351
Miscellaneous ....................................... -- -- --
---------- ------- -------
BALANCE, DECEMBER 31, 1999 .......................... 25,723,444 $ -- $25,723
========== ======= =======
RETAINED ACCUMULATED
EARNINGS OTHER
AND COMPREHENSIVE
SURPLUS OTHER* INCOME TOTAL
----------- ----------- -------------- -----------
BALANCE, DECEMBER 31, 1996 .......................... $ 89,348 $ 9,213 $ 483 $112,855
Net income .......................................... -- 14,040 -- 14,040
Other comprehensive income, net of tax of $2,193..... -- -- 4,070 4,070
--------
Comprehensive income ................................ -- -- -- 18,110
--------
Cash dividends declared ($0.29 per common
share) ............................................. -- (3,826) -- (3,826)
Common stock activity:
Stock offering ..................................... 5,068 -- -- 5,964
Purchase accounting acquisitions ................... 75,762 -- -- 79,768
Dividend reinvestment plan ......................... 818 -- -- 871
Employee stock purchase plan ....................... 150 -- -- 159
Employee stock ownership plan ...................... 2,824 (2,750) -- 250
Exercise of stock options and stock warrants ....... 530 -- -- 611
Conversion and redemption of preferred stock ....... 835 -- -- --
Miscellaneous ....................................... -- 451 -- 451
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 .......................... 175,335 17,128 4,553 215,213
Net income .......................................... -- 24,445 -- 24,445
Other comprehensive income (loss), net of tax of
$2,019.............................................. -- -- (3,717) (3,717)
--------
Comprehensive income ................................ -- -- -- 20,728
--------
Cash dividends declared ($0.33 per common
share) ............................................. -- (6,588) -- (6,588)
Common stock activity:
Stock offering ..................................... 38,196 -- -- 40,438
Repurchase of stock ................................ (9,429) -- -- (9,824)
Acquisitions ....................................... 94,665 -- -- 99,235
Dividend reinvestment plan ......................... 1,252 -- -- 1,309
Restricted stock plan .............................. 591 (622) -- --
Employee stock purchase plan ....................... 204 -- -- 213
Exercise of stock options and stock warrants ....... 330 -- -- 405
Miscellaneous ....................................... 71 787 -- 858
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 .......................... 301,215 35,150 836 361,987
Net income .......................................... -- 27,151 -- 27,151
Other comprehensive income, net of tax of
$11,026............................................. -- -- 19,400 19,400
--------
Comprehensive income ................................ -- -- -- 46,551
--------
Cash dividends declared ($0.37 per common
share) ............................................. -- (9,175) -- (9,175)
Common stock activity:
Repurchase of stock ................................ (816) -- -- (856)
Acquisition ........................................ 1,732 2,535 -- 4,773
Dividend reinvestment plan ......................... 1,357 -- -- 1,422
Restricted stock plan .............................. 1,015 (650) -- 408
Employee stock purchase plan ....................... 243 -- -- 255
Exercise of stock options and stock warrants ....... 3,782 -- -- 4,133
Miscellaneous ....................................... 237 82 -- 319
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 .......................... $308,765 $ 55,093 $ 20,236 $409,817
======== ======== ======== ========
- --------
* Other includes guarantee of employee stock ownership plan debt and nonvested
restricted stock.
See Notes to Consolidated Financial Statements which are an integral part of
these statements.
47
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................................... $ 27,151 $ 24,445 $ 14,040
Adjustments to reconcile net income to net cash (used for) provided by operations
Depreciation ...................................................................... 5,135 4,431 3,301
Amortization of intangibles ....................................................... 6,749 4,468 1,541
Charitable contribution to foundation ............................................. 11,890 -- --
Provision for loan losses ......................................................... 15,846 12,724 12,108
Deferred income taxes ............................................................. (6,099) (601) (2,717)
Gain on disposition of assets and liabilities ..................................... (2,523) -- (2,250)
Gain on sale of credit cards ...................................................... (3,252) -- --
Gain on sale of securities ........................................................ (399) (580) (3,011)
Gain on disposition of equity investments ......................................... (15,471) -- --
Trading account assets, net ....................................................... (781) (809) (66)
Originations of mortgage loans held for sale ...................................... (386,851) (490,019) (268,855)
Sale of mortgage loans held for sale .............................................. 296,432 542,402 235,110
Sale of consumer loans ............................................................ -- -- 25,862
Other assets, net ................................................................. (35,489) (10,239) (3,549)
Other liabilities, net ............................................................ (5,941) (1,370) 773
---------- ---------- ----------
Net cash (used for) provided by operating activities ............................. (93,603) 84,852 12,287
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Interest-bearing bank balances .................................................... 26,168 (20,285) 7,026
Federal funds sold and resale agreements .......................................... 19,591 (18,653) (16,161)
Sale of securities available for sale ............................................. 118,953 37,989 116,583
Maturity of securities available for sale ......................................... 151,447 348,528 137,447
Maturity of securities held for investment ........................................ 8,288 11,622 6,732
Purchase of securities available for sale ......................................... (460,226) (490,228) (246,927)
Purchase of securities held for investment ........................................ (19,157) (12,745) (12,046)
Purchase of loans ................................................................. -- -- (25,793)
Origination of loans, net ......................................................... (360,710) (233,058) (161,449)
Disposition of equity investments ................................................. 4,389 -- --
Sale of credit cards .............................................................. 65,624 -- --
Sale of premises and equipment .................................................... 7,880 (2,036) (2,466)
Capital expenditures .............................................................. (16,494) (5,414) (4,649)
Acquisitions accounted for under the purchase method of accounting ................ 16,976 29,939 6,265
Disposition of assets and liabilities, net ........................................ (39,780) (38,480) (35,656)
---------- ---------- ----------
Net cash used for investing activities ........................................... (477,051) (392,821) (231,094)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Increase in deposits, net ......................................................... 187,665 279,226 232,470
Federal funds purchased and repurchase agreements, net ............................ (16,447) 41,904 10,017
Short-term borrowings ............................................................. 233,243 (32,939) (38,491)
Issuance of long-term debt ........................................................ 166,250 25,080 2,700
Payments of long-term debt ........................................................ (10,000) (300) (127)
Cash dividends paid ............................................................... (8,583) (5,860) (2,688)
Issuance of common stock .......................................................... -- 40,438 5,964
Repurchase of common stock ........................................................ (856) (9,824) --
Other common and preferred stock activity ......................................... 6,129 2,598 1,918
---------- ---------- ----------
Net cash provided by financing activities ........................................ 557,401 340,323 211,763
---------- ---------- ----------
Net change in cash and due from banks ............................................... (13,253) 32,354 (7,044)
Cash and due from banks at beginning of year ........................................ 116,239 83,885 90,929
---------- ---------- ----------
Cash and due from banks at end of year .............................................. $ 102,986 $ 116,239 $ 83,885
========== ========== ==========
See Notes to Consolidated Financial Statements which are an integral part of
these statements.
48
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Carolina
First Corporation and its wholly-owned banking subsidiaries, Carolina First
Bank, Carolina First Bank, F.S.B. and Citrus Bank (collectively, the "Subsidiary
Banks") and non-banking subsidiaries, Blue Ridge Finance Company ("Blue Ridge"),
Carolina First Guaranty Reinsurance, Ltd., Carolina First Investment Limited
Partnership, Carolina First Mortgage Company ("CF Mortgage"), CF Technology
Services and Resource Processing Group, Inc. Carolina First Corporation and its
subsidiaries are collectively defined as the "Company," except where the context
requires otherwise. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The accounting principles followed by the Company and the methods of
applying these principles conform with generally accepted accounting principles
and with general practices within the banking industry. Certain principles which
significantly affect the determination of financial position, results of
operations and cash flows are summarized below.
Certain prior year amounts have been reclassified to conform with 1999
presentations.
SECURITIES
Management determines the appropriate classification of securities at the
time of purchase. Securities, primarily debt securities, are classified as
trading, available for sale and held for investment, defined as follows:
Trading securities are carried at fair value. The Company's policy is to
acquire trading securities only to facilitate their sale to customers.
Adjustments for unrealized gains or losses are included in noninterest income.
Securities available for sale are carried at fair value. Such securities
are used to execute asset/liability management strategy and to manage liquidity.
Adjustments for unrealized gains or losses, net of the income tax effect, are
made through a separate component of shareholders' equity.
Securities held for investment are stated at cost, net of unamortized
balances of premiums and discounts. The Company intends to and has the ability
to hold such securities until maturity.
The Company evaluates securities for other-than-temporary impairment
periodically and, if necessary, charges the unrealized loss to operations. Gains
or losses on the sale of securities are recognized on a specific identification,
trade date basis.
LOANS
Loans receivable are stated at unpaid principal balances adjusted for
unamortized premiums and unearned discounts. The Company recognizes interest on
loans using the simple interest method. Income on certain installment loans is
recognized using the "Rule of 78's" method. The results from the use of the
"Rule of 78's" method are not materially different from those obtained by using
the simple interest method. Loans are considered to be impaired when, in
management's judgment, the collection of principal or interest is not
collectible in accordance with the terms of the obligation. An impaired loan is
put on nonaccrual status, and future cash receipts are applied to principal
only. The accrual of interest resumes only when the loan returns to performing
status.
The premium or discount on purchased loans is amortized over the expected
life of the loans and is included in interest and fees on loans.
Gains or losses on sales of loans are recognized at the time of sale and
are determined by the difference between net sales proceeds and the carrying
value of the loans sold.
49
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
LOANS HELD FOR SALE
Loans held for sale include certain mortgage loans and are carried at the
lower of aggregate cost or market value.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's ongoing evaluation
of the loan portfolio and reflects an amount that, in management's opinion, is
adequate to absorb inherent losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors, including
current economic conditions, prior loan loss experience, the composition of the
loan portfolio and management's estimate of anticipated credit losses. Loans are
charged against the allowance at such time as they are determined to be losses.
Subsequent recoveries are credited to the allowance. Management considers the
year-end allowance appropriate and adequate to cover inherent losses in the loan
portfolio; however, management's judgment is based upon a number of assumptions
about future events, which are believed to be reasonable, but which may or may
not prove valid. Thus, there can be no assurance that charge-offs in future
periods will not exceed the allowance for loan losses or that additional
increases in the allowance for loan losses will not be required. In addition,
various regulatory agencies periodically review the Company's allowance for loan
losses as part of their examination process and could require the Company to
adjust its allowance for loan losses based on information available to them at
the time of their examination.
CONCENTRATIONS OF CREDIT RISK
The Company makes loans to individuals and small businesses for various
personal and commercial purposes primarily throughout South Carolina and
Florida. The Company has a diversified loan portfolio, and the borrowers'
ability to repay their loans is not dependent upon any specific economic
segment.
LOAN SECURITIZATIONS
The Company packages and sells loan receivables as securities to investors.
These transactions are recorded as sales in accordance with SFAS 125 when
control over these assets has been surrendered. Excess cash flows related to the
securitizations are recorded during the life of the transaction. The
interest-only strip security is computed based upon the difference between
interest income received from the borrower less the yield paid to investors,
credit losses and normal servicing fees.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed over the estimated
useful lives of the assets primarily using the straight-line method. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
estimated useful life of the improvement or the term of the respective lease.
Additions to premises and equipment and major replacements or improvements
are capitalized at cost. Maintenance, repairs and minor replacements are
expensed when incurred.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and core deposit premiums
resulting from the Company's acquisitions. On an ongoing basis, the Company
evaluates the carrying value of these intangible assets to determine that the
recorded asset is recoverable from future undiscounted cash flows.
50
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Core deposit intangibles are amortized over 10 years using the
sum-of-the-years' digits method. Goodwill is generally amortized over 25 years
using the straight-line method.
MORTGAGE SERVICING RIGHTS
The Company capitalizes the allocated cost of originated mortgage servicing
rights and records a corresponding increase in mortgage banking income in
accordance with Statement of Financial Accounting Standards ("SFAS") 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." This statement eliminates the distinction between originated
and purchased mortgage servicing rights.
The rights to service mortgage loans for others ("mortgage servicing
rights" or "MSRs") are included in other assets. Purchased mortgage servicing
rights are recorded at lower of cost or market. Originated mortgage servicing
rights are capitalized based on the allocated cost which is determined when the
underlying loans are sold or securitized. MSRs are amortized in proportion to
the servicing income over the estimated life of the related mortgage loan. The
amortization method is designed to approximate a level-yield method, taking into
consideration the estimated prepayment of the underlying loans. For purposes of
measuring impairment, MSRs are reviewed for impairment based upon quarterly
external valuations. Such valuations are based on projections using a discounted
cash flow method that includes assumptions regarding prepayments, interest
rates, servicing costs and other factors. Impairment is measured on a
disaggregated basis for each strata of rights which are segregated by
predominant risk characteristics, including interest rate and loan type.
OTHER REAL ESTATE OWNED
Other real estate owned, included in other assets, is comprised of real
estate properties acquired in partial or total satisfaction of problem loans.
The properties are recorded at the lower of cost or fair market value at the
date acquired. Losses arising at the time of acquisition of such properties are
charged against the allowance for loan losses. Subsequent write-downs that may
be required to the carrying value of these properties are charged to noninterest
expenses. Gains and losses realized from the sale of other real estate owned are
included in noninterest income. Other real estate owned was approximately
$2,440,000 and $3,168,000 at December 31, 1999 and 1998, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into interest rate swap transactions as part of its
overall interest rate risk management activities. There must be a correlation of
interest rate movements between these derivative instruments and the underlying
assets or liabilities to qualify for hedge accounting. The impact of a swap is
accrued over the life of the agreement based on expected settlement payments and
is recorded as an adjustment to interest income or expense in the period in
which it accrues and in the category appropriate to the related asset or
liability. Changes in the fair values of the swaps are not recorded in the
consolidated statements of income because the swap is designated with a specific
asset or liability or finite pool of assets or liabilities.
STOCK-BASED COMPENSATION
The Company reports stock-based compensation using the intrinsic valuation
method presented under Accounting Principles Board ("APB") Opinion 25, which
measures compensation expense as the difference between the quoted market price
of the stock and the exercise price of the option on the date of grant (if any).
The Company has disclosed in the footnotes pro forma net income and earnings per
share information as if the fair value method had been applied in accordance
with SFAS 123, "Accounting for Stock-Based Compensation."
51
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
INCOME TAXES
The Company computes its income taxes in accordance with the provisions of
SFAS 109, "Accounting for Income Taxes." Under SFAS 109, deferred tax assets and
liabilities are recognized on all temporary book/tax differences, operating loss
carryforwards and tax credit carryforwards. Temporary book/tax differences occur
when income and expenses are recognized in different periods for financial
reporting purposes and for purposes of computing income taxes currently payable.
Valuation allowances are established to reduce deferred tax assets if it is
determined to be "more likely than not" that all or some portion of the
potential deferred tax assets will not be realized. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
PER SHARE DATA
Basic earnings per share are computed by dividing net income applicable to
common shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period, with common stock equivalents calculated based on
the average market price. Common stock equivalents consist of convertible
preferred stock, stock warrants and options and are computed using the treasury
stock method.
COMPREHENSIVE INCOME
Comprehensive income is the change in the Company's equity during the
period from transactions and other events and circumstances from non-owner
sources. Total comprehensive income is divided into net income and other
comprehensive income. The Company's other comprehensive income and accumulated
other comprehensive income are comprised solely of unrealized gains and losses
on certain investments in debt and equity securities.
The following summarizes other comprehensive income (loss), net of tax for
the years ended December 31:
1999 1998 1997
------------ ------------ -----------
($ IN THOUSANDS)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ......... $ 30,481 $ (5,541) $ 8,997
Income taxes .................................................... (11,044) 1,947 (3,205)
Less: reclassification adjustment for gains included in net
income ........................................................ (55) (195) (2,734)
Income taxes .................................................... 18 72 1,012
--------- -------- --------
$ 19,400 $ (3,717) $ 4,070
========= ======== ========
BUSINESS SEGMENTS
Effective January 1, 1998, the Company adopted SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. SFAS 131 requires that a public
enterprise report a measure of segment profit or loss, certain specific revenue
and expense items, segment assets, information about the way that the operating
segments were determined and other items. The Company has three reportable
operating segments, Carolina First Bank, CF Mortgage and Citrus Bank (see Note
27).
52
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. This effective date reflects the deferral
provided by SFAS 137 which defers the earlier effective date specified in SFAS
133. The Company has not yet determined the financial impact of the adoption of
SFAS 133.
RISK AND UNCERTAINTIES
In the normal course of its business the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on different bases, than
its interest-earning assets. Credit risk is the risk of default on the Company's
loan portfolio that results from borrowers' inability or unwillingness to make
contractually required payments. Market risk reflects changes in the value of
collateral underlying loans receivable, the valuation of real estate held by the
Company, and the valuation of loans held for sale, mortgage-backed securities
available for sale and mortgage servicing rights.
The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities as of the dates of the Consolidated Balance
Sheets and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ significantly from those estimates and
assumptions.
NOTE 2. STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash includes currency and coin, cash
items in process of collection and due from banks.
The following summarizes supplemental cash flow data for the years ended
December 31:
1999 1998 1997
----------- ---------- ----------
($ IN THOUSANDS)
Interest paid .............................................. $105,347 $95,039 $68,078
Income taxes paid .......................................... 19,521 14,828 10,573
Significant non-cash transactions are summarized as follows:
Purchase accounting acquisitions ......................... 4,773 99,235 79,768
Conversion of preferred stock into common stock .......... -- -- 943
Loans transferred to other real estate owned ............. 1,261 454 554
53
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BUSINESS COMBINATIONS
MERGERS ACCOUNTED FOR AS PURCHASES
For the following business combinations which were accounted for as
purchases, the consolidated financial statements include the results of their
operations only from their respective dates of acquisition.
On July 18, 1997, the Company acquired Lowcountry Savings Bank, Inc.
("Lowcountry"), a South Carolina-chartered savings bank headquartered in Mt.
Pleasant, South Carolina. The Lowcountry transaction was accounted for as a
purchase and resulted in the payment of approximately $13 million for the
outstanding shares of Lowcountry common stock. Of this amount, approximately
$4.8 million was paid in cash, and approximately $8.2 million was paid in the
form of 508,415 shares of the Company's Common Stock. In connection with the
acquisition of Lowcountry, a core deposit premium of approximately $600,000 was
recorded. The excess of the purchase price over the fair market value of the net
identifiable assets acquired, which included the core deposit premium, of
approximately $7.2 million has been recorded as goodwill. At June 30, 1997,
Lowcountry operated through five locations in the Charleston area and had
approximately $80 million in assets, $73 million in loans and $64 million in
deposits.
On November 21, 1997, the Company acquired First Southeast Financial
Corporation ("First Southeast"), the holding company for First Federal Savings
and Loan Association of Anderson based in Anderson, South Carolina. The First
Southeast transaction was accounted for under the purchase method of accounting.
Under the terms of the agreement, the Company acquired all the outstanding
common shares of First Southeast in exchange for 3,497,400 shares of the
Company's Common Stock, valued at approximately $70 million (as of the closing
date of the acquisition). In connection with the acquisition of First Southeast,
a core deposit premium of appxoximately $700,000 was recorded. The excess of the
purchase price over the fair market value of the net identifiable assets
acquired, which included the core deposit premium of approximately $34.6 million
has been recorded as goodwill. At September 30, 1997, First Southeast had total
assets of approximately $350 million, loans of $275 million and deposits of $285
million with 13 branches located in Anderson, Abbeville, Greenwood and
Greenville counties.
On June 1, 1998, the Company acquired Resource Processing Group, Inc., a
credit card origination and servicing company headquartered in Columbia, South
Carolina. In connection with such acquisition, RPGI became a wholly-owned
subsidiary of the Company. The RPGI transaction was accounted for as a purchase
and resulted in the issuance of 398,610 shares of the Company's Common Stock for
the outstanding shares of RPGI common stock. At December 31, 1999, RPGI was
inactive and was not servicing credit card receivables due to the sale of the
Company's credit card portfolio on April 30, 1999.
On September 29, 1998, Carolina First Bank acquired First National Bank of
Pickens County ("First National"), a national bank headquartered in Easley,
South Carolina. The First National transaction was accounted for as a purchase
and resulted in the issuance of 2,817,350 shares of the Company's Common Stock
in exchange for all the outstanding common shares of First National. This
transaction was valued at approximately $60 million (as of the closing date of
the acquisition). The excess of the purchase price over the fair market value of
the net identifiable assets acquired of approximately $45 million has been
recorded as goodwill and core deposit premium. First National operated through
four locations and had total assets, loans, deposits and shareholders' equity of
approximately $121 million, $62 million, $95 million and $16 million,
respectively.
On September 30, 1998, the Company acquired Poinsett Financial Corporation
("Poinsett"), the thrift holding company for Poinsett Bank, a Federal savings
bank headquartered in Travelers Rest, South Carolina. Poinsett Bank changed its
name to Carolina First Bank, F.S.B. and operates as a wholly-owned subsidiary of
the Company. In connection with such acquisition, 753,530 shares of the
Company's Common Stock valued at approximately $16 million (as of the closing
date of the acquisition) were exchanged for all outstanding shares of Poinsett
common stock. This transaction was accounted for using the purchase method of
accounting. The excess of the
54
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BUSINESS COMBINATIONS -- (Continued)
purchase price over the fair market value of the net identifiable assets
acquired of approximately $12 million has been recorded as goodwill and core
deposit premium. Poinsett Bank operated through three locations with total
assets, loans, deposits and shareholders' equity of approximately $89 million,
$67 million, $82 million and $5 million, respectively.
On October 19, 1998, the Company acquired all the outstanding common shares
of Colonial Bank of South Carolina, Inc. ("Colonial"), a state-chartered banking
corporation headquartered in Camden, South Carolina, in exchange for 651,455
shares of the Company's Common Stock. This transaction was accounted for using
the purchase method of accounting and was valued at approximately $14 million
(as of the closing date of the acquisition). The excess of the purchase price
over the fair market value of the net identifiable assets acquired of
approximately $10 million has been recorded as goodwill and core deposit
premium. Colonial Bank operated through three locations and had total assets,
loans, deposits and shareholders' equity of approximately $61 million, $51
million, $43 million and $5 million, respectively.
MERGERS ACCOUNTED FOR AS POOLINGS-OF-INTERESTS
On April 23, 1999, the Company acquired all the outstanding shares of
Citizens First National Bank ("Citizens"), a national bank headquartered in
Crescent City, Florida in exchange for 505,851 shares of the Company's common
stock and a cash payment of approximately $49,000 to a dissenting shareholder.
At March 31, 1999, Citizens had total assets, loans and deposits of
approximately $59 million, $37 million and $53 million, respectively. The
transaction has been accounted for as a pooling-of-interests combination;
however, due to the immateriality of the transaction in relation to the
Company's consolidated financial position and operating results, prior period
financial statements have not been restated.
On July 1, 1999, the Company issued 3,086,478 shares of common stock in
exchange for all the outstanding common stock of Citrus Bank, a Florida
state-chartered bank headquartered in Orlando, Florida. As of June 30, 1999,
Citrus bank had total assets, loans and deposits of approximately $285 million,
$196 million and $264 million, respectively. This transaction has been accounted
for as a pooling-of-interest combination and, accordingly, the Company's
consolidated financial statements for all prior periods have been restated to
include the accounts and results of operations of Citrus Bank, except for cash
dividends declared per common share.
55
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BUSINESS COMBINATIONS -- (Continued)
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
SIX MONTHS ENDED
JUNE 30, 1999 YEARS ENDED DECEMBER 31
----------------- -----------------------
(UNAUDITED) 1998 1997
($ IN THOUSANDS) ---------- ----------
Net interest income:
The Company ......... $53,044 $78,007 $55,060
Citrus Bank ......... 6,386 8,424 5,063
------- ------- -------
Combined ............ $59,430 $86,431 $60,123
======= ======= =======
Noninterest income:
The Company ......... $30,137 $22,531 $19,615
Citrus Bank ......... 1,115 1,858 785
------- ------- -------
Combined ............ $31,252 $24,389 $20,400
======= ======= =======
Net income:
The Company ......... $12,640 $22,443 $14,340
Citrus Bank ......... 1,635 2,002 (300)
------- ------- -------
Combined ............ $14,275 $24,445 $14,040
======= ======= =======
In connection with the mergers completed in 1999 and 1998, the Company
incurred merger-related costs, substantially all of which had been paid as of
December 31, 1999, as follows ($ in thousands):
Severance payments and contracts .................................... $1,018
System conversion costs and write-off of obsolete equipment ......... 1,358
Professional fees ................................................... 1,948
Legal fees .......................................................... 309
Other ............................................................... 871
------
Total ............................................................... $5,504
======
SALES OF BRANCH OFFICES
On April 6, 1997, the Company completed the sale of five branches located
in Barnwell, Blackville, Salley, Springfield and Williston, South Carolina to
The Bank of Barnwell County, a wholly-owned subsidiary of Community Capital
Corporation ("Community Capital"), headquartered in Greenwood, South Carolina.
In connection with this transaction, Carolina First Bank recorded a gain of
$2,250,000, sold loans of approximately $15 million and transferred deposits of
approximately $55 million.
On June 12, 1998, Carolina First Bank completed the sale of three branches
located in Belton, Calhoun Falls and Honea Path, South Carolina to two bank
subsidiaries of Community Capital. All three branches were former locations of
First Federal, which was acquired by the Company in November 1997. The deposit
premium received of approximately $2.7 million was used to reduce intangible
asset balances (recorded in connection with the First Southeast acquisition),
and accordingly no gain was recorded. In connection with this sale, Carolina
First Bank sold loans of approximately $2 million and transferred deposits of
approximately $44 million.
On September 13 and 14, 1999, Carolina First Bank completed the sale of
three branch offices located in Abbeville, Hardeeville and Ridgeland, South
Carolina. On October 18, 1999, Carolina First Bank completed the sale of a
branch office in Johnston, South Carolina. In connection with the sale of these
branches, the Company
56
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BUSINESS COMBINATIONS -- (Continued)
recorded a gain of approximately $2.5 million, sold loans of approximately $13.1
million and transferred deposits of approximately $54.4 million.
In December 1999, Carolina First Bank, F.S.B. applied to the Office of
Thrift Supervision ("OTS") to sell its two branch offices to Carolina First Bank
in a purchase and assumption transaction. Upon completion of the sale, the two
branch offices would function as branches of Carolina First Bank and the name of
Carolina First Bank, F.S.B. would be changed to Bank CaroLine, F.S.B. ("Bank
CaroLine"). Bank CaroLine would operate as an internet-only bank offering its
products and services only over the internet and telephone.
NOTE 4. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Subsidiary Banks are required to maintain average reserve balances with
the Federal Reserve Bank based upon a percentage of deposits. The average
amounts of these reserve balances for the years ended December 31, 1999 and 1998
were approximately $16,082,000 and $19,005,000, respectively.
NOTE 5. SECURITIES
The aggregate amortized cost and fair value of securities at December 31
were as follows:
1999
------------------------------------------------
GROSS
UNREALIZED
AMORTIZED ---------------------- FAIR
COST GAINS LOSSES VALUE
---------- --------- ---------- ----------
($ IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE
U.S. treasury securities ......................................... $ 12,980 $ -- $ 96 $ 12,884
Obligations of U.S. government agencies and corporations ......... 486,705 14 9,075 477,644
Other securities ................................................. 101,588 45,730 4,738 142,580
-------- ------- ------- --------
$601,273 $45,744 $13,909 $633,108
======== ======= ======= ========
SECURITIES HELD FOR INVESTMENT
Obligations of U.S. government agencies and corporations ......... $ 1,484 $ -- $ 4 $ 1,480
Obligations of states and political subdivisions ................. 61,909 143 614 61,438
Other securities ................................................. 402 -- -- 402
-------- ------- ------- --------
$ 63,795 $ 143 $ 618 $ 63,320
======== ======= ======= ========
1998
-----------------------------------------------
GROSS
UNREALIZED
AMORTIZED -------------------- FAIR
COST GAINS LOSSES VALUE
---------- --------- -------- -----------
($ IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE
U.S. treasury securities ......................................... $ 8,412 $ -- $ 3 $ 8,409
Obligations of U.S. government agencies and corporations ......... 352,700 719 8 353,411
Other securities ................................................. 42,767 1,429 879 43,317
-------- ------ ---- --------
$403,879 $2,148 $890 $405,137
======== ====== ==== ========
SECURITIES HELD FOR INVESTMENT
Obligations of U.S. government agencies and corporations ......... $ 2,730 $ 18 $ -- $ 2,748
Obligations of states and political subdivisions ................. 49,047 845 -- 49,892
Other securities ................................................. 300 -- -- 300
-------- ------ ---- --------
$ 52,077 $ 863 $ -- $ 52,940
======== ====== ==== ========
57
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. SECURITIES -- (Continued)
The amortized cost and estimated fair value of debt securities at December
31, 1999, by contractual maturity, are shown in the following table. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. Fair value of securities was determined using quoted market prices.
1999
-----------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
($ IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE
Due in one year or less ........................ $ 18,774 $ 18,341
Due after one year through five years .......... 117,233 114,233
Due after five years through ten years ......... 207,729 200,958
Due after ten years ............................ 224,742 222,897
No contractual maturity ........................ 32,795 76,679
-------- --------
$601,273 $633,108
======== ========
SECURITIES HELD FOR INVESTMENT
Due in one year or less ........................ $ 10,240 $ 10,243
Due after one year through five years .......... 31,530 31,421
Due after five years through ten years ......... 18,935 18,583
Due after ten years ............................ 2,790 2,773
No contractual maturity ........................ 300 300
-------- --------
$ 63,795 $ 63,320
======== ========
Gross realized gains and losses on sales of securities for the years ended
December 31 were:
1999 1998 1997
-------- -------- ---------
($ IN THOUSANDS)
Gross realized gains ................... $ 473 $ 654 $3,286
Gross realized losses .................. (74) (74) (275)
----- ----- ------
Net gain on sale of securities ......... $ 399 $ 580 $3,011
===== ===== ======
The change in the unrealized gain on securities available for sale, net of
tax (as recorded in shareholders' equity) for the year ended December 31, 1999
was an increase of $19.4 million. This increase is largely attributable to
recording the Company's investment in Net.B@nk common stock at market value
beginning July 31, 1999. Securities with an approximate book value of $414
million and $249 million at December 31, 1999 and 1998, respectively, were
pledged to secure public deposits and for other purposes. Estimated market
values of securities pledged were $408 million and $250 million at December 31,
1999 and 1998, respectively.
Carolina First Bank and Carolina First Bank, F.S.B., as members of the
Federal Home Loan Bank ("FHLB") of Atlanta, are required to own capital stock in
the FHLB of Atlanta based generally upon their balances of residential mortgage
loans and FHLB advances. FHLB capital stock is pledged to secure FHLB advances.
No ready market exists for this stock, and it has no quoted market value.
However, redemption of this stock has historically been at par value. At
December 31, 1999 and 1998, Carolina First Bank and Carolina First Bank, F.S.B.
owned a total of $21.7 million and $7.6 million in FHLB stock, respectively.
58
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. EQUITY INVESTMENTS
At December 31, 1999, the Company (through its subsidiary Blue Ridge) owned
2,528,366 shares of common stock of Affinity Technology Group, Inc. ("Affinity")
and a warrant to purchase an additional 3,471,340 shares for approximately
$0.0001 per share ("Affinity Warrant"). The investment in Affinity's common
stock, which was included in securities available for sale with a basis of
approximately $160,000, was recorded at its market value of approximately $1.7
million. The Company's shares in Affinity, and the shares issuable upon the
exercise of the Affinity Warrant, are "restricted" securities as that term is
defined in federal securities laws. The Affinity Warrant was not reported on the
Company's balance sheet as of December 31, 1999.
At December 31, 1999, the Company owned 2,415,000 shares of Net.B@nk common
stock, or approximately 8.4% of the outstanding shares. Net.B@nk owns and
operates Net.B@nk, F.S.B., a FDIC-insured federal savings bank that provides
banking services to consumers utilizing the Internet. Under the terms of the
Office of Thrift Supervision's regulatory ruling with respect to Net.B@nk in
1997, certain affiliates of Net.B@nk, including the Company, may not sell their
shares in Net.B@nk until July 31, 2000. Effective July 31, 1999, or one year
prior to the termination of the restriction, the Company began recording its
investment in Net.B@nk at market value. As of December 31, 1999, the Company's
investment in Net.B@nk, which is included in securities available for sale, had
a pre-tax market value of approximately $44.7 million. In prior periods, these
shares were recorded at the Company's book basis, which was approximately
$671,000 as of December 31, 1999. The Company's shares of Net.B@nk common stock
are "restricted" securities, as that term is defined in federal securities laws.
The Company has made equity investments in fourteen community banks in the
Southeast. In each case, the Company owns less than 5% of the community bank's
outstanding common stock. As of December 31, 1999, equity investments in
community banks, included in securities available for sale, with a book basis of
approximately $10.8 million were recorded at present market value of
approximately $9.1 million.
On September 30, 1997, the Company's subsidiary, CF Investment Company,
became licensed through the Small Business Administration to operate as a Small
Business Investment Company. CF Investment Company is a wholly-owned subsidiary
of Blue Ridge. In 1997, the Company capitalized CF Investment Company with a
contribution of $3.0 million. As of December 31, 1999 CF Investment Company has
invested approximately $2.7 million in companies specializing in electronic
document management, Internet development and Internet Service Provider.
59
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans outstanding by category at December 31:
1999 1998
------------- -------------
($ IN THOUSANDS)
Real estate -- mortgage .................................. $ 569,031 $ 431,209
Real estate -- construction .............................. 126,791 89,383
Commercial and industrial ................................ 407,228 344,335
Commercial and industrial secured by real estate ......... 950,369 756,276
Consumer ................................................. 312,274 198,413
Credit cards ............................................. 8,243 65,266
Lease financing receivables .............................. 15,500 40,450
---------- ----------
Loans held for investment ................................ 2,389,436 1,925,332
Loans held for sale ...................................... 45,316 112,918
---------- ----------
Gross loans .............................................. 2,434,752 2,038,250
Less unearned income ..................................... 5,527 8,064
Less allowance for loan losses ........................... 23,832 20,266
---------- ----------
Net loans ................................................ $2,405,393 $2,009,920
========== ==========
Included in the above:
Nonaccrual loans ......................................... $ 8,464 $ 870
Interest income recognized on nonaccrual loans during 1999, 1998 and 1997
was approximately $709,000, $78,000 and $34,000, respectively.
The following tables summarize impaired loan information as of December 31:
1999 1998
-------- -------
($ IN THOUSANDS)
Impaired loans ............ $8,213 $870
Related allowance ......... 3,298 664
1999 1998 1997
-------- -------- -------
($ IN THOUSANDS)
Recognized interest income ......... $680 $78 $34
Foregone interest .................. 192 92 77
The average recorded investment in impaired loans at December 31, 1999 and
1998 was $3,007,000 and $795,000, respectively. There were no restructured loans
included in loans at December 31, 1999. At December 31, 1998, loans included
$1,283,000 in restructured loans.
60
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. LOANS AND ALLOWANCE FOR LOAN LOSSES -- (Continued)
Changes in the allowance for loan losses were:
1999 1998 1997
---------- ---------- ----------
($ IN THOUSANDS)
Balance at beginning of year ....................... $ 20,266 $ 17,369 $ 12,039
Purchase accounting acquisitions ................... 408 1,822 3,550
Valuation allowance for loans purchased ............ -- -- 658
Allowance adjustment for credit card sale .......... (2,977) -- --
Provision for loan losses .......................... 15,846 12,724 12,108
Recoveries on loans previously charged off ......... 1,466 1,127 1,190
Charge-offs:
Credit cards ...................................... (1,683) (4,309) (5,325)
Other ............................................. (9,494) (8,467) (6,851)
-------- -------- --------
Balance at end of year ............................. $ 23,832 $ 20,266 $ 17,369
======== ======== ========
Directors, executive officers and associates of such persons were customers
of and had transactions with the Company in the ordinary course of business.
Included in such transactions are outstanding loans and commitments, all of
which were made under normal credit terms and did not involve more than normal
risk of collection. The aggregate dollar amount of these loans was approximately
$22,660,000 and $14,378,000 at December 31, 1999 and 1998, respectively. During
1999, new loans of approximately $10,640,000 were made, and payments totaled
approximately $2,358,000.
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
1999 1998
---------- ----------
($ IN THOUSANDS)
Land ................................................... $10,777 $10,778
Buildings .............................................. 18,493 24,777
Furniture, fixtures and equipment ...................... 35,222 31,279
Leasehold improvements ................................. 8,067 7,911
Construction in progress ............................... 9,124 2,176
------- -------
81,683 76,921
Less accumulated depreciation and amortization ......... 23,932 22,291
------- -------
$57,751 $54,630
======= =======
Depreciation and amortization charged to operations totaled $5,135,000,
$4,431,000 and $3,301,000 in 1999, 1998 and 1997, respectively.
At December 31, 1999, there were no land and buildings pledged as
collateral for long-term debt.
61
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, at December 31 are
summarized as follows:
1999 1998
----------- -----------
($ IN THOUSANDS)
Goodwill ..................... $105,026 $116,349
Core deposit premium ......... 8,405 10,557
Credit card premium .......... -- 3,509
-------- --------
$113,431 $130,415
======== ========
NOTE 10. MORTGAGE OPERATIONS
A summary of capitalized Mortgage Servicing Rights ("MSRs"), which are
included in other assets, follows:
1999 1998
---------- ----------
($ IN THOUSANDS)
Balance at beginning of year ............. $ 25,151 $ 19,831
MSRs purchased during the year ........... 6,284 9,248
MSRs capitalized during the year ......... 325 1,863
MSRs amortized during the year ........... (5,992) (5,791)
MSRs sold during the year ................ (882) --
-------- --------
Balance at end of year ................... $ 24,886 $ 25,151
======== ========
The aggregate fair value of capitalized MSRs at December 31, 1999 and 1998
was aproximately $27.2 million and $25.6 million, respectively. No valuation
allowance for capitalized MSRs was required during the years ended December 31,
1999 and 1998.
NOTE 11. DEPOSITS
Deposits at December 31 are summarized as follows:
1999 1998
------------- -------------
($ IN THOUSANDS)
Noninterest-bearing demand deposits ......... $ 331,865 $ 332,531
Interest-bearing demand deposits ............ 479,251 493,991
Money market accounts ....................... 318,028 255,305
Savings accounts ............................ 91,629 95,311
Time deposits ............................... 1,294,221 1,157,045
---------- ----------
$2,514,994 $2,334,183
========== ==========
Maturities of time deposits at December 31 are as follows ($ in thousands):
2000 ............... $1,043,126
2001 ............... 224,445
2002 ............... 12,639
2003 ............... 8,540
2004 ............... 5,430
Thereafter ......... 41
----------
$1,294,221
==========
62
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. DEPOSITS -- (Continued)
Time deposits in excess of $100,000 totaled $419 million and $334 million
at December 31, 1999 and 1998, respectively.
NOTE 12. INCOME TAXES
Income tax expense for the years ended December 31 consisted of the
following:
1999 1998 1997
---------- ---------- -------------
($ IN THOUSANDS)
CURRENTLY PAYABLE
Federal ...................... $ 18,405 $14,072 $ 9,852
State ........................ 1,006 926 761
-------- ------- --------
19,411 14,998 10,613
-------- ------- --------
DEFERRED
Federal ...................... (6,158) (556) (2,713)
State ........................ 59 (45) (4)
-------- ------- ----------
(6,099) (601) (2,717)
-------- ------- ---------
Total income taxes ......... $ 13,312 $14,397 $ 7,896
======== ======= =========
Income taxes are different than tax expense computed by applying the
statutory federal income tax rate of 35% for 1999, 1998 and 1997 to income
before income taxes. The reasons for these differences are as follows:
1999 1998 1997
---------- ---------- ---------
($ IN THOUSANDS)
Tax expense at statutory rate .................................. $ 14,162 $13,595 $7,678
Differences resulting from:
Nondeductible goodwill amortization ........................... 3,201 889 41
Low-income housing tax credit ................................. (100) (97) (97)
Change in valuation allowance for deferred tax assets ......... 1,006 (99) 56
State tax, net of federal benefit ............................. (314) 711 329
Nontaxable interest ........................................... (1,244) (503) (445)
Nontaxable gain on qualified appreciated stock ................ (4,162) -- --
Nondeductible acquisition cost ................................ 474 -- --
Other, net .................................................... 289 (99) 334
-------- ------- ------
$ 13,312 $14,397 $7,896
======== ======= ======
63
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES -- (Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31 are
presented below:
1999 1998
------------ ---------
($ IN THOUSANDS)
DEFERRED TAX ASSETS
Loan loss allowance deferred for tax purposes ........................................... $ 9,408 $ 7,494
Excess basis of intangible assets for financial reporting purposes over tax basis ....... 1,930 2,180
Net operating loss carryforwards ........................................................ 1,259 554
Charitable contribution carryforward .................................................... 2,923 --
Compensation expense deferred for tax reporting purposes ................................ 1,039 1,343
Other ................................................................................... 718 290
-------- -------
17,277 11,861
Less valuation allowance ............................................................. 1,203 197
-------- -------
16,074 11,664
-------- -------
DEFERRED TAX LIABILITIES
Net loan fees/costs deferred for tax purposes ........................................... -- 1,316
Tax depreciation in excess of book depreciation ......................................... 4,152 3,677
Unrealized gain on securities available for sale ........................................ 11,450 424
Tax bad debt reserve recapture adjustment ............................................... 591 952
Excess carrying value of assets acquired for financial reporting purposes over tax basis 3,023 4,021
Compensation ............................................................................ 351 --
Other ................................................................................... 317 708
-------- -------
19,884 11,098
-------- -------
Net deferred tax assets (liabilities) ................................................ $ (3,810) $ 566
======== =======
A portion of the change in net deferred tax assets (liabilities) relates to
unrealized gains on securities available for sale. The related current period
deferred tax expense (benefit) of $11,026,000 and $(2,019,000) for 1999 and
1998, respectively, has been recorded directly to shareholders' equity. Purchase
acquisitions also decreased (increased) the net deferred tax liability by
$551,000 and $(2,510,000) during 1999 and 1998, respectively. The balance of the
change in net deferred tax liabilities results from the current period deferred
tax benefit of $6,099,000 and $601,000 in 1999 and 1998, respectively.
The valuation allowance against the potential total deferred tax assets as
of December 31, 1999 and 1998 relates to deductible temporary differences for
state tax purposes. It is management's conclusion that the realization of the
net deferred tax asset recorded is more likely than not. This conclusion is
based upon taxable income in carryback years and conservative projections of
taxable income in future years.
64
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. BORROWED FUNDS
Short-term borrowings and their related weighted average interest rates at
December 31 were:
1999 1998
------------------------ ------------------------
AMOUNT RATE AMOUNT RATE
----------- ---------- ----------- ----------
($ IN THOUSANDS)
Repurchase agreements ......... $137,618 4.78% $154,065 4.22%
FHLB advances ................. 235,990 5.01 920 5.82
Other ......................... 317 7.08 838 7.79
-------- ---- -------- ----
$373,925 4.93% $155,823 4.25%
======== ==== ======== ====
Repurchase agreements represent short-term borrowings by Carolina First
Bank with maturities ranging from 1 to 182 days collateralized by securities of
the United States government or its agencies which are held by third-party
safekeepers. FHLB advances represent borrowings from the FHLB of Atlanta by
Carolina First Bank pursuant to lines of credit collateralized by a blanket lien
on qualifying loans secured by first mortgages on one-to-four family residences
and mortgage-backed securities. These advances have an initial maturity of one
year or less with interest payable monthly. Other short-term borrowings
represent the current portion of long-term debt.
The maximum short-term borrowings outstanding at any month end were:
1999 1998
----------- -----------
($ IN THOUSANDS)
Federal funds purchased and repurchase agreements ......... $152,622 $154,065
FHLB advances ............................................. 235,990 920
Commercial paper and other short-term borrowings .......... 326 22,036
Aggregate short-term borrowings ........................... 373,925 155,823
Average short-term borrowings during 1999, 1998 and 1997 were $185 million,
$122 million and $169 million, respectively. The average interest rate on
short-term borrowings during 1999, 1998 and 1997 were 4.90%, 5.32% and 5.61%,
respectively.
Interest expense on short-term borrowings for the years ended December 31
related to the following:
1999 1998 1997
--------- --------- ---------
($ IN THOUSANDS)
Federal funds purchased and repurchase agreements ......... $6,174 $6,149 $4,859
FHLB advances ............................................. 2,851 23 3,355
Other short-term borrowings ............................... 24 316 1,274
------ ------ ------
$9,049 $6,488 $9,488
====== ====== ======
NOTE 14. UNUSED LINES OF CREDIT
At December 31, 1999, the Subsidiary Banks had unused short-term lines of
credit to purchase federal funds from unrelated banks totaling $75 million.
These lines of credit are available on a one-to-ten day basis for general
corporate purposes of the Subsidiary Banks. All of the lenders have reserved the
right to withdraw these lines at their option. At December 31, 1999, the
Subsidiary Banks had an unused line of credit with the FHLB of Atlanta totaling
$40 million.
65
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
1999 1998
---------- ----------
($ IN THOUSANDS)
9.00% Subordinated Notes; due September 1, 2005; interest payable quarterly;
redeemable at the option of the Company at any time on or after September 1,
2000 ............................................................................ $ 25,747 $25,618
Note payable; interest at 11.25% (adjusting to 12.50% in 2000) due December 31,
2012, with current annual payments of approximately $125,000..................... 1,012 1,028
Employee stock ownership plan note payable to Centura Bank; due July 23, 2002;
interest at Centura Bank's prime rate less 1.25% with monthly principal payments
of $25,000....................................................................... 1,975 2,275
FHLB advances; fixed interest rates ranging from 5.41% to 6.27% due from May 28,
2002 to December 14, 2009; interest payable quarterly ........................... 189,420 34,160
-------- -------
$218,154 $63,081
======== =======
Required annual principal payments for the five years subsequent to
December 31, 2000 are as follows ($ in thousands):
2001 ............... $ 1,399
2002 ............... 7,618
2003 ............... 2,445
2004 ............... 50,028
2005 ............... 25,778
Thereafter ......... 130,886
--------
$218,154
========
NOTE 16. COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. Any litigation is vigorously defended by
the Company and, in the opinion of management based on consultation with
external legal counsel, any outcome of such litigation would not materially
affect the Company's consolidated financial position or results of operations.
On November 4, 1996, a derivative shareholder action was filed in
Greenville County Court of Common Pleas against the Company, a majority of the
Company's and Carolina First Bank's directors and certain executive and other
officers. The named plaintiffs are the Company by and through certain minority
shareholders. The Company filed a motion to dismiss with respect to all claims
in this complaint, which was granted in December 1997. Plaintiffs have appealed
the grant of the motion to dismiss. Plaintiffs allege as causes of action the
following: conversion of corporate opportunity; fraud and constructive fraud;
and negligent management. The factual basis upon which these claims are made
generally involves the payment to Company officers and other individuals of a
bonus in stock held by the Company in Affinity (as a reward for their efforts in
connection with the Company's procurement of stock in Affinity), statements to
former shareholders of Midlands National Bank in connection with the Company's
acquisition of that bank, and alleged mismanagement by certain executive
officers involving financial matters. The complaint seeks damages for the
benefit of the Company aggregating $41 million and rescission of the Affinity
bonus.
In an action brought by the same attorneys who brought the above-mentioned
derivative action, on December 31, 1996, certain individuals filed a class
action lawsuit against the Company, Carolina First Bank, and a number of
66
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. COMMITMENTS AND CONTINGENCIES -- (Continued)
officers and directors of the Company and Carolina First Bank. In connection
with the judge's granting the motion to dismiss in the above-referenced
derivative action, the plaintiffs' attorneys withdrew this lawsuit, without
prejudice.
On May 6, 1999, plaintiff Kimberly C. McFall filed a gender discrimination
lawsuit against the Company in the United States District Court for the District
of South Carolina. The plaintiff's complaint seeks actual and punitive damages
in unspecified amounts. The plaintiff was an employee of The Poinsett Bank,
F.S.B., a subsidiary of Poinsett Financial Corporation. Poinsett Financial
Corporation merged with the Company on September 30, 1998. Following the merger,
the plaintiff worked for Carolina First Bank until October 12, 1998. The
plaintiff alleges she was on an equal organizational level within The Poinsett
Bank, F.S.B. as two males who received more pay and benefits (including change
of control benefits) than she received. She further alleges that after she
complained about the discrimination, the Company refused to provide her with a
job commensurate with her credentials and experience following the merger. The
plaintiff claims she was constructively discharged.
This lawsuit has been vigorously contested. Depositions have been stayed
pending mediation, and discovery has been extended to April 3, 2000. If insurers
contribute to any damages or settlement in accordance with their employment
practices liability policies, the Company's exposure should be limited to
approximately $100,000. The extent of insurance coverage is currently
unresolved, and the outcome can not be predicted.
NOTE 17. LEASE COMMITMENTS
Minimum rental payments under noncancelable operating leases at December
31, 1999 are as follows ($ in thousands):
2000 ............... $ 8,294
2001 ............... 8,992
2002 ............... 8,216
2003 ............... 6,895
2004 ............... 6,225
Thereafter ......... 110,213
--------
$148,835
========
Leases on premises and equipment have options for extensions under
substantially the same terms as in the original lease period with certain rate
escalations. Lease payments charged to expense totaled $4,738,000, $2,733,000
and $2,439,000 in 1999, 1998 and 1997, respectively. The leases typically
provide that the lessee pay property taxes, insurance and maintenance cost.
NOTE 18. CAPITAL STOCK
On February 13, 1998, the Company completed the sale of 2.0 million shares
of its Common Stock to certain overseas investors (the "Regulation S Offering").
The shares were offered and sold only to non-U.S. persons under an exemption
from registration provided by Regulation S under the Securities Act of 1933. In
connection with this offering, the Company received net proceeds of
approximately $39 million. Subsequent to the consummation of the Regulation S
Offering, the Company filed a registration statement with the Securities and
Exchange Commission registering the further sale of such shares by the
institutional investors which purchased the shares in the Regulation S Offering.
This registration statement became effective on March 11, 1998.
During the fourth quarter of 1998 and first quarter of 1999, the Company
repurchased 434,874 shares of common stock for reissue in connection with the
acquisition of First National.
67
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. CAPITAL STOCK -- (Continued)
In January and February 2000, the Company announced the authorization to
repurchase up to 1,000,000 shares of its common stock in connection with its
proposed merger with Anchor Financial Corporation.
The Company has a Dividend Reinvestment Plan which allows shareholders to
invest dividends and optional cash payments in additional shares of common
stock. Shareholders of record are automatically eligible to participate in the
plan.
NOTE 19. PER SHARE INFORMATION
The following is a summary of the earnings per share calculation for the
years ended December 31:
1999 1998 1997
--------------- --------------- ---------------
($ IN THOUSANDS, EXCEPT SHARE DATA)
BASIC
Net income (numerator) ................................... $ 27,151 $ 24,445 $ 14,040
============ ============ ============
Average common shares outstanding (denominator) .......... 25,248,900 21,284,266 14,046,599
============ ============ ============
Per share amount ......................................... $ 1.08 $ 1.15 $ 1.00
============ ============ ============
DILUTED
Net income (numerator) ................................... $ 27,151 $ 24,445 $ 14,040
============ ============ ============
Average common shares outstanding ........................ 25,248,900 21,284,266 14,046,599
Convertible preferred stock assumed converted ............ -- -- 4,174
Dilutive common stock options and warrants ............... 348,673 400,466 181,870
------------ ------------ ------------
Average diluted shares outstanding (denominator) ......... 25,597,573 21,684,732 14,232,643
============ ============ ============
Per share amount ......................................... $ 1.06 $ 1.13 $ 0.99
============ ============ ============
The following options were outstanding for the years ended December 31 but
were excluded from the calculation of diluted EPS because the exercise price was
greater than the average market price of the common shares:
1999 1998 1997
- --------------------------------- --------------------------------- ----------------------------
NUMBER RANGE OF NUMBER RANGE OF NUMBER RANGE OF
OF SHARES EXERCISE PRICES OF SHARES EXERCISE PRICES OF SHARES EXERCISE PRICES
- ----------- --------------------- ----------- --------------------- ----------- ----------------
276,100 $23.13 to $24.84 77,917 $24.79 to $24.84 90,667 $ 21.56
284,235 $26.25 to $26.94 75,133 $28.03 to $29.06 49,417 24.79
75,133 $28.03 to $29.06 49,417 $31.26 49,417 28.03
49,417 $31.26 49,417 31.26
NOTE 20. RESTRICTION OF DIVIDENDS
The ability of the Company to pay cash dividends over the long term is
dependent upon receiving cash in the form of dividends from its subsidiaries.
South Carolina's banking regulations restrict the amount of dividends that
Carolina First Bank can pay. All dividends paid from Carolina First Bank are
payable only from the net income of the current year.
Florida banking statutes limit the amount of dividends that Citrus Bank can
pay without prior approval of Citrus Bank's regulatory agency. The portion of
retained earnings of Citrus Bank which may be paid as dividends without prior
approval totaled approximately $4,195,000 at December 31, 1999, subject to the
minimum capital requirements (see Note 21).
68
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. RESTRICTION OF DIVIDENDS -- (Continued)
The Office of Thrift Supervision restricts the amount of dividends that
Carolina First Bank, F.S.B. can pay to the Company. These restrictions require
Carolina First Bank, F.S.B. to obtain prior approval of the Office of Thrift
Supervision and not pay dividends in excess of current earnings.
NOTE 21. REGULATORY CAPITAL REQUIREMENTS
The Company and the Subsidiary Banks are subject to various regulatory
capital requirements administered by the Federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Subsidiary Banks must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Company's
and the Subsidiary Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Subsidiary Banks to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier 1 capital (as
defined in the regulation) to risk-weighted assets (as defined) and to average
assets (as defined). Management believes, as of December 31, 1999, that the
Company and the Subsidiary Banks met all capital adequacy requirements.
As of the most recent regulatory examination, the Subsidiary Banks were
deemed well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Subsidiary Banks must
maintain minimum total risk-based, Tier 1 based and Tier 1 leverage ratios as
set forth in the table. Management is not aware of the existence of any
conditions or events occuring since that examination to December 31, 1999 which
would affect the well capitalized classification.
69
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. REGULATORY CAPITAL REQUIREMENTS -- (Continued)
Following are the required and actual capital amounts and ratios for the
Company and the Subsidiary Banks as of December 31, 1999 and 1998:
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
--------------------------- -------------------------- ---------------------------
DECEMBER 31, 1999 1998 1999 1998 1999 1998
- ---------------------------------------- ------------- ------------- ------------- ------------ ------------- -------------
($ IN THOUSANDS)
THE COMPANY
Tier 1 capital ......................... $ 275,776 $ 232,162 $ 110,313 $ 87,973 n/a n/a
Total risk-based capital ............... 325,355 279,201 220,628 175,946 n/a n/a
Tier 1 capital ratio ................... 10.00% 10.56% 4.00% 4.00% n/a n/a
Total risk-based capital ratio ......... 11.80 12.69 8.00 8.00 n/a n/a
Leverage ratio ......................... 7.98 8.21 4.00 4.00 n/a n/a
CAROLINA FIRST BANK
Tier 1 capital ......................... $ 218,758 $ 189,688 $ 92,434 $ 77,131 $ 138,652 $ 115,696
Total risk-based capital ............... 237,460 204,287 184,869 154,262 231,088 192,827
Tier 1 capital ratio ................... 9.47% 9.84% 4.00% 4.00% 6.00% 6.00%
Total risk-based capital ratio ......... 10.28 10.59 8.00 8.00 10.00 10.00
Leverage ratio ......................... 8.33 7.64 4.00 4.00 5.00 5.00
CITRUS BANK
Tier 1 capital ......................... $ 29,047 $ 17,605 $ 13,046 $ 7,465 $ 19,570 $ 11,197
Total risk-based capital ............... 32,671 19,943 26,093 14,930 32,616 18,662
Tier 1 capital ratio ................... 8.91% 9.43% 4.00% 4.00% 6.00% 6.00%
Total risk-based capital ratio ......... 10.02 10.69 8.00 8.00 10.00 10.00
Leverage ratio ......................... 7.95 7.73 4.00 4.00 5.00 5.00
CAROLINA FIRST BANK, F.S.B.
Tier 1 capital ......................... $ 9,157 $ 6,737 $ 3,282 $ 2,186 $ 4,923 $ 3,279
Total risk-based capital ............... 9,829 7,420 6,563 4,372 8,204 5,465
Tier 1 capital ratio ................... 11.16% 12.33% 4.00% 4.00% 6.00% 6.00%
Total risk-based capital ratio ......... 11.98 13.58 8.00 8.00 10.00 10.00
Leverage ratio ......................... 6.10 7.16 4.00 4.00 5.00 5.00
NOTE 22. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, to meet the financing needs of its
customers, the Company is a party to financial instruments with
off-balance-sheet risk. These financial instruments include commitments to
extend credit, standby letters of credit, repurchase agreements and documentary
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates
70
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -- (Continued)
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation.
Loan commitments and letters of credit at December 31, 1999 include the
following ($ in thousands):
Loan commitments ...................... $490,224
Standby letters of credit ............. 23,605
Unused credit card lines .............. 13,000
Documentary letters of credit ......... 11,785
At December 31, 1999, the Company had executed simultaneous
repurchase/reverse repurchase transactions with customers with total principal
amounts of approximately $100 million which are not reflected in the
accompanying balance sheets.
The total portfolios of loans serviced or sub-serviced for non-affiliated
parties at December 31, 1999 and 1998 were $1,864 million and $1,688 million,
respectively.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into off-balance-sheet interest rate
contracts involves not only interest rate risk but also the risk of
counterparties' failure to fulfill their legal obligations. Notional principal
amounts often are used to express the volume of these transactions, but the
amounts potentially subject to credit risk are much smaller. The notional
principal amount of interest rate swaps was $21 million and $22 million at
December 31, 1999 and 1998, respectively. These interest rate contracts are
being used to hedge approximately $22 million in fixed rate loans in South
Carolina.
NOTE 23. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1999, 1998 and 1997, lease payments
aggregating approximately $36,000, $37,000 and $27,000, respectively, were made
to affiliates of directors or companies in which certain directors have an
interest.
The Company's subsidiary, CF Investment Company, invests in companies that
have a bank-related technology or service the Company or its subsidiaries can
use. During the years ended December 31, 1999 and 1998, the Company's
subsidiaries purchased services aggregating approximately $1,884,000 and
$1,578,000, respectively, from companies in which CF Investment Company owned an
equity interest.
These lease payments and service fees were made in the ordinary course of
business and were on terms comparable to those which would have been obtained
between unrelated parties.
NOTE 24. STOCK COMPENSATION PLANS
The Company has a Restricted Stock Plan for awards to certain key
employees. Under the Restricted Stock Plan, the Company may grant Common Stock
to its employees for up to 500,000 shares. All shares granted under the
Restricted Stock Plan are subject to restrictions as to continuous employment
for a specified time period following the date of grant. During this period, the
holder is entitled to full voting rights and dividends. At December 31, 1999,
there were 25,111 shares (adjusted for stock dividends and split) of restricted
stock outstanding. Deferred compensation representing the fair market value of
the stock at the date of grant is being amortized over a five-year vesting
period, with $408,000 charged to expense in 1999, $188,000 in 1998 and $426,000
in 1997.
71
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24. STOCK COMPENSATION PLANS -- (Continued)
The Company has a Stock Option Plan, a Directors' Stock Option Plan and
options acquired from acquisitions (collectively referred to as stock-based
option plans). Under the Stock Option Plan, the Company may grant options to its
employees for up to 1,500,000 shares of Common Stock. The exercise price of each
option either equals or exceeds the fair market value of the Company's Common
Stock on the date of grant. During 1998, the Company amended its Director's
Stock Option plan. Under the amended plan, the Company may grant options to its
non-employee directors for up to 500,000 shares of Common Stock. The exercise
price of each directors' option equals the fair market value of the Company's
Common Stock on the date of grant.
The Company applies APB Opinion 25 in accounting for the stock-based option
plans which are described in the preceding paragraph. Accordingly, no
compensation expense has been recognized for the stock-based option plans. Had
compensation cost been recognized for the stock-based option plans applying the
fair-value-based method as prescribed by SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated in
the following table:
1999 1998 1997
------------ ------------ ------------
($ IN THOUSANDS, EXCEPT SHARE DATA)
NET INCOME
As reported .............. $ 27,151 $ 24,445 $ 14,040
Pro forma ................ 26,264 23,333 13,868
BASIC EARNINGS PER SHARE
As reported .............. $ 1.08 $ 1.15 $ 1.00
Pro forma ................ 1.04 1.10 0.99
DILUTED EARNINGS PER SHARE
As reported .............. $ 1.06 $ 1.13 $ 0.99
Pro forma ................ 1.03 1.08 0.97
The effects of applying SFAS 123 may not be representative of the effects
on reported net income in future years.
72
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24. STOCK COMPENSATION PLANS -- (Continued)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 2.50% for 1999 and 1998 and 3.25% for 1997;
expected volatility of 38% for all years; risk-free interest rate of 5.72%,
5.08% and 6.06% for 1999, 1998 and 1997, respectively; and expected lives of 5
years for 1999 and 7.5 years for 1998 and 1997.
The following is a summary of the activity under the stock-based option
plans for the years 1999, 1998 and 1997. The information has been adjusted for
the six-for-five stock split.
1999 1998 1997
--------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ----------- ------------ ----------- ------------ -----------
Outstanding, January 1 ............... 1,348,514 $ 17.30 900,093 $ 14.83 430,061 $ 10.46
Granted:
Price = Fair Value .................. 571,535 21.61 431,181 23.48 237,057 17.99
Price > Fair Value .................. -- -- -- -- 148,251 28.03
Price < Fair Value (from purchase
acquisitions) ..................... -- -- 115,137 6.52 185,639 6.93
Cancelled ............................ (30,668) 21.93 (22,964) 21.27 (19,493) 12.59
Exercised ............................ (44,611) 4.95 (74,933) 5.42 (81,422) 7.51
--------- -------- ------- -------- ------- --------
Outstanding, December 31 ............. 1,844,770 $ 18.86 1,348,514 $ 17.30 900,093 $ 14.83
========= ======== ========= ======== ======= ========
Exercisable, December 31 ............. 824,657 $ 15.09 701,232 $ 12.68 424,259 $ 8.63
========= ======== ========= ======== ======= ========
Weighted-average fair value of options
granted during the year ............. $ 7.23 $ 8.87 $ 6.43
======== ======== ========
The following table summarizes information about stock options outstanding
under the stock-based option plans at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OF OPTION REMAINING AVERAGE OF OPTION AVERAGE
SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES LOW/HIGH OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------------------------- ------------- ------------ ---------- ------------- ----------
$ 3.55 /$ 8.00..................... 274,607 6.0 yrs. $ 6.81 274,607 $ 6.81
$ 9.55 /$15.69..................... 302,339 6.3 13.86 220,182 13.39
$15.73 /$20.50..................... 240,500 8.7 17.84 52,620 16.65
$20.563/$21.75..................... 224,739 8.3 21.41 123,411 21.52
$22.34..................... 351,235 9.6 22.34 -- --
$23.125/$24.79..................... 247,600 8.6 24.36 63,095 24.45
$24.84 /$31.26..................... 203,750 8.5 28.18 90,742 28.12
------- -------
1,844,770 8.0 yrs. $ 18.86 824,657 $ 15.09
========= =======
73
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 25. EMPLOYEE BENEFITS
The Company maintains the Carolina First Salary Reduction Plan and Trust
for all eligible employees. Upon ongoing approval of the Board of Directors, the
Company matches employee contributions equal to six percent of compensation
subject to certain adjustments and limitations. Contributions of $1,895,000,
$1,109,000 and $895,000 were charged to operations in 1999, 1998 and 1997,
respectively.
The Company maintains the Carolina First Employee Stock Ownership Plan
("ESOP") for all eligible employees. Contributions are at the discretion of, and
determined annually by the Board of Directors, and may not exceed the maximum
amount deductible under the applicable section of the Internal Revenue Code. For
the years ended December 31, 1999, 1998 and 1997, contributions of $1,014,000,
$667,000 and $346,000, respectively, were charged to operations.
The ESOP has a loan used to acquire shares of stock of the Company. Such
stock is pledged as collateral for the loan. In accordance with the requirements
of the American Institute of Certified Public Accountants Statements of Position
76-3 and 93-6, the Company presents the outstanding loan amount as other
borrowed money and as a reduction of shareholders' equity in the accompanying
consolidated balance sheets (Note 15). Company contributions to the ESOP are the
primary source of funds used to service the debt.
NOTE 26. NONINTEREST EXPENSES
The significant components of other noninterest expenses for the years
ended December 31 are presented below:
1999 1998 1997
--------- --------- ---------
($ IN THOUSANDS)
Telephone ................................. $ 3,173 $ 1,824 $ 1,412
Stationery, supplies and printing ......... 2,030 1,620 1,445
Mail and courier services ................. 1,896 1,508 1,432
Advertising ............................... 1,861 794 1,669
Imaging system costs ...................... 1,684 461 --
Professional fees ......................... 1,385 942 866
Year 2000 expenses ........................ 976 250 --
Other outside service fees ................ 3,481 2,133 962
Other ..................................... 13,632 10,580 11,117
------- ------- -------
$30,118 $20,112 $18,903
======= ======= =======
Other real estate owned and other losses in 1997 included a $2.6 million
loss incurred by Citrus Bank prior to the merger. The loss related to the return
by another bank of checks comprising earlier deposits into a Citrus Bank
customer account. Management continues to pursue recovery of Citrus Bank's loss.
Recoveries of $500,000 and $440,000 in 1999 and 1998, respectively, were
included in noninterest income.
NOTE 27. BUSINESS SEGMENTS
For the year ended December 31, 1999, the Company has adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Carolina
First Corporation has five wholly-owned subsidiaries which are evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and assess performance. Three of these subsidiaries qualify as
separately reportable operating segments: Carolina First Bank, CF Mortgage and
Citrus Bank. Carolina First Bank and CF Mortgage offer products and services
primarily to customers in South Carolina and the surrounding areas. Citrus Bank
offers products and services primarily to customers in northern and central
Florida. Revenues for Carolina First Bank and Citrus Bank are derived primarily
74
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 27. BUSINESS SEGMENTS -- (Continued)
from interest and fees on loans, interest on investment securities and service
charges on deposits, while CF Mortgage's revenue is from mortgage banking
income.
The following table summarizes certain financial information concerning the
Company's reportable operating segments for the years ended December 31:
CAROLINA FIRST CF CITRUS ELIMINATING
BANK MORTGAGE BANK OTHER ENTRIES TOTAL
--------------- ---------- ------------ -------------- -------------- -------------
($ IN THOUSANDS)
1999
INCOME STATEMENT DATA
Total revenue ............................ $ 224,029 $6,799 $ 29,223 $25,602 $ (8,399) $ 277,254
Net interest income ...................... 101,094 -- 16,241 4,409 -- 121,744
Provision for loan losses ................ 14,652 -- 955 239 -- 15,846
Noninterest income ....................... 31,107 6,799 2,426 13,342 (5,288) 48,386
Mortgage banking income (loss) ......... (3,190) 6,652 206 20 -- 3,688
Noninterest expenses ..................... 76,336 5,612 13,775 23,386 (5,288) 113,821
Amortization ........................... 5,532 -- -- 1,217 -- 6,749
Net income ............................... 25,392 769 2,493 (1,503) -- 27,151
BALANCE SHEET DATA
Total assets ............................. $2,944,653 $5,547 $365,197 $671,983 $ (425,492) $3,561,888
Loans-net of unearned income ........... 2,001,594 -- 305,627 122,004 -- 2,429,225
Allowance for loan losses .............. 18,702 -- 3,624 1,506 -- 23,832
Intangibles ............................ 97,170 -- 13 16,248 -- 113,431
Deposits ................................. 2,048,105 -- 332,951 142,384 (8,446) 2,514,994
1998
INCOME STATEMENT DATA
Total revenue ............................ $ 188,577 $8,811 $ 18,042 $12,473 $ (6,454) $ 221,449
Net interest income ...................... 86,940 -- 10,019 2,196 -- 99,155
Provision for loan losses ................ 7,684 -- 1,595 3,445 -- 12,724
Noninterest income ....................... 12,885 8,811 1,858 5,370 (4,535) 24,389
Mortgage banking income (loss) ......... (4,148) 8,692 273 (9) -- 4,808
Noninterest expenses ..................... 56,918 4,762 7,134 7,699 (4,535) 71,978
Amortization ........................... 3,726 -- -- 742 -- 4,468
Net income ............................... 21,916 2,606 2,002 (2,079) -- 24,445
BALANCE SHEET DATA
Total assets ............................. $2,590,737 $6,867 $227,358 $518,616 $ (390,286) $2,953,292
Loans-net of unearned income ........... 1,783,494 -- 171,048 75,644 -- 2,030,186
Allowance for loan losses .............. 14,599 -- 2,757 2,910 -- 20,266
Intangibles ............................ 106,873 -- 13 23,529 -- 130,415
Deposits ................................. 2,067,990 -- 208,947 77,496 (20,250) 2,334,183
1997
INCOME STATEMENT DATA
Total revenue ............................ $ 146,248 $5,919 $ 9,316 $ 6,787 $ (3,633) $ 164,637
Net interest income ...................... 66,593 (16) 5,525 129 -- 72,231
Provision for loan losses ................ 9,300 -- 462 2,346 -- 12,108
Noninterest income ....................... 14,171 5,919 785 1,753 (2,228) 20,400
Mortgage banking income (loss) ......... (2,286) 5,919 23 -- -- 3,656
Noninterest expenses ..................... 47,320 3,674 6,344 3,477 (2,228) 58,587
Amortization ........................... 1,753 -- -- (212) -- 1,541
Net income ............................... 15,444 1,434 (300) (2,538) -- 14,040
BALANCE SHEET DATA
Total assets ............................. $2,127,797 $4,562 $145,823 $283,038 $ (259,051) $2,302,169
Loans-net of unearned income ........... 1,589,510 -- 94,140 12,905 -- 1,696,555
Allowance for loan losses .............. 15,062 -- 1,158 1,149 -- 17,369
Intangibles ............................ 55,989 -- -- 2,239 -- 58,228
Deposits ................................. 1,767,307 -- 132,085 -- (20,765) 1,878,627
75
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 28. PARENT COMPANY FINANCIAL INFORMATION
The following is condensed financial information of Carolina First
Corporation (Parent Company only):
CONDENSED BALANCE SHEETS
DECEMBER 31,
------------------------
1999 1998
----------- ----------
($ IN THOUSANDS)
ASSETS
Cash and due from banks ........................ $ 6,005 $ 11,126
Investment in subsidiaries:
Bank subsidiaries ............................ 358,353 337,973
Nonbank subsidiaries ......................... 22,185 20,240
-------- --------
Total investment in subsidiaries ............... 380,538 358,213
Receivable from subsidiaries ................... 16,521 14,652
Premises and equipment, net .................... -- 50
Other investments .............................. 40,238 5,106
Other assets ................................... 11,193 4,514
-------- --------
$454,545 $393,661
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities ......... $ 16,706 $ 3,481
Borrowed funds ................................. 28,022 28,193
Shareholders' equity ........................... 409,817 361,987
-------- --------
$454,545 $393,661
======== ========
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
($ IN THOUSANDS)
INCOME
Equity in undistributed net income of subsidiaries ......... $10,309 $17,743 $11,154
Interest income from subsidiaries .......................... 1,468 1,808 1,407
Dividend income from subsidiaries .......................... 14,750 8,250 4,885
Gain on disposition of equity investments .................. 13,780 -- --
Sundry ..................................................... 2,663 1,196 1,755
------- ------- -------
42,970 28,997 19,201
------- ------- -------
EXPENSES
Interest on borrowed funds ................................. 2,546 2,579 3,744
Deferred compensation ...................................... 408 188 426
Shareholder communications ................................. 555 443 288
Merger-related costs ....................................... 1,533 -- --
Charitable contribution to foundation ...................... 11,890 -- --
Sundry ..................................................... 3,136 2,627 1,810
------- ------- -------
20,068 5,837 6,268
------- ------- -------
Income before taxes ........................................ 22,902 23,160 12,933
Income tax benefits ........................................ 4,249 1,285 1,107
------- ------- -------
Net income ................................................. $27,151 $24,445 $14,040
======= ======= =======
76
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 28. PARENT COMPANY FINANCIAL INFORMATION -- (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
($ IN THOUSANDS)
OPERATING ACTIVITIES
Net income ........................................................... $ 27,151 $ 24,445 $ 14,040
Adjustments to reconcile net income to net cash provided by operations
Equity in undistributed net income of subsidiaries .................. (10,309) (17,743) (11,154)
Charitable contribution to foundation ............................... 11,890 -- --
Gain on disposition of equity investments ........................... (13,780) -- --
Depreciation ........................................................ 13 33 20
Other liabilities, net .............................................. 192 (121) 1,007
Other assets, net ................................................... (6,271) (150) (283)
--------- --------- ---------
Net cash provided by operating activities ............................ 8,886 6,464 3,630
--------- --------- ---------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Investment in bank subsidiaries ..................................... (8,000) (5,000) --
Investment in nonbank subsidiaries .................................. (11) -- (2,820)
Loans to subsidiaries, net .......................................... (1,869) (1,805) 1,545
Proceeds from disposition of equity investments ..................... 2,173 -- --
Other investments ................................................... (2,856) (2,801) (3,449)
Fixed assets, net ................................................... 37 120 (54)
--------- --------- ---------
Net cash used for investing activities ............................... (10,526) (9,486) (4,778)
--------- --------- ---------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Borrowings, net ..................................................... (171) (27,425) 9,515
Issuance of long-term debt .......................................... -- -- 2,700
Cash dividends paid ................................................. (8,583) (5,860) (2,688)
Issuance of common stock ............................................ -- 38,375 --
Repurchase of common stock .......................................... (856) (9,824) --
Other ............................................................... 6,129 2,598 1,918
--------- --------- ---------
Net cash (used for) provided by financing activities ................. (3,481) (2,136) 11,445
--------- --------- ---------
Net change in cash and due from banks ................................ (5,121) (5,158) 10,297
Cash and due from banks at beginning of year ......................... 11,126 16,284 5,987
--------- --------- ---------
Cash and due from banks at end of year ............................... $ 6,005 $ 11,126 $ 16,284
========= ========= =========
NOTE 29. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information, whether or not recognized in the statement
of financial position, when it is practicable to estimate the fair value. SFAS
107 defines a financial instrument as cash, evidence of an ownership interest in
an entity or contractual obligations which require the exchange of cash or other
financial instruments. Certain items are specifically excluded from the
disclosure requirements, including the Company's Common Stock, premises and
equipment, accrued interest receivable and payable and other assets and
liabilities.
77
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
Fair value approximates book value for the following financial instruments
due to the short-term nature of the instrument: cash and due from banks,
interest-bearing bank balances, federal funds sold and resale agreements,
federal funds purchased and repurchase agreements and other short-term
borrowings.
Fair value for variable rate loans that reprice frequently is based on the
carrying value. Fair value for mortgage loans, consumer loans and all other
loans (primarily commercial and industrial loans) with fixed rates of interest
is based on the discounted present value of the estimated future cash flows less
the allowance for loan losses. Discount rates used in these computations
approximate the rates currently offered for similar loans of comparable terms
and credit quality.
The carrying amount for loan commitments and letters of credit, which are
off-balance-sheet financial instruments, approximates the fair value since the
obligations are typically based on current market rates.
Fair value for demand deposit accounts and interest-bearing accounts with
no fixed maturity date is equal to the carrying value. Certificate of deposit
accounts are estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments.
Fair value for long-term debt is based on discounted cash flows using the
Company's current incremental borrowing rate. Investment securities are valued
using quoted market prices.
The Company has used management's best estimate of fair value based on the
above assumptions. Thus, the fair values presented may not be the amounts which
could be realized in an immediate sale or settlement of the instrument. In
addition, any income taxes or other expenses which would be incurred in an
actual sale or settlement are not taken into consideration in the fair values
presented.
The estimated fair values of the Company's financial instruments at
December 31 were as follows:
1999 1998
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
($ IN THOUSANDS)
FINANCIAL ASSETS
Cash and due from banks ................................... $ 102,986 $ 102,986 $ 116,239 $ 116,239
Interest-bearing bank balances ............................ 28,820 28,820 54,988 54,988
Federal funds sold and resale agreements .................. 925 925 28,041 28,041
Trading securities ........................................ 4,668 4,668 3,543 3,543
Securities available for sale ............................. 633,108 633,108 405,137 405,137
Securities held for investment ............................ 63,795 63,320 52,077 52,940
Net loans ................................................. 2,405,393 2,393,720 2,009,920 2,047,827
FINANCIAL LIABILITIES
Deposits .................................................. $2,514,994 $2,513,984 $2,334,183 $2,369,629
Federal funds purchased and repurchase agreements ......... 137,618 137,618 154,065 154,065
Short-term borrowings ..................................... 236,307 236,307 1,758 1,758
Long-term debt ............................................ 218,154 217,204 63,081 62,934
78
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
The estimated fair values for the Company's off-balance-sheet derivative
financial instruments at December 31 were as follows:
1999 1998
------------------- ----------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ------- --------- ----------
($ IN THOUSANDS)
Interest Rate Swaps ......... $21,160 $431 $22,249 $ (703)
======= ==== ======= ======
NOTE 30. PROPOSED MERGER
In January 2000, the Company signed a definitive agreement to merge with
Anchor Financial Corporation ("Anchor"), headquartered in Myrtle Beach, South
Carolina. The resulting holding company will be called The South Financial
Group. At December 31, 1999, Anchor operated through 33 locations in North and
South Carolina and had total assets of approximately $1.2 billion. The
transaction will be accounted for as a pooling-of-interests and the Company will
issue, to Anchor shareholders, shares of the Company's Common Stock valued at
the time of the agreement at approximately $300 million. The merger, which is
subject to regulatory and shareholder approval, is expected to close in the
second quarter of 2000.
79
CAROLINA FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information is incorporated by reference to the Registrant's Proxy
Statement relating to the 2000 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Information is incorporated by reference to the Registrant's Proxy
Statement relating to the 2000 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information is incorporated by reference to the Registrant's Proxy
Statement relating to the 2000 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is incorporated by reference to the Registrant's Proxy
Statement relating to the 2000 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission.
80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Item 8 for reference.
(a)(2) Financial Statement Schedules
Financial statement schedules normally required on Form 10-K are omitted
since they are not applicable or because the required information is
included in the Consolidated Financial Statements or related Notes to
Consolidated Financial Statements.
(a)(3) Listing of Exhibits
2.1-- Reorganization Agreement By and Among Carolina First Corporation,
Carolina First Bank, Anchor Financial Corporation, and The Anchor Bank.
Incorporated by reference to Carolina First Corporation's Current Report
on Form 8-K dated January 13, 2000.
3.1-- Articles of Incorporation: Incorporated by reference to Exhibit 3.1 of
the Company's Registration Statement on Form S-4, Commission File No.
57389
3.2-- Amended and Restated Bylaws of Carolina First Corporation, as amended
and restated as of December 18, 1996: Incorporated by reference to
Exhibit 3.1 of Carolina First Corporation's Current Report on Form 8-K
dated December 18, 1996, Commission File No. 0-15083.
4.1-- Specimen CFC Common Stock certificate: Incorporated by reference to
Exhibit 4.1 of Carolina First Corporation's Registration Statement on
Form S-1, Commission File No. 33-7470.
4.2-- Articles of Incorporation: Included as Exhibit 3.1.
4.2-- Bylaws: Included as Exhibit 3.2.
4.3-- Carolina First Corporation Amended and Restated Common Stock Dividend
Reinvestment Plan: Incorporated by reference to the Prospectus in
Carolina First Corporation's Registration Statement on Form S-3,
Commission File No. 333-06975.
4.6-- Amended and Restated Shareholder Rights Agreement: Incorporated by
reference to Exhibit 4.1 of Carolina First Corporation's Current Report
on Form 8-K dated December 18, 1996, Commission File No. 0-15083.
4.7-- Form of Indenture between Carolina First Corporation and First
American Trust Company, N.A., as Trustee: Incorporated by reference to
Exhibit 4.11 of the Company's Registration Statement on Form S-3,
Commission File No. 22-58879.
10.1--Carolina First Corporation Amended and Restated Restricted Stock Plan:
Incorporated by reference to Exhibit 99.1 from the Company's Registration
Statement on Form S-8, Commission File No. 33-82668/82670.
10.2--Carolina First Corporation Employee Stock Ownership Plan: Incorporated
by reference to Exhibit of Carolina First Corporation's Annual Report on
Form 10-K for the year ended December 31, 1991, Commission File No.
0-15083.
10.3--Carolina First Corporation Amended and Restated Stock Option Plan:
Incorporated by reference to Exhibit 99.1 from the Company's Registration
Statement on Form S-8, Commission File No. 33-80822.
10.4--Carolina First Corporation Salary Reduction Plan: Incorporated by
reference to Exhibit 28.1 of Carolina First Corporation's Registration
Statement on Form S-8, Commission File No. 33-25424.
81
10.5 -- Amended and Restated Noncompetition, Severance and Employment
Agreement dated as of May 21, 1999, by and between Carolina First
Corporation and Mack I. Whittle, Jr.: Incorporated by reference to
Exhibit 10.1 of Carolina First Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, Commission File No.
0-15083.
10.6 -- Amended and Restated Noncompetition, Severance and Employment
Agreement dated May 21, 1999, by and between Carolina First Corporation
and William S. Hummers III: Incorporated by reference to Exhibit 10.2 of
Carolina First Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, Commission File No. 0-15083.
10.7 -- Amended and Restated Noncompetition and Severance Agreement dated
February 21, 1996, between Carolina First Corporation and James W.
Terry, Jr.: Incorporated by reference to Exhibit 10.7 of Carolina First
Corporation's Annual Report on Form 10-K for the year ended December 31,
1995, Commission File No. 0-15083.
10.8 -- Amended and Restated Noncompetition, Severance and Employment
Agreement dated as of October 5, 1999, by and between Carolina First
Corporation and John DuBose. Incorporated by reference to Exhibit 10.3
of Carolina First Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, Commission File No. 0-15053.
10.9 -- Amended and Restated Noncompetition, Severance and Employment
Agreement dated as of November 2, 1998, by and between Carolina First
Corporation and Michael W. Sperry. Incorporated by reference to Exhibit
10.4 of Carolina First Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, Commission File No. 0-15053.
10.10--Employment Agreement dated as of October 7, 1998, by and among
William J. Moore, Carolina First Bank and Carolina First Corporation.
10.11--Short-Term Performance Plan: Incorporated by reference to Exhibit 10.3
of Carolina First Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993, Commission File No. 0-15083.
10.12--Carolina First Corporation Long-Term Management Performance Plan:
Incorporated by reference to Exhibit 10.11 of Carolina First
Corporation's Annual Report on Form 10-K for the year ended December 31,
1994, Commission File No. 0-15083.
10.13--Carolina First Corporation Employee Stock Purchase Plan: Incorporated
by reference to Exhibit 99.1 from the Company's Registration Statement
on Form S-8, Commission File No. 33-79668.
10.14--Carolina First Corporation Directors Stock Option Plan: Incorporated
by reference to Exhibit 99.1 from the Company's Registration Statement
on Form S-8, Commission File No. 33- 82668/82670.
10.15--Warrant to Purchase Common Stock of Affinity Financial Group, Inc.
and Amendment No. 1 with respect to Warrant to Purchase Common Stock of
Affinity Financial Group, Inc. Incorporated by reference to Exhibit
10.16 of Carolina First Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995, Commission File No. 0-15083.
10.16--Letter Agreement between Carolina First Corporation and the Board of
Governors of the Federal Reserve Board regarding warrant to purchase
shares of Affinity Technology Group, Inc. common stock. Incorporated by
reference to Exhibit 10.1 of Carolina First Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, Commission File
No. 0-15083.
10.17--Office of Thrift Supervision Modification of Approval of Holding
Company Acquisition and Purchase of Assets and Assumption of Liabilities
dated July 25, 1997 between Net.B@nk, Inc. and the Office of Thrift
Supervision Regarding Restrictions on Net.B@nk, Inc. Stock. Incorporated
by reference to Exhibit 10.2 of Carolina First Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997, Commission
File No. 0-15053.
82
10.18--Office of Thrift Supervision Letter granting Carolina First
Corporation permission to reduce its Net.B@nk, Inc. stock holdings.
Incorporated by reference to Exhibit 10.19 of Carolina First
Corporation's Annual Report on Form 10-K for the year ended December 31,
1998, Commission File No. 0-15053.
10.19--Carolina First Corporation Amended and Restated Fortune 50 Plan:
Incorporated by reference to the Prospectus in Carolina First
Corporation's Registration Statement on Form S-8, Commission File
No. 333-31948.
11.1-- Computation of Per Share Earnings.
12.1-- Ratio of Earnings to Fixed Charges.
13.1-- 1999 Annual Report to Shareholders.
21.1-- Subsidiaries of the Registrant.
23.1-- Consent of KPMG LLP.
27.1-- Financial Data Schedule included in the electronically filed document
as required
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO WILLIAM S.
HUMMERS III, EXECUTIVE VICE PRESIDENT OF CAROLINA FIRST CORPORATION
(b) Current Reports on Form 8-K
None.
83
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) 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 CORPORATION
SIGNATURE TITLE DATE
- -------------------------------------------------------- -------------------------------- ------------------
/s/MACK I. WHITTLE, JR. President, Chief February 16, 2000
- ------------------------------- Executive Officer and Director
MACK I. WHITTLE, JR.
/s/WILLIAM S. HUMMERS III Executive Vice President and February 16, 2000
- ------------------------------- Secretary
WILLIAM S. HUMMERS III (Principal Accounting and
Principal Financial Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES ON THE DATES INDICATED:
SIGNATURE TITLE DATE
- ---------------------------------------------------------- ---------- ------------------
/s/WILLIAM R. TIMMONS, JR. Chairman February 16, 2000
- -------------------------------
WILLIAM R. TIMMONS, JR.
/s/MACK I. WHITTLE, JR. Director February 16, 2000
- -------------------------------
MACK I. WHITTLE, JR.
/s/WILLIAM S. HUMMERS III Director February 16, 2000
- -------------------------------
WILLIAM S. HUMMERS III
/s/JUDD B. FARR Director February 16, 2000
- -------------------------------
JUDD B. FARR
/s/C. CLAYMON GRIMES, JR. Director February 16, 2000
- -------------------------------
C. CLAYMON GRIMES, JR.
/s/M. DEXTER HAGY Director February 16, 2000
- -------------------------------
M. DEXTER HAGY
Director February 16, 2000
- -------------------------------
VERNON E. MERCHANT, JR.
/s/H. EARLE RUSSELL, JR. Director February 16, 2000
- -------------------------------
H. EARLE RUSSELL, JR.
/s/CHARLES B. SCHOOLER Director February 16, 2000
- -------------------------------
CHARLES B. SCHOOLER
84
SIGNATURE TITLE DATE
- ------------------------------------------------- ---------- ------------------
/s/ELIZABETH P. STALL Director February 16, 2000
- -------------------------------
ELIZABETH P. STALL
/s/EUGENE E. STONE IV Director February 16, 2000
- -------------------------------
EUGENE E. STONE IV
/s/SAMUEL H. VICKERS Director February 16, 2000
- -------------------------------
SAMUEL H. VICKERS
/s/DAVID C. WAKEFIELD Director February 16, 2000
- -------------------------------
DAVID C. WAKEFIELD
85
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------
10.10 Employment Agreement dated as of October 7, 1998, by and among
William J. Moore, Carolina First Bank and Carolina First Corporation.
11.1 Computation of Earnings Per Share
12.1 Ratio of Earnings to Fixed Charges
13.1 1999 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule included in the electronically filed
document as required.