PROSPECTUS
Southern Capital Trust I
$20,000,000
8.25% Capital Securities
(Liquidation Amount $10.00 per Capital Security)
fully and unconditionally guaranteed, as described herein, by
Southern BancShares (N.C.), Inc.
---------------
The Capital Securities offered hereby represent preferred undivided
beneficial interests in the assets of Southern Capital Trust I, a statutory
business trust created under the laws of the State of Delaware (the "Issuer
Trust"). Southern BancShares (N.C.), Inc. ("BancShares"), initially will be the
holder of all the beneficial interests represented by common securities of the
Issuer Trust (the "Common Securities" and, collectively with the Capital
Securities, the "Trust Securities"). The Issuer Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds thereof in
8.25% Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures") to be issued by BancShares. The Junior Subordinated
Debentures will mature on June 30, 2028 (the "Stated Maturity"). See
"Description of the Junior Subordinated Debentures -- General." The Capital
Securities will have a preference under certain circumstances over the Common
Securities with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise. See "Description of the Capital
Securities -- Subordination of Common Securities." The Capital Securities have
been approved for quotation on the American Stock Exchange, Inc., subject to
notice of issuance. (Continued on next page.)
See "Risk Factors" beginning on Page 10 of this Prospectus for a
discussion of certain risk factors that should be considered by prospective
investors in evaluating an investment in the Capital Securities.
---------------
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS,
ARE NOT OBLIGATIONS OF OR GUARANTEED BY A BANKING OR NONBANKING AFFILIATE OF
BANCSHARES (EXCEPT TO THE EXTENT THAT THE CAPITAL SECURITIES ARE GUARANTEED BY
BANCSHARES AS DESCRIBED HEREIN), AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
Price to Underwriting Proceeds to
Public (1) Commission (2) Issuer Trust (3)(4)
<S> <C> <C> <C>
Per Capital Security ......... $ 10.00 (4) $ 10.00
Total (5) .................... $ 20,000,000 (4) $ 20,000,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accumulated Distributions (as defined herein), if any, from June 9,
1998.
(2) BancShares and the Trust each have agreed to indemnify the Underwriter (as
defined herein) against certain liabilities, including certain liabilities
under the Securities Act. See "Underwriting."
(3) Before deducting estimated expenses of $215,000 which are payable by
BancShares.
(4) In view of the fact that the proceeds of the sale of the Capital Securities
will be invested in the Junior Subordinated Debentures issued by
BancShares, BancShares has agreed to pay the Underwriter, as compensation
for its arranging the investment therein of such proceeds, $0.375 per
Capital Security (or $750,000 in the aggregate). See "Underwriting."
(5) The Trust has granted to the Underwriter an option, exercisable within 30
days of the date hereof, to purchase up to 300,000 additional Capital
Securities on the same terms and conditions set forth above solely to
cover over-allotments, if any. If the Underwriter exercises such option in
full, the total Price to Public, Underwriting Commission and Proceeds to
Issuer Trust, will be $23,000,000, $862,500 and $23,000,000, respectively.
See "Underwriting."
---------------
The Capital Securities are offered by the Underwriter, as specified
herein, subject to receipt and acceptance by it, to prior sale and to the
Underwriter's right to reject any order in whole or in part and to withdraw,
cancel or modify the offer without notice. It is expected that delivery of the
Capital Securities will be made on or about June 9, 1998, against payment
therefor in immediately available funds.
---------------
Wheat First Union
The date of this Prospectus is June 3, 1998.
<PAGE>
Holders of the Capital Securities will be entitled to receive preferential
cumulative cash distributions ("Distributions") accumulating from the date of
original issuance and payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year (each a "Distribution Date"),
commencing September 30, 1998, at an annual rate equal to 8.25% on the
Liquidation Amount (as defined herein) of $10.00 per Capital Security. The
distribution rate and the distribution payment dates and other payment dates
for the Capital Securities will correspond to the interest rate and interest
payment dates and other payment dates on the Junior Subordinated Debentures,
which will be the sole assets of the Issuer Trust. So long as no Event of
Default (as defined in the Junior Subordinated Indenture (as defined herein))
has occurred and is continuing with respect to the Junior Subordinated
Debentures (a "Debenture Event of Default"), BancShares has the right to defer
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarterly periods with
respect to each deferral period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures or end on a date other than a Distribution Date. No
interest shall be due and payable during any Extension Period, except at the
end thereof. Upon the termination of any such Extension Period and the payment
of all amounts then due, BancShares may elect to begin a new Extension Period
subject to the requirements set forth herein. If interest payments on the
Junior Subordinated Debentures are so deferred, Distributions on the Capital
Securities will also be deferred and BancShares will not be permitted, subject
to certain exceptions described herein, to declare or pay any cash
distributions with respect to BancShares' capital stock or with respect to debt
securities of BancShares that rank pari passu in all respects with or junior to
the Junior Subordinated Debentures. During an Extension Period, interest on the
Junior Subordinated Debentures will continue to accrue (and the amount of
Distributions to which holders of the Capital Securities are entitled will
accumulate) at a rate equal to 8.25%, compounded quarterly, and holders of
Capital Securities will be required to accrue income for United States federal
income tax purposes. See "Description of the Junior Subordinated Debentures --
Option to Extend Interest Payment Period" and "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
BancShares will, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture (each as defined
herein), taken together, fully, irrevocably and unconditionally guarantee all
the Issuer Trust's obligations under the Capital Securities as described below.
See "Relationship Among the Capital Securities, the Junior Subordinated
Debentures and the Guarantee -- Full and Unconditional Guarantee." The
Guarantee of BancShares guarantees the payment of Distributions and payments on
liquidation or redemption of the Capital Securities, but only in each case to
the extent of funds held by the Issuer Trust, as described herein (the
"Guarantee"). See "Description of the Guarantee." If BancShares does not make
payments on the Junior Subordinated Debentures held by the Issuer Trust, the
Issuer Trust may have insufficient funds to pay Distributions on the Capital
Securities. The Guarantee does not cover payment of Distributions when the
Issuer Trust does not have sufficient funds to pay such Distributions. In such
event, a holder of Capital Securities may institute a legal proceeding directly
against BancShares to enforce payment of such Distributions to such holder. See
"Description of the Junior Subordinated Debentures -- Enforcement of Certain
Rights by Holders of Capital Securities." The obligations of BancShares under
the Guarantee and the Capital Securities are subordinate and junior in right of
payment to all Senior Indebtedness (as defined in "Description of the Junior
Subordinated Debentures -- Subordination") of BancShares.
The Capital Securities are subject to mandatory redemption (i) in whole,
but not in part, at the Stated Maturity upon repayment of the Junior
Subordinated Debentures, (ii) in whole, but not in part, contemporaneously with
the optional redemption by BancShares of the Junior Subordinated Debentures at
any time within 90 days following the occurrence and during the continuation of
a Tax Event, Investment Company Event or Capital Treatment Event (each as
defined herein), in each case subject to possible regulatory approval and (iii)
in whole or in part at any time on or after June 30, 2003, contemporaneously
with the optional redemption by BancShares of the Junior Subordinated
Debentures in whole or in part, in each case at the applicable Redemption Price
(as defined herein). The Junior Subordinated Debentures are redeemable prior to
maturity at the option of BancShares (i) on or after June 30, 2003, in whole at
any time or in part from time to time, or (ii) in whole, but not in part, at
any time within 90 days following the occurrence and continuation of a Tax
Event, Investment Company Event or Capital Treatment Event, in each case at a
redemption price set forth herein, which includes the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed
for redemption. The ability of BancShares to exercise its rights to redeem the
Junior Subordinated Debentures or to cause the redemption of the Capital
Securities prior to the Stated Maturity may be subject to prior regulatory
approval by the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), if then required under applicable Federal Reserve capital guidelines
or policies. See "Description of the Capital Securities -- Liquidation
Distribution Upon Dissolution" and "Description of the Junior Subordinated
Debentures -- Redemption."
In the event of the dissolution of the Issuer Trust, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, the
holders of the Capital Securities will be entitled to receive a Liquidation
Amount of $10.00 per
2
<PAGE>
Capital Security plus accumulated and unpaid Distributions thereon to the date
of payment, subject to certain exceptions, which may be in the form of a
distribution of such amount in Junior Subordinated Debentures. See "Description
of the Capital Securities -- Liquidation Distribution Upon Dissolution."
The holders of the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, to cause the
Junior Subordinated Debentures to be distributed to the holders of the Capital
Securities and Common Securities in liquidation of the Issuer Trust. The
ability of the holders of the outstanding Common Securities to dissolve the
Issuer Trust may be subject to prior regulatory approval of the Federal
Reserve, if then required under applicable Federal Reserve capital guidelines
or policies. See "Description of the Capital Securities -- Liquidation
Distribution Upon Dissolution."
The Junior Subordinated Debentures are unsecured and subordinated to all
Senior Indebtedness of BancShares. See "Description of the Junior Subordinated
Debentures -- Subordination."
The Capital Securities will be represented by global certificates
registered in the name of The Depository Trust Company ("DTC") or its nominee.
Beneficial interests in the Capital Securities will be shown on, and transfers
thereof will be effected only through, records maintained by participants in
DTC. Except as described in the accompanying Prospectus, Capital Securities in
certificated form will not be issued in exchange for the global certificates.
See "Description of the Capital Securities -- Form, Denomination, Book-Entry
Procedures and Transfer."
THE JUNIOR SUBORDINATED DEBENTURES ARE DIRECT AND UNSECURED OBLIGATIONS OF
BANCSHARES AND, LIKE THE CAPITAL SECURITIES, DO NOT EVIDENCE DEPOSITS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER INSURER
OR GOVERNMENTAL AGENCY.
---------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MADE HEREBY MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
CAPITAL SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
CAPITAL SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
---------------
3
<PAGE>
AVAILABLE INFORMATION
BancShares is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). BancShares intends to
seek an order from the Commission conditionally exempting the Issuer Trust from
the reporting requirements of the Exchange Act pursuant to Section 12(h)
thereof, and, therefore, it is not expected that the Issuer Trust will be
filing separate reports under the Exchange Act. BancShares' reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such material may also be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. If available, such information also
may be accessed through the Commission's electronic data gathering, analysis
and retrieval system ("EDGAR") via electronic means, including the Commission's
home page on the Internet (http://www.sec.gov). In addition, reports, proxy
statements and other information concerning BancShares will be available for
inspection at the offices of the American Stock Exchange, Inc. upon approval of
its application for quotation of the Capital Securities.
BancShares and the Issuer Trust have filed with the Commission a
Registration Statement on Form S-1 (together with all amendments and exhibits
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Capital Securities, the
Junior Subordinated Debentures and the Guarantee. This Prospectus does not
contain all of the information set forth in such Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. Reference is made to the Registration Statement
and the exhibits filed as a part thereof or incorporated by reference therein
for further information with respect to BancShares, the Issuer Trust and the
securities to which this Prospectus relates. Statements contained herein
concerning the provisions of any document filed or incorporated by reference as
an exhibit to the Registration Statement, or otherwise filed with the
Commission or incorporated by reference herein, are not necessarily complete
and, in each instance, reference is made to the copy of such document so filed
or incorporated by reference for a more complete description of the matter
involved. Each such statement is qualified in its entirety by such reference.
No separate financial statements of the Issuer Trust have been included
herein. BancShares and the Issuer Trust do not consider that such financial
statements would be material to holders of the Capital Securities because (i)
the Issuer Trust is a newly-formed special purpose entity, has no operating
history or independent operations and is not engaged in and does not propose to
engage in any activity other than holding as trust assets the Junior
Subordinated Debentures, issuing the Trust Securities and engaging in
incidental activities, (ii) all of the voting securities of the Issuer Trust
will be owned, directly or indirectly, by BancShares, a reporting company under
the Exchange Act, and (iii) the obligations of the Issuer Trust under the
Capital Securities are guaranteed by BancShares as described herein. See
"Southern Capital Trust I," "Description of the Capital Securities,"
"Description of the Junior Subordinated Debentures," and "Description of the
Guarantee."
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus does not give effect to the exercise of the
Underwriter's over-allotment option. Prospective investors should carefully
consider the information set forth under the heading "Risk Factors." Throughout
this Prospectus, unless the context clearly requires otherwise, references to
"BancShares" should be deemed references to the combined activities of Southern
BancShares (N.C.), Inc., a non-operating holding company, and its principal
operating subsidiary, Southern Bank and Trust Company. As used herein, (i) the
"Junior Subordinated Indenture" means the Junior Subordinated Indenture, to be
dated as of June 9, 1998, as amended and supplemented from time to time,
between BancShares and Bankers Trust Company ("Bankers Trust"), as trustee (the
"Debenture Trustee"), relating to the Junior Subordinated Debentures, (ii) the
"Trust Agreement" means the Amended and Restated Trust Agreement relating to
the Issuer Trust among BancShares, as Depositor, Bankers Trust, as Property
Trustee (the "Property Trustee"), Bankers Trust (Delaware), as Delaware Trustee
(the "Delaware Trustee") (collectively, the "Issuer Trustees"), the
Administrators (as defined herein) named therein, and the holders, from time to
time, of undivided beneficial interests in the assets of the Issuer Trust, and
(iii) the "Guarantee" means the Guarantee Agreement relating to the Capital
Securities between BancShares and Bankers Trust, as Guarantee Trustee (the
"Guarantee Trustee").
Southern BancShares (N.C.), Inc.
General
BancShares is a registered bank holding company, incorporated under the
laws of Delaware, and headquartered in Mount Olive, North Carolina. It was
organized during 1986 as the successor to, and to effect a change in the state
of incorporation of, the original bank holding company of BancShares'
wholly-owned subsidiary, Southern Bank and Trust Company (the "Bank").
BancShares operates through the Bank which provides a variety of retail and
commercial banking products and services to individuals and small- to
medium-sized businesses located in the communities it serves. At March 31,
1998, BancShares had total consolidated assets of approximately $593.9 million,
total consolidated deposits of approximately $516.0 million, and total
consolidated shareholders' equity of approximately $57.0 million. The Bank is a
North Carolina-chartered bank that currently maintains 42 banking offices in 38
eastern North Carolina communities.
BancShares is focused on community-oriented banking via (i) localized
lending, (ii) core deposit funding, (iii) conservative balance sheet
management, and (iv) stable growth. BancShares' franchise includes many smaller
communities where competition is limited due to the exit of larger institutions
or to the limited products of smaller institutions. By outsourcing its core
data processing requirements, BancShares can offer a complete array of
financial services while maintaining its community banking orientation.
BancShares' focus on non-metropolitan markets and its emphasis on customer
service provide it with a stable source of core funding. At March 31, 1998,
transaction accounts and non-interest bearing accounts equaled 25.23% and
12.41%, respectively, of total deposits.
BancShares' return on average assets and return on average equity were
1.17% and 14.47%, respectively, for the year ended December 31, 1997, and an
annualized 1.72% and 17.95%, respectively, for the three months ended March 31,
1998.
Members of the Holding family, including Frank B. Holding, have been
actively involved in the management of BancShares, and, currently, various
members of the family control an aggregate of 51.55% of BancShares' common
stock. See "Beneficial Ownership of Securities" and "Certain Relationships and
Related Transactions." As a result, BancShares has been managed from a
long-term perspective with primary emphasis being placed on balance sheet
liquidity, loan quality, and earnings stability. At March 31, 1998, BancShares'
loan-to-deposit ratio was 68.65%, over 65.23% of its $184.6 million investment
portfolio was invested in U.S. government obligations with an average maturity
of 15 months, and approximately 38.39% of the investment portfolio was
classified as held-to-maturity. Consistent with its management philosophy,
BancShares has emphasized a low-risk loan portfolio derived from its local
markets. At March 31, 1998, BancShares' non-performing assets were $1.2
million, or 0.35% of gross loans and other real estate. Net charge-offs for
1997 were 0.07% of average loans and, for the first quarter of 1998, were an
annualized 0.02% of average loans. The allowance for loan losses, at March 31,
1998, was 1.70% of gross loans and 504.27% of non-performing loans.
BancShares' principal executive offices are located at 121 East Main
Street, Mount Olive, North Carolina 28365, and its telephone number is (919)
658-7000.
For additional information regarding BancShares and its financial
condition and results of operations, see "Available Information," "Risks
Factors -- Risk Factors Relating to BancShares," "Southern BancShares (N.C.),
Inc.," "Capitalization," "Selected Consolidated Financial Data," "Business,"
"Supervision and Regulation," "Beneficial Ownership of Securities,"
5
<PAGE>
"Directors and Executive Officers," "Executive Compensation," "Certain
Relationships and Related Transactions," and "Southern BancShares (N.C.), Inc.
and Subsidiary Index to Consolidated Financial Statements."
Recent Acquisition
Effective May 15, 1998, the Bank acquired Enfield Savings Bank, Inc.
("ESB"), a state-chartered savings bank headquartered in Enfield, North
Carolina. In connection with the transaction, the Bank assumed aggregate
deposit liabilities of approximately $15.6 million and purchased approximately
$16.4 million in loans associated with one of ESB's offices which became a
branch office of the Bank. The deposits and loans related to ESB's second
office were transferred and assigned to an affiliated financial institution in
a purchase and assumption transaction. See "Certain Relationships and Related
Transactions."
Southern Capital Trust I
The Issuer Trust is a statutory business trust created under Delaware law
on April 29, 1998 and which will be governed by the Trust Agreement. The Issuer
Trust exists for the exclusive purposes of (i) issuing and selling the Trust
Securities, (ii) using the proceeds from the sale of the Trust Securities to
acquire the Junior Subordinated Debentures, and (iii) engaging in only those
other activities necessary, convenient or incidental thereto (such as
registering the transfer of the Trust Securities). Accordingly, the Junior
Subordinated Debentures will be the sole assets of the Issuer Trust, and
payments under the Junior Subordinated Debentures will be the sole source of
revenue of the Issuer Trust. Upon issuance of the Capital Securities, the
purchasers thereof will own all of the Capital Securities of the Issuer Trust.
Upon issuance of the Common Securities, BancShares will own all of the Common
Securities of the Issuer Trust which will represent an aggregate Liquidation
Amount equal to at least 3% of the Issuer Trust's total capital. See "Southern
Capital Trust I."
The Offering
Securities Offered.............. $20,000,000 aggregate Liquidation Amount of
8.25% Capital Securities (Liquidation Amount
$10.00 per Capital Security).
Offering Price.................. $10.00 per Capital Security plus
accumulated Distributions, if any, from the
date of original issuance.
Distribution Dates.............. March 31, June 30, September 30 and
December 31 of each year, commencing
September 30, 1998.
Extension Periods............... So long as no Debenture Event of Default
has occurred and is continuing, Distributions
on Capital Securities may be deferred for the
duration of any Extension Period selected by
BancShares with respect to the payment of
interest on the Junior Subordinated
Debentures. No Extension Period may exceed 20
consecutive quarterly periods or extend
beyond the Stated Maturity. See "Description
of the Capital Securities -- Distributions,"
"Description of the Junior Subordinated
Debentures -- Option to Extend Interest
Payment Period" and "Certain Federal Income
Tax Consequences -- Interest Income and
Original Issue Discount."
Ranking......................... The Capital Securities will rank pari
passu, and payments thereon will be made pro
rata, with the Common Securities except as
described under "Description of the Capital
Securities -- Subordination of Common
Securities." The Junior Subordinated
Debentures will be unsecured and subordinate
and junior in right of payment to the extent
and in the manner set forth in the Junior
Subordinated Indenture to all Senior
Indebtedness. See "Description of the Junior
Subordinated Debentures." The Guarantee will
constitute an unsecured obligation of
BancShares and will rank subordinate and
junior in right of payment to the extent and
in the manner set forth in the Guarantee to
all Senior Indebtedness. See "Description of
the Guarantee." In addition, because
BancShares is a holding company, the
6
<PAGE>
Junior Subordinated Debentures and the
Guarantee will be effectively subordinated
to all existing and future liabilities of
BancShares' subsidiaries, including the
Bank's deposit liabilities. See
"Description of the Junior Subordinated
Debentures -- Subordination."
Redemption...................... The Trust Securities are subject to
mandatory redemption (i) in whole, but not in
part, at the Stated Maturity upon repayment
of the Junior Subordinated Debentures, (ii)
in whole, but not in part, contemporaneously
with the optional redemption at any time by
BancShares of the Junior Subordinated
Debentures at any time within 90 days
following the occurrence and during the
continuation of a Tax Event, Investment
Company Event or Capital Treatment Event, in
each case subject to possible regulatory
approval, and (iii) in whole or in part at
any time on or after June 30, 2003,
contemporaneously with the optional
redemption by BancShares of the Junior
Subordinated Debentures in whole or in part,
in each case at the applicable redemption
price. See "Description of the Capital
Securities -- Redemption" and "Description of
the Junior Subordinated Debentures --
Redemption."
Ratings......................... The Capital Securities will not be rated by
any rating service, nor is any other security
issued by BancShares so rated.
ERISA Considerations............ Prospective investors must carefully
consider the restrictions on purchase set
forth under "ERISA Considerations."
Absence of Market for the
Capital Securities............... The Capital Securities will be a new issue
of securities for which there currently is
no market. The Capital Securities have been
approved for quotation on the American Stock
Exchange, Inc. ("AMEX"), subject to notice
of issuance. However, there can be no
assurance that an active public market will
develop for the Capital Securities or that,
if such market develops, that it will be
maintained. See "Underwriting."
American Stock Exchange, Inc.... The Capital Securities have been approved
for quotation on AMEX, subject to notice of
issuance. See "Underwriting."
For additional information regarding the Capital Securities, see "Southern
Capital Trust I," "Accounting Treatment," "Use of Proceeds," "Description of
the Capital Securities," "Description of the Junior Subordinated Debentures,"
"Description of the Guarantee," "Relationship Among the Capital Securities, the
Junior Subordinated Debentures and the Guarantee," "Certain Federal Income Tax
Consequences," and "ERISA Considerations."
Use of Proceeds
All net proceeds to the Issuer Trust from the sale of the Capital
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. All the net proceeds to be received by BancShares from the sale of
the Junior Subordinated Debentures will be used for general corporate purposes,
although it is likely that substantially all such proceeds will be used
initially to make additional capital contributions to the Bank to fund its
operations and continued expansion and to maintain its status as a "well
capitalized" bank under bank regulatory capital guidelines. See "Supervision
and Regulation." Portions of the net proceeds from the sale of the Junior
Subordinated Debentures also may be used in the future for acquisitions by
BancShares or the Bank, extensions of credit to the Bank, or for repurchases of
outstanding common stock of BancShares. The proceeds from the Capital
Securities will qualify as Tier 1 or core capital of BancShares under the risk-
based capital guidelines of the Federal Reserve. See "Use of Proceeds" and
"Accounting Treatment."
Risk Factors
Prospective investors should carefully consider the matters set forth under
"Risk Factors" beginning on page 10.
7
<PAGE>
Selected Consolidated Financial Data
The following table sets forth selected consolidated financial information
for BancShares for the five years ended December 31, 1997, and the three-month
periods ended March 31, 1998 and 1997. The selected consolidated financial data
as of and for each of the years in the five-year period ended December 31, 1997
have been derived from BancShares' audited consolidated financial statements.
The consolidated financial statements as of December 31, 1997 and 1996 and for
each of the years in the three-year period ended December 31, 1997, and the
report thereon of KPMG Peat Marwick LLP, independent certified public
accountants, are included elsewhere in this Prospectus. The information
presented as of and for the three-month periods ended March 31, 1998 and 1997
is derived from BancShares' unaudited consolidated financial statements for
these periods. Those unaudited consolidated financial statements, which are
included elsewhere in this Prospectus, include all adjustments, consisting only
of normal recurring accruals which management considers necessary for a fair
presentation of the financial condition and results of operations for such
interim periods. Results for the three-month period ended March 31, 1998 are
not necessarily indicative of results to be expected for the full year or any
other interim period. The following information should also be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. See also "Available
Information," "Experts," and "Southern BancShares (N.C.), Inc. and Subsidiary
Index to Consolidated Financial Statements."
<TABLE>
As of and For the
Three Months Ended
March 31,
---------------------------
1998 1997
------------- -------------
(Dollars in thousands,
except per share data)
(Unaudited)
<S> <C> <C>
Summary of Operations
Interest income .................................. $ 10,093 $ 9,255
Interest expense ................................. 4,802 4,363
--------- ---------
Net interest income .............................. 5,291 4,892
Provision for loan losses ........................ 60 60
--------- ---------
Net interest income after provision for loan
losses .......................................... 5,231 4,832
Noninterest income ............................... 2,933 4,470
Noninterest expense .............................. 4,788 8,465
--------- ---------
Income before income taxes ....................... 3,376 837
Income taxes ..................................... 809 80
--------- ---------
Net income ....................................... $ 2,567 $ 757
========= =========
Selected Period-End Balances
Total assets ..................................... $ 593,889 $ 547,671
Investment securities and federal funds sold ..... 192,865 172,913
Loans ............................................ 354,206 328,791
Interest earning assets .......................... 551,371 507,804
Deposits ......................................... 515,977 480,896
Interest bearing liabilities ..................... 462,458 434,918
Shareholders' equity ............................. 57,013 44,735
Common shares outstanding ........................ 119,918 119,918
--------- ---------
Selected Average Balances
Total assets ..................................... $ 597,721 $ 541,812
Investment securities and federal funds sold ..... 197,217 176,842
Loans ............................................ 352,141 322,867
Interest earning assets .......................... 531,833 485,185
Deposits ......................................... 519,366 480,783
Interest bearing liabilities ..................... 463,966 427,421
Shareholders' equity ............................. 57,195 45,260
Common shares outstanding ........................ 119,918 119,918
--------- ---------
Profitability Ratios
Return on average total assets ................... 1.72% 0.56%
Return on average shareholders' equity ........... 17.95 6.69
Dividend payout ratio (1) ........................ 5.65 18.89
--------- ---------
Liquidity and Capital Ratios
Average loans to average deposits ................ 67.80% 67.15%
Average shareholders' equity to average total
assets .......................................... 9.57 8.35
Tier 1 capital ratio ............................. 12.14 10.54
Total capital ratio .............................. 13.49 11.84
Leverage capital ratio ........................... 6.53 6.28
--------- ---------
As of and For the
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income .................................. $ 39,055 $ 36,776 $ 32,894 $ 27,164 $ 22,418
Interest expense ................................. 18,827 17,450 16,055 11,044 8,803
--------- --------- --------- --------- ---------
Net interest income .............................. 20,228 19,326 16,839 16,120 13,615
Provision for loan losses ........................ 60 140 -- -- 300
--------- --------- --------- --------- ---------
Net interest income after provision for loan
losses .......................................... 20,168 19,186 16,839 16,120 13,315
Noninterest income ............................... 9,849 4,508 4,028 2,888 3,197
Noninterest expense .............................. 23,064 18,203 15,661 13,918 10,978
--------- --------- --------- --------- ---------
Income before income taxes ....................... 6,953 5,491 5,206 5,090 5,534
Income taxes ..................................... 340 1,127 1,293 1,402 1,741
--------- --------- --------- --------- ---------
Net income ....................................... $ 6,613 $ 4,364 $ 3,913 $ 3,688 $ 3,793
========= ========= ========= ========= =========
Selected Period-End Balances
Total assets ..................................... $ 590,752 $ 540,758 $ 496,980 $ 408,035 $ 411,604
Investment securities and federal funds sold ..... 190,373 179,709 164,526 123,852 145,732
Loans ............................................ 349,353 317,755 287,960 252,611 236,732
Interest earning assets .......................... 544,926 499,164 452,486 376,463 382,464
Deposits ......................................... 513,328 480,566 449,002 367,522 375,061
Interest bearing liabilities ..................... 458,339 422,941 396,631 326,442 338,515
Shareholders' equity ............................. 54,984 44,778 37,163 30,965 24,650
Common shares outstanding ........................ 119,918 119,918 119,918 121,767 130,031
--------- --------- --------- --------- ---------
Selected Average Balances
Total assets ..................................... $ 567,236 $ 519,541 $ 456,499 $ 407,554 $ 326,232
Investment securities and federal funds sold ..... 162,936 157,779 145,417 131,923 114,321
Loans ............................................ 340,195 310,389 270,563 242,217 191,360
Interest earning assets .......................... 507,971 469,792 415,980 374,140 305,681
Deposits ......................................... 498,303 459,552 407,252 367,618 294,264
Interest bearing liabilities ..................... 445,354 411,960 366,597 331,104 263,097
Shareholders' equity ............................. 45,703 40,234 34,657 28,445 23,126
Common shares outstanding ........................ 119,918 119,918 121,226 123,521 130,312
--------- --------- --------- --------- ---------
Profitability Ratios
Return on average total assets ................... 1.17% 0.84% 0.86% 0.90% 1.16%
Return on average shareholders' equity ........... 14.47 10.85 11.29 12.97 16.40
Dividend payout ratio (1) ........................ 8.85 13.45 13.57 12.80 11.65
--------- --------- --------- --------- ---------
Liquidity and Capital Ratios
Average loans to average deposits ................ 68.27% 67.54% 66.44% 65.89% 65.03%
Average shareholders' equity to average total
assets .......................................... 8.06 7.74 7.59 6.98 7.09
Tier 1 capital ratio ............................. 11.43 9.33 8.87 9.08 8.01
Total capital ratio .............................. 12.78 10.66 10.19 10.39 9.27
Leverage capital ratio ........................... 6.07 5.46 5.60 5.20 4.23
--------- --------- --------- --------- ---------
</TABLE>
8
<PAGE>
<TABLE>
As of and For the
Three Months Ended
March 31,
-----------------------
1998 1997
----------- -----------
(Dollars in thousands,
except per share data)
(Unaudited)
<S> <C> <C>
Per Share of Common Stock
Net income applicable to common shares (2) ...... $ 20.58 $ 5.48
Cash dividends .................................. .38 .37
Book value (3) .................................. 475.43 373.05
-------- --------
Asset Quality Ratios
Nonperforming assets to total gross loans and
other real estate owned ........................ 0.35% 0.31%
Net charge-offs to average loans ................ 0.02 ( 0.03)
Total allowance for loan losses to total
nonperforming assets ........................... 484.77 611.66
As of and For the
Year Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ------------ ----------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Per Share of Common Stock
Net income applicable to common shares (2) ...... $ 51.77 $ 33.00 $ 28.90 $ 27.04 $ 26.72
Cash dividends .................................. 1.50 1.50 1.00 1.00 1.00
Book value (3) .................................. 458.51 373.41 309.90 254.30 189.57
-------- --------- -------- -------- --------
Asset Quality Ratios
Nonperforming assets to total gross loans and
other real estate owned ........................ 0.21% 0.16% 0.22% 0.73% 0.62%
Net charge-offs to average loans ................ 0.07 0.10 0.12 0.03 0.26
Total allowance for loan losses to total
nonperforming assets ........................... 802.55 1,237.55 981.52 358.85 455.39
</TABLE>
- ---------
(1) For each indicated period, total common and preferred dividends paid
divided by net income.
(2) For each indicated period, net income less preferred dividends paid,
divided by the average number of common shares outstanding. BancShares'
adoption of Statement 128, "Earnings per Share," had no effect on its
earnings per share disclosure since BancShares has no potentially dilutive
securities.
(3) At the end of each indicated period, shareholders' equity divided by the
number of common shares outstanding.
9
<PAGE>
RISK FACTORS
Prospective purchasers of the Capital Securities should carefully review
the information contained elsewhere in this Prospectus and should particularly
consider the following matters. Certain statements in this Prospectus are
forward-looking and are identified by the use of forward-looking words or
phrases such as "intended,""will be positioned,""expects," is or are
"expected,""anticipates,"and "anticipated." These forward-looking statements
are based on BancShares' current expectations. To the extent any of the
information contained in this Prospectus constitutes a "forward-looking
statement" as defined in Section 21E(i)(1) of the Exchange Act, the risk
factors set forth below are cautionary statements identifying important factors
that could cause actual results to differ materially from those in the
forward-looking statement.
Risk Factors Relating to the Capital Securities
Ranking of Subordinated Obligations Under the Guarantee and the Junior
Subordinated Debentures. The obligations of BancShares under the Guarantee
issued by BancShares for the benefit of the holders of Capital Securities and
under the Junior Subordinated Debentures are subordinate and junior in right of
payment to all Senior Indebtedness. At March 31, 1998, the Senior Indebtedness
of BancShares aggregated approximately $4.3 million. None of the Junior
Subordinated Indenture, the Guarantee or the Trust Agreement places any
limitation on the amount of secured or unsecured debt, including Senior
Indebtedness, that may be incurred by BancShares. See "Description of the
Guarantee -- Status of the Guarantee" and "Description of the Junior
Subordinated Debentures -- Subordination."
The ability of the Issuer Trust to pay amounts due on the Capital
Securities is solely dependent upon BancShares' making payments on the Junior
Subordinated Debentures as and when required.
Option to Extend Interest Payment Period; Tax Consequences. So long as no
Debenture Event of Default has occurred and is continuing, BancShares has the
right under the Junior Subordinated Indenture to defer the payment of interest
on the Junior Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures or end on a date other
than a Distribution Date. See "Description of the Junior Subordinated
Debentures -- Debenture Events of Default." As a consequence of any such
deferral, quarterly Distributions on the Capital Securities by the Issuer Trust
will be deferred during any such Extension Period. Distributions to which
holders of the Capital Securities are entitled will accumulate additional
Distributions thereon during any Extension Period at a rate equal to 8.25% per
annum, compounded quarterly from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. Additional
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. The term "Distributions" as used herein
shall include any such additional Distributions. During any such Extension
Period, BancShares may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of BancShares' capital stock or (ii) make any payment of principal of or
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of BancShares that rank pari passu in all respects with or junior in
interest to the Junior Subordinated Debentures (other than (a) repurchases,
redemptions or other acquisitions of shares of capital stock of BancShares in
connection with any employment contract, benefit plan or other similar
arrangement with or for the benefit of any one or more employees, officers,
directors or consultants, in connection with a dividend reinvestment or
shareholder stock purchase plan or in connection with the issuance of capital
stock of BancShares (or securities convertible into or exercisable for such
capital stock) as consideration in an acquisition transaction entered into
prior to the applicable Extension Period, (b) as a result of an exchange or
conversion of any class or series of BancShares' capital stock (or any capital
stock of a subsidiary of BancShares) for any class or series of BancShares'
capital stock or of any class or series of BancShares' indebtedness for any
class or series of BancShares' capital stock, (c) the purchase of fractional
interests in shares of BancShares' capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged, (d) any declaration of a dividend in connection with any
shareholder's rights plan, or the issuance of rights, stock or other property
under any shareholder's rights plan, or the redemption or repurchase of rights
pursuant thereto, or (e) any dividend in the form of stock, warrants, options
or other rights where the dividend stock or the stock issuable upon exercise of
such warrants, options or other rights is the same stock as that on which the
dividend is being paid or ranks pari passu with or junior to such stock). Prior
to the termination of any such Extension Period, BancShares may further defer
the payment of interest, provided that no Extension Period may exceed 20
consecutive quarterly periods, extend beyond the Stated Maturity of the Junior
Subordinated Debentures, or end on a date other than a Distribution Date. Upon
the termination of any Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at a rate equal to 8.25% per
annum, compounded quarterly), BancShares may elect to begin a new Extension
Period subject to the above conditions. No interest shall be due and payable
during an Extension Period,
10
<PAGE>
except at the end thereof. BancShares must give the Issuer Trustees notice of
its election of such Extension Period at least one Business Day prior to the
earlier of (i) the date the Distributions on the Capital Securities would have
been payable but for the election to begin such Extension Period and (ii) the
date the Property Trustee is required to give notice to holders of the Capital
Securities of the record date or the date such Distributions are payable, but
in any event not less than one Business Day prior to such record date. The
Property Trustee will give notice of BancShares' election to begin a new
Extension Period to the holders of the Capital Securities. Subject to the
foregoing, there is no limitation on the number of times that BancShares may
elect to begin an Extension Period. See "Description of the Capital Securities
- -- Distributions" and "Description of the Junior Subordinated Debentures --
Option to Extend Interest Payment Period."
Should an Extension Period occur, a holder of Capital Securities will
accrue income (in the form of original issue discount) for United States
federal income tax purposes in respect of its pro rata share of the Junior
Subordinated Debentures held by the Issuer Trust. As a result, a holder of
Capital Securities will include such original issue discount income in gross
income for United States federal income tax purposes in advance of the receipt
of cash attributable to such income, and will not receive the cash related to
such income from the Issuer Trust if the holder disposes of the Capital
Securities prior to the record date for the payment of Distributions with
respect to such Extension Period. See "Certain Federal Income Tax Consequences
- -- Interest Income and Original Issue Discount" and "-- Sale or Redemption of
Capital Securities."
BancShares has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should BancShares elect to exercise such
right in the future, the market price of the Capital Securities is likely to be
affected. A holder that disposes of its Capital Securities during an Extension
Period, therefore, might not receive the same return on its investment as a
holder that continues to hold its Capital Securities. In addition, as a result
of the existence of BancShares' right to defer interest payments, the market
price of the Capital Securities (which represent preferred undivided beneficial
interests in the assets of the Issuer Trust) may be more volatile than the
market prices of other securities on which original issue discount accrues that
are not subject to such deferrals.
Tax Event, Investment Company Event or Capital Treatment Event Redemption
and Optional Early Redemption. Upon the occurrence and during the continuation
of a Tax Event, Investment Company Event or Capital Treatment Event, BancShares
has the right to redeem the Junior Subordinated Debentures in whole, but not in
part, at any time within 90 days following the occurrence of such Tax Event,
Investment Company Event or Capital Treatment Event and thereby cause a
mandatory redemption of the Capital Securities and Common Securities. In
addition, on or after June 30, 2003, BancShares may prepay the Junior
Subordinated Debentures, in whole or in part, for any reason and thereby cause
an optional redemption of the Capital Securities, in whole or in part. Any such
redemption shall be at a price equal to the aggregate liquidation amount of the
Capital Securities and Common Securities, respectively, together with
accumulated Distributions to but excluding the date fixed for redemption. The
ability of BancShares to exercise its rights to redeem the Junior Subordinated
Debentures prior to the stated maturity may be subject to prior regulatory
approval by the Federal Reserve, if then required under applicable Federal
Reserve capital guidelines or policies. See "Description of the Capital
Securities -- Redemption" and " -- Liquidation Distribution Upon Dissolution,"
and "Description of the Junior Subordinated Debentures -- Redemption."
A "Tax Event" means the receipt by the Issuer Trust of an opinion of
counsel to BancShares experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or
any political subdivision or taxing authority thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or which pronouncement, action or decision is announced on
or after the date of issuance of the Capital Securities (including, without
limitation, any of the foregoing arising with respect to, or resulting from,
any proposal, proceeding or other action commencing on or before such date),
there is more than an insubstantial risk that (i) the Issuer Trust is, or will
be within 90 days of the delivery of such opinion, subject to United States
federal income tax with respect to income received or accrued on the Junior
Subordinated Debentures, (ii) interest payable by BancShares on the Junior
Subordinated Debentures is not, or within 90 days of the delivery of such
opinion will not be, deductible by BancShares, in whole or in part, for United
States federal income tax purposes or (iii) the Issuer Trust is, or will be
within 90 days of the delivery of the opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental charges. According
to a petition recently filed in the United States Tax Court by a corporation
unrelated to BancShares and the Issuer Trust, the Internal Revenue Service has
challenged the deductibility for United States federal income tax purposes of
interest payments on certain purported debt instruments held by entities
intended to be taxable as partnerships for United States federal income tax
purposes, where those entities, in turn, issued preferred securities to
investors. Although the overall structure of the financing arrangement involved
in that case is somewhat similar to the financing
11
<PAGE>
structure for the Junior Subordinated Debentures and the Issuer Trust, the
relevant facts in that case appear to differ significantly from those relating
to the Junior Subordinated Debentures and the Issuer Trust. Whether the
Internal Revenue Service would attempt to challenge the deductibility of
interest on the Junior Subordinated Debentures cannot be predicted. BancShares,
based on the advice of counsel, intends to take the position that interest
payments on the Junior Subordinated Debentures will be deductible by BancShares
for United States federal income tax purposes. See "Certain Federal Income Tax
Consequences -- Classification of the Junior Subordinated Debentures." Adverse
developments relating to the deductibility of interest, whether arising in
connection with the case currently pending in the United States Tax Court or
not, could give rise to a Tax Event.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to BancShares experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation
or application of law or regulation by any legislative body, court,
governmental agency or regulatory authority, there is more than an
insubstantial risk that the Issuer Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change or
prospective change becomes effective or would become effective, as the case may
be, on or after the date of the issuance of the Capital Securities.
A "Capital Treatment Event" means the reasonable determination by
BancShares that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the Capital
Securities, there is more than an insubstantial risk that BancShares will not
be entitled to treat an amount equal to the Liquidation Amount of the Capital
Securities as "Tier 1 capital" (or the then equivalent thereof) for purposes of
the risk-based capital adequacy guidelines of the Federal Reserve, as then in
effect and applicable to BancShares.
Possible Tax Law Changes. In both 1996 and 1997, the Clinton
Administration proposed to amend the Internal Revenue Code of 1986, as amended
(the "Code"), to deny deductions of interest and original issue discount
("OID") on instruments with features similar to those of the Junior
Subordinated Debentures when issued under arrangements similar to the Issuer
Trust. That proposal was not passed by, and is not currently pending before,
Congress. There can be no assurance, however, that future legislative
proposals, future regulations or official administrative pronouncements, or
future judicial decisions will not affect the ability of BancShares to deduct
interest on the Junior Subordinated Debentures. Such a change could give rise
to a Tax Event, which may permit BancShares, upon approval of the Federal
Reserve if then required under applicable capital guidelines or policies of the
Federal Reserve, to cause a redemption of the Capital Securities, as described
more fully under "Description of the Capital Securities -- Redemption."
Exchange of Capital Securities for Junior Subordinated Debentures. The
holders of all the outstanding Common Securities have the right at any time to
dissolve the Issuer Trust and, after satisfaction of liabilities to creditors
of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Capital
Securities and Common Securities in liquidation of the Issuer Trust. The
ability of BancShares to dissolve the Issuer Trust may be subject to prior
regulatory approval of the Federal Reserve, if then required under applicable
Federal Reserve capital guidelines or policies. See "Description of the Capital
Securities -- Liquidation Distribution Upon Dissolution."
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Issuer Trust will be classified as a grantor
trust for United States federal income tax purposes, a distribution of the
Junior Subordinated Debentures upon a liquidation of the Issuer Trust will not
be a taxable event to holders of the Capital Securities. However, if a Tax
Event were to occur that would cause the Issuer Trust to be subject to United
States federal income tax with respect to income received or accrued on the
Junior Subordinated Debentures, a distribution of the Junior Subordinated
Debentures by the Issuer Trust would be a taxable event to the Issuer Trust and
the holders of the Capital Securities. See "Certain Federal Income Tax
Consequences -- Distribution of Junior Subordinated Debentures to Holders of
Capital Securities."
Rights Under the Guarantee. Bankers Trust will act as the Guarantee
Trustee under the Guarantee and will hold the Guarantee for the benefit of the
holders of the Capital Securities. Bankers Trust will also act as Debenture
Trustee for the Junior Subordinated Debentures and as Property Trustee under
the Trust Agreement. Bankers Trust (Delaware) will act as Delaware Trustee
under the Trust Agreement. The Guarantee guarantees to the holders of the
Capital Securities the following payments, to the extent not paid by or on
behalf of the Issuer Trust: (i) any accumulated and unpaid Distributions
required to be paid on the Capital Securities, to the extent that the Issuer
Trust has funds on hand available therefor at such time; (ii) the Redemption
Price (as defined in "Description of the Capital Securities -- Redemption")
with respect to any Capital
12
<PAGE>
Securities called for redemption, to the extent that the Issuer Trust has funds
on hand available therefor at such time; and (iii) upon a voluntary or
involuntary dissolution of the Issuer Trust (unless the Junior Subordinated
Debentures are distributed to holders of the Capital Securities), the lesser of
(a) the aggregate of the Liquidation Amount and all accumulated and unpaid
Distributions to the date of payment, to the extent that the Issuer Trust has
funds on hand available therefor at such time, and (b) the amount of assets of
the Issuer Trust remaining available for distribution to holders of the Capital
Securities on liquidation of the Issuer Trust. The Guarantee is subordinated as
described under " -- Ranking of Subordinated Obligations Under the Guarantee
and the Junior Subordinated Debentures" and "Description of the Guarantee --
Status of the Guarantee." The holders of not less than a majority in aggregate
Liquidation Amount of the outstanding Capital Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust power conferred upon the Guarantee Trustee under the
Guarantee. Any holder of the Capital Securities may institute a legal
proceeding directly against BancShares to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Issuer
Trust, the Guarantee Trustee or any other person or entity.
If BancShares were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Issuer Trust may lack funds for
the payment of Distributions or amounts payable on redemption of the Capital
Securities or otherwise, and, in such event, holders of the Capital Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and
such event is attributable to the failure of BancShares to pay any amounts
payable in respect of the Junior Subordinated Debentures on the payment date on
which such payment is due and payable, then a holder of Capital Securities may
institute a legal proceeding directly against BancShares for enforcement of
payment to such holder of any amounts payable in respect of such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Capital Securities of such holder (a "Direct
Action"). In connection with such Direct Action, BancShares will have a right
of set-off under the Junior Subordinated Indenture to the extent of any payment
made by BancShares to such holder of Capital Securities in the Direct Action.
Except as described herein, holders of Capital Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of the Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Capital Securities"
and " -- Debenture Events of Default," and "Description of the Guarantee." The
Trust Agreement provides that each holder of Capital Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Junior Subordinated
Indenture.
Limited Voting Rights. Holders of Capital Securities will have limited
voting rights relating generally to the modification of the Capital Securities
and the Guarantee and the exercise of the Issuer Trust's rights as holder of
Junior Subordinated Debentures. Holders of Capital Securities will not be
entitled to appoint, remove or replace the Property Trustee or the Delaware
Trustee except upon the occurrence of certain events specified in the Trust
Agreement and described herein. The Property Trustee and the holders of all the
Common Securities may, subject to certain conditions, amend the Trust Agreement
without the consent of holders of Capital Securities to cure any ambiguity or
make other provisions not inconsistent with the Trust Agreement or to ensure
that the Issuer Trust (i) will not be taxable as a corporation for United
States federal income tax purposes, or (ii) will not be required to register as
an "investment company" under the Investment Company Act. See "Description of
the Capital Securities -- Voting Rights; Amendment of Trust Agreement" and " --
Removal of Issuer Trustees; Appointment of Successors."
Absence of Prior Market for the Capital Securities and Certain Trading
Restrictions. There is no current public market for the Capital Securities.
Although the Capital Securities have been approved for quotation on AMEX,
subject to notice of issuance, there can be no assurance that an active public
market will develop for the Capital Securities or that, if such market
develops, that it will be maintained or that the market price will equal or
exceed the public offering price set forth on the cover page of this
Prospectus. The public offering price for the Capital Securities has been
determined through negotiations between BancShares and the Underwriter. Prices
for the Capital Securities will be determined in the marketplace and may be
influenced by many factors, including prevailing interest rates, the liquidity
of the market for the Capital Securities, investor perceptions of BancShares
and general industry and economic conditions. In addition, notwithstanding the
registration of the Capital Securities, holders who are "affiliates" of
BancShares or the Issuer Trust as defined under Rule 405 of the Securities Act
may publicly offer for sale or resell the Capital Securities only in compliance
with the provisions of Rule 144 under the Securities Act. See "Underwriting."
Because holders of Capital Securities may receive Junior Subordinated
Debentures on termination of the Issuer Trust, prospective purchasers of
Capital Securities are also making an investment decision with regard to the
Junior Subordinated
13
<PAGE>
Debentures and should carefully review all the information regarding the Junior
Subordinated Debentures contained herein. See "Description of the Junior
Subordinated Debentures."
Capital Securities are Not Insured. The Capital Securities are not insured
by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") or by any other
governmental agency.
Risk Factors Relating to BancShares
Status of BancShares as a Bank Holding Company. Because BancShares is a
bank holding company, its right to participate in any distribution of assets,
if any, of the Bank upon its liquidation or reorganization or otherwise (and
thus the ability of holders of the Capital Securities to benefit indirectly
from such a distribution) is subject to the prior claims of creditors of the
Bank (including its depositors), except to the extent that BancShares may
itself be recognized as a creditor of the Bank. At March 31, 1998, the Bank had
total liabilities (excluding liabilities owed to BancShares) of approximately
$529.5 million, including deposits. Accordingly, the Capital Securities
effectively will be subordinated to all existing and future liabilities of the
Bank, and holders of Capital Securities should look only to the assets of
BancShares for payments on the Capital Securities. Neither the Guarantee nor
the Junior Subordinated Indenture places any limitation on the amount of
secured or unsecured debt that may be incurred by the Bank in the future. See
"Description of the Junior Subordinated Debentures" and "Description of the
Guarantee."
Reliance on Dividend Payments by the Bank. Almost all of the operating
assets of BancShares are owned by the Bank, and BancShares relies primarily on
dividends from the Bank to meet its obligations for the payment of principal
and interest on its separate debt obligations and corporate expenses and for
payment of dividends on its outstanding common stock. The payment of dividends
by the Bank to BancShares is subject to certain legal and regulatory
limitations, is subject to ongoing review by banking regulators and, under
certain circumstances, may require prior approval by banking regulatory
authorities. At March 31, 1998, approximately $5.7 million was available for
payment of dividends to BancShares from the Bank without affecting the Bank's
current classification as a "well capitalized" bank under federal bank
regulatory capital guidelines and without regulatory approval. However, no
assurance can be given that the Bank will have funds available to pay dividends
to BancShares at any particular time in the future. At March 31, 1998,
BancShares had separate assets (consisting primarily of marketable equity
securities) with a fair value of approximately $17.5 million that could have
been liquidated, if necessary, in order to pay obligations of BancShares. See
"Supervision and Regulation." The Bank also is subject to certain restrictions
under federal law on extensions of credit to, and certain other transactions
with, BancShares and certain of its other affiliates, and on investments in the
stock or other securities thereof. Such restrictions prevent BancShares and
such other affiliates from borrowing from the Bank unless the loans are secured
by various types of collateral. Further, such secured loans or other
transactions and investments by the Bank are generally limited in amount as to
BancShares and as to each such other affiliate to 10% of the Bank's capital and
surplus and as to BancShares and all such other affiliates to an aggregate of
20% of the Bank's capital and surplus.
Fluctuations in Performance. BancShares' operating results can fluctuate
substantially from period to period as a result of a number of factors,
including the volume of loan production, interest rates, risk of credit losses
and changes in the economy, including the local economy in BancShares' banking
markets. In particular, BancShares' results are strongly influenced by the
level of loan production, which is influenced by the interest rate environment
and other economic factors. Accordingly, BancShares' net income may fluctuate
substantially from period to period.
Interest Rate Fluctuations. Changes in interest rates can have differing
effects on various aspects of BancShares' business, particularly on the net
interest income of BancShares, the rate of loan prepayments, and the volume of
loans originated.
Net Interest Income. The Bank's profitability is dependent to a large
extent on its net interest income, which is the difference between its income
on interest-earning assets and its expense on interest-bearing liabilities. The
Bank, like most financial institutions, is affected by changes in general
interest rate levels and by other economic factors beyond its control. Interest
rate risk arises in part from the mismatch (i.e., the interest sensitivity gap)
between the dollar amount of repricing or maturing interest earning assets and
liabilities, and is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. More interest earning assets than interest
bearing liabilities repricing or maturing over a given time period is
considered asset-sensitive and is reflected as a positive gap, and more
liabilities than assets repricing or maturing over a given time period is
considered liability-sensitive and is reflected as a negative gap. A
liabilities-sensitive position (i.e., a negative gap) may generally enhance net
interest income in a falling interest rate environment and reduce net interest
income in a rising interest rate environment, while an asset-sensitive position
(i.e., a positive gap) may generally enhance
14
<PAGE>
net interest income in a rising interest rate environment and will reduce net
interest income in a falling interest rate environment. Fluctuations in
interest rates are not predictable or controllable. Periodically, the Bank
estimates the prepayment rates of all loans in its loan portfolios in order to
determine its gap position over the approaching twelve-month period. At
December 31, 1997, based on management's assumptions derived from its
experience, the Bank calculated that it had a negative one-year cumulative gap
position representing 18.6% of total assets.
Rate of Loan Prepayment. Changes in interest rates also affect the
average life of loans. The relatively lower interest rates in recent periods
have resulted in increased prepayments of loans and mortgage-backed securities
as borrowers have refinanced their mortgages to reduce their borrowing costs.
Under these circumstances, the Bank is subject to reinvestment risk to the
extent that it is not able to reinvest such prepayments at rates which are
comparable to the rates on the prepaid loans or securities.
Allowance for Loan Losses. Industry experience indicates that a portion of
BancShares' loans held in its portfolio will become delinquent and a portion of
the loans will become charge-offs. Regardless of the underwriting criteria used
by the Bank, losses may be experienced as a result of various factors beyond
the Bank's control, including, among other things, changes in market conditions
affecting the value of properties and problems affecting the credit of the
borrower. The Bank's determination of the adequacy of its allowance for loan
losses is based on various considerations, including an analysis of the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans which would have loan loss potential, delinquency
trends, estimated fair value of the underlying collateral, current economic
conditions, the views of the Bank's regulators (who have the authority to
require additional reserves), and geographic and industry loan concentration.
If delinquency levels were to increase as a result of adverse general economic
conditions, the loan loss reserve so determined by the Bank, however, may not
be adequate. The Bank believes the allowance to be adequate, but there can be
no assurance that the allowance will be adequate to cover possible loan losses
or that the Bank will not experience significant losses in its loan portfolio
which may require significant increases to the allowance for loan losses in the
future. At March 31, 1998, BancShares' allowance for loan losses totaled $6.0
million which was 1.70% of gross loans, or 504.27% of non-performing loans.
Growth. BancShares has grown, and may seek to grow in the future, through
acquisitions by the Bank of other financial institutions and branches of
financial institutions. However, competition for acquisitions in BancShares'
market area is highly competitive. Moreover, any acquisitions will be subject
to regulatory approval and there can be no assurance that BancShares will
obtain such approvals. BancShares may not be successful in the future in
identifying acquisition candidates, integrating acquired institutions or
preventing deposit erosion at acquired institutions or branches. Furthermore,
BancShares' ability to grow through acquisitions will depend on its maintaining
sufficient regulatory capital levels and on economic conditions.
BancShares has experienced growth over the past five years, as total
assets have increased from $411.6 million at December 31, 1993 to approximately
$590.8 million at December 31, 1997. There can be no assurance that BancShares
will be able to manage adequately and profitably its future growth. Failure by
BancShares to manage its growth effectively or sustain historical increases in
loan origination volume could have a material adverse effect on BancShares'
business, financial condition, and results of operations.
Concentration of Control. A significant percentage of BancShares' voting
securities are beneficially owned by members of the Holding family.
Accordingly, the Holding family is able to control the election of the Board of
Directors of BancShares and thus the direction and future operations of
BancShares without any approving vote of the holders of the Capital Securities
offered hereby. See "Beneficial Ownership of Securities."
Potential Conflicts of Interest. Certain decisions concerning the
operations of, or financial dealings between, BancShares and other financial
services companies controlled by the Holding family, may present conflicts of
interest between the Holding family and the holders of the Capital Securities
offered hereby. Although it is expected that the terms of any such transactions
between BancShares or the Bank and such other companies will be on terms no
less favorable than those that could be obtained from an independent third
party, BancShares cannot predict with certainty either the nature of, or the
financial terms of, any transactions which may arise in the future. See
"Southern BancShares (N.C.), Inc.," "Business," and "Certain Relationships and
Related Transactions."
Competition. The banking business is highly competitive. In its primary
market area, the Bank competes with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking firms and other financial and
non-financial companies operating locally and elsewhere, which may offer
products similar to those offered by the Bank. Certain of the Bank's primary
competitors have substantially
15
<PAGE>
greater resources and lending limits than the Bank and offer services the Bank
does not provide at this time. BancShares' profitability depends upon the
Bank's ability to continue to compete in its primary market areas. See
"Business -- Competition."
Developments in Technology. BancShares is heavily dependent upon complex
computer systems for all phases of its operations. The year 2000 issue common
to most corporations concerns the inability of certain software and databases
to recognize properly date sensitive information beginning January 1, 2000.
This problem could result in a disruption to BancShares' operations, if not
corrected. Financial services institutions are particularly sensitive to such
disruptions. BancShares uses third-party vendors for substantially all of its
data processing. As a result, much of BancShares' remediation effort relates to
monitoring and communicating with those vendors. BancShares has assessed and
developed a detailed strategy to prevent or at least minimize problems related
to the year 2000 issue. In 1997, resources were committed and implementation
began to modify the affected information systems. Implementation is currently
on schedule, but the degree of success of the project cannot be determined at
this time. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Accounting and Other Matters" and "Certain
Relationships and Related Transactions."
The market for financial services, including banking services, is
increasingly affected by advances in technology, including developments in
telecommunications, data processing, computers, automation, Internet-based
banking, debit cards and so-called "smart" cards. BancShares' ability to
compete successfully in its markets may depend on the extent to which it is
able to exploit such technological changes. However, there can be no assurance
that the development of these or any other new technologies, or BancShares'
success or failure in anticipating or responding to such developments, will
materially affect BancShares' business, financial condition and operating
results.
Economy of Eastern North Carolina. BancShares is headquartered and
operates primarily in rural eastern North Carolina. Economic information from
state and national sources indicates that the 17 counties served by the Bank
lag the median figures of North Carolina in the areas of per capita income,
family income, and population growth rates. Between 1980 and 1990, the Bank's
market counties experienced a negative net migration of the population. Only in
the area of unemployment does the Bank's market area compare favorably to the
rest of eastern North Carolina, but this may be related to the negative growth
during the same period and the agricultural nature of the area.
Dependence on Local Agriculture and Tobacco Industry. The tobacco industry
contributes significantly to the economy of eastern North Carolina, especially
in the 17 eastern North Carolina counties in which the Bank operates. For
several decades, the tobacco industry, both in the United States and abroad,
has faced, and continues to face, a number of issues that may adversely affect
the volume, operating revenues, cash flows, operating income and financial
position of businesses operating in eastern North Carolina and, by consequence,
BancShares.
In the United States, these issues include proposed federal regulatory
controls (including, as discussed below, the issuance of final regulations by
the United States Food and Drug Administration (the "FDA") that regulate
cigarettes as "drugs" or "medical devices"); actual and proposed excise tax
increases; actual and proposed federal, state and local governmental and
private bans and restrictions on smoking (including in workplaces and in
buildings permitting public access); actual and proposed restrictions on
tobacco manufacturing, marketing, advertising (including decisions by certain
companies to limit or not accept tobacco advertising) and sales; proposed
legislation and regulations to require additional health warnings on cigarette
packages and in advertising, and to eliminate the tax deductibility of tobacco
advertising and promotional costs; actual and proposed requirements regarding
disclosure of cigarette ingredients and other proprietary information; actual
and proposed requirements regarding disclosure of the yields of "tar," nicotine
and other constituents found in cigarette smoke; increased assertions of
adverse health effects associated with both smoking and exposure to
environmental tobacco smoke ("ETS"); legislation or other governmental action
seeking to ascribe to the industry responsibility and liability for the
purported adverse health effects associated with both smoking and exposure to
ETS; the diminishing social acceptance of smoking; increased pressure from
anti-smoking groups; unfavorable press reports; governmental and grand jury
investigations; and increased smoking and health litigation, including private
plaintiff class action litigation and health care cost recovery actions brought
by state and local governments, unions and others seeking reimbursement for
Medicaid and/or other health care expenditures allegedly caused by cigarette
smoking.
Risk of Claims. In the ordinary course of its business, the Bank is or may
become subject to claims made against it by borrowers arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, errors and omissions of employees, officers
and agents of the Bank, incomplete documentation, and failures by the Bank to
comply with various laws and regulations applicable to its business. Relying as
it does on employees interacting with its customers, the Bank may encounter
circumstances where employees knowingly or unknowingly violate laws or
regulations without the knowledge of management, in which case the Bank may be
liable for these acts.
16
<PAGE>
BancShares believes that liability with respect to any currently asserted
claims or legal actions is not likely to be material to BancShares' results of
operations or financial condition; however, any claims asserted may result in
legal expenses or liabilities which could have a material adverse effect on
BancShares' results of operations and financial condition.
Environmental Matters. In the course of its business, through the
foreclosure process the Bank has acquired, and may acquire in the future,
properties securing loans that are in default. Therefore, there is a risk that
the Bank could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after their acquisition and
may be held liable to a governmental entity or to third-parties for property
damage, personal injury and investigation and cleanup costs incurred by such
parties in connection with the contamination. To date, the Bank has not been
required to perform any investigation or cleanup activities of any material
nature. No assurance can be given, however, that this will remain the case in
the future.
SOUTHERN BANCSHARES (N.C.), INC.
General
BancShares is a registered bank holding company, incorporated under the
laws of Delaware, and headquartered in Mount Olive, North Carolina. It was
organized during 1986 as the successor to, and to effect a change in the state
of incorporation of, the Bank's original bank holding company. BancShares
operates through the Bank which provides a variety of retail and commercial
banking products and services to individuals and small-to-medium sized
businesses located in the communities it serves. At March 31, 1998, BancShares
had total consolidated assets of approximately $593.9 million, total
consolidated deposits of approximately $516.0 million, and total consolidated
shareholders' equity of approximately $57.0 million. The Bank is a North
Carolina-chartered bank that currently maintains 42 banking offices in 38
eastern North Carolina communities.
BancShares is focused on community-oriented banking via (i) localized
lending, (ii) core deposit funding, (iii) conservative balance sheet
management, and (iv) stable growth. BancShares' franchise includes many smaller
communities where competition is limited due to the exit of larger institutions
or to the limited products of smaller institutions. By outsourcing its core
data processing requirements, BancShares can offer a complete array of
financial services while maintaining its community banking orientation.
BancShares' focus on non-metropolitan markets and its emphasis on customer
service provide it with a stable source of core funding. At March 31, 1998,
transaction accounts and non-interest bearing accounts equaled 25.23% and
12.41%, respectively, of total deposits.
BancShares' return on average assets and return on average equity were
1.17% and 14.47%, respectively, for the year ended December 31, 1997, and an
annualized 1.72% and 17.95%, respectively, for the three months ended March 31,
1998.
Members of the Holding family, including Frank B. Holding who serves as a
director and Chairman of BancShares' Executive Committee, have been actively
involved in the management of BancShares, and, currently, various members of
the family control an aggregate of 51.55% of BancShares' common stock. See
"Beneficial Ownership of Securities" and "Certain Relationships and Related
Transactions." As a result, BancShares has been managed from a long-term
perspective with primary emphasis being placed on balance sheet liquidity, loan
quality, and earnings stability. At March 31, 1998, BancShares' loan-to-deposit
ratio was 68.65%, over 65.23% of its $184.6 million investment portfolio was
invested in U.S. government obligations with an average maturity of 15 months,
and approximately 38.39% of the investment portfolio was classified as
held-to-maturity. Consistent with its management philosophy, BancShares has
emphasized a low-risk loan portfolio derived from its local markets. At March
31, 1998, BancShares' non-performing assets were $1.2 million, or 0.35% of
gross loans and other real estate. Net charge-offs for 1997 were 0.07% of
average loans and, for the first quarter of 1998, were an annualized 0.02% of
average loans. The allowance for loan losses at March 31, 1998, was 1.70% of
gross loans and 504.27% of non-performing loans.
BancShares' principal executive offices are located at 121 East Main
Street, Mount Olive, North Carolina 28365, and its telephone number is (919)
658-7000.
For additional information regarding BancShares' and its financial
condition and results of operations, see "Prospectus Summary,"
"Capitalization," "Selected Consolidated Financial Data," "Business,"
"Supervision and Regulation," "Beneficial Ownership of Securities," "Directors
and Executive Officers," "Executive Compensation," "Certain Relationships and
Related Transactions," and "Southern BancShares (N.C.), Inc. and Subsidiary
Index to Consolidated Financial Statements."
17
<PAGE>
Recent Acquisition
Effective May 15, 1998, the Bank acquired ESB, a state-chartered savings
bank headquartered in Enfield, North Carolina, which maintained two banking
offices. In connection with that transaction, the Bank assumed aggregate
deposit liabilities of approximately $15.6 million, and purchased approximately
$16.4 million in loans associated with one of ESB's offices which became a
branch office of the Bank. The deposits and loans related to ESB's second
office were transferred and assigned to an affiliated financial institution in
a purchase and assumption transaction. See "Certain Relationships and Related
Transactions."
Relationship with Affiliated Financial Institution
The Bank is party to a contract with an affiliated financial institution,
First-Citizens Bank & Trust Company, Raleigh, North Carolina ("FCB"), pursuant
to which FCB provides the Bank with certain management consulting services and
with various support and data processing services relating to (i) its deposit
and loan, item processing, general ledger, statement rendering and securities
portfolio management functions which the Bank has chosen not to provide for
itself, (ii) service as trustee for the Bank's pension plan and Section 401(k)
salary deferral plan, and (iii) until 1997, internal audit services. Fees paid
by the Bank to FCB for such services during 1997, 1996 and 1995 totaled
approximately $2.4 million, $2.6 million and $2.0 million, respectively.
Management of the Bank estimates that fees payable during 1998 will total
approximately $2.6 million. See "Certain Relationships and Related
Transactions."
SOUTHERN CAPITAL TRUST I
The Issuer Trust is a statutory business trust created under Delaware law
pursuant to the filing of a certificate of trust with the Delaware Secretary of
State. The Issuer Trust will be governed by the Trust Agreement among
BancShares, as Depositor, Bankers Trust (Delaware), as Delaware Trustee,
Bankers Trust, as Property Trustee, the Administrators (as defined herein)
named therein, and the holders, from time to time, of undivided beneficial
interests in the assets of the Issuer Trust. Two individuals will be selected
by the holders of the Common Securities to act as administrators with respect
to the Issuer Trust (the "Administrators"). BancShares, while holder of the
Common Securities, intends to select two individuals who are employees or
officers of or affiliated with BancShares to serve as the Administrators. See
"Description of the Capital Securities -- Miscellaneous." The Issuer Trust
exists for the exclusive purposes of (i) issuing and selling the Trust
Securities, (ii) using the proceeds from the sale of the Trust Securities to
acquire the Junior Subordinated Debentures and (iii) engaging in only those
other activities necessary, convenient or incidental thereto (such as
registering the transfer of the Trust Securities). Accordingly, the Junior
Subordinated Debentures will be the sole assets of the Issuer Trust, and
payments under the Junior Subordinated Debentures will be the sole source of
revenue of the Issuer Trust.
All the Common Securities will initially be owned by BancShares. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Capital Securities, except that upon the occurrence and during
the continuation of a Debenture Event of Default arising as a result of any
failure by BancShares to pay any amounts in respect of the Junior Subordinated
Debentures when due, the rights of the holders of the Common Securities to
payment in respect of Distributions and payments upon liquidation, redemption
or otherwise will be subordinated to the rights of the holders of the Capital
Securities. See "Description of the Capital Securities -- Subordination of
Common Securities." BancShares will acquire Common Securities in an aggregate
Liquidation Amount equal to at least 3% of the total capital of the Issuer
Trust. The Issuer Trust has a term of 31 years, but may dissolve earlier as
provided in the Trust Agreement. The address of the Delaware Trustee is Bankers
Trust (Delaware), E.A. Delle Donne Corporate Center, Montgomery Building, 1011
Centre Road, Suite 200, Wilmington, Delaware 19805-1266, telephone number (302)
636-3301. The address of the Property Trustee, the Guarantee Trustee and the
Debenture Trustee is Bankers Trust Company, Four Albany Street, 4th Floor, New
York, New York 10006, telephone number (212) 250-2500.
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer Trust will be treated as a
subsidiary of BancShares and, accordingly, the accounts of the Issuer Trust
will be included in the consolidated financial statements of BancShares. The
Capital Securities will be included as long-term obligations and described as
"Company-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of BancShares" in the
consolidated balance sheets of BancShares. Appropriate disclosures about the
Capital Securities, the Guarantee and the Junior Subordinated Debentures will
be included
18
<PAGE>
in the notes to the consolidated financial statements of BancShares. For
financial reporting purposes, Distributions on the Capital Securities will be
recorded in the consolidated statements of income as interest expense of
BancShares. See also "Capitalization."
USE OF PROCEEDS
All the net proceeds to the Issuer Trust from the sale of the Capital
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. All the net proceeds to be received by BancShares from the sale of
the Junior Subordinated Debentures will be used for general corporate purposes,
although it is likely that substantially all such proceeds will be used
initially to make additional capital contributions to the Bank to fund its
operations and continued expansion and to maintain its status as a "well
capitalized" bank under bank regulatory capital guidelines. See "Supervision
and Regulation." Portions of the net proceeds from the sale of the Junior
Subordinated Debentures also may be used in the future for acquisitions by
BancShares or the Bank, extensions of credit to the Bank, or for repurchases of
outstanding common stock of BancShares. Pending such use, the net proceeds may
be temporarily invested. The precise amounts and timing of the application of
proceeds will depend upon the funding requirements of BancShares and its
subsidiaries and the availability of other funds. In view of anticipated
funding requirements, BancShares may from time to time engage in additional
financings of a character and in amounts to be determined. The proceeds from
the sale of the Capital Securities are expected to qualify as Tier 1 or core
capital with respect to BancShares under the risk-based capital guidelines
established by the Federal Reserve, however, capital received from the proceeds
of the sale of the Capital Securities cannot constitute more than 25% of the
total Tier 1 capital of BancShares (the "25% Capital Limitation"). Amounts in
excess of the 25% Capital Limitation will constitute Tier 2 or supplementary
capital of BancShares.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table presents the unaudited consolidated ratios of earnings
to fixed charges of BancShares for the periods indicated. The consolidated
ratio of earnings to fixed charges has been computed by dividing income before
income taxes and fixed charges by fixed charges. Fixed charges represent all
interest expense (ratios are presented both excluding and including interest on
deposits). Interest expense (other than on deposits) includes interest on
borrowed funds, federal funds purchased and securities sold under agreements to
repurchase, and other funds borrowed.
<TABLE>
For the
three months
ended March 31, For the year ended December 31,
----------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings to fixed charges:
Excluding interest on deposits ......... 24.12x 16.50x 12.63x 11.62x 9.07x 13.54x 22.96x
Including interest on deposits ......... 1.70 1.19 1.37 1.31 1.32 1.46 1.63
</TABLE>
19
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization
of BancShares and its subsidiary as of March 31, 1998, and as adjusted to give
effect to the consummation of the offering of the Capital Securities and the
application of the net proceeds thereof as provided under "Use of Proceeds."
The following data is qualified in its entirety by, and should be read in
conjunction with, the detailed information contained in BancShares'
consolidated financial statements contained elsewhere herein and the other
information contained in its reports filed with the Commission under the
Exchange Act. See "Available Information," "Selected Consolidated Financial
Data," and "Southern BancShares (N.C.), Inc. and Subsidiary Index to
Consolidated Financial Statements."
<TABLE>
As of March 31, 1998
(Unaudited)
----------------------------------
Adjusted for Capital
Actual Securities issuance
------------ ---------------------
(Dollars in thousands)
<S> <C> <C>
Short-term borrowings:
TT&L and repurchase agreements ...................................................... $ 6,236 $ 6,236
-------- --------
Total short-term borrowings ........................................................ 6,236 6,236
-------- --------
Long-term obligations:
Company-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated debentures of BancShares (1) .................... -- 20,000
Note payable ........................................................................ 4,300 4,300
-------- --------
Total long-term obligations ........................................................ 4,300 24,300
-------- --------
Total borrowings .................................................................. 10,536 30,536
-------- --------
Shareholders' equity:
Series B non-cumulative preferred stock, no par value; 408,728 shares authorized;
407,752 shares outstanding at March 31, 1998 ....................................... 1,976 1,976
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized;
43,631 shares outstanding at March 31, 1998 ........................................ 578 578
Common stock: 158,485 shares authorized; 119,918 shares outstanding at
March 31, 1998 ..................................................................... 600 600
Surplus ............................................................................. 10,000 10,000
Retained earnings ................................................................... 29,155 29,155
Unrealized gain on securities available-for-sale, net of taxes ...................... 14,704 14,704
-------- --------
Total shareholders' equity .......................................................... 57,013 57,013
-------- --------
Total capitalization ............................................................... $ 67,549 $ 87,549
======== ========
Capital ratios:
Tier 1 capital ratio ................................................................ 12.14% 16.19%
Total capital ratio ................................................................. 13.49 20.02
Leverage capital ratio .............................................................. 6.53 8.41
</TABLE>
- ---------
(1) See "Accounting Treatment."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for BancShares for the five years ended December 31, 1997, and the three-month
periods ended March 31, 1998 and 1997. The selected consolidated financial data
as of and for each of the years in the five-year period ended December 31, 1997
have been derived from BancShares' audited consolidated financial statements.
The consolidated financial statements as of December 31, 1997 and 1996 and for
each of the years in the three-year period ended December 31, 1997, and the
report thereon of KPMG Peat Marwick LLP, independent certified public
accountants, are included elsewhere in this Prospectus. The information
presented as of and for the three-month periods ended March 31, 1998 and 1997
is derived from BancShares' unaudited consolidated financial statements for
these periods. Those unaudited consolidated financial statements, which are
included elsewhere in this Prospectus, include all adjustments, consisting only
of normal recurring accruals which management considers necessary for a fair
presentation of the financial condition and results of operations for such
interim periods. Results for the three-month period ended March 31, 1998 are
not necessarily indicative of results to be expected for the full year or any
other interim period. The following information should also be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. See also "Available
Information," "Experts," and "Southern BancShares (N.C.), Inc. and Subsidiary
Index to Consolidated Financial Statements."
<TABLE>
As of and For the
Three Months Ended
March 31,
---------------------------
1998 1997
------------- -------------
(Dollars in thousands,
except per share data)
(Unaudited)
<S> <C> <C>
Summary of Operations
Interest income .................................. $ 10,093 $ 9,255
Interest expense ................................. 4,802 4,363
--------- ---------
Net interest income .............................. 5,291 4,892
Provision for loan losses ........................ 60 60
--------- ---------
Net interest income after provision for loan
losses .......................................... 5,231 4,832
Noninterest income ............................... 2,933 4,470
Noninterest expense .............................. 4,788 8,465
--------- ---------
Income before income taxes ....................... 3,376 837
Income taxes ..................................... 809 80
--------- ---------
Net income ....................................... $ 2,567 $ 757
========= =========
Selected Period-End Balances
Total assets ..................................... $ 593,889 $ 547,671
Investment securities and federal funds sold ..... 192,865 172,913
Loans ............................................ 354,206 328,791
Interest earning assets .......................... 551,371 507,804
Deposits ......................................... 515,977 480,896
Interest bearing liabilities ..................... 462,458 434,918
Shareholders' equity ............................. 57,013 44,735
Common shares outstanding ........................ 119,918 119,918
--------- ---------
Selected Average Balances
Total assets ..................................... $ 597,721 $ 541,812
Investment securities and federal funds sold ..... 197,217 176,842
Loans ............................................ 352,141 322,867
Interest earning assets .......................... 531,833 485,185
Deposits ......................................... 519,366 480,783
Interest bearing liabilities ..................... 463,966 427,421
Shareholders' equity ............................. 57,195 45,260
Common shares outstanding ........................ 119,918 119,918
--------- ---------
Profitability Ratios
Return on average total assets ................... 1.72% 0.56%
Return on average shareholders' equity ........... 17.95 6.69
Dividend payout ratio (1) ........................ 5.65 18.89
--------- ---------
Liquidity and Capital Ratios
Average loans to average deposits ................ 67.80% 67.15%
Average shareholders' equity to average total
assets .......................................... 9.57 8.35
Tier 1 capital ratio ............................. 12.14 10.54
Total capital ratio .............................. 13.49 11.84
Leverage capital ratio ........................... 6.53 6.28
Per Share of Common Stock
Net income applicable to common shares (2) ....... $ 20.58 $ 5.48
Cash dividends ................................... .38 .37
Book value (3) ................................... 475.43 373.05
--------- ---------
As of and For the Year Ended
December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income .................................. $ 39,055 $ 36,776 $ 32,894 $ 27,164 $ 22,418
Interest expense ................................. 18,827 17,450 16,055 11,044 8,803
--------- --------- --------- --------- ---------
Net interest income .............................. 20,228 19,326 16,839 16,120 13,615
Provision for loan losses ........................ 60 140 -- -- 300
--------- --------- --------- --------- ---------
Net interest income after provision for loan
losses .......................................... 20,168 19,186 16,839 16,120 13,315
Noninterest income ............................... 9,849 4,508 4,028 2,888 3,197
Noninterest expense .............................. 23,064 18,203 15,661 13,918 10,978
--------- --------- --------- --------- ---------
Income before income taxes ....................... 6,953 5,491 5,206 5,090 5,534
Income taxes ..................................... 340 1,127 1,293 1,402 1,741
--------- --------- --------- --------- ---------
Net income ....................................... $ 6,613 $ 4,364 $ 3,913 $ 3,688 $ 3,793
========= ========= ========= ========= =========
Selected Period-End Balances
Total assets ..................................... $ 590,752 $ 540,758 $ 496,980 $ 408,035 $ 411,604
Investment securities and federal funds sold ..... 190,373 179,709 164,526 123,852 145,732
Loans ............................................ 349,353 317,755 287,960 252,611 236,732
Interest earning assets .......................... 544,926 499,164 452,486 376,463 382,464
Deposits ......................................... 513,328 480,566 449,002 367,522 375,061
Interest bearing liabilities ..................... 458,339 422,941 396,631 326,442 338,515
Shareholders' equity ............................. 54,984 44,778 37,163 30,965 24,650
Common shares outstanding ........................ 119,918 119,918 119,918 121,767 130,031
--------- --------- --------- --------- ---------
Selected Average Balances
Total assets ..................................... $ 567,236 $ 519,541 $ 456,499 $ 407,554 $ 326,232
Investment securities and federal funds sold ..... 162,936 157,779 145,417 131,923 114,321
Loans ............................................ 340,195 310,389 270,563 242,217 191,360
Interest earning assets .......................... 507,971 469,792 415,980 374,140 305,681
Deposits ......................................... 498,303 459,552 407,252 367,618 294,264
Interest bearing liabilities ..................... 445,354 411,960 366,597 331,104 263,097
Shareholders' equity ............................. 45,703 40,234 34,657 28,445 23,126
Common shares outstanding ........................ 119,918 119,918 121,226 123,521 130,312
--------- --------- --------- --------- ---------
Profitability Ratios
Return on average total assets ................... 1.17% 0.84% 0.86% 0.90% 1.16%
Return on average shareholders' equity ........... 14.47 10.85 11.29 12.97 16.40
Dividend payout ratio (1) ........................ 8.85 13.45 13.57 12.80 11.65
--------- --------- --------- --------- ---------
Liquidity and Capital Ratios
Average loans to average deposits ................ 68.27% 67.54% 66.44% 65.89% 65.03%
Average shareholders' equity to average total
assets .......................................... 8.06 7.74 7.59 6.98 7.09
--------- --------- --------- --------- ---------
Tier 1 capital ratio ............................. 11.43 9.33 8.87 9.08 8.01
Total capital ratio .............................. 12.78 10.66 10.19 10.39 9.27
Leverage capital ratio ........................... 6.07 5.46 5.60 5.20 4.23
Per Share of Common Stock
Net income applicable to common shares (2) ....... $ 51.77 $ 33.00 $ 28.90 $ 27.04 $ 26.72
Cash dividends ................................... 1.50 1.50 1.00 1.00 1.00
Book value (3) ................................... 458.51 373.41 309.90 254.30 189.57
--------- --------- --------- --------- ---------
</TABLE>
21
<PAGE>
<TABLE>
As of and For the
Three Months Ended As of and For the Year Ended
March 31, December 31,
--------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ------------ ---------- ---------- ----------
(Dollars in thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Quality Ratios
Nonperforming assets to total gross loans and
other real estate owned ........................ 0.35% 0.31% 0.21% 0.16% 0.22% 0.73% 0.62%
Net charge-offs to average loans ................ 0.02 ( 0.03) 0.07 0.10 0.12 0.03 0.26
Total allowance for loan losses to total
nonperforming assets ........................... 484.77 611.66 802.55 1,237.55 981.52 358.85 455.39
</TABLE>
- ---------
(1) For each indicated period, total common and preferred dividends paid
divided by net income.
(2) For each indicated period, net income less preferred dividends paid,
divided by the average number of common shares outstanding. BancShares'
adoption of Statement 128, "Earnings per Share," had no effect on its
earnings per share disclosure since BancShares has no dilutive securities.
(3) At the end of each indicated period, shareholders' equity divided by the
number of common shares outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three Years Ended December 31, 1997, 1996 and 1995
Introduction. This discussion provides information concerning changes in the
consolidated financial condition and results of operations of BancShares and
the Bank for 1997, 1996 and 1995. The comments are intended to supplement and
should be reviewed in conjunction with the consolidated financial statements,
related notes and selected financial data presented elsewhere herein.
Acquisitions. In May 1997, BancShares acquired the Aulander, North Carolina,
the Aurora, North Carolina and the Hamilton, North Carolina offices of
Wachovia Bank of North Carolina, N.A. These acquisitions were accounted for as
purchases, and, therefore, the results of operations prior to purchase of the
financial institutions are not included in the consolidated financial
statements. The acquisitions were as follows:
<TABLE>
Transaction Loans Deposits
Date Acquired Acquired
------------- ---------- ---------
(Dollars in
thousands)
<S> <C> <C> <C>
Wachovia Bank of North Carolina, N.A. -- Aulander, NC ..... May 1997 $ 180 $ 5,117
Wachovia Bank of North Carolina, N.A. -- Aurora, NC ....... May 1997 852 11,838
Wachovia Bank of North Carolina, N.A. -- Hamilton, NC ..... May 1997 412 4,106
------ -------
1997 acquisition totals .................................. $1,444 $21,061
====== =======
</TABLE>
In June 1996, BancShares acquired the Windsor, North Carolina office of FCB
and sold its Scotland Neck office to Triangle Bank. In August 1996 BancShares
acquired the Edenton, North Carolina office of United Carolina Bank. These
acquisitions were accounted for as purchases, so the results of operations
prior to the purchase of the financial institutions are not included in the
consolidated financial statements. The 1996 acquisitions and divestitures were
as follows:
<TABLE>
Loans Deposits
Transaction Acquired Acquired
Date (Sold) (Sold)
------------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
First-Citizens Bank & Trust Company -- Windsor, NC ..... June 1996 $ 83 $ 7,348
Triangle Bank -- Scotland Neck, NC ..................... June 1996 (42) (4,037)
United Carolina Bank -- Edenton, NC .................... August 1996 5,304 6,085
------ --------
Net 1996 acquisition totals ........................... $5,345 $ 9,396
====== ========
</TABLE>
Results of Operations.
Earnings. For 1997, net income of $6.6 million represented a 51.54%
increase from 1996 net income of $4.4 million. Net income for 1995 was $3.9
million. The increase in 1997 net income was principally the result of gains on
the sale of
22
<PAGE>
available-for-sale securities and a reduction in income taxes resulting from
the donation of available-for-sale securities. Excluding the impact of
securities gains and charitable contributions, income before income taxes
decreased by approximately $158,000 between 1996 and 1997, principally due to
increased costs associated with expansion in existing and new markets.
The increase in 1996 net income was principally the result of increased
net interest income resulting from the 1996 full year impact of June 1995
acquisitions. Net income per average share of common stock increased to $51.77
in 1997, from $33.00 in 1996, due to increased earnings. Net income per average
share of common stock increased to $33.00 in 1996, from $28.90 in 1995 due to
increased earnings and a decrease in the average shares outstanding for 1996.
Net Interest Income. The greatest portion of BancShares' earnings is from
net interest income, which is the difference between interest income on
interest earning assets and interest paid on deposits and other interest
bearing liabilities. The primary factors affecting net interest income are
changes in the volume and yields/rates on earning assets and interest bearing
liabilities, and the ability to respond to changes in interest rates through
asset/liability management. In 1997 net interest income was $20.2 million as
compared to $19.3 million in 1996, an increase of $902,000 or 4.67%. In 1996
net interest income was $19.3 million as compared to $16.8 million in 1995, an
increase of $2.5 million or 14.77%. The 1997 increase was primarily
attributable to increased loan revenue from a 9.60% increase in average loan
balances outstanding from $310.4 million in 1996 to $340.2 million in 1997. The
yields received on average loans for 1997 decreased to 8.59% from 8.66% for
1996. The rates paid on interest bearing liabilities decreased 1 basis point
during 1997 and the average interest bearing deposits increased 8.15% between
1996 and 1997 resulting in an 7.89% increase in total interest expense.
The 1996 increase was primarily attributable to increased loan revenue
from a 14.72% increase in average loan balances outstanding from $270.6 million
in 1995 to $310.4 million in 1996. The yields received on average loans for
1996 decreased to 8.66% from 9.00% for 1995. The rates paid on interest bearing
liabilities decreased 14 basis points during 1996 and the average interest
bearing deposits increased 12.49% between 1995 and 1996 resulting in an 8.69%
increase in total interest expense.
Loans produced the largest component of interest income, amounting to
$29.2 million in 1997, $26.9 million in 1996 and $24.3 million in 1995. This
represented an increase in 1997 of 8.73%. For the year ended December 31, 1996,
interest income on loans increased 10.44%. During 1997 average loans
outstanding increased $29.8 million or 9.60%. This average increase was
primarily due to loan growth in the existing branch network and the impact of
the 1997 branch acquisitions as set forth in Table 2. The 1996 increase in
interest income was primarily due to loan growth in the existing branch network
and the impact of the 1996 branch acquisitions discussed above. In 1997, the
average yield on loans decreased to 8.59% from 8.66% in 1996. This decrease
resulted from overall lower market interest rates during most of 1997. The 1995
average yield was 9.00%.
Earnings from investments and federal funds sold provided the balance of
interest income, contributing $9.8 million in 1997, $9.9 million in 1996, and
$8.6 million in 1995. In 1997, BancShares realized lower yields on investment
securities and federal funds sold and maintained larger average balances for
each period. In 1996, BancShares realized higher yields on investment
securities and federal funds sold and larger average balances. Average
investment securities and federal funds sold was $162.9 million in 1997, an
increase from $157.8 million in 1996. The 1997 average increase was principally
the result of the acquisitions made in May 1997.
Total 1997 interest expense for BancShares increased 7.89% after
increasing in 1996 by 8.69%. The principal component of BancShares' interest
expense, interest paid on deposits, totaled $18.2 million in 1997, $16.9
million in 1996 and $15.4 million in 1995. BancShares' deposit base increased
6.82% in 1997, primarily as a result of the 1997 acquisitions. The cost of
interest bearing deposits also increased in 1997 primarily as a result of the
1997 acquisitions. The cost of interest bearing deposits increased in 1996
principally as a result of deposit growth within the branch network excluding
the 1996 acquisitions. The average effective rates paid on interest bearing
liabilities were 4.23%, 4.24%, and 4.38% in 1997, 1996, and 1995 respectively.
During 1993, BancShares borrowed $5.5 million to purchase a savings bank.
During 1997, BancShares utilized long term borrowings to provide a $5.0 million
injection of capital into its subsidiary and to refinance the remaining balance
of the 1993 borrowings. The 1993 debt was being repaid at $100,000 per month
plus interest. These debts are to be repaid at $450,000 per quarter plus
interest. Interest on these debts was $295,000 in 1997, $117,000 in 1996 and
$309,000 in 1995. The outstanding debt at December 31, 1997 was $4.8 million.
BancShares' interest rate spread was 3.60%, 3.75% and 3.63% on a tax
equivalent basis in 1997, 1996 and 1995, respectively. BancShares' ability to
maintain a favorable spread between interest income and interest expense is a
major factor in generating earnings; therefore, it is necessary to manage
effectively earning assets and interest bearing liabilities.
23
<PAGE>
Noninterest Income. Noninterest income which consists primarily of
securities gains, service charges, commissions, fees and gains on sales of
loans, increased $5.3 million in 1997. Total noninterest income was $9.8
million in 1997, as compared to $4.5 million in 1996 and $4.0 million in 1995.
Total noninterest income for 1997 includes securities gains of $5.6 million
related to the funding of a charitable foundation by the contribution of
available-for-sale equity securities and the sale of available-for-sale
securities. Service charges on deposit accounts increased $254,000, or 9.53%,
in 1997 to $2.9 million, from $2.7 million in 1996. This increase was primarily
attributable to the full year impact of the accounts subject to service charges
acquired in June and August 1996 and the May acquisitions of 1997. Service
charges on deposit accounts increased $317,000, or 13.51%, in 1996, from $2.3
million in 1995 to $2.7 million for 1996. This increase was primarily
attributable to the full year impact of the accounts subject to service charges
acquired in June 1995 and the June and August acquisitions of 1996.
BancShares had an increase in 1997 in other service charges and fees of
$88,000. BancShares had an increase in 1996 in other service charges and fees
of $135,000.
During 1997, the remaining noninterest income decreased $108,000 from
$604,000 in 1996 to $496,000 in 1997. This decrease was primarily attributable
to a gain of $213,000 on the sale of a branch in 1996. During 1996, the
remaining noninterest income decreased $431,000 from $1.0 million in 1995 to
$604,000 in 1996. This decrease was primarily attributable to a favorable one
time $410,000 settlement of a law suit in 1995.
Noninterest Expense. Noninterest expense includes personnel, intangibles
amortization, data processing, occupancy, furniture and equipment, FDIC
assessments, printing, supplies, legal and professional fees, postage and other
miscellaneous operating expenses. Noninterest expense was $23.1 million in 1997
compared to $18.2 million in 1996 and $15.7 million in 1995. In 1997 BancShares
recorded $4.1 million of charitable contributions expense related to the
funding of a charitable foundation. Control of noninterest expense is an
important aspect in managing net income. The 1995, 1996 and 1997 acquisitions
should enhance the future operating results of BancShares. However, for the
following ten years, earnings will be reduced as BancShares amortizes
intangibles resulting from the assets acquired.
The most significant element of BancShares' noninterest expense is
personnel costs. In 1997, salaries and benefits represented $8.8 million, or
37.99%, of total noninterest expense. The personnel costs of 1997 include the
impact of a full year of the costs related to the acquisitions made in June and
August 1996 and a partial year of costs for the acquisitions made in May 1997.
In 1996, salaries and benefits represented $8.0 million, or 43.81%, of total
noninterest expense. The personnel costs of 1996 include the impact of a full
year of the costs related to the acquisitions made in June 1995 and a partial
year of costs for the acquisitions made in June and August, 1996. In 1995,
salaries and benefits represented $6.9 million, or 44.01%, of total noninterest
expense. The personnel costs of 1995 included the impact of a full year of the
costs related to the acquisitions made in the last quarter of 1994 and the
partial year costs for the acquisitions made in June, 1995.
The 1997 noninterest expense, other than personnel and charitable
contributions, was $10.2 million, an increase of $586,000, or 6.08%, from $9.6
million in 1996. Occupancy expenses increased from $941,000 in 1995 to $1.2
million in 1996 to $1.4 million in 1997. These increases of 27.8% and 15.4%,
respectively, are principally the result of additional expenditures incurred as
a result of the 1995, 1996 and 1997 acquisitions, the replacements of aging
branch facilities and the 1997 opening of a second location in Rocky Mount,
North Carolina. Furniture and fixture expenses increased from $1.1 million in
1995 to $1.3 million in 1996 and to $1.6 million in 1997. These increases of
18.27% and 24.28%, respectively, reflect the additional equipment expenses
incurred as a result of the acquisitions in 1995, 1996 and 1997 and the opening
of the second Rocky Mount branch in 1997.
Data processing costs represent charges by vendors that perform data
processing services for the Bank. The Bank has contracts with four such
companies. Data processing fees are primarily based upon per item or per
account charges. Data processing costs in 1997 were $1.6 million, an increase
of 10.97%, over 1996 data processing expenses of $1.4 million. This increase
was the result of the 1996 and 1997 acquisitions and volume increases in the
existing branch system. Data processing costs in 1996 were $1.4 million, an
increase of 7.95%, over 1995 data processing expenses of $1.3 million. This
increase was the result of the 1995 and 1996 acquisitions and volume increases
in the existing branch system.
Intangibles amortization in 1997 was $1.8 million, a 7.14% increase over
the 1996 intangibles amortization. Intangibles amortization in 1996 was $1.6
million, a 20.26% increase over the 1995 intangibles amortization of $1.4
million. The 1997 amortization included a full year's amortization for the 1996
acquisitions and partial year amortizations for the acquisitions made in May
1997. The 1996 amortization included a full year's amortization for the 1995
acquisitions and partial year amortizations for the acquisitions made in June
and August 1996. The 1995 amortization included a full year's amortization for
the 1994 acquisitions and partial year amortizations for the acquisitions made
in June 1995.
24
<PAGE>
The Bank has deposits insured under both of the FDIC's insurance funds,
the BIF and the SAIF. In July 1995, the FDIC and other regulatory agencies
proposed a plan to recapitalize the SAIF, and Congress mandated a one-time
assessment for all SAIF insured deposits on September 30, 1996. Congress
required that 80% of the Bank's SAIF insured deposits as reported on the Bank's
March 31, 1995 call report and 100% of SAIF insured deposits purchased by the
Bank after March 31, 1995 be assessed at .66%. On September 30, 1996 the Bank
had approximately $87.0 million of SAIF-insured deposits based on the above
formula and recorded a $569,000 charge to earnings on September 30, 1996 as a
one-time FDIC SAIF insurance expense. The decrease in 1997 and the increase in
1996 FDIC assessment expenses of $660,000 and $121,000, respectively, for FDIC
premiums, resulted primarily from the 1996 one-time assessment discussed above
and the 1995 reduction in deposit premiums for bank deposits for all banks
combined with the full year assessment for the deposit growth from the 1995 and
1996 acquisitions respectively and the partial year assessment for the 1997
acquisitions.
BancShares expects that, under current FDIC assessment guidelines, it will
not incur any FDIC deposit insurance assessments for 1998. However, beginning
in 1997 the FDIC began collecting from all banks an assessment for Financing
Corporation ("FICO") funding requirements. Accordingly, BancShares expects a
1998 FDIC FICO assessment expense of approximately $112,000, based on the FDIC
FICO assessment rates in effect for the first quarter of 1998.
Charitable contributions increased $3.5 million, to $4.1 million in 1997
from $589,000 in 1996 after increasing $416,000 from $173,000 in 1995.
Charitable contributions expense for 1997 includes $4.1 million related to the
additional funding of a charitable foundation through the contribution of
available-for-sale securities. Charitable contributions expense for 1996
includes $536,000 related to the contribution of available-for-sale securities
to a charitable foundation.
Other miscellaneous noninterest operating expenses were $3.7 million, $3.3
million and $3.2 million for 1997, 1996 and 1995 respectively. Included in
other miscellaneous noninterest operating expenses were losses resulting from
the abandonment/ replacement of premises and equipment for aging branch
facilities of $317,000, $55,000 and $315,000 for 1997, 1996, and 1995
respectively.
Income Taxes. In 1997, 1996, and 1995, BancShares had taxable income for
book purposes that resulted in income tax expense of $340,000, $1.1 million and
$1.3 million respectively. Decreases in these expenses are primarily the result
of an increase in tax-exempt income for 1996 and 1995. The 1997 decrease is
principally a result of the 1997 contribution of available-for-sale securities
to the charitable foundation discussed above.
Financial Condition.
Earning and Nonearning Assets. Earning assets consist of loans, investment
securities, and short-term investments that earn interest. Average earning
assets during 1997 were $508.0 million, an increase of 8.14% from the 1996
average of $469.7 million. This increase was due primarily to growth within the
existing branch system. The 1997 full year average impact of the June and
August 1996 acquisitions and the partial year impact of the May 1997
acquisitions increased average earning assets to a much lesser extent. The cash
received in the acquisitions was ultimately invested primarily in loans and
short-term investments.
Average earning assets during 1996 were $469.7 million, an increase of
12.92% from the 1995 average of $416.0 million. This increase was due primarily
to the 1996 full year average impact of the June 1995 acquisitions and the
partial year impact of the June 1996 and August 1996 acquisitions. The cash
received in the acquisitions was ultimately invested primarily in loans and
short-term investments including federal funds.
Average non-interest earning assets during 1997 were $59.3 million, an
increase of 19.0% from the 1996 average of $49.8 million. This increase was due
primarily to the 1997 full year average impact of the June and August 1996
acquisitions and the partial year impact of the May 1997 acquisitions. Average
non-interest earning assets during 1996 were $49.8 million, an increase of
22.92% from the 1995 average of $40.5 million. The principal nonearning asset
for BancShares is cash and due from banks. Cash and due from banks averaged
$17.7 million in 1997, $15.7 million in 1996 and $15.4 million in 1995.
Return on total average assets was 1.17% in 1997 as compared to 0.84% in
1996 and 0.86% in 1995. The increase in 1997 was principally the result of
gains on the sale of available-for-sale securities. The decrease in 1996 was
principally the result of increased average assets.
Interest Bearing and Noninterest Bearing Liabilities. Interest bearing
liabilities consists of deposits, short term borrowed funds and long-term notes
payable. Average interest bearing liabilities during 1997 were $445.4 million,
an increase of 8.11% from the 1996 average of $412.0 million. This increase was
due primarily to the 1997 full year impact of the June and August 1996
acquisitions and the partial year 1997 impact of the May 1997 acquisitions. The
principal interest bearing
25
<PAGE>
liabilities of BancShares are interest bearing deposits. Average noninterest
bearing liabilities during 1997 were $76.2 million, an increase of 13.11% from
the 1996 average of $67.3 million. This increase was also due primarily to the
1997 full year impact of the June and August 1996 acquisitions and the partial
year 1997 impact of the May 1997 acquisitions. Noninterest bearing demand
deposits are the principal noninterest bearing liability. The cost of total
interest bearing liabilities was 4.23% in 1997 as compared to 4.24% in 1996.
The decrease in 1997 was principally the result of a generally lower deposit
interest rate market in 1997.
Average interest bearing liabilities during 1996 were $412.0 million, an
increase of 12.37% from the 1995 average of $366.6 million. This increase was
due primarily to the 1996 full year impact of the June 1995 acquisitions and
the partial year 1996 impact of the June and August 1996 acquisitions. Average
noninterest bearing liabilities during 1996 were $67.3 million, an increase of
21.91% from the 1995 average of $55.2 million. Noninterest bearing demand
deposits are the principal noninterest bearing liability. This increase was
also due primarily to the 1996 full year impact of the June 1995 acquisitions
and the partial year 1996 impact of the June and August 1996 acquisitions. The
cost of total interest bearing liabilities was 4.24% in 1996 as compared to
4.38% in 1995. The decrease in 1996 was principally the result of a generally
lower deposit interest rate market in 1996.
Loans. As of December 31, 1997, loans, net of allowance for loan losses,
totaled $343.4 million compared to $311.6 million at year-end 1996. A portion
of the growth was related to the current year acquisitions, as discussed above.
The loan portfolio grew $1.4 million through these acquisitions. The remaining
increase was attributed to normal loan growth, particularly in the real estate
mortgage and commercial loan portfolios, which grew $13.3 million and $13.4
million, respectively. There were no significant loan promotions in the current
year nor were there any significant changes made to underwriting standards.
Rate sensitivity and liquidity in the loan portfolio are achieved by
making loans with adjustable interest rates and shorter maturities. This allows
the Bank to adjust its pricing structure with changes in interest rates. At the
end of 1997, 55.89% of the loan portfolio was due to mature or be available for
repricing of interest rates during 1998.
Investments. Management's asset/liability strategies include maintaining
an investment securities portfolio with appropriate maturities to preclude the
necessity of selling investment securities for purposes of liquidity.
Traditionally, BancShares has maintained a larger investment portfolio
than its peers. BancShares traditionally has carried unrealized gains on
investments significantly greater than the average of its peers in North
Carolina primarily due to its investments in marketable equity securities. At
the end of 1997 and 1996, the Bank had one of the highest ratios of market
value to book value for its investment securities in the state of North
Carolina.
BancShares accounts for investment securities under the provisions of
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities," which
requires that investments in debt and equity securities be classified in three
categories and accounted for as follows: debt securities that BancShares has
the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; debt and equity securities
that are bought and held principally for the purpose of selling them in the
near term are classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings; debt and equity securities
not classified as either held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. Securities available-for-sale consist of
certain debt and marketable equity securities not classified as trading
securities nor as securities held-to-maturity, and consist of securities which
may be sold in response to changes in interest rates, prepayment risk,
regulatory capital requirements and liquidity needs.
At December 31, 1997 the fair value of available-for-sale securities
exceeded the carrying value by $22.9 million, deferred taxes related to these
available-for-sale securities were $7.8 million and shareholders' equity
included $15.1 million for the net unrealized gain related to these
available-for-sale securities. At December 31, 1996 the fair value of
available-for-sale securities exceeded the carrying value by $16.5 million,
deferred taxes related to these available-for-sale securities were $5.6 million
and shareholders' equity included $10.9 million for the net unrealized gain
related to these available-for-sale securities. BancShares does not maintain a
trading account.
On December 17, 1996, the Bank's board of directors approved the
contribution of 7,500 shares of marketable equity securities to the Southern
Bank Foundation. These investments had an average cost basis of $78,000 and, on
December 17, 1996, a fair value of $536,000. The Bank recorded a securities
gain of $458,000 and a charitable contribution expense of $536,000 related to
this transaction.
26
<PAGE>
On February 14, 1997, the Bank's board of directors approved the
contribution of 48,250 shares of marketable equity securities to the Southern
Bank Foundation. These investments had an average cost basis of $542,000 and,
on February 5, 1997, a fair value of $4.1 million. The Bank recorded a 1997
securities gain of $3.5 million and charitable contribution expense of $4.1
million related to this transaction.
Asset Quality.
Provision and Allowance for Loan Losses. Because the loan portfolio
represents BancShares' largest earning asset, BancShares continually monitors
the quality of its loan portfolio. The Bank operates in an area dominated by
agriculture and, accordingly, many loans are made to commercial enterprises or
to consumers who are directly or indirectly supported by the region's
agricultural economy. In 1997, BancShares charged-off loans net of recoveries
of $252,000. This represents a decrease of $46,000 from 1996 net charge-offs of
$298,000. This decrease is primarily the result of decreased gross charge-offs
in 1997. Recoveries of loans previously charged off also decreased in 1997. The
percentage of charge-offs (net of recoveries) to average outstanding loans was
0.07% in 1997, 0.10% in 1996 and 0.12% in 1995.
The ratio of total non-performing loans to total loans increased from
0.16% at December 31, 1996 to 0.20% at December 31,1997, principally due to
increases in non-performing loans (nonaccrual, restructured, and accruing loans
greater than 90 days past due) to $696,000 at December 31, 1997, compared to
$498,000 at December 31, 1996. The ratio of non-performing loans and assets to
total assets increased to 0.13% at December 31, 1997 from 0.09% a year before.
This increase was primarily the result of increased non-performing loans. At
December 31, 1997 BancShares had $48,000 of assets classified as other real
estate. At December 31, 1996 BancShares had no assets classified as other real
estate.
Accrual of interest is discontinued on a loan when management believes the
borrower's financial condition is such that collection of principal or interest
is doubtful. Loans are returned to the accrual status when the factors
indicating doubtful collectibility cease to exist.
Management considers a loan to be impaired when based on current
information or events, it is probable that a borrower will be unable to pay all
amounts due according to contractual terms of the loan agreement. Impaired
loans are valued using either the discounted expected cash flow method or the
value of the collateral. When the ultimate collectibility of the impaired
loan's principal is doubtful, all cash receipts are applied to principal. Once
the recorded principal balance has been reduced to zero, future cash receipts
are applied to interest income, to the extent that any interest has been
foregone. Future cash receipts are recorded as recoveries of any amounts
previously charged-off.
At December 31, 1997 and 1996, the Bank had nonaccrual loans of $230,000
and $147,000, respectively. At December 31, 1997 and 1996, the Bank had
restructured loans of $0 and $8,000, respectively. At December 31, 1997 and
1996, the Bank had accruing loans past due 90 days or more totaling $466,000
and $343,000, respectively. The amounts of foregone interest on nonaccrual and
restructured loans for the years ended December 31, 1997, 1996 and 1995 were
not material for the periods presented. At December 31, 1997 and 1996, the
Bank's impaired loans, as determined under Statement 114, were less than the
nonaccrual and restructured loan amounts presented above.
There are certain loans classified for regulatory purposes as substandard
or special mention that have not been disclosed in the nonperforming asset
amounts above. Such loans do not represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources. Such classified loans also
do not represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
The allowance for loan losses represented 858% of non-performing loans at
December 31, 1997. This was a decrease of 380 basis points from the 1,238%
ratio at December 31, 1996. The allowance for loan losses represented 1.71% and
1.94% of loans outstanding at year end 1997 and 1996, respectively. The Bank's
provision for loan losses charged against earnings was $60,000 in 1997,
$140,000 in 1996 and $0 in 1995.
Management considers the December 31, 1997 allowance for loan losses
adequate to cover the losses inherent in the loan portfolio. Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's experience, the estimated value of
any underlying collateral, current economic conditions and other risk factors.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
27
<PAGE>
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and losses on other real estate owned. Such agencies may require the Bank to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
Liquidity, Market Risk and Interest Sensitivity.
Liquidity. Liquidity refers to the ability of BancShares to generate
sufficient funds to meet its financial obligations and commitments at a
reasonable cost. One of BancShares' objectives is to maintain a high level of
liquidity, and this goal continues to be met. Maintaining liquidity ensures
that funds will be available for reserve requirements, customer demand for
loans, withdrawal of deposit balances and maturities of other deposits and
liabilities. These events may take place daily or at other intervals in the
normal operation of the business. Past experiences helps management anticipate
cyclical demands and amounts of cash required. These obligations can be met by
existing cash reserves or funds from maturing loans and investments, but in the
normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including:
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include available-for-sale investment
securities, federal funds sold, and cash and due from banks. These assets
represented 31.65% of total deposits at December 31, 1997, an increase from
28.61% at December 31, 1996.
The Bank's liquidity ratio, which is defined as net cash plus short term
and marketable securities divided by net deposits and short term liabilities,
was 33.98% at December 31, 1997, compared to 27.40% and 38.50% at year-end 1996
and 1995 respectively.
BancShares has traditionally maintained a high level of liquidity,
characteristic of the high ratio of investment securities to total assets
and/or total deposits that BancShares maintains. Although loans increased with
the 1996 and 1997 acquisitions, BancShares' ability to manage its liquidity was
enhanced with the addition of a mortgage loan department acquired in 1993. With
this acquisition, BancShares has the ability to sell mortgage loans held for
sale, if needed, for liquidity or other asset/liability management
requirements.
Any maturing investments whose funds are not immediately necessary to
sustain BancShares' liquidity, will be invested in similar instruments or used
to fund any increased loan demand. Investments scheduled to mature within the
one year time frame represented 45.79%, 55.06% and 44.58% of the total
investment securities portfolio at December 31, 1997, 1996 and 1995,
respectively.
Included in investments maturing within one year are investments in
marketable equity securities held by BancShares with fair values of $30.3
million, $24.8 million and $16.7 million in 1997, 1996 and 1995, respectively.
Although these investments do not "mature" in the next twelve months, they are
available-for-sale and could be sold at management's discretion.
Since the volume of investments actually maturing during 1998 is
comparable to the volumes that matured during 1997 and 1996, the effect on net
interest margin and operating results for 1998 should also be similar to
effects realized in 1997 and 1996.
The consolidated statements of cash flows disclose the principal sources
and uses of cash from operating, investing and financing activities for 1997,
1996, and 1995. In 1997, operating activities of BancShares provided cash flows
of $9.8 million. Net income of $6.6 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Decreases
in other assets of $1.8 million and decreases in other liabilities of $1.3
million, increased and decreased, respectively, the contribution of net income
to BancShares' cash flow. Investing activities, including lending, utilized
$19.8 million of BancShares' cash flow. Loans originated, net of principal
collected, used $30.4 million. BancShares received $18.0 million in cash in
connection with the branches purchased from another financial institution in
1997.
Net additional cash inflows of $16.2 million resulted from financing
activities. Net deposit inflows of $11.7 million were improved by an increase
in short term borrowed funds of $1.8 million and by an increase of $3.4 million
in long term obligations and reduced by payments for cash dividends and
retirements of stock totaling $608,000.
In 1996, operating activities of BancShares provided cash flows of $7.4
million. Net income of $4.4 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Decreases
in other assets of $1.7 million and increases in other liabilities of $2.3
million, increased the contribution of net income to BancShares' cash flow.
Investing activities, including lending, utilized $41.8 million of BancShares'
cash flow. Loans originated, net of principal collected, used $24.7 million.
BancShares received $3.4 million in cash in connection with the branches
purchased from
28
<PAGE>
other financial institutions in 1996. Net additional cash inflows of $24.0
million resulted from financing activities. Net deposit inflows of $22.2
million were improved by an increase in short term borrowed funds of $3.6
million and reduced by the $1.2 million repayment of long term obligations,
payments for cash dividends and retirements of stock totaling $599,000.
In 1995, operating activities of BancShares provided cash flows of $9.6
million. Net income of $3.9 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Increases
in other assets of $114,000 and increases in other liabilities of $2.2 million,
increased the contribution of net income to BancShares' cash flow. Investing
activities, including lending, utilized $12.0 million of BancShares' cash flow.
Loans originated, net of principal collected, used $33.1 million. BancShares
received $46.1 million in cash in connection with the branches purchased from
other financial institutions in 1995. In 1995, net additional cash outflows of
$28.1 million resulted from financing activities. Net deposit inflows of $30.6
million were reduced by the $1.2 million repayment of long term obligations, a
decrease in short term borrowed funds of $497,000 and payments for cash
dividends and retirements of stock totaling $784,000.
The Bank has no brokered deposits. Jumbo certificates of deposit ("CD's")
are considered to include all CD's of $100,000 or more. The Bank does not and
has never aggressively bid on these deposits, and it does not seek nor does it
accept deposits from outside of its general trade area. Almost all of the
Bank's jumbo CD customers have other relationships with the Bank, including
savings, demand and other time deposits, and in some cases, loans. At December
31, 1997 and 1996, jumbo CD's represented 10.3% and 9.0%, respectively, of
total deposits.
In the opinion of management, BancShares has the ability to generate
sufficient amounts of cash to cover normal requirements and any additional
needs which may arise, within realistic limitations, and management is not
aware of any known demands, commitments or uncertainties that will affect
liquidity in a material way.
Market Risk. Market risk reflects the risk of economic loss resulting from
adverse changes in market price and interest rates. This risk of loss can be
reflected in either diminished current market values or reduced potential net
interest income in future periods.
BancShares' market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. The structure of BancShares' loan
and deposit portfolios is such that a significant decline in the prime rate may
adversely impact net market values and net interest income. Management seeks to
manage this risk through the use of shorter term maturities. The composition
and size of the investment portfolio is managed so as to reduce the interest
rate risk in the deposit and loan portfolios while at the same time maximizing
the yield generated from the portfolio.
29
<PAGE>
The table below presents in tabular form the contractual balances and the
estimated fair value of financial instruments at their expected maturity dates
as of December 31, 1997. The expected maturity categories take into
consideration historical prepayment experience as well as management's
expectations based on the interest rate environment as of December 31, 1997.
For core deposits without contractual maturity (i.e.,interest bearing checking,
savings and money market accounts), the table presents principal cash flows as
maturing in 1998 since they are subject to immediate repricing. Weighted
average variable rates are based on the implied forward rates in the yield
curve as of December 31, 1997.
<TABLE>
Maturing in years ended December 31,
-----------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans
Fixed rate ............... $ 49,436 $ 40,406 $ 29,803 $ 26,304 $ 33,081 $32,215
Average rate ............. 8.37% 8.96% 8.04% 8.28% 7.56% 7.90%
Variable rate ............ $ 55,149 $ 20,429 $ 7,890 $ 8,143 $ 7,375 $40,551
Average rate ............. 9.06% 9.94% 8.99% 8.89% 8.73% 9.21%
Investment securities
Fixed rate ............... $ 82,487 $ 73,358 $ 1,196 $ 1,021 $ 1,063 $15,951
Average rate ............. 5.64% 5.96% 8.35% 8.58% 8.37% 8.21%
Variable rate ............ -- $ 1,400 -- -- -- $ 3,657
Average rate ............. -- 9.34% -- -- -- 9.34 %
Liabilities
Savings and interest
bearing checking
Fixed rate ............... $167,843 -- -- -- -- --
Average rate ............. 2.13% -- -- -- -- --
Certificates of deposit
Fixed rate ............... $223,080 $ 32,214 $ 15,708 $ 338 -- --
Average rate ............. 5.33% 5.72% 5.90% 5.90% -- --
Variable rate ............ $ 5,088 $ 2,492 -- -- -- --
Average rate ............. 4.77% 4.85% -- -- -- --
Short-term borrowings
Variable rate ............ $ 6,826 -- -- -- -- --
Average rate ............. 5.51% -- -- -- -- --
Long-term debt
Variable rate ............ $ 1,800 $ 1,800 $ 1,150 -- -- --
Average rate ............. 6.71% 6.71% 6.71% -- -- --
Total Fair Value
------------- -----------
(Dollars in thousands)
<S> <C> <C>
Assets
Loans
Fixed rate ............... $ 211,245 $210,268
Average rate ............. 8.23%
Variable rate ............ $ 139,537 $139,537
Average rate ............. 9.20%
Investment securities
Fixed rate ............... $ 175,076 $176,089
Average rate ............. 6.21%
Variable rate ............ $ 5,057 $ 5,057
Average rate ............. 9.34%
Liabilities
Savings and interest
bearing checking
Fixed rate ............... $ 167,843 $167,843
Average rate ............. 2.13%
Certificates of deposit
Fixed rate ............... $ 271,340 $272,107
Average rate ............. 5.41%
Variable rate ............ $ 7,580 $ 7,580
Average rate ............. 4.83%
Short-term borrowings
Variable rate ............ $ 6,826 $ 6,826
Average rate ............. 5.51%
Long-term debt
Variable rate ............ $ 4,750 $ 4,750
Average rate ............. 6.71%
</TABLE>
Interest Sensitivity. Deregulation of interest rates and short-term,
interest bearing deposits which are more volatile, have created a need for
shorter maturities of earning assets. As a result, an increasing percentage of
commercial, installment and mortgage loans are being made with variable rates
or shorter maturities to increase liquidity and interest rate sensitivity.
The difference between interest sensitive asset and interest sensitive
liability repricing within time periods is referred to as the interest rate
sensitivity gap. Gaps are identified as either positive (interest sensitive
assets in excess of interest sensitive liabilities) or negative (interest
sensitive liabilities in excess of interest sensitive assets).
As of December 31, 1997, BancShares had a negative one year cumulative gap
position of 18.6%. BancShares has interest earning assets of $297.6 million
maturing or repricing within one year and interest bearing liabilities of
$407.6 million repricing or maturing within one year. This is primarily the
result of stable core deposits being used to fund longer term interest earning
assets, such as loans and investment securities. A negative gap position
implies that interest bearing liabilities (deposits) will reprice at a faster
rate than interest earning assets (loans and investments). In a falling rate
environment, this position will generally have a positive effect on earnings,
while in a rising rate environment this position will generally have a negative
effect on earnings.
30
<PAGE>
BancShares' savings and core time deposits of $393.8 million include
interest bearing checking accounts of $66.7 million. These deposits are
considered as repricing in the earliest period because the rate can be changed
weekly. However, history has shown that the decreases in the interest rates
paid on these deposits have little, if any, effect on their movement out of the
Bank. Therefore, in reality, they are not sensitive to changes in market rates
and could be considered non-rate sensitive. If this change were made,
BancShares' rate sensitive assets and rate sensitive liabilities would be more
closely matched at the end of the one year period.
Inflation. The effect of inflation on financial institutions differs from
the impact on other types of businesses. Since assets and liabilities of banks
are primarily monetary in nature, they are more affected by changes in interest
rates than by the rate of inflation.
Inflation generates increased credit demand and fluctuation in interest
rates. Although credit demand and interest rates are not directly tied to
inflation, each can significantly impact net interest income. As in any
business or industry, expenses such as salaries, equipment, occupancy, and
other operating expenses are also subject to the upward pressures created by
inflation.
Since the rate of inflation has been relatively stable during the last
several years, the impact of inflation on the earnings presented in this report
is insignificant.
Capital Resources.
Shareholders' Equity and Capital Adequacy. Sufficient levels of capital
are necessary to sustain growth and absorb losses. To this end, the Federal
Reserve, which regulates BancShares, and the FDIC, which regulates the Bank,
have established risk based capital ("RBC") adequacy guidelines. In 1997,
BancShares experienced an increase in all of its regulatory capital ratios.
As of December 31, 1997, BancShares' Leverage Capital Ratio (as defined
herein) was 6.07%, up from 5.46% and 5.60%, respectively, at year end 1996 and
1995. For regulatory purposes, a 5.00% Leverage Capital Ratio represents a well
capitalized financial institution.
Within the RBC calculations, BancShares' assets, including commitments to
lend and other off-balance sheet items, are weighted according to Federal
regulatory guidelines for the risk considered inherent in the assets.
BancShares' Tier 1 Capital Ratio (as defined herein) as of December 31, 1997
was 11.43% which is, along with a ratio of 9.33% and 8.87% for 1996 and 1995,
respectively, representative of a well-capitalized institution. The calculation
of the Total Capital Ratio (as defined herein) allows, in BancShares'
circumstances, the inclusion of BancShares' allowance for loan losses in
capital, but only to a maximum of 0.25% of risk weighted assets. As of December
31, 1997 BancShares' Total Capital Ratio was 12.78%, which is representative of
a well-capitalized institution. The Total Capital Ratio for 1996 and 1995 were
10.66% and 10.19%, respectively, both of which were also representative of a
well capitalized financial institution. See "Supervision and Regulation --
Capital Adequacy."
These ratios will only improve if BancShares' capital increases at a rate
proportionately faster than liabilities. Management is aware that growth must
be controlled. The projected 1998 acquisition of the branch office discussed
below may appear to be contrary to this policy but management is also aware
that the process of expanding market share by normal business development
processes can be very difficult and expensive. Management believes that
improvement in its overall market share within an existing trade area is
valuable in the long run and should be pursued by BancShares, when it can be
done prudently.
BancShares' primary source of new capital is earnings. In 1997, equity
capital increased through retention of earnings by $6.0 million, by $3.8
million in 1996 and by $3.4 million in 1995. BancShares' internal capital
generation rate was 13.19% in 1997, 9.39% in 1996, and 9.76% in 1995. As of
December 31, 1997, shareholders' equity totaled $55.0 million compared to $44.8
million in 1996. The shareholders' equity for 1997 and 1996 included, as
discussed above, $15.1 million and $10.9 million, respectively, of net
unrealized securities gains as a result of BancShares' adoption of SFAS 115.
The ratio of average shareholders' equity to average total assets was
8.06% in 1997 and 7.74% in 1996. The 1997 increase was primarily the result of
the substantial increase in unrealized gains on available-for-sale securities.
Retention of sufficient earnings to maintain an adequate capital position
that provides BancShares with expansion capabilities is an important factor in
determining dividends. During 1997, BancShares paid $585,000 in dividends,
versus $587,000
31
<PAGE>
in 1996 and $531,000 in 1995. As a percentage of net income, dividends were
8.85% in 1997, 13.45% in 1996 and 13.57% in 1995. The 1997 percentage decrease
was principally the result of increased earnings resulting from the sale of
available-for-sale securities.
Economy of Eastern North Carolina. BancShares is headquartered and
operates primarily in rural eastern North Carolina. Economic information from
state and national sources indicates that the seventeen counties served by
Southern lag the median figures of North Carolina in the areas of per capita
income, family income, and population growth rates. Between 1980 and 1990,
Southern's market counties experienced a negative net migration of the
population. Only in the area of unemployment does the Bank's market area
compare favorably to the rest of eastern North Carolina, but this may be
related to the negative growth during the same period and the agricultural
nature of the area.
Agriculture. The tobacco industry contributes significantly to the economy
of eastern North Carolina and especially in the seventeen eastern North
Carolina counties where the Bank operates.
For several decades, the tobacco industry, both in the United States and
abroad, has faced, and continues to face, a number of issues that may adversely
affect the volume, operating revenues, cash flows, operating income and
financial position of businesses operating in eastern North Carolina and, by
consequence, BancShares.
In the United States, these issues include proposed federal regulatory
controls (including, as discussed below, the issuance of final regulations by
the FDA that regulate cigarettes as "drugs" or "medical devices"); actual and
proposed excise tax increases; actual and proposed federal, state and local
governmental and private bans and restrictions on smoking (including in
workplaces and in buildings permitting public access); actual and proposed
restrictions on tobacco manufacturing, marketing, advertising (including
decisions by certain companies to limit or not accept tobacco advertising) and
sales; proposed legislation and regulations to require additional health
warnings on cigarette packages and in advertising, and to eliminate the tax
deductibility of tobacco advertising and promotional costs; actual and proposed
requirements regarding disclosure of cigarette ingredients and other
proprietary information; actual and proposed requirements regarding disclosure
of the yields of "tar," nicotine and other constituents found in cigarette
smoke; increased assertions of adverse health effects associated with both
smoking and exposure to ETS; legislation or other governmental action seeking
to ascribe to the industry responsibility and liability for the purported
adverse health effects associated with both smoking and exposure to ETS; the
diminishing social acceptance of smoking; increased pressure from anti-smoking
groups; unfavorable press reports; governmental and grand jury investigations;
and increased smoking and health litigation, including private plaintiff class
action litigation and health care cost recovery actions brought by state and
local governments, unions and others seeking reimbursement for Medicaid and/or
other health care expenditures allegedly caused by cigarette smoking.
Accounting and Other Matters.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("Statement 130"). Statement 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. It does not address issues of recognition
or measurement for comprehensive income and its components. The provisions of
Statement 130 are effective for fiscal years beginning after December 15, 1997.
BancShares plans to adopt this statement in fiscal 1998 and will make the
necessary disclosures of comprehensive income for periods beginning in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("Statement 131"). Statement 131
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate and their major customers. The provisions of Statement 131 are
effective for fiscal years beginning after December 15, 1997. Adoption of this
pronouncement is not expected to have a material effect on BancShares'
consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement standardizes
the disclosure requirements of pensions and other postretirement benefits. This
statement does not change any measurement or recognition provisions, and thus
will not materially impact BancShares. This statement is effective for fiscal
years beginning after December 15, 1997.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect
of the proposed statements on the consolidated financial statements of
BancShares and monitors the status of changes to issued exposure drafts and to
proposed effective dates.
32
<PAGE>
In 1997 BancShares developed a plan to deal with the "Year 2000 issue" and
contracted with an industry consultant to review its overall exposure to the
year 2000 issue. The year 2000 issue relates to computer programs written using
two digits rather than four to define the applicable year. In 1997 management
reviewed the results of the consultant's analysis of BancShares' data
processing year 2000 exposure and committed the human resources and the
financial resources for BancShares to complete its resolution of the year 2000
issue in 1998. The total cost of the year 2000 conversion project for
BancShares is estimated to be $200,000 and is being funded through operating
cash flows. BancShares is expensing all costs associated with the required
systems changes as the costs are incurred. As of December 31, 1997, $3,000 had
been expensed. As discussed in note 15 to the consolidated financial
statements, BancShares utilizes the mainframe system of an affiliated bank
holding company, First Citizens BancShares, Inc. ("FCBancShares"), and its
subsidiary, FCB, for most of its mission-critical applications. These systems
are currently being remediated, replaced or retired as part of FCBancShares'
Year 2000 compliance program. BancShares is closely monitoring FCBancShares'
progress. Based on discussions with management of FCBancShares, BancShares'
management does not expect significant increases in future data processing
costs relating to Year 2000 compliance.
Management is not aware of any other known trends, events, uncertainties,
or current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on BancShares' liquidity, capital
resources or other operations.
33
<PAGE>
Statistical Information. The following tables contain certain additional
statistical information regarding BancShares' business operations.
Table I.
Average Balance Sheet Items and Net Interest Differential
Average Balances and Average Rates Earned and Paid
<TABLE>
December 31, 1997 December 31, 1996
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- --------- ----------- ---------- ---------
(Dollars in thousands, taxable-equivalent)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (1) (2) .................... $340,195 $29,225 8.59% $310,389 $26,878 8.66%
Taxable investment
securities ..................... 126,829 7,532 5.94 125,068 7,899 6.32
Nontaxable investment
securities (3) ................. 24,581 2,130 8.67 25,914 2,290 8.84
Federal funds sold ............... 11,526 623 5.41 6,895 402 5.83
Other ............................ 4,840 269 5.56 1,526 62 4.06
-------- ------- ---- -------- ------- ----
Total interest earning assets ..... 507,971 39,779 7.83 469,792 37,531 7.99
-------- ------- -------- -------
Non-interest earning assets:
Cash and due from banks .......... 17,730 15,726
Premises and equipment,
net ............................ 17,457 13,498
Other ............................ 24,078 20,525
-------- --------
Total assets ...................... $567,236 $519,541
======== ========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits .................. $ 76,080 1,234 1.62% $ 70,443 1,227 1.74%
Savings deposits ................. 87,577 2,259 2.58 83,761 2,202 2.63
Time deposits .................... 270,863 14,736 5.44 247,575 13,504 5.45
Short-term borrowings ............ 6,295 303 4.81 8,160 400 4.90
Long-term obligations ............ 4,539 295 6.50 2,021 117 5.79
-------- ------- ---- -------- ------- ----
Total interest bearing
liabilities ...................... 445,354 18,827 4.23 411,960 17,450 4.24
-------- ------- -------- -------
Non-interest bearing
liabilities:
Demand deposits .................. 63,783 57,773
Other ............................ 12,396 9,574
Shareholders' equity .............. 45,703 40,234
-------- --------
Total liabilities and equity ...... $567,236 $519,541
======== ========
Interest rate spread (4) .......... 3.60 3.75
Net interest income and net
interest margin (5) .............. $20,952 4.12% $20,081 4.28%
======= =======
December 31, 1995
---------------------------------
Average Average
Balance Interest Rate
----------- ---------- ----------
(Dollars in thousands,
taxable-equivalent)
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (1) (2) .................... $270,563 $24,338 9.00%
Taxable investment
securities ..................... 107,279 6,292 5.87
Nontaxable investment
securities (3) ................. 23,760 2,202 9.27
Federal funds sold ............... 14,378 810 5.63
Other ............................ -- -- --
-------- ------- ----
Total interest earning assets ..... 415,980 33,642 8.01
-------- -------
Non-interest earning assets:
Cash and due from banks .......... 15,381
Premises and equipment,
net ............................ 10,974
Other ............................ 14,164
--------
Total assets ...................... $456,499
========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits .................. $ 59,926 1,262 2.11%
Savings deposits ................. 79,486 2,238 2.82
Time deposits .................... 217,752 11,910 5.47
Short-term borrowings ............ 6,280 336 5.35
Long-term obligations ............ 3,153 309 9.80
-------- ------- ----
Total interest bearing
liabilities ...................... 366,597 16,055 4.38
-------- -------
Non-interest bearing
liabilities:
Demand deposits .................. 50,088
Other ............................ 5,157
Shareholders' equity .............. 34,657
--------
Total liabilities and equity ...... $456,499
========
Interest rate spread (4) .......... 3.63
Net interest income and net
interest margin (5) .............. $17,587 3.85%
=======
</TABLE>
- ---------
(1) Includes non-accrual loans
(2) Interest income includes related loan fee amounts which were immaterial.
(3) The average rate on nontaxable investment securities has been adjusted to a
tax equivalent yield using a 34% tax rate.
(4) Interest rate spread is the difference between earning asset yield and
interest bearing liability rate.
(5) Net interest margin is net interest income divided by average earning
assets.
34
<PAGE>
Table II.
Average Balance Sheet Items and Net Interest Differential
Analysis of Changes in Interest Differential
<TABLE>
December 31, 1997 Increase (Decrease)
-------------------------------------------------------
Amount Amount Amount
Total Attributable Attributable Attributable
Change to Change to Change to Change
1996-1997 in Volume in Rate Rate/Volume
----------- -------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net ............................... $2,347 $2,581 $(217) $(17)
Taxable investment securities ............ (183) 339 (506) (16)
Non-taxable investment securities ........ (161) (144) (18) 1
Federal funds sold ....................... 221 270 (29) (20)
------ ------ ----- ----
Total interest income ...................... 2,224 3,046 (770) (52)
------ ------ ----- ----
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits .......................... (479) 98 (535) (42)
Savings deposits ......................... 57 100 (42) (1)
Time deposits ............................ 1,718 1,269 421 28
Short-term borrowings .................... (97) (91) (7) 1
Long-term obligations .................... 178 146 14 18
------ ------ ------- ------
Total interest expense ..................... 1,377 1,522 (149) 4
------ ------ ------- ------
Net interest income ........................ $ 847 $1,524 $(621) $(56)
====== ====== ======= ======
</TABLE>
<TABLE>
December 31, 1996 Increase (Decrease)
-------------------------------------------------------
Amount Amount Amount
Total Attributable Attributable Attributable
Change to Change to Change to Change
1995-1996 in Volume in Rate Rate/Volume
----------- -------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net ............................... $ 2,540 $3,584 $ (920) $(124)
Taxable investment securities ............ 2,602 1,075 1,277 250
Non-taxable investment securities ........ (1,291) 56 (1,327) (20)
Federal funds sold ....................... (408) (421) 29 (16)
-------- ------ -------- -----
Total interest income ...................... 3,443 4,294 (941) 90
-------- ------ -------- -----
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits .......................... (35) 222 (222) (35)
Savings deposits ......................... (36) 121 (151) (6)
Time deposits ............................ 1,594 1,631 (44) 7
Short-term borrowed funds ................ 64 101 (28) (9)
Long-term obligations .................... (192) (111) (126) 45
-------- ------ -------- -------
Total interest expense ..................... 1,395 1,964 (571) 2
-------- ------ -------- -------
Net interest income ........................ $ 2,048 $2,330 $ (370) $ 88
======== ====== ======== =======
</TABLE>
Average loan balances include nonaccrual loans. BancShares earns
tax-exempt interest on certain loans and investment securities due to the
borrower or issuer being either a governmental agency or a quasi-governmental
agency. Yields related to loans and securities exempt from both federal and
state income taxes, federal income taxes only, or state income taxes only, are
stated on a taxable-equivalent basis assuming a statutory federal income tax
rate of 34% for all periods. The taxable equivalent adjustment was $724,000,
$755,000 and $748,000 for the years 1997, 1996 and 1995, respectively.
35
<PAGE>
Table III. Investment Portfolio
The following table sets forth the carrying amount of investment
securities:
<TABLE>
December 31,
----------------------------------
1997 1996 1995
----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury and U.S. Government agencies and
corporations ................................ $118,589 $108,592 $ 97,831
States and political subdivisions ............ 31,150 35,086 33,999
Other ........................................ 30,394 25,011 16,976
-------- -------- --------
Total ....................................... $180,133 $168,689 $148,806
======== ======== ========
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1997 and the weighted average yields of such securities. (Note
that nontaxable investment securities have not been adjusted to a tax
equivalent basis and unrealized gain (loss) on available for sale is not
included.)
<TABLE>
Maturing
After One But
Within One Year Within Five Years
--------------------- ---------------------
Amount Yield Amount Yield
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies
(1) ........................................... $46,484 5.74% $69,956 5.90%
States and political subdivisions .............. 5,709 6.93 7,973 6.98
Other (2) ...................................... 8,119 4.41 -- --
------- ---- ------- ----
$60,312 5.68% $77,929 6.01%
======= =======
After Five But
Within Ten Years After Ten Years
------------------- -------------------
Amount Yield Amount Yield
-------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies
(1) ........................................... -- -- $1,977 6.66%
States and political subdivisions .............. 9,036 6.25% 7,906 5.41
Other (2) ...................................... -- -- 100 6.75
----- ---- ------ ----
$9,036 6.25% $9,983 5.67%
====== ======
</TABLE>
- ---------
(1) Mortgage-backed securities are included in the obligations of U.S.
Government agencies and spread within the columns according to their
anticipated repayment schedules.
(2) The "Within One Year" column of the "Other" category includes marketable
equity securities held by BancShares. Accordingly, the yield on these
securities represents anticipated dividend income rather than interest
income.
Table IV. Loan Portfolio
Analysis of loans by type and maturity
The table below classifies loans by major category:
<TABLE>
December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 84,281 $ 70,881 $ 57,398 $ 36,343 $ 23,672
Real estate:
Construction ......................... 5,209 2,470 1,533 3,221 1,851
Mortgage:
One to four family residential ..... 106,444 113,915 111,372 108,804 110,258
Commercial ......................... 58,056 52,686 43,580 41,090 45,470
Equityline ......................... 27,759 18,654 13,828 10,858 8,868
Other .............................. 27,868 21,615 20,535 17,261 16,464
Consumer ............................... 35,780 35,512 37,548 33,762 30,149
Lease financing ........................ 5,385 2,370 2,410 1,447 --
-------- -------- -------- -------- --------
350,782 318,103 288,204 252,786 236,732
Less: unearned income .................. (1,429) (348) (244) (175) --
-------- -------- -------- -------- --------
$349,353 $317,755 $287,960 $252,611 $236,732
======== ======== ======== ======== ========
</TABLE>
36
<PAGE>
The following table identifies the maturities of all loans as of December
31, 1997 and addresses the sensitivity of these loans to changes in interest
rates:
<TABLE>
Within After One Year but After Five
One Year Within Five Years Years Total
---------- -------------------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and financial .............. $ 28,593 $ 43,692 $11,996 $ 84,281
Real estate:
Construction ......................... 2,228 2,500 481 5,209
One to four family residential ..... 25,547 60,241 20,656 106,444
Commercial ......................... 12,772 32,594 12,690 58,056
Equityline ......................... 1,164 5,751 20,844 27,759
Other .............................. 9,407 14,303 4,158 27,868
Consumer ........................... 24,091 11,069 620 35,780
Lease financing ....................... 783 3,280 1,322 5,385
-------- -------- ------- --------
Total ............................. $104,585 $173,430 $72,767 $350,782
======== ======== ======= ========
Fixed rate ............................ $ 49,436 $129,593 $32,216 $211,245
Variable rate ......................... 55,149 43,837 40,551 139,537
-------- -------- ------- --------
Total ............................. $104,585 $173,430 $72,767 $350,782
======== ======== ======= ========
</TABLE>
Non-accrual, past-due, and restructured loans
The following analysis identifies other real estate owned and loans that
were either non-accruing, past-due or restructured:
<TABLE>
December 31,
-------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------ -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans ........................... $ 230 $ 147 $ 50 $ 77 $ 44
Restructured loans .......................... -- 8 -- 204 221
Accruing loans past-due 90 days or more ..... 466 343 508 234 183
----- ----- ---- ------ ------
Total non-performing loans ................. 696 498 558 515 448
Other real estate owned ..................... 48 -- 86 1,339 1,020
----- ----- ---- ------ ------
Total non-performing loans and assets ....... $ 744 $ 498 $644 $1,854 $1,468
===== ===== ==== ====== ======
</TABLE>
The amount of interest which would have been recorded in 1997 on
non-accrual loans had they been in accordance with the original terms
throughout the period was immaterial. Loans are placed on a non-accrual basis
when they become 90 days past due and the ability of the borrower to comply
with the present terms is doubtful.
37
<PAGE>
Table V. Summary of Loan Loss Experience
Analysis of the allowance for loan losses:
The table presented below summarizes activity in the allowance for loan
losses for each of the five years ended December 31, 1997:
<TABLE>
December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses -- beginning of year ......... $ 6,163 $ 6,321 $ 6,653 $ 6,717 $ 3,553
Charge-offs:
Commercial, financial, and agricultural ............... 47 5 -- 26 10
Real estate:
Construction ........................................ -- -- -- -- --
Mortgage:
One to four residential ........................... 86 106 34 89 141
Commercial ........................................ -- -- -- -- --
Equityline ........................................ -- -- -- -- --
Other ............................................. 23 -- 209 -- 240
Consumer .............................................. 307 428 220 181 358
Lease Financing ....................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Total charge-offs ...................................... 463 539 463 296 749
--------- --------- --------- --------- ---------
Recoveries:
Commercial, financial, and agricultural ............... 13 -- 54 29 74
Real estate:
Construction ........................................ -- 19 -- -- --
Mortgage:
One to four residential ........................... 59 131 19 27 48
Commercial ........................................ -- -- -- -- --
Equityline ........................................ -- -- -- 15 --
Other ............................................. -- -- -- 20 8
Consumer .............................................. 139 91 58 141 126
Lease Financing ....................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries ....................................... 211 241 131 232 256
--------- --------- --------- --------- ---------
Net charge-offs (recoveries) ........................... 252 298 332 64 493
Provision for loan losses .............................. 60 140 -- -- 300
Addition from Citizens Savings Bank .................... -- -- -- -- 3,357
--------- --------- --------- --------- ---------
Allowance for loan losses -- end of year ............... $ 5,971 $ 6,163 $ 6,321 $ 6,653 $ 6,717
========= ========= ========= ========= =========
Average loans outstanding during the year .............. $ 340,195 $ 310,389 $ 270,563 $ 242,217 $ 191,360
========= ========= ========= ========= =========
Ratio of net charge-offs (recoveries) to average loans
outstanding ........................................... 0.07% 0.10% 0.12% 0.03% 0.26%
</TABLE>
The allowances for loan losses is increased by charges to the provision
for loan losses and reduced by loans charged off net of recoveries. The Bank's
provision is the amount necessary to maintain the allowance at a level
considered adequate to provide for possible loan losses based on management's
internal evaluation of the loan portfolio, as well as prevailing and
anticipated economic conditions.
38
<PAGE>
Allocation of the allowance for loan losses:
The composition of the allowance by loan category shown in the table below
is based upon management's evaluation of the loan portfolio, past history, and
prevailing economic conditions:
<TABLE>
December 31,
--------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
% of loans % of loans % of loans
in each in each in each
category to category to category to
Amount total loans Amount total loans Amount total loans
-------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural ........ $2,149 24% $2,214 22% $1,264 20%
Real estate:
Construction ........ 60 1 76 1 63 1
Mortgage:
1 to 4
residential ..... 1,194 30 1,245 36 2,188 39
Commercial ....... 537 17 566 17 853 15
Equityline ....... 239 8 204 6 260 5
Other ............ 239 8 248 6 408 7
Consumer ............. 1,493 10 1,537 11 1,222 13
Lease financing ...... 60 2 73 1 63 --
------ -- ------ -- ------ --
$5,971 100% $6,163 100% $6,321 100%
====== === ====== === ====== ===
December 31,
--------------------------------------------
1994 1993
---------------------- ---------------------
% of loans % of loans
in each in each
category to category to
Amount total loans Amount total loans
-------- ------------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial,
financial and
agricultural ........ $ 774 14% $ 672 10%
Real estate:
Construction ........ 247 1 53 1
Mortgage:
1 to 4
residential ..... 2,813 43 3,134 47
Commercial ....... 1,061 16 1,284 19
Equityline ....... 277 4 257 4
Other ............ 460 8 462 6
Consumer ............. 1,021 13 855 13
Lease financing ...... -- 1 -- --
------ -- ------ --
$6,653 100% $6,717 100%
====== === ====== ===
</TABLE>
Table VI. Deposits
The average monthly volume of deposits, which is considered representative
of BancShares' operations, and the average rates paid on such deposits are
presented below:
<TABLE>
1997 1996 1995
-------------------- -------------------- ---------------------
Average Average Average Average Average Average
Balances Rates Balances Rates Balances Rates
---------- --------- ---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand ..... $ 63,783 -- $ 57,773 -- $ 50,088 --
Interest bearing demand ......... 76,080 0.98% 70,443 1.74% 59,926 2.11%
Savings ......................... 87,577 2.58 83,761 2.63 79,486 2.82
Time deposits ................... 270,863 5.62 247,575 5.45 217,752 5.47
-------- -------- --------
Total deposits ................. $498,303 $459,552 $407,252
======== ======== ========
</TABLE>
Maturities of $100,000 or more time certificates of deposit at December
31, 1997 are summarized as follows (dollars in thousands):
<TABLE>
<S> <C>
Maturity category:
Three months or less ...................... $20,339
Over three through six months ............. 10,430
Over six months through twelve months ..... 14,720
Over one year through five years .......... 7,269
Over five years ........................... 246
-------
$53,004
=======
</TABLE>
39
<PAGE>
Table VII. Return on Equity and Assets
The following table presents certain ratios of the Company:
<TABLE>
December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Return on assets (net income divided by average total assets) ......... 1.17% 0.84% 0.86%
Return on equity -- including Series B and C preferred
(net income divided by average total equity) ......................... 14.47 10.85 11.29
Dividend payout ratio
(Dividends paid divided by net income) ............................... 8.85 13.45 13.57
Equity to assets ratio -- including Series B and C preferred
(Average equity divided by average total assets) ..................... 8.06 7.74 7.59
</TABLE>
Table VIII. Capital Adequacy
The following table presents certain calculations of BancShares' capital
and related ratios:
<TABLE>
December 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Total shareholders' equity ......... $ 54,984 $ 44,778 $ 37,163
Leverage capital ................... 34,380 27,891 23,369
Tier 1 capital ..................... 34,380 27,891 23,369
Total capital ...................... 38,449 31,861 26,831
Leverage capital ratio (1) ......... 6.07% 5.46% 5.60%
Tier 1 capital ratio ............... 11.43 9.33 8.87
Total capital ratio (2) ............ 12.78 10.66 10.19
</TABLE>
- ---------
(1) Bank holding companies operating at the 3% minimum are expected to have
well diversified risk profiles, including no undue interest rate risk,
excellent asset quality, high liquidity and strong earnings. Bank holding
companies not meeting these requirements are expected to maintain a
leverage ratio somewhat higher than the 3% minimum applicable to the
highest rated companies.
(2) The minimum ratio of qualifying total capital to risk weighted assets is
8%, of which 4% must be Tier 1 capital, which is common equity, retained
earnings, and a limited amount of perpetual preferred stock, less certain
intangibles.
Table IX. Rate of Internal Capital Generation
<TABLE>
December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Return on average assets (based on net income) ................. 1.17% 0.84% 0.86%
Average equity as a percentage of total average assets ......... 8.06 7.74 7.59
Return on average equity ....................................... 14.47 10.85 11.29
Dividend payout ratio .......................................... 8.85 13.45 13.57
(Dividends paid divided by net income)
Earnings retention ............................................. 91.15 86.55 86.43
(Net income less dividends divided by net income)
Rate of internal capital generation ............................ 13.19 9.39 9.76
(Return on average equity ratio times earnings retention ratio)
</TABLE>
40
<PAGE>
Table X. Interest Rate Sensitivity Analysis
<TABLE>
December 31, 1997
Non-Rate
1-30 31-90 91-180 181-365 Sensitive
Days Days Days Days & Over
Sensitive Sensitive Sensitive Sensitive 1 Year Total
------------- ----------- ------------- ------------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned income .......... $ 82,232 $68,584 $ 16,151 $ 28,290 $154,096 $349,353
Investment securities .................. 38,654 16,178 5,249 26,869 93,183 180,133
Temporary investments .................. 10,240 -- -- -- -- 10,240
Other .................................. -- 5,200 -- -- -- 5,200
--------- ------- --------- --------- -------- --------
Total interest earning assets .......... $ 131,126 $89,962 $ 21,400 $ 55,159 $247,279 $544,926
========= ======= ========= ========= ======== ========
Interest-bearing liabilities:
Savings and core time deposits ......... $ 200,515 $39,330 $ 50,300 $ 60,382 $ 43,232 $393,759
Time deposits of $100,000 and more...... 9,579 10,760 10,430 14,720 7,515 53,004
Short-term borrowings .................. 6,826 -- -- -- -- 6,826
Long-term obligations .................. -- 4,750 -- -- -- 4,750
--------- ------- --------- --------- -------- --------
Total interest bearing liabilities ..... $ 216,920 $54,840 $ 60,730 $ 75,102 $ 50,747 $458,339
========= ======= ========= ========= ======== ========
Interest sensitivity gap ............... $ (85,794) $35,122 $ (39,330) $ (19,943) $196,532 $ 86,587
========= ======= ========= ========= ======== ========
</TABLE>
Interest sensitivity is continually changing. The table above reflects
BancShares' gap position at December 31, 1997 and does not necessarily
represent its position on any other dates.
Table XI. Short-Term Borrowings
<TABLE>
1997 1996
------------------- -------------------
Amount Rate Amount Rate
-------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Repurchase agreements:
At December 31 ................................ $4,761 5.62% $3,838 6.71%
Average during year ........................... 4,819 4.18 2,934 4.04
Maximum month-end balance during year ......... 5,929 4,507
Treasury tax and loan accounts:
At December 31 ................................ $2,065 5.25% $1,226 5.15%
Average during year ........................... 997 5.85 1,052 5.09
Maximum month-end balance during year ......... 2,215 1,300
</TABLE>
41
<PAGE>
Table XII. Selected Quarterly Data
<TABLE>
1997 1996
---------------------------------------------------- --------------------------------------
Fourth Third Second First Fourth Third Second
------------- ------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income ................... $ 10,100 $ 9,989 $ 9,711 $ 9,255 $ 9,469 $ 9,321 $ 9,102
Interest expense .................. 4,881 4,845 4,738 4,363 4,313 4,345 4,344
--------- --------- --------- --------- --------- --------- ---------
Net interest income ............... 5,219 5,144 4,973 4,892 5,156 4,976 4,758
Provision for loan losses ......... -- -- -- 60 60 60 20
--------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses ....... 5,219 5,144 4,973 4,832 5,096 4,916 4,738
Noninterest income ................ 3,234 1,166 979 4,470 1,426 1,018 1,013
Noninterest expense ............... 5,046 4,874 4,679 8,465 4,813 5,068 4,222
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes ........ 3,407 1,436 1,273 837 1,709 866 1,529
Income taxes ...................... 100 30 130 80 36 221 415
--------- --------- --------- --------- --------- --------- ---------
Net income ........................ $ 3,307 $ 1,406 $ 1,143 $ 757 $ 1,673 $ 645 $ 1,114
========= ========= ========= ========= ========= ========= =========
Net income applicable to
common shares ................... $ 3,203 $ 1,303 $ 1,045 $ 657 $ 1,569 $ 541 $ 1,015
========= ========= ========= ========= ========= ========= =========
PER SHARE OF STOCK
Net income per common share ....... $ 26.71 $ 10.87 $ 8.71 $ 5.48 $ 13.09 $ 4.51 $ 8.46
Cash dividends -- common .......... 0.38 0.38 0.37 0.37 0.38 0.37 0.375
Cash dividends -- preferred B ..... 0.23 0.23 0.22 0.22 0.23 0.23 0.22
Cash dividends -- preferred C ..... 0.23 0.23 0.22 0.22 0.23 0.23 0.22
Common sales price
High ............................ $ 175.00 $ 175.00 $ 175.00 $ 175.00 $ 175.00 $ 175.00 $ 175.00
Low ............................. 175.00 175.00 175.00 175.00 175.00 175.00 110.00
Preferred B sales price
High ............................ $ 11.25 $ 11.25 $ 11.25 $ 11.25 $ 11.25 $ 11.25 $ 10.80
Low ............................. 11.25 11.25 11.25 11.25 11.25 10.80 10.00
Preferred C sales price
High ............................ $ 11.25 $ 11.25 $ 11.25 $ 11.25 $ 11.25 $ 11.25 $ 10.80
Low ............................. 11.25 11.25 11.25 11.25 11.25 10.80 10.00
1996
------------
First
------------
<S> <C>
SUMMARY OF OPERATIONS
Interest income ................... $ 8,884
Interest expense .................. 4,448
---------
Net interest income ............... 4,436
Provision for loan losses ......... --
---------
Net interest income after
provision for loan losses ....... 4,436
Noninterest income ................ 1,051
Noninterest expense ............... 4,100
---------
Income before income taxes ........ 1,387
Income taxes ...................... 455
---------
Net income ........................ $ 932
=========
Net income applicable to
common shares ................... $ 832
=========
PER SHARE OF STOCK
Net income per common share ....... $ 6.94
Cash dividends -- common .......... 0.375
Cash dividends -- preferred B ..... 0.22
Cash dividends -- preferred C ..... 0.22
Common sales price
High ............................ $ 110.00
Low ............................. 110.00
Preferred B sales price
High ............................ $ 10.00
Low ............................. 10.00
Preferred C sales price
High ............................ $ 10.00
Low ............................. 10.00
</TABLE>
42
<PAGE>
For the Three Months Ended March 31, 1998 and 1997
Introduction. In the first three months of 1998, BancShares' net income
increased $1.8 million from $757,000 in the first three months of 1997 to $2.6
million in the first three months of 1998, an increase of 239.10%. This
increase resulted primarily from a contribution expense of $4.1 million which
was partially offset by a securities gain of $3.5 million and the resulting
reduction in income tax related to the contribution of marketable equity
securities to a charitable foundation during the three months ended March 31,
1997. During the three months ended March 31, 1998, BancShares also sold
$188,000 of available-for-sale securities, resulting in a gain of $1.8 million.
Net income available to common shares per share for the first three months
of 1998 was $20.58 per common share, an increase of $15.10, or 275.55%, from
$5.48 in 1997. The return on average equity increased to 17.95%, for the period
ending March 31, 1998, from 6.69% for the period ending March 31, 1997 and the
return on average assets increased to 1.72%, for the period ending March 31,
1998, from 0.56% for the period ending March 31, 1997. At March 31, 1998,
BancShares' assets totaled $593.9 million, an increase of $3.1 million, or
0.53%, from the $590.8 million reported at December 31, 1997. During this three
month period, net loans increased $4.8 million or 1.40%, from $343.4 million to
$348.2 million. During the three months ended March 31, 1998 investment
securities increased $4.5 million, or 2.50% from $180.1 million at December 31,
1997 to $184.6 million at March 31, 1998. Total deposits increased $2.6
million, or 0.51% from $513.3 million at December 31, 1997 to $516.0 million at
March 31, 1998. The above increases resulted from internal growth as there were
no branch acquisitions or new branches opened by the Bank in the quarter ended
March 31, 1998.
Interest Income. Interest and fees on loans increased $626,000, or 9.06%,
from $6.9 million for the three months ended March 31, 1997 to $7.5 million for
the three months ended March 31, 1998. This increase was due to increased loan
volume. Average loans for the three months ending March 31, 1998 were $352.1
million, an increase of 9.07% from $322.9 million for the prior year three
month period. The yield on the loan portfolio was 8.56% in both the three
months ended March 31, 1998 and 1997, respectively.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased $138,000, or 6.16%, from $2.2 million in the three months
ended March 31, 1997 to $2.4 million in the three months ended March 31, 1998.
This increase was due to an increase in the volume of average investment
securities for the three months ended March 31, 1998 to $160.8 million as
compared to $151.9 million for the 1997 period. The yield on investment
securities was 5.91% and 5.89% for the three months ended March 31, 1998 and
1997, respectively.
Interest income on federal funds sold increased $74,000, or 67.27%, from
$110,000 for the three months ended March 31, 1997 to $184,000 for the three
months ended March 31, 1998. This increase in income resulted primarily from
the increase in the average federal funds sold to $13.7 million for the three
months ended March 31, 1998 from $8.6 million for the three months ended March
31, 1997. Average federal funds sold yields were 5.37% for the three months
ended March 31, 1998, an increase from 5.11% for the three months ended March
31, 1997.
Total interest income increased $838,000, or 9.05%, from $9.3 million for
the three months ended March 31, 1997 to $10.1 million for the three months
ended March 31, 1998. This increase was the result of volume increases. Average
earning asset interest yields for the three months ended March 31, 1998 and
March 31, 1997 were 7.59% and 7.63%, respectively. Average earning assets
increased from $485.2 million in the three months ended March 31, 1997 to
$531.8 million in the period ended March 31, 1998. This $46.6 million increase
in the average earning assets resulted from the acquisition of three Wachovia
Bank of North Carolina, N. A. branches having approximately $21.1 million in
deposits in May 1997, and from internal growth within the other Southern
branches. BancShares did not open any new branches or purchase any new branches
during the quarter ended March 31, 1998.
Interest Expense. Total interest expense increased $439,000 or 10.06%,
from $4.4 million in the three months ended March 31, 1997 to $4.8 million for
the three months ended March 31, 1998. The principal reason for the increase
was the increased average interest bearing liabilities from $427.4 million for
the quarter ended March 31, 1997 to $464.0 million for the quarter ended March
31, 1998. BancShares' total cost of funds also increased from 4.08% at March
31, 1997 to 4.14% for the quarter ended March 31, 1998. Average interest
bearing deposits were $453.1 million in the three months ended March 31, 1998,
an increase of $31.8 million from the $421.3 million in the three months ended
March 31, 1997. The increase in interest-bearing liabilities was primarily the
result of the 1997 branch purchases discussed above.
Net Interest Income. Net interest income was up $399,000, or 8.16%, from
$4.9 million for the three months ended March 31, 1997 to $5.3 million for the
three months ended March 31, 1998. This increase was primarily due to the
increased
43
<PAGE>
earning asset volume resulting from the 1997 branch purchases discussed above.
The net interest margin at March 31, 1998 was 3.45%, a decrease of 10 basis
points from the 3.55% interest margin at March 31, 1997.
Asset Quality and Provision for Loan Losses. For the three months ended
March 31, 1998 and 1997, management added $60,000 as volume related additions
to the provision for loan losses. During the first three months of 1998
management charged-off loans totaling $41,000 and received recoveries of
$26,000, resulting in net charge-offs of $15,000. During the same period in
1997, $57,000 in loans were charged-off and recoveries of $79,000 were
received, resulting in net recoveries of $22,000. The increase in net
charge-offs was primarily due to decreased recoveries in 1998. The following
table presents comparative asset quality ratios of the company:
<TABLE>
March 31, December 31,
1998 1997
----------- -------------
<S> <C> <C>
Ratio of annualized net loans charged off to average loans .02% .07%
Allowance for loan losses to loans ......................... 1.70 1.71
Non-performing loans to loans .............................. .34 .20
Non-performing loans and assets to total assets ............ .21 .13
Allowance for loan losses to non-performing loans .......... 504.27 857.90
</TABLE>
The ratio of net charge-offs to average loans outstanding decreased to
0.02% (annualized) at March 31, 1998 from 0.07% for the year ended December 31,
1997 primarily due to increased recoveries of loans previously charged off. The
allowance for loan losses represented 1.70% of loans for the quarter ended
March 31, 1998, a decrease of 1 basis point from the December 31, 1997 ratio of
1.71%. Loans increased $4.9 million, or 1.39%, from December 31, 1997 to March
31, 1998.
The increase in the ratio of nonperforming loans to loans from 0.20% at
December 31, 1997 to 0.34% at March 31, 1998 is the result of a slight
performance decline in the loan portfolio. Nonperforming loans and assets to
total assets increased to 0.21% at March 31, 1998 from 0.13% at December 31,
1997. The allowance for loan losses to nonperforming loans represented 504.27%
of nonperforming loans at March 31, 1998, a decrease from the 857.90% at
December 31, 1997. This decrease is primarily the result of an increase in
nonperforming loans to $1.2 million at March 31, 1998 from $696,000 at December
31, 1997. The nonperforming loans at March 31, 1998 included $102,000 of
nonaccrual loans, $1.1 million of accruing loans 90 days past due and no
restructured loans. Other real estate at both March 31, 1998 and December 31,
1997 was $48,000.
Management considers the March 31, 1998 allowance for loan losses adequate
to cover the losses and risks inherent in the loan portfolio at March 31, 1998
and will continue to monitor its portfolio and to adjust the relative level of
the allowance as needed. BancShares' impaired loans were approximately $102,000
at March 31, 1998. At March 31, 1998, BancShares had no loans classified for
regulatory purposes as loss or doubtful and less than $1.0 million of loans
classified as substandard. Management actively maintains a current loan watch
list and knows of no other loans which are material and (i) represent or result
from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity or capital resources, or
(ii) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
Noninterest Income. BancShares had a decrease of $1.7 million in net
investment securities gains, for the quarter ended March 31, 1998 as compared
to the prior year quarter principally related to the donation in the three
months ended March 31, 1997 of available-for-sale securities to the charitable
foundation discussed above. BancShares had gains on the sale of mortgage loans
of $1,000 in the three months ended March 31, 1998 compared to $10,000 in
losses on the sales of mortgage loans in the three months ended March 31, 1997.
Income from service charges on deposit accounts, other service charges and
fees, insurance commissions and other noninterest income not detailed above
increased $198,000, or 20.93%, from $946,000 for the three months ended March
31, 1997 to $1.1 million for the three months ended March 31, 1998.
Noninterest Expense. BancShares had a decrease in charitable contribution
expense of $4.1 million for the quarter ended March 31, 1998 as compared to the
prior year quarter principally related to the available-for-sale securities
donation in the three months ended March 31, 1997 to provide additional funding
to the charitable foundation discussed above.
Noninterest expense, other than contribution expense, including personnel,
occupancy, furniture and equipment, data processing, FDIC insurance and state
assessments, printing and supplies and other expenses, increased $395,000 or
8.99%, from $4.4 million in the three months ended March 31, 1997 to $4.8
million in the three months ended March 31, 1998.
44
<PAGE>
This increase was primarily due to an increase in personnel expense of
$197,000, or 9.43%, from $2.1 million at March 31 1997 to $2.3 million at March
31, 1998 and increased occupancy, furniture and equipment expense and other
volume related expenses resulting from branch acquisitions in May 1997.
Income Taxes. In the three months ended March 31, 1998 BancShares had
income tax expense of $809,000, an increase of $729,000, or 911.25%, from
$80,000 in the prior year period. This increase was due both to increased
profitability resulting from the sale of available-for-sale securities
discussed above and the non-recurring tax benefits in 1997 of the charitable
donation in the three months ended March 31, 1997. The resulting effective tax
rates based on the accruals for the three months ended in March 1998 and 1997
were 23.96% and 9.56%, respectively.
Shareholders' Equity and Capital Adequacy. Sufficient levels of capital
are necessary to sustain growth and absorb losses. To this end, the Federal
Reserve, which regulates BancShares, and the FDIC, which regulates the Bank,
have established minimum capital guidelines for the institutions they
supervise.
In the quarter ended March 31, 1997 BancShares borrowed an additional $5.0
million and contributed an additional $5.0 million in capital to the Bank which
improved each of the Bank's capital ratios.
Regulatory guidelines define minimum requirements for the Bank's leverage
capital ratio. Leverage capital equals total equity less goodwill and certain
other intangibles and is measured relative to total adjusted assets as defined
by regulatory guidelines. According to these guidelines, the Bank's leverage
capital ratio at March 31, 1998 was 6.01%. At December 31, 1997, the Bank's
leverage capital ratio was 6.02%. Both of these ratios are greater than the
level designated as "well capitalized" by the FDIC.
The Bank is also required to meet minimum requirements for RBC. The Bank's
assets, including loan commitments and other off-balance sheet items, are
weighted according to federal guidelines for the risk considered inherent in
each asset. At March 31, 1998, the Total Capital Ratio was 12.68%. At December
31, 1997 the Total Capital Ratio was 12.81%. Both of these ratios are greater
than the level designated as "well capitalized" by the FDIC.
The regulatory capital ratios reflect increases in assets and liabilities
from the acquisitions the Bank has made. Each of the acquisitions required the
payment of a premium for the deposits received. Each of these premiums resulted
in increased intangible assets on BancShares' financial statements, which is
deducted from total equity in the ratio calculations.
The unrealized gains on securities available for sale at March 31, 1998 of
$22.3 million and at December 31, 1997 of $22.9 million, although a part of
total shareholders' equity, are not included in the calculation of either the
Total Capital or Leverage Capital Ratios pursuant to regulatory definitions of
these capital requirements. The following table presents capital adequacy
calculations and ratios of the Bank:
<TABLE>
March 31, December 31,
1998 1997
---------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Risk-based capital:
Tier 1 capital ................. $ 33,922 $ 33,999
Total capital .................. 37,834 37,876
Risk-adjusted assets ........... 298,452 295,654
Average tangible assets ........ 564,455 564,633
Tier 1 capital ratio ........... 11.37%(1) 11.50%(1)
Total capital ratio ............ 12.68(1) 12.81(1)
Leverage capital ratio ......... 6.01(1) 6.02(1)
</TABLE>
- ---------
(1) These ratios exceed the minimum ratios required for a bank to be classified
as "well capitalized," as defined by the FDIC.
At March 31, 1998 and December 31, 1997, BancShares also was in compliance
with its regulatory capital requirements, and all of its regulatory capital
ratios exceeded the minimum ratios required for it to be classified as "well
capitalized." See "Supervision and Regulation -- Capital Adequacy."
Liquidity. Liquidity refers to the ability of the Bank to generate
sufficient funds to meet its financial obligations and commitments at a
reasonable cost. Maintaining liquidity ensures that funds will be available for
reserve requirements, customer demand for loans, withdrawal of deposit balances
and maturities of other deposits and liabilities. Past experiences help
management anticipate cyclical demands and amounts of cash required. These
obligations can be met by existing cash reserves or funds from maturing loans
and investments, but in the normal course of business are met by deposit
growth.
45
<PAGE>
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include cash and due from banks, federal
funds sold and investment securities available-for-sale. The liquidity ratio,
which is defined as net cash plus short term and marketable securities divided
by net deposits and short term liabilities, was 31.81% at March 31, 1998 and
37.15% at December 31, 1997.
The Consolidated Statement of Cash Flows discloses the principal sources
and uses of cash from operating, investing and financing activities for the
three months ended March 31, 1998 and 1997, respectively. BancShares has no
brokered deposits. Jumbo time deposits are considered to include all time
deposits of $100,000 or more. BancShares has never aggressively bid on these
deposits. Almost all jumbo time deposit customers have other relationships with
the Bank, including savings, demand and other time deposits, and in some cases,
loans. At March 31, 1998 and at December 31, 1997 jumbo time deposits
represented 11.48% and 10.33%, respectively, of total deposits.
Management believes that BancShares has the ability to generate sufficient
amounts of cash to cover normal requirements and any additional needs which may
arise, within realistic limitations, and management is not aware of any known
demands, commitments or uncertainties that will affect liquidity in a material
way.
Accounting and Other Matters. In February 1998, the FASB issued Statement
132, "Employers' Disclosures about Pensions and other Postretirement Benefits.
This statement standardizes the disclosure requirements of pensions and other
postretirement benefits. This statement does not change any measurement or
recognition provisions, and thus will not materially impact BancShares.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect
of the proposed statements on the consolidated financial statements of
BancShares and monitors the status of changes to issued exposure drafts and to
proposed effective dates.
In 1997 BancShares developed a plan to deal with the "Year 2000 issue" and
contracted with an industry consultant to review its overall exposure to the
Year 2000 issue. The Year 2000 issue relates to computer programs written using
two digits rather than four to define the applicable year. In 1997 management
reviewed the results of the consultant's analysis of BancShares' data
processing Year 2000 exposure and committed the human resources and the
financial resources for BancShares to complete its resolution of the Year 2000
issue in 1998. The total cost of the Year 2000 conversion project for
BancShares is estimated to be $200,000 and is being funded through operating
cash flows. BancShares is expensing all costs associated with the required
systems changes as the costs are incurred. As of December 31, 1997, excluding
personnel costs, $3,000 had been expensed. As of March 31, 1998, excluding
personnel costs, $6,000 additional had been expensed. As discussed in "Certain
Relationships and Related Transactions," BancShares utilizes the mainframe
system of FCBancShares and its subsidiary, FCB, for most of its
mission-critical applications. These systems are currently being remediated,
replaced or retired as part of FCBancShares' Year 2000 compliance program.
BancShares is closely monitoring FCBancShares' progress. Based on
discussions with management of FCBancShares, BancShares' management does not
expect significant increases in future data processing costs relating to Year
2000 compliance.
Effective May 15, 1998, the Bank acquired ESB, a state-chartered savings
bank headquartered in Enfield, North Carolina, which maintained two banking
offices. In connection with that transaction, the Bank assumed aggregate
deposit liabilities of approximately $15.6 million, and purchased approximately
$16.4 million in loans associated with one of ESB's offices which became a
branch office of the Bank. The deposits and loans related to ESB's second
office were transferred and assigned to FCB in a purchase and assumption
transaction. In the third quarter of 1998 BancShares expects to acquire,
subject to regulatory approval, the $6.0 million deposit Gates, North Carolina
office of FCB. See "Certain Relationships and Related Transactions." BancShares
has received approval to open de novo branches in two new eastern North
Carolina markets. These offices are planned to open in 1999.
Management is not aware of any other trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on BancShares' liquidity, capital
resources or other operations.
46
<PAGE>
BUSINESS
General
BancShares is a registered bank holding company, incorporated under the
laws of Delaware, and headquartered in Mount Olive, North Carolina. It was
organized during 1986 as the successor to, and to effect a change in the state
of incorporation of, the Bank's original bank holding company. BancShares
conducts all of its operations through the Bank which provides a variety of
retail and commercial banking products and services to individuals and small-
to medium-sized businesses located in the communities it serves. At March 31,
1998, BancShares had total consolidated assets of approximately $593.9 million,
total consolidated deposits of approximately $516.0 million, and total
consolidated shareholders' equity of approximately $57.0 million. The Bank is a
North Carolina-chartered bank that currently maintains 42 banking offices in 38
eastern North Carolina communities.
BancShares is focused on community-oriented banking via (i) localized
lending, (ii) core deposit funding, (iii) conservative balance sheet
management, and (iv) stable growth. BancShares' franchise includes many smaller
communities where competition is limited due to the exit of larger institutions
or to the limited products of smaller institutions. By outsourcing its core
data processing requirements, BancShares can offer a complete array of
financial services while maintaining its community banking orientation.
BancShares' focus on non-metropolitan markets and its emphasis on customer
service provide it with a stable source of core funding. At March 31, 1998,
transaction accounts and non-interest bearing accounts equaled approximately
25.23% and 12.41%, respectively, of total deposits.
BancShares' return on average assets and return on average equity were
1.17% and 14.47%, respectively, for the year ended December 31, 1997, and an
annualized 1.72% and 17.95%, respectively, for the three months ended March 31,
1998.
Members of the Holding family, including Frank B. Holding, have been
actively involved in the management of BancShares, and, currently, various
members of the family control an aggregate of 51.55% of BancShares' common
stock. See "Beneficial Ownership of Securities" and "Certain Relationships and
Related Transactions." As a result, BancShares has been managed from a
long-term perspective with primary emphasis being placed on balance sheet
liquidity, loan quality, and earnings stability. At March 31, 1998, BancShares'
loan-to-deposit ratio was 68.65%, 65.23% of its $184.6 million investment
portfolio was invested in U.S. government obligations with an average maturity
of 15 months, and approximately 38.39% of the investment portfolio was
classified as held-to-maturity. Consistent with its management philosophy,
BancShares has emphasized a low-risk loan portfolio derived from its local
markets. At March 31, 1998, BancShares' non-performing assets were $1.2
million, or 0.35% of gross loans and other real estate. Net charge-offs for
1997 were 0.07% of average loans and, for the first quarter of 1998, were an
annualized 0.02% of average loans. The allowance for loan losses at March 31,
1998, was 1.70% of gross loans and 504.27% of non-performing loans.
BancShares' principal executive offices are located at 121 East Main
Street, Mount Olive, North Carolina 28365, and its telephone number at that
address is (919) 658-7000.
Description of Business
General. The Bank is a community-oriented bank which is engaged in a
general commercial and consumer banking business. Its operations are primarily
retail oriented and directed toward individuals, small to medium-sized
businesses and local governmental units located in its market area. While the
Bank provides most traditional commercial and consumer banking services, its
principal activities are the taking of demand and time deposits and the making
of secured and unsecured loans. The Bank's deposits are insured by the FDIC to
the maximum amount permitted by law.
The Bank's primary source of revenue is interest income from its lending
activities. Since it commenced business, the Bank has pursued a strategy of
growth through internal expansion by establishing branch offices in communities
in its geographic market and by acquiring smaller institutions or offices of
other institutions in its existing markets or in new markets.
Lending Activities. The Bank's loans are concentrated in three major
areas: (i) real estate loans; (ii) commercial and agricultural loans; and (iii)
consumer loans.
At March 31, 1998, approximately 65.13% of the Bank's loan portfolio
consisted of real estate loans. All real estate loans are secured by liens on
real property, and management estimates that more than 70.00% of those loans
actually were made for purposes related to the real estate collateral. However,
in addition to such real estate purpose loans (which generally are made up of
loans made to individuals and businesses for the purchase and improvement of or
investment in real estate, including construction loans to individuals and
builders), the Bank's real estate loans include loans secured by first or
junior liens on real estate but which were made for various other commercial,
agricultural and consumer purposes. The high percentage of the Bank's loans
which are secured by real estate generally is reflective of efforts by
management to
47
<PAGE>
minimize credit risk by taking real estate as primary or additional collateral
on loans made for purposes not directly related to the real estate itself. Real
estate loans may be made at fixed or variable interest rates and for terms, or
which provide for payments based on an amortization schedule, of up to 15
years. However, loans having terms of more than five years, or which are based
on an amortization schedule of more than that many years, generally will
contain contractual provisions which allow the Bank to call the loan in full,
or provide for a "balloon" payment in full, at any time after the fifth year.
The Bank's commercial and agricultural loans include loans to individuals
and small-to-medium sized businesses located in its market area for working
capital, equipment purchases and various other business and agricultural
purposes (other than any such loan secured by real estate) and loans made to
finance the production of crops or livestock operations. A majority of the
Bank's commercial and agricultural loans are secured by inventory, equipment or
similar assets, but these loans also may be made on an unsecured basis.
Commercial and agricultural loans may be made at variable or fixed rates of
interest; however, it currently is the Bank's policy that those loans which
have terms or amortization schedules of longer than five years normally will
carry interest rates which vary with the prime lending rate and may be called
in full at any time after the fifth year.
The Bank's consumer loan portfolio consists primarily of loans to
individuals for various consumer purposes (other than any such loan secured by
real estate), but also includes the outstanding balances on consumer revolving
credit accounts, including credit card accounts. The majority of the Bank's
installment loans are secured by liens on various personal assets of the
borrowers, but these loans may also be made on an unsecured basis. Consumer
loans are made at fixed and variable interest rates and for terms which
generally do not exceed five years. However, the Bank will make consumer loans
for terms of up to seven years.
The Bank's other loans consist primarily of lease receivables.
Certain statistical information regarding the Bank's loan portfolio,
reserve for loan losses and its nonaccrual, past due and restructured loans, at
December 31, 1997, and March 31, 1998, is contained in this Prospectus under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Loan Administration and Underwriting. The Bank's loan portfolio is managed
under a defined credit review process which includes guidelines for loan
underwriting standards and risk assessment, procedures for ongoing
identification and management of credit deterioration and regular portfolio
reviews to assess loss exposure and to ascertain compliance with the Bank's
credit policies and procedures. This process includes a centralized credit
review and analysis prior to funding of all credit decisions in excess of
$500,000, a review of all loans over $100,000 within 30 days after funding, and
an annual review of all loans over $100,000.
The Bank's loan approval policies generally provide for various levels of
lending authority for lending personnel. All loans over $100,000 require the
approval of senior management, and all loans over $800,000 require the approval
of the Executive Committee of the Bank's Board of Directors.
During periodic reviews, loans are assigned a grade which indicates the
level of management attention to be given to that loan to protect the Bank's
position and to reduce loss exposure. Loans are placed in a non-accrual status
whenever, in the opinion of management, collection becomes doubtful, and they
are charged off when the collection of principal and interest is doubtful and
the loans can no longer be considered sound collectible assets. Management
meets regularly to review asset quality trends and to discuss loan policy
issues. Potential losses are identified during these reviews and reserves are
established accordingly.
Deposit Activities. The Bank's deposit services include business and
individual checking accounts, savings accounts, NOW accounts, certificates of
deposit and market rate checking accounts. It is the Bank's policy to monitor
its competition in order to keep the rates paid on its deposits at a
competitive level. Time deposits of $100,000 and over made up approximately
11.48% of the Bank's total deposits at March 31, 1998. The vast majority of the
Bank's deposits are generated from within its market area. The Bank does not
accept brokered deposits but does actively solicit public funds deposits in its
market area.
Certain statistical information regarding the Bank's deposit accounts at
December 31, 1997, and March 31, 1998, is contained in this Prospectus under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Other Services. The Bank provides most other traditional commercial and
consumer banking services. Trust services and discount brokerage and investment
advisory services are offered by the Bank through a correspondent bank.
48
<PAGE>
Investment Portfolio. At December 31, 1997, the Bank's investment
portfolio consisted almost entirely of U.S. government securities and
obligations of states and political subdivisions, 29.00% of which mature within
one year and 43.32% of which mature after one through five years.
Certain statistical information regarding the Bank's investment portfolio
at December 31, 1997, and March 31, 1998, is contained in this Prospectus under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Subsidiary. The Bank has one wholly-owned subsidiary which acts as agent
for credit life and credit accident and health insurance written in connection
with loans made by the Bank.
Competition. Commercial banking in North Carolina is highly competitive.
In its market areas, the Bank competes directly with a number of local,
regional and superregional banking organizations. Competition among financial
institutions for loans and deposits is based, to a large extent, on interest
rates charged or paid. Fees and charges for other services, office location,
the quality of customer services, community reputation and continuity of
personnel, and, in the case of loans to large commercial borrowers, relative
lending limits, also are important competitive factors. Many of the Bank's
competitors have greater resources, broader geographic markets and higher
lending limits and offer more services than the Bank, and they can better
afford and make more effective use of media advertising, support services and
electronic technology than can the Bank. The Bank depends on its reputation in
its local community, direct customer contact, its ability to make credit and
other business decisions locally, and personalized service to counter these
competitive disadvantages.
In recent years, federal and state legislation has heightened the
competitive environment in which all financial institutions must conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly. Additionally, with the elimination of
restrictions on interstate banking, a North Carolina commercial bank may be
required to compete not only with other North Carolina financial institutions,
but also with out-of-state financial institutions which may acquire North
Carolina institutions and are able to conduct certain specific financial
services across state lines, thereby adding to the competitive atmosphere of
the industry in general.
Employees. At December 31, 1997, the Bank employed 295 full-time employees
and 14 part-time employees. It is not a party to any collective bargaining
agreements and considers relations with its employees to be good. BancShares
does not have any separate employees.
Property. BancShares does not own or lease any real property. Except for
four tracts of land that are leased and upon which are constructed leasehold
improvements for the conduct of its banking business, the Bank owns all of the
real property utilized in its operations. At March 31, 1998, the Bank's
investment in premises and equipment, net of depreciation, was approximately
$18.0 million.
Legal Proceedings. The Bank is a party to various legal proceedings in the
ordinary course of its business. However, based on information presently
available, and after consultation with legal counsel, BancShares' management
believes that the ultimate outcome in such proceedings, in the aggregate, will
not have any material adverse effect on BancShares' financial condition.
Statistical Information. Certain statistical information with respect to
BancShares' business is contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which appears elsewhere in this
Prospectus.
SUPERVISION AND REGULATION
The following information is not intended to be an exhaustive description
of the statutes and regulations applicable to BancShares or the Bank. The
discussion is qualified in its entirety by reference to all particular
statutory or regulatory provisions. Additional information regarding
supervision and regulation is included in the documents filed by BancShares
with the Commission. See "Available Information."
The business and operations of BancShares and the Bank are subject to
extensive federal and state governmental regulation and supervision.
Regulation of BancShares
BancShares is a bank holding company registered with the Federal Reserve
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is
subject to supervision and examination by, and the regulations and reporting
requirements of, the Federal Reserve. Under the BHCA, the activities of
BancShares are limited to banking, managing or
49
<PAGE>
controlling banks or engaging in any other activity which 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 BancShares from acquiring direct or indirect control of
more than 5.0% of the outstanding voting stock or substantially all of the
assets of any financial institution, or merging or consolidating with another
bank holding company or savings bank holding company, without prior approval of
the Federal Reserve. Additionally, the BHCA prohibits BancShares from engaging
in, or acquiring ownership or control of more than 5.0% of the outstanding
voting stock of any company engaged in, a nonbanking activity unless such
activity is determined by the Federal Reserve to be so closely related to
banking as to be a proper incident thereto. In approving an application by
BancShares to engage in a nonbanking activity, the Federal Reserve must
consider whether that activity can reasonably be expected to produce benefits
to the public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.
There are a number of obligations and restrictions imposed by law on a
bank holding company and its insured depository institution subsidiaries that
are designed to minimize potential loss to depositors and the FDIC insurance
funds. For example, if a bank holding company's insured depository institution
subsidiary becomes "undercapitalized," the bank holding company is required to
guarantee (subject to certain limits) the subsidiary's compliance with the
terms of any capital restoration plan filed with its appropriate federal
banking agency. Also, a bank holding company is required to serve as a source
of financial strength to its depository institution subsidiaries and to commit
resources to support such institutions in circumstances where it otherwise
might not do so, absent such policy. Under the BHCA, the Federal Reserve has
the authority to require a bank holding company to terminate any activity or to
relinquish control of a nonbank subsidiary upon the Federal Reserve's
determination that such activity or control constitutes a serious risk to the
financial soundness and stability of a depository institution subsidiary of the
bank holding company.
Regulation of the Bank
The Bank is a North Carolina-chartered commercial bank, and its deposits
are insured by the FDIC. It is subject to supervision and examination by, and
the regulations and reporting requirements of, the North Carolina Commissioner
of Banks (the "Commissioner") and the FDIC. As a result of its ownership of the
Bank, BancShares also is registered with and subject to regulation by the
Commissioner under the state's bank holding company laws.
As an insured institution, the Bank is prohibited from engaging as a
principal in activities that are not permitted for national banks unless (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund and (ii) the Bank is, and continues to be,
in compliance with all applicable capital standards. Insured institutions also
are prohibited from directly acquiring or retaining any equity investment of a
type or in an amount not permitted for national banks.
The Federal Reserve, the FDIC and the Commissioner all have broad powers
to enforce laws and regulations applicable to BancShares and the Bank and to
require corrective action of conditions affecting the safety and soundness of
the Bank. Among others, these powers include cease and desist orders, the
imposition of civil penalties and the removal of officers and directors.
Payment of Dividends
BancShares is a legal entity separate and distinct from the Bank. The
principal sources of cash flow of BancShares, including cash flow to pay
dividends to its shareholders, are dividends it receives from the Bank. There
are statutory and regulatory limitations on the payment of dividends by the
Bank to BancShares, as well as by BancShares to its shareholders. As an insured
depository institution, the Bank also is prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, it would become "undercapitalized" (as such term is defined in
the Federal Deposit Insurance Act). See "Southern BancShares (N.C.), Inc. and
Subsidiary Notes to Consolidated Financial Statements -- Note 11. Regulatory
Requirements and Restrictions."
If, in the opinion of the FDIC, a depository institution under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), the FDIC may require,
after notice and hearing, that such institution cease and desist from such
practice. The federal banking agencies have indicated that paying dividends
that deplete a depository institution's capital base to an inadequate level
would be an unsafe and unsound banking practice. Under current federal law, a
depository institution may not pay any dividend if payment would cause it to
become undercapitalized or if it already is undercapitalized. See
50
<PAGE>
" -- Prompt Corrective Action." Moreover, the federal agencies have issued
policy statements which provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
At March 31, 1998, approximately $5.7 million was available for payment of
dividends to BancShares from the Bank without affecting the Bank's
classification as a "well capitalized" bank under federal bank regulatory
capital guidelines and without regulatory approval.
The payment of dividends by BancShares and the Bank may also be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines.
Capital Adequacy
BancShares and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve in the case of BancShares and the
FDIC in the case of the Bank. There are two basic measures of capital adequacy
that have been promulgated by the Federal Reserve and each of the federal bank
regulatory agencies: a risk-based measure and a leverage measure. All
applicable capital standards must be satisfied for a bank holding company or an
insured depository institution to be considered in compliance.
Under the Federal Reserve's standards, the minimum guideline for the ratio
("Total Capital Ratio") of total capital ("Total Capital") to risk-weighted
assets (including certain off-balance-sheet items, such as standby letters of
credit) is 8.0%. At least half of Total Capital must be composed of common
equity, undivided profits, minority interests in the equity accounts of
consolidated subsidiaries, qualifying noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist
of certain subordinated debt, certain hybrid capital instruments and other
qualifying preferred stock, and a limited amount of loan loss reserves ("Tier 2
Capital"). At March 31, 1998, BancShares' consolidated Total Capital Ratio and
its ratio of Tier 1 Capital to risk-weighted assets ("Tier 1 Capital Ratio")
were 13.49% and 12.14%, respectively, and the Bank's consolidated Total Capital
and Tier 1 Capital Ratios were 12.68% and 11.37%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Capital Ratio") of Tier 1 Capital to average assets, less
goodwill and certain other intangible assets, of 3.0% for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies generally are required to
maintain an additional cushion of 100 to 200 basis points above the stated
minimums. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve has
indicated that it will consider a "tangible Leverage Ratio" (deducting all
intangibles) and other indicia of capital strength in evaluating proposals for
expansion or new activities. BancShares' and the Bank's respective Leverage
Capital Ratios at March 31, 1998 were 6.53% and 6.01%, respectively.
The Bank is subject to risk-based and leverage capital requirements
adopted by the FDIC which are substantially similar to those adopted by the
Federal Reserve for bank holding companies. The Bank was in compliance with
applicable minimum capital requirements as of December 31, 1997. Neither
BancShares nor the Bank has been advised by any federal banking agency of any
additional, specific minimum capital ratio requirement applicable to it.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
" -- Prompt Corrective Action."
The Federal Reserve and the FDIC also consider interest rate risk (when
the interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. The bank regulatory agencies'
methodology for evaluating interest rate risk requires banks with excessive
interest rate risk exposure to hold additional amounts of capital against such
exposures.
Prompt Corrective Action
Current federal law establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions. Under this system, which
became effective in December 1992, the federal banking regulators are required
to establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary
51
<PAGE>
actions, with respect to institutions in the three undercapitalized categories.
The severity of such actions taken will depend upon the capital category in
which the institution is placed. Generally, subject to a narrow exception,
current federal law requires the banking regulators to appoint a receiver or
conservator for an institution that is critically undercapitalized.
Under the final agency rules implementing the prompt corrective action
provisions, an institution that (i) has a Total Capital Ratio of 10% or
greater, a Tier 1 Capital Ratio of 6.0% or greater, and a Leverage Ratio of
5.0% or greater, and (ii) is not subject to any written agreement, order,
capital directive, or prompt corrective action directive issued by the
appropriate federal banking agency, is deemed to be well capitalized. An
institution with a Total Capital Ratio of 8.0% or greater, a Tier 1 Capital
Ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater, is
considered to be adequately capitalized. A depository institution that has a
Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than
4.0%, or a Leverage Ratio of less than 4.0%, is considered to be
undercapitalized. A depository institution that has a Total Capital Ratio of
less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio
of less than 3.0%, is considered to be significantly undercapitalized, and an
institution that has a tangible equity capital to assets ratio equal to or less
than 2.0% is deemed to be critically undercapitalized. For purposes of the
regulation, the term "tangible equity" includes core capital elements counted
as Tier 1 Capital for purposes of the risk-based capital standards, plus the
amount of outstanding cumulative perpetual preferred stock (including related
surplus), minus all intangible assets with certain exceptions. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.
An institution that is categorized as undercapitalized, significantly
under-capitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
A bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
obligation of a controlling bank holding company to fund a capital restoration
plan is limited to the lesser of 5.0% of an undercapitalized subsidiary's
assets or the amount required to meet regulatory capital requirements. An
undercapitalized institution is also generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches, or
engaging in any new line of business, except in accordance with an accepted
capital restoration plan or with the approval of the FDIC. In addition, the
appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described above if it determines "that those actions are
necessary to carry out the purpose" of the law.
At March 31, 1998, the Bank had the requisite capital levels to qualify as
well capitalized.
Reserve Requirements
Pursuant to regulations of the Federal Reserve, all FDIC-insured
depository institutions must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the first
$4.3 million of transaction accounts, and reserves equal to 3% must be
maintained on the next $52.0 million of transaction accounts, plus reserves
equal to 10% on the remainder. These percentages are subject to adjustment by
the Federal Reserve. Because required reserves must be maintained in the form
of vault cash or in a non-interest-bearing account at a Federal Reserve Bank,
the effect of the reserve requirement is to reduce the amount of the
institution's interest-earning assets. As of March 31, 1998, the Bank met its
reserve requirements.
FDIC Insurance Assessments
The FDIC currently uses a risk-based assessment system that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities for purposes of calculating deposit insurance
assessments to be paid by insured depository institutions. The risk-based
assessment system, which went into effect on January 1, 1994, assigns an
institution to one of three capital categories: (i) well capitalized; (ii)
adequately capitalized; and (iii) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned. Under the final risk-based assessment system, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
52
<PAGE>
In 1996, the FDIC imposed a special one-time assessment of approximately
65.7 basis points (0.657%) on a depository institution's assessable deposits
insured by the SAIF held as of March 31, 1995 (or approximately 52.6 basis
points on SAIF deposits acquired by banks in certain qualifying transactions),
and adopted revisions to the assessment rate schedules that would generally
eliminate the disparity between assessment rates applicable to the deposits
insured by the BIF and the SAIF. BancShares anticipates that the net effect of
the decrease in the premium assessment rate on SAIF deposits will result in a
reduction in the Bank's total deposit insurance premium assessments through
1999 as compared to years prior to 1997, assuming no further changes in
announced premium assessment rates. BancShares recorded a charge against
earnings for the special assessment in 1996 in the pre-tax amount of
approximately $569,000.
Under the Federal Deposit Insurance Act, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in
unsafe and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, an insured institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of an insured institution, to assess the institution's
record of meeting the credit needs of its community, using the ratings of
"outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance," and to take that record into account in its evaluation of
certain applications by the institution. All institutions are required to make
public disclosure of their CRA performance rating. The Bank received a
satisfactory rating in its last CRA examination by the FDIC as of August 5,
1997.
On May 4, 1995, the bank regulatory agencies, including the FDIC, adopted
new uniform CRA regulations that provide guidance to financial institutions on
their CRA obligations and the methods by which those obligations will be
assessed and enforced. The regulations establish three tests applicable to the
Bank: (i) a lending test to evaluate direct lending in low-income areas and
indirect lending to groups that specialize in community lending; (ii) a service
test to evaluate its delivery of services to such areas, and (iii) an
investment test to evaluate its investment in programs beneficial to such
areas. The new CRA regulations became effective on July 1, 1995, but reporting
requirements were not effective until January 1, 1997. Evaluation under the
regulations was not mandatory until July 1, 1997. The Bank believes its current
operations and policies substantially comply with the regulations and therefore
no material changes to operations or policies are expected.
Transactions With Affiliates
The Bank is subject to restrictions imposed by federal law on extensions
of credit to, and certain other transactions with, BancShares and other
affiliates and on investments in the stock or other securities thereof. These
restrictions prevent BancShares and other affiliates from borrowing from the
Bank unless the loans are secured by specified collateral, and require such
transactions to have terms comparable to terms of arms-length transactions with
third persons. Further, such secured loans and other transactions and
investments by the Bank are generally limited in amount as to BancShares and as
to any other affiliate to 10.0% of the Bank's capital and surplus and as to
BancShares and all other affiliates to an aggregate of 20.0% of the Bank's
capital and surplus. These regulations and restrictions may limit BancShares'
ability to obtain funds from the Bank for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses. The
Bank's ability to extend credit to its directors, executive officers, and 10.0%
stockholders, as well as to entities controlled by such persons, is governed by
the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O of the Federal Reserve thereunder.
Interstate Banking and Branching
The BHCA, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Law"), permits adequately capitalized and managed bank
holding companies to acquire control of the assets of banks in any state.
Acquisitions are subject to antitrust provisions that cap at 10.0% the portion
of the total deposits of insured depository institutions in the United States
that a single bank holding company may control and generally cap at 30.0% the
portion of the total deposits of insured depository institutions in a state
that a single bank holding company may control. Under certain circumstances,
states have the authority to increase or decrease the 30.0% cap, and states may
set minimum age requirements of up to five years on target banks within their
borders.
53
<PAGE>
Beginning June 1, 1997, and subject to certain conditions, the Interstate
Banking Law also permitted interstate branching by allowing a bank to merge
with a bank located in a different state. A state was allowed to accelerate the
effective date for interstate mergers by adopting a law authorizing such
transactions prior to June 1, 1997, or it could "opt out" and thereby prohibit
interstate branching by enacting legislation to that effect prior to that date.
The Interstate Banking Law also permits banks to establish branches in other
states by opening new branches or acquiring existing branches of other banks,
provided the laws of those other states specifically permit that form of
interstate branching. North Carolina has adopted statutes which, subject to
conditions contained therein, specifically authorize out-of-state bank holding
companies and banks to acquire or merge with North Carolina banks and to
establish or acquire branches in North Carolina.
BENEFICIAL OWNERSHIP OF SECURITIES
Principal Shareholders
At the close of business on March 9, 1998, the following persons were
known to management to own beneficially or of record 5% or more of any class of
BancShares' voting securities:
<TABLE>
Name and address Amount and nature of Percentage Percentage of
Title of class of beneficial owner beneficial ownership (1, 2, 3) of class total votes (4)
- -------------------- ----------------------------- -------------------------------- ------------ ----------------
<S> <C> <C> <C> <C>
Common Frank B. Holding 32,284 26.92% 24.51%
P.O. Box 1377
Smithfield, NC 27577
Lewis R. Holding 27,577 23.00 20.93
P.O. Box 151
Raleigh, NC 27602
Series B Preferred Frank B. Holding 22,171 5.47 .44
P.O. Box 1377
Smithfield, NC 27577
Series C Preferred James R. Hendrix 6,120 14.03 .12
3332 Virginia Road
Tyner, NC 27980
Elmo J. Peele 3,229 7.40 .06
P.O. Box 189
Lewiston-Woodville, NC 27849
Charlie H. Spivey 2,550 5.84 .05
Route 1, Box 33
Sunbury, NC 27979
Harry N. and Nell C. Willey 2,200 5.04 .04
Route 1, Box 235
Hobbsville, NC 27946
</TABLE>
- ---------
(1) Except as otherwise indicated below and to the best knowledge of management
of BancShares, the individuals named and included in the group exercise
sole voting and investment power with respect to shares shown as
beneficially owned.
(2) Named individuals exercise shared voting and investment power with respect
to the following numbers of shares: Mr. F. Holding -- 17,205 shares Series
B Preferred. Mr. and Mrs. Willey jointly own and share voting and
investment power as to 1,700 shares of Series C Preferred, while Mr.
Willey has sole voting and investment power as to an additional 500
shares.
(3) Named individuals disclaim beneficial ownership with respect to the
following numbers of shares which are included in the shares listed for
them above and as to which they may be deemed to exercise shared voting
and investment power: Mr. F. Holding -- 24,935 shares Common and 4,020
shares Series B Preferred; Mr. L. Holding -- 5,001 shares Common.
(4) Reflects the total votes to which these shares are entitled as a percentage
of the aggregate votes that may be cast by the holders of all shares of
BancShares' outstanding voting securities.
54
<PAGE>
Management
As of the close of business on March 9, 1998, the beneficial ownership of
BancShares' voting securities by its directors and each of its named executive
officers, and by all directors and executive officers as a group, was as
follows:
<TABLE>
Name of Amount and nature Percentage Percentage of
Title of class beneficial owner of beneficial ownership (1, 2, 3) of class total votes (4)
- -------------------- ---------------------------- ----------------------------------- ------------ ----------------
<S> <C> <C> <C> <C>
Common Bynum R. Brown 372 .31% .28%
William H. Bryan 108 .09 .08
D. Hugh Carlton 288 .24 .22
Robert J. Carroll 30 .03 .02
Hope H. Connell 5,266 4.39 4.00
J. Edwin Drew 3,593 3.00 2.73
Moses B. Gillam, Jr. 125 .10 .09
LeRoy C. Hand, Jr. 148 .12 .11
Frank B. Holding 32,284 26.92 24.51
M. J. McSorley 204 .17 .15
W. B. Midyette, Jr. 150 .13 .11
W. Hunter Morgan 350 .29 .27
John C. Pegram, Jr. 5 .00 (5)
Charles I. Pierce, Sr. 70 .06 .05
W. A. Potts 550 .46 .42
Charles L. Revelle, Jr. 1,020 .85 .77
Charles O. Sykes 100 .08 .08
John N. Walker 190 .16 .14
R. S. Williams 225 .19 .17
All directors and executive
officers as a group
(22 persons) 39,887 33.26 30.28
Series B Preferred Bynum R. Brown 2,358 .58% .05%
Robert J. Carroll 2,687 .66 .05
Hope H. Connell 2,000 .49 .04
LeRoy C. Hand, Jr. 17,522 4.32 .35
Frank B. Holding 22,171 5.47 .44
M. J. McSorley 6,565 1.62 .10
W. Hunter Morgan 7,368 1.82 .15
Charles I. Pierce, Sr. 336 .08 .01
R. S. Williams 7,109 1.75 .14
All directors and executive
officers as a group
(22 persons) 66,116 16.30 1.32
Series C Preferred M. J. McSorley 25 .06% (5)
Charles I. Pierce, Sr. 139 .32 (5)
All directors and executive
officers as a group
(22 persons) 164 .38 (5)
</TABLE>
- ---------
(1) Except as otherwise indicated below and to the best knowledge of management
of BancShares, the individuals named and included in the group exercise
sole voting and investment power with respect to all shares shown as
beneficially owned.
55
<PAGE>
(2) Individuals named or included in the group exercise shared voting and
investment power with respect to the following numbers of shares: Mr.
Carlton -- 174 shares Common; Ms. Connell -- 220 shares Common; Mr.
Holding -- 17,205 shares Series B Preferred; Mr. Morgan -- 3,442 shares
Series B Preferred; Mr. Pierce -- 71 shares Series B Preferred and 29
shares Series C Preferred.
(3) Individuals named or included in the group disclaim beneficial ownership
with respect to the following numbers of shares which are included in the
shares listed for them above and as to which they may be deemed to
exercise shared voting and investment power: Ms. Connell -- 1,527 shares
Common and 2,000 shares Series B Preferred; Mr. Hand -- 48 shares Common
and 6,289 shares of Series B Preferred; Mr. Holding -- 24,935 shares
Common and 4,020 shares Series B Preferred; Mr. McSorley -- 60 shares
Common; Mr. Morgan -- 125 shares Common and 2,131 shares Series B
Preferred; Mr. Potts -- 200 shares Common; Mr. Williams -- 50 shares
Common and 324 shares Series B Preferred; Mr. Carroll -- 693 shares Series
B Preferred; Mr. McSorley -- 6,015 shares Series B Preferred and 25 shares
Series C Preferred.
(4) Reflects the votes to which these shares are entitled as a percentage of
the aggregate votes that may be cast by the holders of all shares of
BancShares' outstanding voting securities.
(5) Less than .01%
DIRECTORS AND EXECUTIVE OFFICERS
Directors
BancShares' Bylaws currently provide for not less than five nor more than
thirty directors, with the actual number of directors being set and changed
from time to time by the Board of Directors. All directors serve for terms of
one year or until their successors have been duly elected and qualified. The
following table contains the names and certain information about BancShares'
current directors.
<TABLE>
Positions with Year
BancShares first Principal occupation and
Name and age and Bank elected (1) business experience for past five years
- ---------------------- ---------------- ------------- ------------------------------------------------------------------
<S> <C> <C> <C>
Bynum R. Brown Director 1986 President and Owner, Bynum R. Brown Agency, Inc. (real estate
72 and insurance); Secretary/Treasurer, Roanoke Valley Nursing
Home, Inc.; President and Owner, Brown Manor, Inc. (family care
home)
William H. Bryan Director 1992 President, Director and Treasurer, Mount Olive Pickle Company,
40 Inc. (manufacturer of pickle and pepper products)
D. Hugh Carlton Director 1994 President, Carlton Insurance Agency, Inc. (insurance)
66
Robert J. Carroll Director 1986 President and Owner, Carroll's Garage, Inc. (truck and farm
73 equipment dealer)
Hope H. Connell (2) Director 1992 Senior Vice President, First-Citizens Bank & Trust Company
35
J. Edwin Drew Director 1973 Retired physician and former President, J. Edwin Drew, M.D., P.A.
67
Moses B. Gillam, Jr. Director 1982 Partner, Gillam and Gillam (attorneys)
81
LeRoy C. Hand, Jr. Director 1986 Retired physician and former President, Albemarle Emergency
77 Associates, P.A.
Frank B. Holding (2) Director and 1962 Executive Vice Chairman, First Citizens BancShares, Inc. and
69 Chairman of First-Citizens Bank & Trust Company; Vice Chairman of the
Executive Board, First Citizens Bancorporation of S.C., Inc. and
Committee First-Citizens Bank and Trust Company of South Carolina
M. J. McSorley Vice Chairman 1990 Vice Chairman of the Bank since January 1998; formerly President
64 of Bank and Chief Executive Officer of the Bank; Vice President of
BancShares
W. B. Midyette, Jr. Director 1982 Retired farmer
78
W. Hunter Morgan Director 1986 President, Kellogg-Morgan Agency, Inc. (insurance)
67
</TABLE>
56
<PAGE>
<TABLE>
Positions with Year
BancShares first Principal occupation and
Name and age and Bank elected (1) business experience for past five years
- ------------------------- ---------------- ------------- ------------------------------------------------------------------
<S> <C> <C> <C>
John C. Pegram, Jr. President of 1998 President of BancShares and Bank since January 1998; formerly
53 BancShares and Executive Vice President of Bank and Vice President of
Bank; Director BancShares; prior to that, Senior Vice President of Bank
Charles I. Pierce, Sr. Director 1986 President, Pierce Printing Co., Inc. (commercial printers)
80
W. A. Potts Vice Chairman 1968 Retired veterinarian and former President, W. A. Potts, DVM,
71 of the Board P.A.; former Chairman of the Board, Mount Olive Pickle
Company, Inc.
Charles L. Revelle, Jr. Director 1986 Chairman of the Board, Revelle Agri-Products, Inc.; Vice
71 President, Revelle Builders of NC, Inc.; President, Revelle
Equipment Co., Inc. (agribusiness)
Charles O. Sykes Director 1984 President, Mount Olive Livestock Market, Inc. (livestock auction
68 market and dealer)
John N. Walker Director 1971 President Emeritus (former President, Chief Executive Officer and
72 Director), Mount Olive Pickle Company, Inc. (manufacturer of
pickle and pepper products)
R. S. Williams Chairman of 1971 Chairman of the Board and Consultant, Southern BancShares and
69 the Board Bank; retired President of BancShares and Bank)
</TABLE>
- ---------
(1) Refers to the year each director first became a director of BancShares or
its predecessor or, if elected to the Board prior to December 31, 1982,
the year first elected to the Board of the Bank.
(2) Ms. Connell is the daughter of Frank B. Holding.
Executive Officers
Information regarding BancShares' and the Bank's executive officers is set
forth in the following table. All executive officers serve at the pleasure of
the Board of Directors.
<TABLE>
Name and age Positions with BancShares and the Bank
- ----------------------- ------------------------------------------------------------
<S> <C>
R. S. Williams Chairman of the Board of BancShares and Bank; previously,
68 President and Chief Executive Officer of BancShares (until
January 1998) and President of Bank
M. J. McSorley Vice President and Director of BancShares (since 1990);
64 Director of Bank (since 1990) (Vice Chairman since January
1998); previously, President and Chief Executive Officer of
Bank
John C. Pegram, Jr President and Director of BancShares and Bank (since 1998);
53 previously, Executive Vice President of Bank and Vice
President of BancShares
Paul A. Brewer Senior Vice President (since 1992) of Bank; previously,
55 Regional Vice President of Bank
Richard D. Ray Senior Vice President (since 1993) of Bank; previously,
51 Regional Vice President of Bank
David A. Bean Treasurer (since 1986) and Secretary (since 1992) of
49 BancShares; Vice President and Controller (since 1984) and
Secretary (since 1992) of Bank
</TABLE>
57
<PAGE>
EXECUTIVE COMPENSATION
Executive Officers
Cash Compensation. The following table shows, for 1997, 1996 and 1995, the
cash and certain other compensation paid to or received or deferred by certain
of the executive officers of BancShares and the Bank, respectively, in all
capacities in which they served.
<TABLE>
Summary Compensation Table
Annual Compensation
------------------------------------
Other annual All other
Name and principal position Year Salary (1) Bonus compensation compensation
- -------------------------------------------------------- ------ ------------ -------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
R. S. Williams 1997 $ 0 $ 0 $0 $ 80,900(3)
Chairman, President and Chief 1996 0 0 0 80,900
Executive Officer of BancShares (2) 1995 0 6,000 0 78,500
M. J. McSorley 1997 $134,640 $ 0 $0 $ 6,083(5)
President and Chief Executive 1996 128,055 0 0 5,286
Officer of Bank and Vice President of BancShares (4) 1995 119,730 0 0 5,237
</TABLE>
- --------
(1) Includes amounts deferred at Mr. McSorley's election pursuant to the Bank's
Section 401(k) salary deferral plan.
(2) Mr. Williams retired from active employment with the Bank in December 1989
but continued to serve as President and Chief Executive Officer of
BancShares until January 21, 1998, when John C. Pegram was elected as
President of BancShares. Mr. Williams continues to serve as Chairman of,
and to provide consulting services to, BancShares and the Bank.
(3) The 1997 amount consists of $46,900 in benefits from the Bank's pension
plan and $34,000 received pursuant to a noncompetition and consulting
agreement with the Bank. See "Pension Plan" and "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
(4) Mr. McSorley served in the capacities indicated above during 1995, 1996 and
1997. On January 21, 1998, he was elected as Vice Chairman of the Bank's
Board and John C. Pegram, Jr. was elected as President of the Bank. Mr.
McSorley continues to serve as Vice President of BancShares.
(5) The 1997 amount consists entirely of the Bank's contributions on Mr.
McSorley's behalf pursuant to the terms of the Bank's Section 401(k)
salary deferral plan.
Pension Plan. The following table shows the estimated annual benefits
payable to a covered participant at normal retirement age under the Bank's
qualified defined benefit pension plan (the "Pension Plan") based on various
specified numbers of years of service and levels of covered compensation.
<TABLE>
Years of service
-----------------------------------------------------------------------------
Final average compensation 10 years 15 years 20 years 25 years 30 years 35 years 40 years
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 175,000 $30,470 $45,705 $60,940 $76,176 $91,411 $106,646 $117,146
150,000 25,845 38,768 51,690 64,613 77,536 90,458 99,458
125,000 21,220 31,830 42,440 53,051 63,661 74,271 81,771
100,000 16,595 24,893 33,190 41,448 49,786 58,083 64,083
75,000 11,970 17,955 23,940 29,926 35,911 41,896 46,396
50,000 7,345 11,018 14,690 18,363 22,036 25,708 28,708
</TABLE>
Benefits shown in the table are computed as straight life annuities
beginning at age 65 and are not subject to a deduction for Social Security
benefits or any other offset amount. A participant's compensation covered by
the Pension Plan is his base salary, and the participant's benefits are based
on his "final average compensation" covered by the Pension Plan, which consists
of the average earnings of the participant during the five highest consecutive
earning years of the last ten complete calendar years as a participant. The
current estimated years of service and "final average compensation,"
respectively, for M. J. McSorley are 38 years and $120,285. R. S. Williams
retired from employment with the Bank in December 1989 and receives benefits of
$46,900 per year pursuant to the terms of the Pension Plan.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements. Effective on R. S. Williams' retirement from employment with the
Bank in December 1989, he entered into a consulting and noncompetition
agreement with the Bank pursuant to which he provides advisory and consulting
services to the Bank, agreed not to compete with the Bank in North Carolina,
and currently receives monthly payments of $2,533 for the noncompetition
arrangement and $300
58
<PAGE>
for consulting services. The agreement, as amended, will terminate on December
31, 1998, unless further extended by mutual agreement of the parties involved.
Pursuant to the terms of a similar agreement with the Bank, M. J. McSorley
will receive monthly payments of $1,067 for a noncompetition arrangement and
$356 for consulting services during the ten-year period following his
retirement.
Director Compensation
BancShares' directors receive a quarterly retainer of $400, plus $200 for
attendance at each meeting of the Board of Directors, $100 for attendance at
each meeting of a Board committee of which a director is a member, and $40 for
attendance at each monthly local advisory board meeting. R. S. Williams, Frank
B. Holding, M. J. McSorley, and John C. Pegram, Jr. do not receive any separate
compensation for their service as directors of BancShares.
Since his retirement as the Bank's President in December 1989, R. S.
Williams has been compensated for his services pursuant to a consulting and
noncompetition agreement with the Bank under which he currently receives
monthly payments of $2,533 for the noncompetition arrangement and $300 for his
consulting services. In addition, Mr. Williams receives payments under the
Bank's Pension Plan. See " -- Cash Compensation" and " -- Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of business with several of the directors, executive
officers, and principal shareholders of BancShares and the Bank and their
associates. Loans included in those transactions were made on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others, and did not involve more than the normal
risk of collectibility or present other unfavorable features. Each such
transaction has been approved by the Board of Directors of the Bank.
The Bank is party to a contract with FCB, an affiliated financial
institution located in Raleigh, North Carolina, pursuant to which FCB provides
the Bank with certain management consulting services and with various support
and data processing services relating to (i) its deposit and loan, item
processing, general ledger, statement rendering and securities portfolio
management functions which the Bank has chosen not to provide for itself, (ii)
service as trustee for the Bank's pension plan and Section 401(k) salary
deferral plan, and (iii) until 1997, internal audit services. Fees paid by the
Bank to FCB for such services during 1997, 1996 and 1995 totaled approximately
$2.4 million, $2.6 million and $2.0 million. Management of the Bank estimates
that fees payable during 1998 will total approximately $2.6 million. FCB is the
wholly-owned bank subsidiary of FCBancShares. Frank B. Holding, who is a
director, Chairman of the Executive Committee and a principal shareholder of
BancShares, and Lewis R. Holding, also a principal shareholder of BancShares,
are directors and executive officers of FCBancShares and FCB and are principal
shareholders of FCBancShares, and Hope H. Connell, the daughter of Frank B.
Holding and a director of BancShares, also is a principal shareholder of
FCBancShares and an officer of FCB; and, the Holding family, whose control of
BancShares' outstanding capital stock is described under "Benficial Ownership
of Securities," also controls 43.0% of the Class A, and 68.8% of the Class B,
common stock of FCBancShares. The Bank's contract with FCB was negotiated at
arms-length and was approved by BancShares' Board of Directors, with Mr.
Holding and Ms. Connell abstaining from the voting. Based on its comparison of
the terms of the contract in previous years with terms available to it from
other providers of the services being obtained from FCB, management of the Bank
believes the terms of its contract with FCB, including prices, are no less
favorable to the Bank than could be obtained from an unrelated provider.
Included in the services described above are the management services of Frank
B. Holding for which the Bank reimburses FCB for a portion of his salary paid
by FCB. The amount of such reimbursement was $75,842 during 1997 (which is
included in the aggregate amount of 1997 payments listed above) and is expected
to amount to $77,549 during 1998. Mr. Holding receives no salary, directors
fees or other compensation from BancShares or the Bank for his services as a
director and Chairman of the Executive Committee.
59
<PAGE>
During 1995 and 1996, the Bank purchased assets (including loans) totaling
approximately $10.5 million, and assumed an aggregate of approximately $10.5
million in deposit liabilities, of branch offices of FCB located in Kill Devil
Hills and Windsor, North Carolina. In connection with those transactions, the
Bank paid deposit premiums to FCB of $62,000 and $539,000, respectively.
Effective May 18, the Bank sold and transferred to FCB approximately $2,000 in
assets (including loans) and approximately $2.4 million in deposit liabilities
of the Littleton, North Carolina, branch office of ESB which was acquired by
the Bank and for which FCB paid a deposit premium to the Bank of approximately
$84,000. Additionally, during 1998, the Bank has agreed to purchase assets
(including loans) totaling approximately $1.1 million, and assume an aggregate
of approximately $6.3 million in deposit liabilities, of FCB's Gates, North
Carolina, branch office, and for which it will pay FCB a deposit premium that
currently is projected to amount to approximately $221,000.
During the quarter ended March 31, 1998, the Bank acquired the rights to
service $51 million in mortgage loans from The Fidelity Bank, Fuquay-Varina,
North Carolina, for which the Bank paid $522,000. The Holding family controls
77.3% of the common stock of The Fidelity Bank's parent holding company.
During 1997, the Bank paid $98,323 to Carlton Insurance Agency, Inc., of
which D. Hugh Carlton, a director of BancShares and the Bank, is President, for
servicing the general liability and comprehensive insurance policies on
property and vehicles for the Bank, as well as the Bank's workers' compensation
coverage and umbrella policies. It is expected that such relationship will
continue during 1998.
During 1997, the law firm of Gillam and Gillam performed legal services
for the Bank, and it is expected that such relationship will continue during
1998. Moses B. Gillam, Jr., who serves as a director of BancShares and the
Bank, is senior partner in that firm.
DESCRIPTION OF THE CAPITAL SECURITIES
Pursuant to the terms of the Trust Agreement for the Issuer Trust, the
Issuer Trustees on behalf of the Issuer Trust will issue the Capital Securities
and the Common Securities. The Capital Securities will represent preferred
undivided beneficial interests in the assets of the Issuer Trust and the
holders thereof will be entitled to a preference in certain circumstances with
respect to Distributions and amounts payable on redemption or liquidation over
the Common Securities, as well as other benefits as described in the Trust
Agreement. This summary of certain provisions of the Capital Securities and the
Trust Agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Trust
Agreement, including the definitions therein of certain terms. Wherever
particular defined terms of the Trust Agreement are referred to herein, such
defined terms are incorporated herein by reference. A copy of the form of the
Trust Agreement is available upon request from the Issuer Trust by contacting
the Issuer Trustees.
General
The Capital Securities will be limited to $20,000,000 aggregate
Liquidation Amount outstanding (unless the Underwriter's over allotment option
is exercised, in which case they will be limited to $23,000,000 aggregate
Liquidation Amount). The Capital Securities will rank pari passu, and payments
will be made thereon pro rata, with the Common Securities except as described
under " -- Subordination of Common Securities." The Junior Subordinated
Debentures will be registered in the name of the Issuer Trust and held by the
Property Trustee in trust for the benefit of the holders of the Capital
Securities and Common Securities. The Guarantee will be a guarantee on a
subordinated basis with respect to the Capital Securities but will not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of such Capital Securities when the Issuer Trust does not have
funds on hand available to make such payments. See "Description of the
Guarantee."
Distributions
The Capital Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and Distributions on each Capital Security
will be payable at an annual rate equal to 8.25% on the stated Liquidation
Amount of $10.00, payable quarterly in arrears on March 31, June 30, September
30 and December 31 of each year (each a "Distribution Date"), to the holders of
the Capital Securities at the close of business on the fifteenth day (whether
or not a Business Day (as defined below)) next preceding the relevant
Distribution Date. Distributions on the Capital Securities will be cumulative.
Distributions will accumulate from the date of original issuance. The first
Distribution Date for the Capital Securities will be September 30, 1998. The
amount of Distributions payable for any period less than a full Distribution
period will be computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. Distributions
payable for each full Distribution period will be computed by dividing the rate
per annum by four. If any date
60
<PAGE>
on which Distributions are payable on the Capital Securities is not a Business
Day, then payment of the Distributions payable on such date will be made on the
next succeeding day that is a Business Day (without any additional
Distributions or other payment in respect of any such delay), with the same
force and effect as if made on the date such payment was originally payable.
So long as no Debenture Event of Default has occurred and is continuing,
BancShares has the right under the Junior Subordinated Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarterly periods with
respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures or end on a
date other than a Distribution Date. As a consequence of any such deferral,
quarterly distributions on the Capital Securities by the Issuer Trust will be
deferred during any such Extension Period. Distributions to which holders of
the Capital Securities are entitled will accumulate additional Distributions
thereon at a rate equal to 8.25% per annum, compounded quarterly from the
relevant payment date for such Distributions, computed on the basis of a
360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period. Additional Distributions payable for each full
Distribution period will be computed by dividing the rate per annum by four.
The term "Distributions" as used herein shall include any such additional
Distributions. During any such Extension Period, BancShares may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire or make
a liquidation payment with respect to, any of BancShares' capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of BancShares that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of BancShares in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or shareholder stock purchase plan or in connection with the
issuance of capital stock of BancShares (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of BancShares'
capital stock (or any capital stock of a subsidiary of BancShares) for any
class or series of BancShares' capital stock or of any class or series of
BancShares' indebtedness for any class or series of BancShares' capital stock,
(c) the purchase of fractional interests in shares of BancShares' capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged, (d) any declaration of a dividend in
connection with any shareholder's rights plan, or the issuance of rights, stock
or other property under any shareholder's rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of
stock, warrants, options or other rights where the dividend stock or the stock
issuable upon exercise of such warrants, options or other rights is the same
stock as that on which the dividend is being paid or ranks pari passu with or
junior to such stock). Prior to the termination of any such Extension Period,
BancShares may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods, extend beyond the
Stated Maturity of the Junior Subordinated Debentures, or end on a date other
than a Distribution Date. Upon the termination of any such Extension Period and
the payment of all amounts then due, BancShares may elect to begin a new
Extension Period. No interest shall be due and payable during an Extension
Period, except at the end thereof. BancShares must give the Issuer Trustees
notice of its election of such Extension Period at least one Business Day prior
to the earlier of (i) the date the Distributions on the Capital Securities
would have been payable but for the election to begin such Extension Period and
(ii) the date the Property Trustee is required to give notice to holders of the
Capital Securities of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Property Trustee will give notice of BancShares' election to begin a
new Extension Period to the holders of the Capital Securities. Subject to the
foregoing, there is no limitation on the number of times that BancShares may
elect to begin an Extension Period. See "Description of the Junior Subordinated
Debentures -- Option To Extend Interest Payment Period" and "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
BancShares has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
The revenue of the Issuer Trust available for distribution to holders of
the Capital Securities will be limited to payments under the Junior
Subordinated Debentures in which the Issuer Trust will invest the proceeds from
the issuance and sale of the Capital Securities. See "Description of the Junior
Subordinated Debentures." If BancShares does not make payments on the Junior
Subordinated Debentures, the Issuer Trust may not have funds available to pay
Distributions or other amounts payable on the Capital Securities. The payment
of Distributions and other amounts payable on the Capital Securities (if and to
the extent the Issuer Trust has funds legally available for and cash sufficient
to make such payments) is guaranteed by BancShares on a limited basis as set
forth herein under "Description of the Guarantee."
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<PAGE>
Redemption
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined herein) of the Trust Securities, upon not less than 30 nor more
than 60 days notice, at a redemption price (the "Redemption Price") equal to
the aggregate Liquidation Amount of such Capital Securities plus accumulated
but unpaid Distributions thereon to but excluding the date of redemption (the
"Redemption Date"). See "Description of the Junior Subordinated Debentures --
Redemption." If less than all the Junior Subordinated Debentures are to be
repaid or redeemed on a Redemption Date, then the proceeds from such repayment
or redemption shall be allocated to the redemption pro rata of the Capital
Securities and the Common Securities.
BancShares has the right to redeem the Junior Subordinated Debentures (i)
on or after June 30, 2003, in whole at any time or in part from time to time,
or (ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of a Tax Event, Investment Company Event
or Capital Treatment Event, in each case subject to possible regulatory
approval. See " -- Liquidation Distribution Upon Dissolution." A redemption of
the Junior Subordinated Debentures would cause a mandatory redemption of a Like
Amount of the Capital Securities and Common Securities at the Redemption Price.
The Redemption Price, in the case of a redemption under (i) or (ii) above,
shall equal the Liquidation Amount, together with accumulated Distributions to
but excluding the date fixed for redemption.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a day
on which banking institutions in the City of New York, New York, or the City of
Raleigh, North Carolina are authorized or required by law or executive order to
remain closed, or (c) a day on which the Property Trustee's Corporate Trust
Office or the Corporate Trust Office of the Debenture Trustee is closed for
business.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Junior Subordinated Debentures to be contemporaneously
redeemed in accordance with the Junior Subordinated Indenture, allocated to the
Common Securities and to the Capital Securities pro rata based upon the
relative Liquidation Amounts of such classes and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities
in connection with a dissolution or liquidation of the Issuer Trust, Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Junior Subordinated
Debentures are distributed.
"Liquidation Amount" means the stated amount of $10.00 per Trust Security.
"Tax Event" means the receipt by the Issuer Trust of an opinion of counsel
to BancShares experienced in such matters to the effect that, as a result of
any amendment to, or change (including any announced prospective change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement, action or decision is announced on or after
the date of issuance of the Capital Securities (including, without limitation,
any of the foregoing arising with respect to, or resulting from, any proposal,
proceeding or other action commencing on or before such date), there is more
than an insubstantial risk that (i) the Issuer Trust is, or will be within 90
days of the delivery of such opinion, subject to United States federal income
tax with respect to income received or accrued on the Junior Subordinated
Debentures, (ii) interest payable by BancShares on the Junior Subordinated
Debentures is not, or within 90 days of the delivery of such opinion, will not
be, deductible by BancShares, in whole or in part, for United States federal
income tax purposes or (iii) the Issuer Trust is, or will be within 90 days of
the delivery of such opinion, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to BancShares experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation
or application of law or regulation by any legislative body, court,
governmental agency or regulatory authority, there is more than an
insubstantial risk that the Issuer Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change or prospective change becomes effective or would
become effective, as the case may be, on or after the date of the issuance of
the Capital Securities.
"Capital Treatment Event" means, in respect of the Issuer Trust, the
reasonable determination by BancShares that, as a result of the occurrence of
any amendment to, or change (including any announced prospective change) in,
the laws (or
62
<PAGE>
any rules or regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement, action or decision is announced on or after the date of
issuance of the Capital Securities, there is more than an insubstantial risk
that BancShares will not be entitled to treat an amount equal to the
Liquidation Amount of the Capital Securities as "Tier 1 capital" (or the then
equivalent thereof) for purposes of the risk-based capital adequacy guidelines
of the Federal Reserve, as then in effect and applicable to BancShares.
Payment of Additional Sums. If a Tax Event described in clause (i) or
(iii) of the definition of Tax Event above has occurred and is continuing and
the Issuer Trust is the holder of all the Junior Subordinated Debentures,
BancShares will pay Additional Sums (as defined herein), if any, on the Junior
Subordinated Debentures.
"Additional Sums" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Issuer Trust
on the outstanding Capital Securities and Common Securities of the Issuer Trust
will not be reduced as a result of any additional taxes, duties and other
governmental charges to which the Issuer Trust has become subject as a result
of a Tax Event.
Redemption Procedures
Capital Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Capital
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that the Issuer Trust has funds on hand
available for the payment of such Redemption Price. See also " -- Subordination
of Common Securities."
If the Issuer Trust gives a notice of redemption in respect of any Capital
Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to
the extent funds are available, in the case of Capital Securities held in
book-entry form, the Property Trustee will deposit irrevocably with DTC funds
sufficient to pay the applicable Redemption Price and will give DTC irrevocable
instructions and authority to pay the Redemption Price to the holders of the
Capital Securities. With respect to Capital Securities not held in book-entry
form, the Property Trustee, to the extent funds are available, will irrevocably
deposit with the paying agent for the Capital Securities funds sufficient to
pay the applicable Redemption Price and will give such paying agent irrevocable
instructions and authority to pay the Redemption Price to the holders thereof
upon surrender of their certificates evidencing the Capital Securities.
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date for any Capital Securities called for redemption shall be
payable to the holders of the Capital Securities on the relevant record dates
for the related Distribution Dates. If notice of redemption shall have been
given and funds deposited as required, then upon the date of such deposit all
rights of the holders of such Capital Securities so called for redemption will
cease, except the right of the holders of such Capital Securities to receive
the Redemption Price, and any Distribution payable in respect of the Capital
Securities, but without interest on such Redemption Price, and such Capital
Securities will cease to be outstanding. If any date fixed for redemption of
Capital Securities is not a Business Day, then payment of the Redemption Price
payable on such date will be made on the next succeeding day which is a
Business Day (without any interest or other payment in respect of any such
delay), except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day. In the event
that payment of the Redemption Price in respect of Capital Securities called
for redemption is improperly withheld or refused and not paid either by the
Issuer Trust or by BancShares pursuant to the Guarantee as described under
"Description of the Guarantee," Distributions on such Capital Securities will
continue to accumulate at the then applicable rate, from the Redemption Date
originally established by the Issuer Trust for such Capital Securities to the
date such Redemption Price is actually paid, in which case the actual payment
date will be the date fixed for redemption for purposes of calculating the
Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities laws), BancShares or its affiliates may at any time and from
time to time purchase outstanding Capital Securities by tender, in the open
market or by private agreement, and may resell such securities.
If less than all the Capital Securities and Common Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
Capital Securities and Common Securities to be redeemed shall be allocated pro
rata to the Capital Securities and the Common Securities based upon the
relative Liquidation Amounts of such classes. The particular Capital Securities
to be redeemed shall be selected on a pro rata basis not more than 60 days
prior to the Redemption Date by the Property Trustee from the outstanding
Capital Securities not previously called for redemption. The Property Trustee
shall promptly notify the securities registrar for the Trust Securities in
writing of the Capital Securities selected
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<PAGE>
for redemption and, in the case of any Capital Securities selected for partial
redemption, the Liquidation Amount thereof to be redeemed. For all purposes of
the Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of Capital Securities shall relate, in the case of
any Capital Securities redeemed or to be redeemed only in part, to the portion
of the aggregate Liquidation Amount of Capital Securities which has been or is
to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each registered holder of Capital
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless BancShares defaults in payment of the
Redemption Price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on the Junior Subordinated
Debentures or portions thereof (and, unless payment of the Redemption Price in
respect of the Capital Securities is withheld or refused and not paid either by
the Issuer Trust or BancShares pursuant to the Guarantee, Distributions will
cease to accumulate on the Capital Securities or portions thereof) called for
redemption.
Subordination of Common Securities
Payment of Distributions (including Additional Amounts, if applicable) on,
the Liquidation Distribution in respect of, and the Redemption Price of, the
Capital Securities and Common Securities, as applicable, shall be made pro rata
based on the Liquidation Amount of such Capital Securities and Common
Securities. However, if on any Distribution Date or Redemption Date a Debenture
Event of Default has occurred and is continuing as a result of any failure by
BancShares to pay any amounts in respect of the Junior Subordinated Debentures
when due, no payment of any Distribution (including Additional Amounts) on, or
Liquidation Distribution in respect of, or Redemption Price of, any of the
Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid Distributions
(including Additional Amounts) on all the outstanding Capital Securities for
all Distribution periods terminating on or prior thereto, or in the case of
payment of the Redemption Price, the full amount of such Redemption Price on
all the outstanding Capital Securities then called for redemption, or in the
case of payment of the Liquidation Distribution, the full amount of such
Liquidation Distribution on all outstanding Capital Securities, shall have been
made or provided for, and all funds immediately available to the Property
Trustee shall first be applied to the payment in full in cash of all
Distributions (including any Additional Amounts) on, or the Redemption Price
of, or Liquidation Distribution in respect of, the Capital Securities then due
and payable. The existence of an Event of Default does not entitle the Holders
of Capital Securities to accelerate the maturity thereof.
In the case of any Event of Default resulting from a Debenture Event of
Default, the holders of the Common Securities will be deemed to have waived any
right to act with respect to any such Event of Default under the Trust
Agreement until the effects of all such Events of Default with respect to such
Capital Securities have been cured, waived or otherwise eliminated. See " --
Events of Default; Notice" and "Description of the Junior Subordinated
Debentures -- Debenture Events of Default." Until all such Events of Default
under the Trust Agreement with respect to the Capital Securities have been so
cured, waived or otherwise eliminated, the Property Trustee will act solely on
behalf of the holders of the Capital Securities and not on behalf of the
holders of the Common Securities, and only the holders of the Capital
Securities will have the right to direct the Property Trustee to act on their
behalf.
Liquidation Distribution Upon Dissolution
The amount payable on the Capital Securities in the event of any
liquidation of the Issuer Trust is $10.00 per Capital Security plus accumulated
and unpaid Distributions to the date of payment, subject to certain exceptions,
which may be in the form of a distribution of such amount in Junior
Subordinated Debentures.
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Capital
Securities and Common Securities in liquidation of the Issuer Trust.
The Federal Reserve's risk-based capital guidelines currently provide that
redemptions of permanent equity or other capital instruments before stated
maturity could have a significant impact on a bank holding company's overall
capital structure and that any organization considering such a redemption
should consult with the Federal Reserve before redeeming any equity or capital
instrument prior to maturity if such redemption could have a material effect on
the level or composition of the organization's capital base (unless the equity
or capital instrument were redeemed with the proceeds of, or replaced by, a
like amount of a similar or higher quality capital instrument and the Federal
Reserve considers the organization's capital position to be fully adequate
after the redemption).
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In the event BancShares, while a holder of Common Securities, dissolves
the Issuer Trust prior to the Stated Maturity of the Capital Securities and the
dissolution of the Issuer Trust is deemed to constitute the redemption of
capital instruments by the Federal Reserve under its risk-based capital
guidelines or policies, the dissolution of the Issuer Trust by BancShares may
be subject to the prior approval of the Federal Reserve. Moreover, any changes
in applicable law or changes in the Federal Reserve's risk-based capital
guidelines or policies could impose a requirement on BancShares that it obtain
the prior approval of the Federal Reserve to dissolve the Issuer Trust.
Pursuant to the Trust Agreement, the Issuer Trust will automatically
dissolve upon expiration of its term or, if earlier, will dissolve on the first
to occur of: (i) certain events of bankruptcy, dissolution or liquidation of
BancShares or the holder of the Common Securities, (ii) if the holders of
Common Securities have given written direction to the Property Trustee to
dissolve the Issuer Trust (which direction, subject to the foregoing
restrictions, is optional and wholly within the discretion of the holders of
Common Securities), (iii) the repayment of all the Capital Securities in
connection with the redemption of all the Trust Securities as described under "
- -- Redemption" and (iv) the entry of an order for the dissolution of the Issuer
Trust by a court of competent jurisdiction.
If dissolution of the Issuer Trust occurs as described in clause (i), (ii)
or (iv) above, the Issuer Trust will be liquidated by the Property Trustee as
expeditiously as the Property Trustee determines to be possible by
distributing, after satisfaction of liabilities to creditors of the Issuer
Trust as provided by applicable law, to the holders of such Trust Securities a
Like Amount of the Junior Subordinated Debentures, unless such distribution is
not practical, in which event such holders will be entitled to receive out of
the assets of the Issuer Trust available for distribution to holders, after
satisfaction of liabilities to creditors of the Issuer Trust as provided by
applicable law, an amount equal to, in the case of holders of Capital
Securities, the aggregate of the Liquidation Amount plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If such Liquidation Distribution can be paid only
in part because the Issuer Trust has insufficient assets available to pay in
full the aggregate Liquidation Distribution, then the amounts payable directly
by the Issuer Trust on its Capital Securities shall be paid on a pro rata
basis. The holders of the Common Securities will be entitled to receive
distributions upon any such liquidation pro rata with the holders of the
Capital Securities, except that if a Debenture Event of Default has occurred
and is continuing as a result of any failure by BancShares to pay any amounts
in respect of the Junior Subordinated Debentures when due, the Capital
Securities shall have a priority over the Common Securities. See " --
Subordination of Common Securities."
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures (i) the Capital Securities will no longer be deemed to
be outstanding, (ii) DTC or its nominee, as the registered holder of Capital
Securities represented by Global Capital Securities (as herein described) shall
receive a registered global certificate or certificates representing the Junior
Subordinated Debentures to be delivered upon such distribution with respect to
such Global Capital Securities, and (iii) each certificates representing the
Capital Securities other than Global Capital Securities will be deemed to
represent the Junior Subordinated Debentures having a principal amount equal to
the stated Liquidation Amount of the Capital Securities and bearing accrued and
unpaid interest in an amount equal to the accumulated and unpaid Distributions
on the Capital Securities until such certificates are presented to the security
registrar for the Trust Securities for transfer or reissuance.
If BancShares does not redeem the Junior Subordinated Debentures prior to
the Stated Maturity and the Issuer Trust is not liquidated and the Junior
Subordinated Debentures are not distributed to holders of the Capital
Securities, the Capital Securities will remain outstanding until the repayment
of the Junior Subordinated Debentures and the distribution of the Liquidation
Distribution to the holders of the Capital Securities.
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Capital Securities if a dissolution and liquidation of the Issuer
Trust were to occur. Accordingly, the Capital Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive
on dissolution and liquidation of the Issuer Trust, may trade at a discount to
the price that the investor paid to purchase the Capital Securities offered
hereby.
Events of Default; Notice
Any one of the following events constitutes an "Event of Default" under
the Trust Agreement (an "Event of Default") with respect to the Capital
Securities (whatever the reason for such Event of Default and whether it is
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
the Junior Subordinated Debentures -- Debenture Events of Default"); or
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(ii) default by the Issuer Trust in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a period
of 30 days; or
(iii) default by the Issuer Trust in the payment of any Redemption Price
of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Issuer Trustees in the Trust Agreement
(other than a covenant or warranty a default in the performance of which or
the breach of which is dealt with in clause (ii) or (iii) above), and
continuation of such default or breach for a period of 60 days after there
has been given, by registered or certified mail, to the Issuer Trustees and
BancShares by the holders of at least 25% in aggregate Liquidation Amount
of the outstanding Capital Securities, a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee if a successor Property Trustee has not
been appointed within 90 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of Trust Securities and the
Administrators, unless such Event of Default has been cured or waived.
BancShares, as Depositor, and the Administrators are required to file annually
with the Property Trustee a certificate as to whether or not they are in
compliance with all the conditions and covenants applicable to them under the
Trust Agreement.
If a Debenture Event of Default has occurred and is continuing as a result
of any failure by BancShares to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Capital Securities will have a preference
over the Common Securities with respect to payments of any amounts in respect
of the Capital Securities as described above. See " -- Subordination of Common
Securities," " -- Liquidation Distribution Upon Dissolution" and "Description
of the Junior Subordinated Debentures -- Debenture Events of Default."
Removal of Issuer Trustees; Appointment of Successors
The holders of at least a majority in aggregate Liquidation Amount of the
outstanding Capital Securities may remove an Issuer Trustee for cause or, if a
Debenture Event of Default has occurred and is continuing, with or without
cause. If an Issuer Trustee is removed by the holders of the outstanding
Capital Securities, the successor may be appointed by the holders of at least
25% in Liquidation Amount of Capital Securities then outstanding. If an Issuer
Trustee resigns, such Issuer Trustee will appoint its successor. If an Issuer
Trustee fails to appoint a successor, the holders of at least 25% in
Liquidation Amount of the outstanding Capital Securities may appoint a
successor. If a successor has not been appointed by the holders, any holder of
Capital Securities or Common Securities or the other Issuer Trustee may
petition a court in the State of Delaware to appoint a successor. Any Delaware
Trustee must meet the applicable requirements of Delaware law. Any Property
Trustee must be a national or state-chartered bank and have a combined capital
and surplus of at least $50,000,000. No resignation or removal of an Issuer
Trustee and no appointment of a successor trustee shall be effective until the
acceptance of appointment by the successor trustee in accordance with the
provisions of the Trust Agreement.
Merger or Consolidation of Issuer Trustees
Any entity into which the Property Trustee or the Delaware Trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Issuer
Trustee is a party, or any entity succeeding to all or substantially all of the
corporate trust business of such Issuer Trustee, will be the successor of such
Issuer Trustee under the Trust Agreement, provided such entity is otherwise
qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Issuer Trust
The Issuer Trust may not merge with or into, consolidate, amalgamate, or
be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any entity, except as described below or as
otherwise set forth in the Trust Agreement. The Issuer Trust may, at the
request of the holders of the Common Securities and with the consent of the
holders of at least a majority in aggregate Liquidation Amount of the
outstanding Capital Securities, merge with or into, consolidate, amalgamate, or
be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to a trust organized as such under the laws of any
State, so long as (i) such successor entity either (a) expressly assumes all
the obligations of the Issuer Trust with respect to the Capital Securities or
(b) substitutes for the Capital Securities other
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securities having substantially the same terms as the Capital Securities (the
"Successor Securities") so long as the Successor Securities have the same
priority as the Capital Securities with respect to distributions and payments
upon liquidation, redemption and otherwise, (ii) a trustee of such successor
entity, possessing the same powers and duties as the Property Trustee, is
appointed to hold the Junior Subordinated Debentures, (iii) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does
not cause the Capital Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (iv)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Capital Securities (including any Successor Securities) in any
material respect, (v) such successor entity has a purpose substantially
identical to that of the Issuer Trust, (vi) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, the
Issuer Trust has received an opinion from independent counsel experienced in
such matters to the effect that (a) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the Capital Securities
(including any Successor Securities) in any material respect and (b) following
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease, neither the Issuer Trust nor such successor entity will be required to
register as an investment company under the Investment Company Act, and (vii)
BancShares or any permitted successor or assignee owns all the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Issuer Trust may not,
except with the consent of holders of 100% in aggregate Liquidation Amount of
the Capital Securities, consolidate, amalgamate, merge with or into, or be
replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to, any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Issuer Trust or the successor entity to be taxable other than
as a grantor trust for United States federal income tax purposes.
Voting Rights; Amendment of Trust Agreement
Except as provided below and under " -- Removal of Issuer Trustees;
Appointment of Successors" and "Description of the Guarantee -- Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Capital Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the holders of a
majority in Liquidation Amount of the Common Securities and the Property
Trustee, without the consent of the holders of the Capital Securities, (i) to
cure any ambiguity, correct or supplement any provisions in the Trust Agreement
that may be inconsistent with any other provision, or to make any other
provisions with respect to matters or questions arising under the Trust
Agreement, provided that any such amendment does not adversely affect in any
material respect the interests of any holder of Trust Securities, or (ii) to
modify, eliminate or add to any provisions of the Trust Agreement to such
extent as may be necessary to ensure that the Issuer Trust will not be taxable
other than as a grantor trust for United States federal income tax purposes at
any time that any Trust Securities are outstanding or to ensure that the Issuer
Trust will not be required to register as an "investment company" under the
Investment Company Act, and any such amendments of the Trust Agreement will
become effective when notice of such amendment is given to the holders of Trust
Securities. The Trust Agreement may be amended by the holders of a majority of
the Common Securities and the Property Trustee with (i) the consent of holders
representing not less than a majority in aggregate Liquidation Amount of the
outstanding Capital Securities and (ii) receipt by the Issuer Trustees of an
opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Issuer Trustees in accordance with such amendment will not
affect the Issuer Trust's being taxable as a grantor trust for United States
federal income tax purposes or the Issuer Trust's exemption from status as an
"investment company" under the Investment Company Act, except that, without the
consent of each holder of Trust Securities affected thereby, the Trust
Agreement may not be amended to (x) change the amount or timing of any
Distribution on the Trust Securities or otherwise adversely affect the amount
of any Distribution required to be made in respect of the Trust Securities as
of a specified date or (y) restrict the right of a holder of Trust Securities
to institute suit for the enforcement of any such payment on or after such
date.
So long as any Junior Subordinated Debentures are held by the Issuer
Trust, the Property Trustee will not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Property Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is
waivable under Section 5.13 of the Junior Subordinated Indenture, (iii)
exercise any right to rescind or annul a declaration that the Junior
Subordinated Debentures shall be due and payable or (iv) consent to any
amendment, modification or termination of the Junior Subordinated Indenture or
the Junior Subordinated Debentures, where such consent shall be required,
without, in each case, obtaining the prior approval of the holders of at least
a majority in aggregate Liquidation Amount of the Capital Securities, except
that, if a consent under the Junior Subordinated Indenture would require the
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consent of each holder of Junior Subordinated Debentures affected thereby, no
such consent will be given by the Property Trustee without the prior written
consent of each holder of the Capital Securities. The Property Trustee may not
revoke any action previously authorized or approved by a vote of the holders of
the Capital Securities except by subsequent vote of the holders of the Capital
Securities. The Property Trustee will notify each holder of Capital Securities
of any notice of default with respect to the Junior Subordinated Debentures. In
addition to obtaining the foregoing approvals of the holders of the Capital
Securities, before taking any of the foregoing actions, the Property Trustee
will obtain an opinion of counsel experienced in such matters to the effect
that the Issuer Trust will not be taxable other than as a grantor trust for
United States federal income tax purposes on account of such action.
Any required approval of holders of Capital Securities may be given at a
meeting of holders of Capital Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Capital Securities are entitled to vote, or of any matter upon
which action by written consent of such holders is to be taken, to be given to
each registered holder of Capital Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Capital Securities will be required
to redeem and cancel Capital Securities in accordance with the Trust Agreement.
Notwithstanding that holders of Capital Securities are entitled to vote or
consent under any of the circumstances described above, any of the Capital
Securities that are owned by BancShares, the Issuer Trustees or any affiliate
of BancShares or any Issuer Trustees, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
Form, Denomination, Book-Entry Procedures and Transfer
The Capital Securities to be issued in the offering may be transferred or
exchanged in the manner and at the offices described below.
The Capital Securities to be issued in the offering initially will be
represented by one or more Capital Securities in registered, global form
(collectively, the "Global Capital Securities"). The Global Capital Securities
will be deposited upon issuance with the Property Trustee as custodian for DTC,
in New York, New York, and registered in the name of DTC or its nominee, in
each case for credit to an account of a direct or indirect participant in DTC,
as described below.
Except as set forth below, the Global Capital Securities may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the Global Capital
Securities may not be exchanged for Certificated Capital Securities except in
the limited circumstances described under " -- Exchange of Book-Entry Capital
Securities for Certificated Capital Securities" below. In addition, transfer of
beneficial interests in the Global Capital Securities will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants,
which may change from time to time.
Depositary Procedures
DTC has advised the Issuer Trust and BancShares that DTC is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the
clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership
interest of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and the Indirect Participants.
DTC has also advised the Issuer Trust and BancShares that, pursuant to
procedures established by it, (i) upon deposit of the Global Capital
Securities, DTC will credit the accounts of Participants on behalf of
purchasers of the Capital Securities with portions of the Liquidation Amount of
the Global Capital Securities and (ii) ownership of such interests in the
Global Capital Securities will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Capital
Securities).
Investors in the Global Capital Securities may hold their interests
therein directly through DTC if they are Participants in such system, or
indirectly through organizations which are Participants in such system. All
interests in a Global Capital
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Security may be subject to the procedures and requirements of DTC. The laws of
some states require that certain persons take physical delivery in certificated
form of securities that they own. Consequently, the ability to transfer
beneficial interests in a Global Capital Security to such persons will be
limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in a Global Capital Security to
pledge such interests to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests. For certain
other restrictions on the transferability of the Capital Securities, see " --
Exchange of Book-Entry Capital Securities for Certificated Capital Securities."
Except as described below, owners of interests in the Global Capital
Securities will not have Capital Securities registered in their name, will not
receive physical delivery of Certificated Capital Securities and will not be
considered the registered owners or holders thereof under the Trust Agreement
for any purpose.
Payments in respect of the Global Capital Securities registered in the
name of DTC or its nominee will be payable by the Property Trustee to DTC in
its capacity as the registered holder under the Trust Agreement. Under the
terms of the Trust Agreement, the Property Trustee will treat the persons in
whose names the Capital Securities, including the Global Capital Securities,
are registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, neither the
Property Trustee nor any agent thereof has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Capital Securities, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Capital Securities or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Issuer Trust and BancShares that its current practice, upon receipt
of any payment in respect of securities such as the Capital Securities, is to
credit the account of the relevant Participants with the payment on the payment
date, in amounts proportionate to their respective holdings in Liquidation
Amount of beneficial interests in the relevant security as shown on the records
of DTC unless DTC has reason to believe it will not receive payment on such
payment date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Capital Securities will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Property Trustee, the Issuer Trust or BancShares. Neither the Issuer
Trust nor BancShares or the Property Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Capital Securities, and the Issuer Trust or BancShares and the Property Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee for all purposes.
DTC has advised the Issuer Trust and BancShares that it will take any
action permitted to be taken by a holder of Capital Securities only at the
direction of one or more Participants to whose account with DTC interests in
the Global Capital Securities are credited and only in respect of such portion
of the Liquidation Amount of the Capital Securities as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Trust Agreement, DTC reserves the right to
exchange the Global Capital Securities for Certificated Capital Securities and
to distribute such Capital Securities to its Participants.
The information in this section concerning DTC and book-entry systems has
been obtained from sources that the Issuer Trust and BancShares believe to be
reliable, but neither the Issuer Trust nor BancShares takes responsibility for
the accuracy thereof.
Exchange of Book-Entry Capital Securities for Certificated Capital Securities
A Global Capital Security is exchangeable for Certificated Capital
Securities if (i) DTC (x) notifies BancShares and the Property Trustee in
writing that it is unwilling or unable to properly discharge its
responsibilities as depositary for the Global Capital Security and BancShares
is unable to locate a qualified successor, or (y) has ceased to be a clearing
agency registered under the Exchange Act and BancShares thereupon is unable to
locate a qualified successor, (ii) the Issuer Trust at its option advises DTC
in writing that it elects to terminate the book-entry system through DTC, or
(iii) there shall have occurred and be continuing an Event of Default or any
event which after notice or lapse of time or both would be an Event of Default
under the Trust Agreement. In addition, beneficial interests in a Global
Capital Security may be exchanged for Certificated Capital Securities upon
request but only upon at least 20 days prior written notice given to the
Property Trustee by or on behalf of DTC in accordance with customary
procedures. In all cases, Certificated Capital Securities delivered in exchange
for any Global Capital Security or beneficial interests therein will be
registered in the names, and issued in any approved denominations, requested by
or on behalf of DTC (in accordance with its customary procedures).
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Expenses and Taxes
In the Trust Agreement, BancShares has agreed to pay all debts and other
obligations (other than with respect to the Capital Securities) and all costs
and expenses of the Issuer Trust (including costs and expenses relating to the
organization of the Issuer Trust, the fees and expenses of the Issuer Trustees
and the costs and expenses relating to the operation of the Issuer Trust) and
to pay any and all taxes and all costs and expenses with respect thereto (other
than withholding taxes) to which the Issuer Trust might become subject. The
foregoing obligations of BancShares under the Trust Agreement are for the
benefit of, and shall be enforceable by, any person to whom any such debts,
obligations, costs, expenses and taxes are owed (a "Creditor") whether or not
such Creditor has received notice thereof. Any such Creditor may enforce such
obligations of BancShares directly against BancShares, and BancShares has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Issuer Trust or any other person before proceeding
against BancShares. BancShares has also agreed in the Trust Agreement to
execute such additional agreements as may be necessary or desirable to give
full effect to the foregoing.
Payment and Paying Agency
Payments in respect of the Capital Securities will be made by check mailed
to the address of the holder entitled thereto as such address appears on the
securities register for the Trust Securities. The paying agent (the "Paying
Agent") initially will be the Property Trustee and any co-paying agent chosen
by the Property Trustee and acceptable to the Administrators. The Paying Agent
will be permitted to resign as Paying Agent upon 30 days' written notice to the
Property Trustee and the Administrators. If the Property Trustee is no longer
the Paying Agent, the Property Trustee will appoint a successor (which must be
a bank or trust company reasonably acceptable to the Administrators) to act as
Paying Agent.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
Registration of transfers of Capital Securities will be effected without
charge by or on behalf of the Issuer Trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Issuer Trust will not be required to register or cause to be
registered the transfer of the Capital Securities after the Capital Securities
have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, after such Event of Default, must
exercise the same degree of care and skill as a prudent person would exercise
or use in the conduct of his or her own affairs. Subject to this provision, the
Property Trustee is under no obligation to exercise any of the powers vested in
it by the Trust Agreement at the request of any holder of Capital Securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred thereby.
For information concerning the relationships between Bankers Trust
Company, the Property Trustee, and BancShares, see "Description of the Junior
Subordinated Debentures -- Information Concerning the Debenture Trustee."
Miscellaneous
The Administrators and the Property Trustee are authorized and directed to
conduct the affairs of and to operate the Issuer Trust in such a way that the
Issuer Trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or taxable other than as a grantor
trust for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of BancShares for
United States federal income tax purposes. In this connection, the Property
Trustee and the holders of Common Securities are authorized to take any action,
not inconsistent with applicable law, the certificate of trust of the Issuer
Trust or the Trust Agreement, that the Property Trustee and the holders of
Common Securities determine in their discretion to be necessary or desirable
for such purposes, as long as such action does not materially adversely affect
the interests of the holders of the Capital Securities.
Holders of the Capital Securities have no preemptive or similar rights.
The Issuer Trust may not borrow money or issue debt or mortgage or pledge
any of its assets.
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Governing Law
The Trust Agreement will be governed by and construed in accordance with
the laws of the State of Delaware.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Junior
Subordinated Indenture, under which Bankers Trust Company is acting as
Debenture Trustee. This summary of certain terms and provisions of the Junior
Subordinated Debentures and the Junior Subordinated Indenture does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Junior Subordinated Indenture, including the
definitions therein of certain terms. Whenever particular defined terms of the
Junior Subordinated Indenture (as amended or supplemented from time to time)
are referred to herein, such defined terms are incorporated herein by
reference. A copy of the form of Junior Subordinated Indenture is available
from the Debenture Trustee upon request.
General
Concurrently with the issuance of the Capital Securities, the Issuer Trust
will invest the proceeds thereof, together with the consideration paid by
BancShares for the Common Securities, in the Junior Subordinated Debentures
issued by BancShares. The Junior Subordinated Debentures will bear interest,
accruing from the date of original issuance, at a rate equal to 8.25% per annum
on the principal amount thereof, payable quarterly in arrears on March 31, June
30, September 30 and December 31 of each year (each, an "Interest Payment
Date"), commencing September 30, 1998, to the person in whose name each Junior
Subordinated Debenture is registered at the close of business on the fifteenth
day (whether or not a Business Day) next preceding such Interest Payment Date.
It is anticipated that, until the liquidation, if any, of the Issuer Trust,
each Junior Subordinated Debenture will be registered in the name of the Issuer
Trust and held by the Property Trustee in trust for the benefit of the holders
of the Trust Securities. The amount of interest payable for any period less
than a full interest period will be computed on the basis of a 360-day year of
twelve 30-day months and the actual days elapsed in a partial month in such
period. The amount of interest payable for any full interest period will be
computed by dividing the rate per annum by four. If any date on which interest
is payable on the Junior Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next
succeeding day that is a Business Day (without any interest or other payment in
respect of any such delay), with the same force and effect as if made on the
date such payment was originally payable. Accrued interest that is not paid on
the applicable Interest Payment Date will bear additional interest on the
amount thereof (to the extent permitted by law) at a rate equal to 8.25% per
annum, compounded quarterly and computed on the basis of a 360-day year of
twelve 30-day months and the actual days elapsed in a partial month in such
period. The amount of additional interest payable for any full interest period
will be computed by dividing the rate per annum by four. The term "interest" as
used herein includes quarterly interest payments, interest on quarterly
interest payments not paid on the applicable Interest Payment Date and
Additional Sums (as defined below), as applicable.
The Junior Subordinated Debentures will mature on June 30, 2028.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness of
BancShares. The Junior Subordinated Debentures will not be subject to a sinking
fund and will not be eligible as collateral for any loan made by BancShares.
The Junior Subordinated Indenture does not limit the incurrence or issuance of
other secured or unsecured debt by BancShares, including Senior Indebtedness,
whether under the Junior Subordinated Indenture or any existing or other
indenture or agreement that BancShares may enter into in the future or
otherwise. See " -- Subordination."
Option to Extend Interest Payment Period
So long as no Debenture Event of Default has occurred and is continuing,
BancShares has the right at any time during the term of the Junior Subordinated
Debentures to defer the payment of interest at any time or from time to time
for a period not exceeding 20 consecutive quarterly periods with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures or end on a date other
than an Interest Payment Date. At the end of such Extension Period, BancShares
must pay all interest then accrued and unpaid (together with interest thereon
at a rate equal to 8.25% per annum, compounded quarterly and computed on the
basis of a 360-day year of twelve 30-day months and the actual days elapsed in
a partial month in such period, to the extent permitted by applicable law). The
amount of additional interest payable for any full interest period will be
computed by dividing the rate
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per annum by four. During an Extension Period, interest will continue to accrue
and holders of Junior Subordinated Debentures (or holders of Capital Securities
while outstanding) will be required to accrue original issue discount income
for United States federal income tax purposes. See "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
During any such Extension Period, BancShares may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of BancShares' capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of BancShares that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of BancShares in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or shareholder stock purchase plan or in connection with the
issuance of capital stock of BancShares (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of BancShares'
capital stock (or any capital stock of a subsidiary of BancShares) for any
class or series of BancShares' capital stock or of any class or series of
BancShares' indebtedness for any class or series of BancShares' capital stock,
(c) the purchase of fractional interests in shares of BancShares' capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged, (d) any declaration of a dividend in
connection with any shareholder's rights plan, or the issuance of rights, stock
or other property under any shareholders rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of
stock, warrants, options or other rights where the dividend stock or the stock
issuable upon exercise of such warrants, options or other rights is the same
stock as that on which the dividend is being paid or ranks pari passu with or
junior to such stock). Prior to the termination of any such Extension Period,
BancShares may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity of the Junior Subordinated Debentures or end on a date
other than an Interest Payment Date. Upon the termination of any such Extension
Period and the payment of all amounts then due, BancShares may elect to begin a
new Extension Period subject to the above conditions. No interest shall be due
and payable during an Extension Period, except at the end thereof. BancShares
must give the Issuer Trustees notice of its election of such Extension Period
at least one Business Day prior to the earlier of (i) the date the
Distributions on the Capital Securities would have been payable but for the
election to begin such Extension Period and (ii) the date the Property Trustee
is required to give notice to holders of the Capital Securities of the record
date or the date such Distributions are payable, but in any event not less than
one Business Day prior to such record date. The Property Trustee will give
notice of BancShares' election to begin a new Extension Period to the holders
of the Capital Securities. There is no limitation on the number of times that
BancShares may elect to begin an Extension Period.
Redemption
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of BancShares (i) on or after June 30, 2003, in whole at any time or in
part from time to time, or (ii) in whole, but not in part, at any time within
90 days following the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event (each as defined under
"Description of Capital Securities -- Redemption"), in each case at the
redemption price described below. The proceeds of any such redemption will be
used by the Issuer Trust to redeem the Capital Securities.
The Federal Reserve's risk-based capital guidelines, which are subject to
change, currently provide that redemptions of permanent equity or other capital
instruments before stated maturity could have a significant impact on a bank
holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on the level or composition of the organization's
capital base (unless the equity or capital instrument were redeemed with the
proceeds of, or replaced by, a like amount of a similar or higher quality
capital instrument and the Federal Reserve considers the organization's capital
position to be fully adequate after the redemption).
The redemption of the Junior Subordinated Debentures by BancShares prior
to their Stated Maturity would constitute the redemption of capital instruments
under the Federal Reserve's current risk-based capital guidelines and may be
subject to the prior approval of the Federal Reserve.
The redemption price for Junior Subordinated Debentures in the case of a
redemption under (i) or (ii) above shall equal their principal amount, together
with accrued interest to but excluding the date fixed for redemption.
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Additional Sums
BancShares has covenanted in the Junior Subordinated Indenture that, if
and for so long as (i) the Issuer Trust is the holder of all Junior
Subordinated Debentures and (ii) the Issuer Trust is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, BancShares will pay as additional sums on the Junior Subordinated
Debentures such amounts as may be required so that the Distributions payable by
the Issuer Trust will not be reduced as a result of any such additional taxes,
duties or other governmental charges. See "Description of Capital Securities --
Redemption."
Registration, Denomination and Transfer
The Junior Subordinated Debentures will initially be registered in the
name of the Issuer Trust. If the Junior Subordinated Debentures are distributed
to holders of Capital Securities, it is anticipated that the depositary
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Capital Securities. See "Description of
Capital Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in
definitive form.
Payments on Junior Subordinated Debentures represented by a global
security will be made to Cede, the nominee for DTC, as the registered holder of
the Junior Subordinated Debentures, as described under "Description of the
Capital Securities -- Book Entry, Delivery and Form." If Junior Subordinated
Debentures are issued in certificated form, principal and interest will be
payable, the transfer of the Junior Subordinated Debentures will be
registrable, and Junior Subordinated Debentures will be exchangeable for Junior
Subordinated Debentures of other authorized denominations of a like aggregate
principal amount, at the corporate trust office of the Debenture Trustee in New
York, New York or at the offices of any Paying Agent or transfer agent
appointed by the Company, provided that payment of interest may be made at the
option of the Company by check mailed to the address of the persons entitled
thereto. However, a holder of $1 million or more in aggregate principal amount
of Junior Subordinated Debentures may receive payments of interest (other than
interest payable at the Stated Maturity) by wire transfer of immediately
available funds upon written request to the Debenture Trustee not later than 15
calendar days prior to the date on which the interest is payable.
The Junior Subordinated Debentures will be issuable only in registered
form without coupons in integral multiples of $10.00. Junior Subordinated
Debentures will be exchangeable for other Junior Subordinated Debentures of
like tenor, of any authorized denominations, and of a like aggregate principal
amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Junior Subordinated Indenture or at the office of any transfer agent designated
by BancShares for such purpose without service charge and upon payment of any
taxes and other governmental charges as described in the Junior Subordinated
Indenture. BancShares will appoint the Debenture Trustee as securities
registrar under the Junior Subordinated Indenture. BancShares may at any time
designate additional transfer agents with respect to the Junior Subordinated
Debentures.
In the event of any redemption, neither BancShares nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) to register the
transfer or exchange of any Junior Subordinated Debentures so selected for
redemption, except, in the case of any Junior Subordinated Debentures being
redeemed in part, any portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by BancShares in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of BancShares, be repaid to
BancShares and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to BancShares for
payment thereof.
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Restrictions on Certain Payments; Certain Covenants of BancShares
BancShares has covenanted that it will not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of BancShares' capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of BancShares that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of BancShares in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or shareholder stock purchase plan or in connection with the
issuance of capital stock of BancShares (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period or other
event referred to below, (b) as a result of an exchange or conversion of any
class or series of BancShares' capital stock (or any capital stock of a
subsidiary of BancShares) for any class or series of BancShares' capital stock
or of any class or series of BancShares' indebtedness for any class or series
of BancShares' capital stock, (c) the purchase of fractional interests in
shares of BancShares' capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any declaration of a dividend in connection with any shareholder's rights
plan, or the issuance of rights, stock or other property under any
shareholder's rights plan, or the redemption or repurchase of rights pursuant
thereto, or (e) any dividend in the form of stock, warrants, options or other
rights where the dividend stock or the stock issuable upon exercise of such
warrants, options or other rights is the same stock as that on which the
dividend is being paid or ranks pari passu with or junior to such stock), if at
such time (x) there has occurred any event (1) of which BancShares has actual
knowledge that with the giving of notice or the lapse of time, or both, would
constitute a Debenture Event of Default and (2) that BancShares has not taken
reasonable steps to cure, (y) if the Junior Subordinated Debentures are held by
the Issuer Trust, BancShares is in default with respect to its payment of any
obligations under the Guarantee or (z) BancShares has given notice of its
election of an Extension Period as provided in the Junior Subordinated
Indenture and has not rescinded such notice, or such Extension Period, or any
extension thereof, is continuing.
BancShares has covenanted in the Junior Subordinated Indenture (i) to
continue to hold, directly or indirectly, 100% of the Common Securities,
provided that certain successors that are permitted pursuant to the Junior
Subordinated Indenture may succeed to BancShares' ownership of the Common
Securities, (ii) as holder of the Common Securities, not to voluntarily
terminate, wind up or liquidate the Issuer Trust, other than (a) in connection
with a distribution of Junior Subordinated Debentures to the holders of the
Capital Securities in liquidation of the Issuer Trust or (b) in connection with
certain mergers, consolidations or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms
and provisions of the Trust Agreement, to cause the Issuer Trust to continue to
be taxable as a grantor trust for United States federal income tax purposes.
Modification of Junior Subordinated Indenture
From time to time, BancShares and the Debenture Trustee may, without the
consent of any of the holders of the outstanding Junior Subordinated
Debentures, amend, waive or supplement the provisions of the Junior
Subordinated Indenture to: (i) evidence succession of another corporation or
association to BancShares and the assumption by such person of the obligations
of BancShares under the Junior Subordinated Indenture and the Junior
Subordinated Debentures; (ii) add further covenants for the benefit of holders
of the Junior Subordinated Debentures, or surrender any right or power
conferred upon BancShares by the Junior Subordinated Indenture; (iii) cure
ambiguities or correct or supplement any provision in the Junior Subordinated
Debentures in the case of defects or inconsistencies in the provisions thereof,
so long as any such cure or correction does not adversely affect the interest
of the holders of the Junior Subordinated Debentures or the Capital Securities
in any material respect; (iv) change the terms of the Junior Subordinated
Indenture to facilitate the issuance of the Junior Subordinated Debentures in
certificated or other definitive form; (v) evidence or provide for the
acceptance of appointment under the Junior Subordinated Indenture of a
successor Debenture Trustee; (vi) comply with the requirements of the
Commission to qualify, or maintain the qualification of, the Junior
Subordinated Indenture under the Trust Indenture Act; (vii) convey, transfer,
assign, mortgage or pledge any property to or with the Debenture Trustee or to
surrender any right or power conferred on BancShares in the Junior Subordinated
Indenture; (viii) establish the form or terms of any series of the Junior
Subordinated Debentures as permitted by the Junior Subordinated Indenture; (ix)
change or eliminate any provision of the Junior Subordinated Indenture, so long
as at the time of such change there are no outstanding Junior Subordinated
Debentures entitled to the benefit of such provision or such change does not
apply to then outstanding Junior Subordinated Debentures; or (x) add any
additional Debenture Events of Default for the holders of the Junior
Subordinated Debentures. The Junior Subordinated Indenture contains provisions
permitting BancShares and the Debenture Trustee, with the consent of the
holders of not less than a majority in principal amount of the Junior
Subordinated Debentures, to modify the Junior
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Subordinated Indenture in a manner affecting the rights of the holders of the
Junior Subordinated Debentures, except that no such modification may, without
the consent of the holder of each outstanding Junior Subordinated Debenture so
affected, (i) change the Stated Maturity of the principal of, or any
installment of interest on, the Junior Subordinated Debentures, or reduce the
principal amount thereof, the rate of interest thereon or any premium payable
upon the redemption thereof, or change the place of payment where, or the
currency in which, any such amount is payable or impair the right to institute
suit for the enforcement of any Junior Subordinated Debenture or (ii) reduce
the percentage of principal amount of Junior Subordinated Debentures, the
holders of which are required to consent to any such modification of, or to
waive certain matters provided for in, the Junior Subordinated Indenture.
Furthermore, so long as any of the Capital Securities remain outstanding, no
such modification may be made that adversely affects the holders of such
Capital Securities in any material respect, and no termination of the Junior
Subordinated Indenture may occur, and no waiver of any Debenture Event of
Default or compliance with any covenant under the Junior Subordinated Indenture
may be effective, without the prior consent of the holders of at least a
majority of the aggregate Liquidation Amount of the outstanding Capital
Securities unless and until the principal of (and premium, if any, on) the
Junior Subordinated Debentures and all accrued and unpaid interest thereon have
been paid in full and certain other conditions are satisfied.
Debenture Events of Default
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure to pay any interest on the Junior Subordinated Debentures
when due and payable, and continuance of such default for a period of 30
days (subject to the deferral of any due date in the case of an Extension
Period); or
(ii) failure to pay any principal of or premium, if any, on the Junior
Subordinated Debentures when due whether at maturity, upon redemption, by
declaration of acceleration or otherwise; or
(iii) failure to duly observe or perform in any material respect certain
other covenants contained in the Junior Subordinated Indenture for 90 days
after written notice to BancShares from the Debenture Trustee or the
holders of at least 25% in aggregate outstanding principal amount of the
outstanding Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of
BancShares.
For purposes of the Trust Agreement and this Offering Memorandum, each
such Event of Default under the Junior Subordinated Debenture is referred to as
a "Debenture Event of Default." As described in "Description of the Capital
Securities -- Events of Default; Notice," the occurrence of a Debenture Event
of Default will also constitute an Event of Default in respect of the Trust
Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Junior Subordinated Debentures may
declare the principal due and payable upon a Debenture Event of Default which
is continuing, and, should the Debenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate Liquidation Amount of the outstanding Capital Securities shall
have such right. The holders of a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures may annul such declaration and waive
the default if all defaults (other than the non-payment of the principal of
Junior Subordinated Debentures which has become due solely by such
acceleration) have been cured or waived and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the outstanding
Capital Securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding Junior Subordinated Debentures affected thereby, and the holders of
a majority in aggregate Liquidation Amount of the Capital Securities issued by
the Issuer Trust, may, on behalf of the holders of all the Junior Subordinated
Debentures, waive any past default, except a default in the payment of
principal (or premium, if any) or interest (unless such default has been cured
and a sum sufficient to pay all matured installments of interest and principal
due otherwise than by acceleration has been deposited with the Debenture
Trustee) or a default in respect of a covenant or provision which under the
Junior Subordinated Indenture cannot be modified or amended without the consent
of the holder of each outstanding Junior Subordinated Debenture affected
thereby. See " -- Modification of Junior Subordinated Indenture." BancShares is
required to file annually with the Debenture Trustee a
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certificate as to whether or not BancShares is in compliance with all the
conditions and covenants applicable to it under the Junior Subordinated
Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the Junior
Subordinated Indenture, to be forthwith due and payable and to enforce its
other rights as a creditor with respect to the Junior Subordinated Debentures.
Enforcement of Certain Rights by Holders of Capital Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of BancShares to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date such amounts are
otherwise payable, a registered holder of Capital Securities may institute a
legal proceeding directly against BancShares for enforcement of payment to such
holder of an amount equal to the amount payable in respect of Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Capital Securities held by such holder (a "Direct
Action"). BancShares may not amend the Junior Subordinated Indenture to remove
the foregoing right to bring a Direct Action without the prior written consent
of the holders of all the Capital Securities. BancShares will have the right
under the Junior Subordinated Indenture to set-off any payment made to such
holder of Capital Securities by BancShares in connection with a Direct Action.
With certain exceptions, the holders of the Capital Securities would not
be able to exercise directly any remedies available to the holders of the
Junior Subordinated Debentures except under the circumstances described in the
preceding paragraph. See "Description of the Capital Securities -- Events of
Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Junior Subordinated Indenture provides that BancShares may not
consolidate with or merge into any other Person or convey, transfer or lease
its properties and assets substantially as an entirety to any Person, and no
Person may consolidate with or merge into BancShares or convey, transfer or
lease its properties and assets substantially as an entirety to BancShares,
unless (i) if BancShares consolidates with or merges into another Person or
conveys, or transfers or leases its properties and assets substantially as an
entirety to any Person, the successor Person is organized under the laws of the
United States or any state thereof or the District of Columbia, and such
successor Person expressly assumes BancShares' obligations in respect of the
Junior Subordinated Debentures; (ii) immediately after giving effect thereto,
no Debenture Event of Default, and no event which, after notice or lapse of
time or both, would constitute a Debenture Event of Default, has occurred and
is continuing; and (iii) certain other conditions as prescribed in the Junior
Subordinated Indenture are satisfied.
The provisions of the Junior Subordinated Indenture do not afford holders
of the Junior Subordinated Debentures protection in the event of a highly
leveraged or other transaction involving BancShares that may adversely affect
holders of the Junior Subordinated Debentures.
Satisfaction and Discharge
The Junior Subordinated Indenture provides that when, among other things,
all Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation (i)(a) have become due and payable or (b) will become
due and payable at the Stated Maturity within one year, or (c) are to be called
for redemption within one year under arrangements satisfactory to the Debenture
Trustee, and (ii) BancShares deposits or causes to be deposited with the
Debenture Trustee funds, in trust, for the purpose and in an amount sufficient
to pay and discharge the entire indebtedness on the Junior Subordinated
Debentures not previously delivered to the Debenture Trustee for cancellation,
for the principal (and premium, if any) and interest (including any additional
interest) to the date of the deposit or to the Stated Maturity, as the case may
be, then the Junior Subordinated Indenture will, upon BancShares' request, be
satisfied and discharged and cease to be of further effect (except as to any
surviving rights of registration of transfer or exchange, certain obligations
of BancShares to the Debenture Trustree and the obligations of the Debenture
Trustee to apply money deposited by BancShares in payment of the Junior
Subordinated Debentures).
Subordination
The Junior Subordinated Debentures will be subordinate and junior in right
of payment, to the extent set forth in the Junior Subordinated Indenture, to
all Senior Indebtedness (as defined below) of BancShares. If BancShares
defaults in the payment of any principal, premium, if any, or interest, if any,
on any Senior Indebtedness when the same becomes due and
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payable, whether at maturity or at a date fixed for redemption or by
declaration of acceleration or otherwise, then, unless and until such default
has been cured or waived or has ceased to exist or all Senior Indebtedness has
been paid, no direct or indirect payment (in cash, property, securities, by
setoff or otherwise) may be made or agreed to be made on the Junior
Subordinated Debentures, or in respect of any redemption, repayment,
retirement, purchase or other acquisition of any of the Junior Subordinated
Debentures.
As used herein, "Senior Indebtedness" means, whether recourse is to all or
a portion of the assets of BancShares and whether or not contingent, (i) every
obligation of BancShares for money borrowed; (ii) every obligation of
BancShares evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of BancShares with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of BancShares; (iv) every obligation of BancShares issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of BancShares; (vi) every
obligation of BancShares for claims (as defined in Section 101(4) of the United
States Bankruptcy Code of 1978, as amended) in respect of derivative products
such as interest and foreign exchange rate contracts, commodity contracts and
similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another person the payment of which BancShares has
guaranteed or is responsible or liable, directly or indirectly, as obligor or
otherwise. At March 31, 1998, BancShares' Senior Indebtedness aggregated
approximately $4.3 million. See "Risk Factors -- Risk Factors Relating to
BancShares -- Status of BancShares as a Bank Holding Company." "Senior
Indebtedness" shall not include (i) any obligations which, by their terms, are
expressly stated to rank pari passu in right of payment with, or to not be
superior in right of payment to, the Junior Subordinated Debentures, (ii) any
indebtedness of BancShares which when incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to BancShares, (iii) any indebtedness of
BancShares to any of its subsidiaries, (iv) indebtedness to any executive
officer or director of BancShares, or (v) any indebtedness in respect of debt
securities issued to any trust, or a trustee of such trust, partnership or
other entity affiliated with BancShares that is a financing entity of
BancShares in connection with the issuance of such financing entity of
securities that are similar to the Capital Securities.
In the event of (i) certain events of bankruptcy, dissolution or
liquidation of BancShares, (ii) any proceeding for the liquidation, dissolution
or other winding up of BancShares, voluntary or involuntary, whether or not
involving insolvency or bankruptcy proceedings, (iii) any assignment by
BancShares for the benefit of creditors or (iv) any other marshalling of the
assets of BancShares, all Senior Indebtedness (including any interest thereon
accruing after the commencement of any such proceedings) shall first be paid in
full before any payment or distribution, whether in cash, securities or other
property, shall be made on account of the Junior Subordinated Debentures. In
such event, any payment or distribution on account of the Junior Subordinated
Debentures, whether in cash, securities or other property, that would otherwise
(but for the subordination provisions) be payable or deliverable in respect of
the Junior Subordinated Debentures will be paid or delivered directly to the
holders of Senior Indebtedness in accordance with the priorities then existing
among such holders until all Senior Indebtedness (including any interest
thereon accruing after the commencement of any such proceedings) has been paid
in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Indebtedness, the holders of Junior Subordinated
Debentures, together with the holders of any obligations of BancShares ranking
on a parity with the Junior Subordinated Debentures, will be entitled to be
paid from the remaining assets of BancShares the amounts at the time due and
owing on the Junior Subordinated Debentures and such other obligations before
any payment or other distribution, whether in cash, property or otherwise, will
be made on account of any capital stock or obligations of BancShares ranking
junior to the Junior Subordinated Debentures and such other obligations. If any
payment or distribution on account of the Junior Subordinated Debentures of any
character or any security, whether in cash, securities or other property is
received by any holder of any Junior Subordinated Debentures in contravention
of any of the terms hereof and before all the Senior Indebtedness has been paid
in full, such payment or distribution or security will be received in trust for
the benefit of, and must be paid over or delivered and transferred to, the
holders of the Senior Indebtedness at the time outstanding in accordance with
the priorities then existing among such holders for application to the payment
of all Senior Indebtedness remaining unpaid to the extent necessary to pay all
such Senior Indebtedness in full. By reason of such subordination, in the event
of the insolvency of BancShares, holders of Senior Indebtedness may receive
more, ratably, and holders of the Junior Subordinated Debentures may receive
less, ratably, than the other creditors of BancShares. Such subordination will
not prevent the occurrence of any Event of Default in respect of the Junior
Subordinated Debentures.
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The Junior Subordinated Indenture places no limitation on the amount of
additional Senior Indebtedness that may be incurred by BancShares. BancShares
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness.
Information Concerning the Debenture Trustee
The Debenture Trustee, other than during the occurrence and continuance of
a Debenture Event of Default, undertakes to perform only such duties as are
specifically set forth in the Junior Subordinated Indenture, is under no
obligation to exercise any of the powers vested in it by the Junior
Subordinated Indenture, and, after such Debenture Event of Default, must
exercise the same degree of care and skill as a prudent person would exercise
in the conduct of his or her own affairs. The Debenture Trustee is not required
to expend or risk its own funds or otherwise incur personal financial liability
in the performance of its duties if the Debenture Trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it.
Bankers Trust Company, the Debenture Trustee, may serve from time to time
as trustee under other indentures or trust agreements with BancShares or its
subsidiaries relating to other issues of their securities. In addition,
BancShares and certain of its affiliates may have other banking relationships
with Bankers Trust Company and its affiliates.
Governing Law
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
New York.
DESCRIPTION OF THE GUARANTEE
The Guarantee will be executed and delivered by BancShares concurrently
with the issuance of Capital Securities by the Issuer Trust for the benefit of
the holders from time to time of the Capital Securities. Bankers Trust Company
will act as Guarantee Trustee under the Guarantee. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all the provisions of the
Guarantee, including the definitions therein of certain terms. A copy of the
form of Guarantee is available upon request from the Guarantee Trustee. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Capital Securities.
General
BancShares will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to
the holders of the Capital Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Issuer Trust may have or
assert other than the defense of payment. The following payments with respect
to the Capital Securities, to the extent not paid by or on behalf of the Issuer
Trust (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on such Capital
Securities, to the extent that the Issuer Trust has funds on hand available
therefor at such time; (ii) the Redemption Price with respect to any Capital
Securities called for redemption, to the extent that the Issuer Trust has funds
on hand available therefor at such time; and (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Issuer Trust (unless
the Junior Subordinated Debentures are distributed to holders of the Capital
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment, to the extent that
the Issuer Trust has funds on hand available therefor at such time, and (b) the
amount of assets of the Issuer Trust remaining available for distribution to
holders of the Capital Securities on liquidation of the Issuer Trust.
BancShares' obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by BancShares to the holders of the Capital
Securities or by causing the Issuer Trust to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Issuer Trust's obligations under the Capital Securities, but will apply
only to the extent that the Issuer Trust has funds sufficient to make such
payments, and is not a guarantee of collection.
If BancShares does not make payments on the Junior Subordinated Debentures
held by the Issuer Trust, the Issuer Trust will not be able to pay any amounts
payable in respect of the Capital Securities and will not have funds legally
available therefor. The Guarantee will rank subordinate and junior in right of
payment to all Senior Indebtedness of BancShares. See " -- Status of the
Guarantee." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of BancShares, including Senior Indebtedness, whether
under the Junior Subordinated Indenture, any other indenture that BancShares
may enter into in the future or otherwise.
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BancShares has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture, taken together,
fully, irrevocably and unconditionally guaranteed all the Issuer Trust's
obligations under the Capital Securities. No single document standing alone or
operating in conjunction with fewer than all the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Issuer Trust's obligations in respect of the Capital Securities. See
"Relationship Among the Capital Securities, the Junior Subordinated Debentures
and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of BancShares and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of BancShares in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Capital Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Issuer
Trust or distribution to the holders of the Capital Securities of the Junior
Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes which do not materially adversely
affect the rights of holders of the Capital Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of the Capital Securities. The manner of obtaining any such approval will be as
set forth under "Description of the Capital Securities -- Voting Rights;
Amendment of Trust Agreement." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of BancShares and shall inure to the benefit of the holders of
the Capital Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of
BancShares to perform any of its payment or other obligations thereunder, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days. The holders of not less than a majority in aggregate
Liquidation Amount of the Capital Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee.
Any registered holder of Capital Securities may institute a legal
proceeding directly against BancShares to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Issuer
Trust, the Guarantee Trustee or any other person or entity.
BancShares, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not BancShares is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of
a default by BancShares in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after the
occurrence of an event of default with respect to the Guarantee, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by
the Guarantee at the request of any holder of the Capital Securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby.
For information concerning the relationship between Bankers Trust Company,
the Guarantee Trustee, and BancShares, see "Description of the Junior
Subordinated Debentures -- Information Concerning the Debenture Trustee."
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Capital Securities, upon full
payment of the amounts payable with respect to the Capital Securities upon
liquidation of the
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Issuer Trust or upon distribution of Junior Subordinated Debentures to the
holders of the Capital Securities. The Guarantee will continue to be effective
or will be reinstated, as the case may be, if at any time any holder of the
Capital Securities must restore payment of any sums paid under the Capital
Securities or the Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Capital Securities
(to the extent the Issuer Trust has funds available for such payment) are
irrevocably guaranteed by BancShares as and to the extent set forth under
"Description of the Guarantee." Taken together, BancShares' obligations under
the Junior Subordinated Debentures, the Junior Subordinated Indenture, the
Trust Agreement and the Guarantee provide, in the aggregate, a full,
irrevocable and unconditional guarantee of payments of Distributions and other
amounts due on the Capital Securities. No single document standing alone or
operating in conjunction with fewer than all the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Issuer Trust's obligations in respect of the Capital Securities. If and to the
extent that BancShares does not make payments on the Junior Subordinated
Debentures, the Issuer Trust will not have sufficient funds to pay
Distributions or other amounts due on the Capital Securities. The Guarantee
does not cover payment of amounts payable with respect to the Capital
Securities when the Issuer Trust does not have sufficient funds to pay such
amounts. In such event, the remedy of a holder of the Capital Securities is to
institute a legal proceeding directly against BancShares for enforcement of
payment of BancShares' obligations under Junior Subordinated Debentures having
a principal amount equal to the Liquidation Amount of the Capital Securities
held by such holder.
The obligations of BancShares under the Junior Subordinated Debentures and
the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
Sufficiency of Payments
As long as payments are made when due on the Junior Subordinated
Debentures, such payments will be sufficient to cover Distributions and other
payments distributable on the Capital Securities, primarily because: (i) the
aggregate principal amount of the Junior Subordinated Debentures will be equal
to the sum of the aggregate stated Liquidation Amount of the Capital Securities
and Common Securities; (ii) the interest rate and interest and other payment
dates on the Junior Subordinated Debentures will match the Distribution rate,
Distribution Dates and other payment dates for the Capital Securities; (iii)
BancShares will pay for all and any costs, expenses and liabilities of the
Issuer Trust except the Issuer Trust's obligations to holders of the Trust
Securities; and (iv) the Trust Agreement further provides that the Issuer Trust
will not engage in any activity that is not consistent with the limited
purposes of the Issuer Trust.
Notwithstanding anything to the contrary in the Junior Subordinated
Indenture, BancShares has the right to set-off any payment it is otherwise
required to make thereunder against and to the extent BancShares has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee.
Enforcement Rights of Holders of Capital Securities
A holder of any Capital Security may institute a legal proceeding directly
against BancShares to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Issuer Trust
or any other person or entity. See "Description of the Guarantee."
A default or event of default under any Senior Indebtedness of BancShares
would not constitute a default or Event of Default in respect of the Capital
Securities. However, in the event of payment defaults under, or acceleration
of, Senior Indebtedness of BancShares, the subordination provisions of the
Junior Subordinated Indenture provide that no payments may be made in respect
of the Junior Subordinated Debentures until such Senior Indebtedness has been
paid in full or any payment default thereunder has been cured or waived. See
"Description of the Junior Subordinated Debentures -- Subordination."
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Limited Purpose of Issuer Trust
The Capital Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and the Issuer Trust exists for the sole
purpose of issuing its Capital Securities and Common Securities and investing
the proceeds thereof in Junior Subordinated Debentures. A principal difference
between the rights of a holder of a Capital Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from BancShares payments on Junior Subordinated Debentures
held, while a holder of Capital Securities is entitled to receive Distributions
or other amounts distributable with respect to the Capital Securities from the
Issuer Trust (or from BancShares under the Guarantee) only if and to the extent
the Issuer Trust has funds available for the payment of such Distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution of the Issuer Trust, other
than any such dissolution involving the distribution of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Issuer Trust
as required by applicable law, the holders of the Capital Securities will be
entitled to receive, out of assets held by the Issuer Trust, the Liquidation
Distribution in cash. See "Description of the Capital Securities -- Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation
or bankruptcy of BancShares, the Issuer Trust, as registered holder of the
Junior Subordinated Debentures, would be a subordinated creditor of BancShares,
subordinated and junior in right of payment to all Senior Indebtedness as set
forth in the Junior Subordinated Indenture, but entitled to receive payment in
full of all amounts payable with respect to the Junior Subordinated Debentures
before any shareholders of BancShares receive payments or distributions. Since
BancShares is the guarantor under the Guarantee and has agreed under the Junior
Subordinated Indenture to pay for all costs, expenses and liabilities of the
Issuer Trust (other than the Issuer Trust's obligations to the holders of the
Trust Securities), the positions of a holder of the Capital Securities and a
holder of such Junior Subordinated Debentures relative to other creditors and
to shareholders of BancShares in the event of liquidation or bankruptcy of
BancShares are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the principal United States federal income
tax consequences of the purchase, ownership and disposition of Capital
Securities. The statements of law and legal conclusions set forth in this
summary regarding the tax consequences to the beneficial owners of Capital
Securities (the "Securityholders") represent the opinion of Hunton & Williams,
Richmond, Virginia, special tax counsel to BancShares. This summary does not
address all tax consequences that may be applicable to a Securityholder, nor
does it address the tax consequences to (i) persons that may be subject to
special treatment under United States federal income tax law, such as banks,
insurance companies, thrift institutions, regulated investment companies, real
estate investment trusts, tax-exempt organizations and dealers in securities or
currencies, (ii) persons that will hold Capital Securities as part of a
position in a "straddle" or as part of a "hedging", "conversion" or other
integrated investment transaction for federal income tax purposes, (iii) except
with respect to the discussion under the caption "United States Alien
Securityholders", persons whose functional currency is not the United States
dollar or (iv) persons that do not hold Capital Securities as capital assets.
This summary is based upon the Code, Treasury Regulations, Internal
Revenue Service (the "IRS") rulings and pronouncements and judicial decisions
now in effect, all of which are subject to change at any time. Such changes may
be applied retroactively in a manner that could cause the tax consequences to
vary substantially from the consequences described below, possibly adversely
affecting a beneficial owner of Capital Securities. In addition, the
authorities on which this summary is based (including authorities
distinguishing debt from equity) are subject to various interpretations, and it
is therefore possible that the federal income tax treatment of the Capital
Securities may differ from the treatment described below. No ruling has been
received from the IRS regarding the tax consequences of the Capital Securities.
Counsel's opinion regarding such tax consequences represents only counsel's
best legal judgment based on current authorities and is not binding on the IRS
or the courts.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS
IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF CAPITAL SECURITIES,
AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
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Classification of the Junior Subordinated Debentures
The Junior Subordinated Debentures are intended to be, in the opinion of
Hunton & Williams should be, and BancShares intends to take the position that
the Junior Subordinated Debentures will be, classified for United States
federal income tax purposes as indebtedness under current law. No assurance can
be given, however, that the IRS will not challenge that position. According to
a petition recently filed in the United States Tax Court by a corporation
unrelated to BancShares and the Issuer Trust, the IRS has challenged the status
as indebtedness, for United States federal income tax purposes, of certain
purported debt instruments held by entities intended to be taxable as
partnerships for United States federal income tax purposes, where those
entities, in turn, issued preferred securities to investors. Although the
overall structure of the financing arrangement involved in that case is
somewhat similar to the financing structure for the Junior Subordinated
Debentures and the Issuer Trust, the relevant facts involved in that case
appear to differ significantly from those relating to the Junior Subordinated
Debentures and the Issuer Trust. The remainder of this summary assumes that the
Junior Subordinated Debentures will be classified as indebtedness for United
States federal income tax purposes.
Classification of the Issuer Trust
In the opinion of Hunton & Williams, under current law and assuming
compliance with the terms of the Trust Agreement, the Issuer Trust will be
classified as a grantor trust and not as an association taxable as a
corporation for United States federal income tax purposes. As a result, each
Securityholder will be treated as owning an undivided beneficial interest in
the Junior Subordinated Debentures. Accordingly, each Securityholder will be
required to include in its gross income its pro rata share of the interest,
including any OID, and any other income received or accrued with respect to the
Junior Subordinated Debentures whether or not cash is actually distributed to
the Securityholders. See " -- Interest Income and Original Issue Discount." No
amount included in income with respect to the Capital Securities will be
eligible for the dividends received deduction.
Interest Income and Original Issue Discount
Under Treasury Regulations applicable to debt instruments issued after
August 12, 1996 (the "Regulations"), a "remote" contingency that stated
interest will not be timely paid will be ignored in determining whether a debt
instrument is issued with OID. BancShares believes that the likelihood of its
exercising its option to defer payments of interest on the Junior Subordinated
Debentures is remote. Based on the foregoing, in the opinion of Hunton &
Williams, the Junior Subordinated Debentures will not be considered to be
issued with OID at the time of their original issuance and, accordingly, a
Securityholder should include in gross income such Securityholder's allocable
share of interest on the Junior Subordinated Debentures (other than any portion
of the first interest payment attributable to pre-issuance accrued interest,
which a Securityholder may treat as a reduction of the issue price of the
Junior Subordinated Debentures rather than as gross income) in accordance with
such Securityholder's method of tax accounting.
Under the Regulations, if BancShares should actually exercise its option
to defer any payment of interest, the Junior Subordinated Debentures would at
that time be treated as issued with OID, and all stated interest on the Junior
Subordinated Debentures would thereafter be treated as OID so long as the
Junior Subordinated Debentures remained outstanding. In such event, all of a
Securityholder's taxable interest income with respect to the Junior
Subordinated Debentures would be accounted for as OID on an economic accrual
basis regardless of such Securityholder's method of tax accounting, and actual
payments of stated interest would not be reported as taxable income.
Consequently, a Securityholder would be required to include in gross income OID
even though BancShares would not make any cash payments during an Extension
Period.
The Regulations have not been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take a
position contrary to the interpretation herein.
Market Discount and Amortizable Premium
A secondary market purchaser of Capital Securities at a discount from the
principal amount (or, if the Junior Subordinated Debentures are deemed to be
issued with OID, the issue price plus accrued but unpaid OID) of the pro rata
share of Junior Subordinated Debentures represented by the Capital Securities
acquires such Capital Securities with "market discount" if the discount is not
less than the product of (i) 0.25% of the principal amount (or, if the Junior
Subordinated Debentures are deemed to be issued with OID, the issue price plus
accrued but unpaid OID) multiplied by (ii) the number of complete years to
maturity of the Junior Subordinated Debentures after the date of purchase. A
purchaser of Capital Securities with market discount generally will be required
to treat any gain on the sale, redemption or other disposition of all or part
of such Capital Securities as ordinary income to the extent of accrued (but not
previously taxable) market discount. Market discount generally will accrue
ratably during the period from the date of purchase to the maturity date,
unless
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the Securityholder elects to accrue such market discount on the basis of a
constant interest rate. A Securityholder who acquires Capital Securities at a
market discount may be required to defer some interest deductions attributable
to any indebtedness incurred or continued to purchase or carry the Capital
Securities.
A secondary market purchaser of Capital Securities at a premium over the
stated principal amount of the pro rata share of Junior Subordinated Debentures
(plus accrued interest) generally may elect to amortize such premium ("Section
171 premium"), under a constant yield method, as an offset to interest income
on the Junior Subordinated Debentures. If the Junior Subordinated Debentures
are deemed to be issued with OID and Capital Securities are acquired at a
premium, the premium will not be Section 171 premium but will be amortized as a
reduction in the amount of OID includable in the Securityholder's income.
Distribution of Junior Subordinated Debentures to Holders of Capital Securities
Except as noted below, under current law a distribution by the Issuer
Trust of the Junior Subordinated Debentures as described under the caption
"Description of Capital Securities -- Liquidation Distribution Upon
Dissolution," would not be a taxable event to Securityholders for United States
federal income tax purposes; such a distribution would result in a
Securityholder receiving directly its pro rata share of the Junior Subordinated
Debentures previously held indirectly through the Issuer Trust, with a holding
period and aggregate tax basis equal to the holding period and aggregate tax
basis such Securityholder had in its Capital Securities before such
distribution; and a Securityholder would account for interest, market discount
and amortizable premium in respect of Junior Subordinated Debentures received
from the Issuer Trust in the manner described above under " -- Interest Income
and Original Issue Discount" and " -- Market Discount and Amortizable Premium."
If, however, the Junior Subordinated Debentures were distributed in connection
with a Tax Event that would cause the Issuer Trust to be subject to United
States federal income tax with respect to income received or accrued on the
Junior Subordinated Debentures, the distribution likely would be a taxable
event to Securityholders. In that case, Securityholders would recognize gain or
loss equal to the difference between their adjusted bases in their Capital
Securities and the fair market value of the Junior Subordinated Debentures
distributed to the Securityholders, and they would obtain new holding periods
and fair market value bases for such Junior Subordinated Debentures.
Sale or Redemption of Capital Securities
Upon a sale (including redemption) of Capital Securities, a Securityholder
will recognize gain or loss equal to the difference between its adjusted tax
basis in the Capital Securities and the amount realized on the sale of such
Capital Securities (excluding any amount attributable to any accrued interest
with respect to such Securityholder's pro rata share of the Junior Subordinated
Debentures not previously included in income, which will be taxable as ordinary
income). Provided that BancShares does not exercise its option to defer payment
of interest on the Junior Subordinated Debentures and the Capital Securities
are not considered to be issued with OID, a Securityholder's adjusted tax basis
in the Capital Securities generally will be its initial purchase price,
increased by any market discount included in income and reduced by any
amortized Section 171 premium for such Capital Securities. If the Junior
Subordinated Debentures are deemed to be issued with OID as a result of
BancShares' deferral of any interest payment, a Securityholder's tax basis in
the Capital Securities generally will be increased by OID previously includable
in such Securityholder's gross income to the date of disposition and decreased
by distributions or other payments received on the Capital Securities since and
including the commencement date of the first Extension Period. Such gain or
loss, except to the extent of any accrued market discount, generally will be a
capital gain or loss and generally will be a long-term capital gain or loss if
the Capital Securities have been held for more than one year.
Should BancShares exercise its option to defer any payment of interest on
the Junior Subordinated Debentures, the Capital Securities may trade at a price
that does not accurately reflect the value of accrued but unpaid interest with
respect to the underlying Junior Subordinated Debentures. As a result, and
because a Securityholder will be required to include in income accrued but
unpaid interest on Junior Subordinated Debentures and to add such amount to its
adjusted tax basis, such Securityholder may recognize a capital loss on a sale
of Capital Securities during an Extension Period. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax
purposes.
Backup Withholding Tax and Information Reporting
The amount of interest paid and any OID accrued with respect to the
Capital Securities to Securityholders (other than corporations and other exempt
Securityholders) will be reported to the IRS. It is expected that such income
on the Capital Securities will be reported to Securityholders on Form 1099 and
mailed to Securityholders by January 31 following each
83
<PAGE>
calendar year. "Backup" withholding at a rate of 31% will apply to payments of
interest and payments of disposition (including redemption) proceeds to a
non-exempt Securityholder unless the Securityholder furnishes to the payor its
taxpayer identification number, certifies that such number is correct, and
meets certain other conditions. Any amounts withheld from a Securityholder
under the backup withholding rules will be allowable as a refund or a credit
against such Securityholder's United States federal income tax liability.
United States Alien Securityholders
For purposes of this discussion, a United States Alien Securityholder is
any corporation, individual, partnership, estate or trust that for United
States federal income tax purposes is a foreign corporation, non-resident alien
individual, foreign partnership, foreign estate or foreign trust. This
discussion assumes that income with respect to the Capital Securities is not
effectively connected with a trade or business in the United States in which
the United States Alien Securityholder is engaged.
Under current United States federal income tax law:
(i) payments by the Issuer Trust or any of its paying agents to any
holder of Capital Securities that is a United States Alien Securityholder
generally will not be subject to withholding or other Untied States federal
income tax, provided that, in the case of payments with respect to interest
(including OID), (a) the beneficial owner of the Capital Securities does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of BancShares entitled to vote, (b) the
beneficial owner of the Capital Securities is not a controlled foreign
corporation that is related to BancShares through stock ownership, and (c)
either (A) the beneficial owner of the Capital Securities certifies to the
Issuer Trust or its agent, under penalties of perjury, that it is a United
States Alien Securityholder and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
(a "Financial Institution") and holds the Capital Securities in such
capacity certifies to the Issuer Trust or its agent under penalties of
perjury that such statement has been received from the beneficial owner by
it or by a Financial Institution between it and the beneficial owner and
furnishes the Issuer Trust or its agent with a copy thereof; and
(ii) a United States Alien Securityholder of Capital Securities generally
will not be subject to withholding or other United States federal income
tax on any gain realized upon the sale or other disposition of Capital
Securities.
Possible Tax Law Changes
In both 1996 and 1997, the Clinton Administration proposed to amend the
Code to deny deductions of interest and OID on instruments with features
similar to those of the Junior Subordinated Debentures when issued under
arrangements similar to the Issuer Trust. That proposal was not passed by, and
is not currently pending before, Congress. There can be no assurance, however,
that future legislative proposals, future regulations or official
administrative pronouncements, or future judicial decisions will not affect the
ability of BancShares to deduct interest on the Junior Subordinated Debentures.
Such a change could give rise to a Tax Event, which may permit BancShares, upon
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve, to cause a redemption of the
Capital Securities, as described more fully under "Description of the Capital
Securities -- Redemption."
ERISA CONSIDERATIONS
Before authorizing an investment in the Capital Securities, fiduciaries of
pension, profit sharing or other employee benefit plans subject to the Employee
Retirement Income Security Act of 1974 ("ERISA") ("Plans") should consider,
among other matters, (a) ERISA's fiduciary standards (including its prudence
and diversification requirements), (b) whether such fiduciaries have authority
to make such investment in the Capital Securities under the applicable Plan
investment policies and governing instruments, and (c) rules under ERISA and
the Code that prohibit Plan fiduciaries from causing a Plan to engage in a
"prohibited transaction."
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of
the Code (also "Plans"), from, among other things, engaging in certain
transactions involving "plan assets" with persons who are "parties in interest"
under ERISA or "disqualified persons" under the Code ("Parties in Interest")
with respect to such Plan. A violation of these "prohibited transaction" rules
may result in an excise tax or other liabilities under ERISA and/or Section
4975 of the Code for such persons, unless exemptive relief is available under
an applicable statutory or administrative exemption. Employee benefit plans
that are governmental plans (as defined
84
<PAGE>
in Section 3(32) of ERISA), certain church plans (as defined in Section 3(33)
of ERISA) and foreign plans (as described in Section 4(b)(4) of ERISA) are not
subject to the requirements of ERISA or Section 4975 of the Code.
The Department of Labor (the "DOL") has issued a regulation (29 C.F.R. ss.
2510.3-101) (the "Plan Assets Regulation") concerning the definition of what
constitutes the assets of a Plan. The Plan Assets Regulation provides that, as
a general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment will be deemed, for purposes of ERISA, to be assets of the
investing Plan unless certain exceptions apply.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of the Issuer Trust would not be deemed to be "plan assets" of investing
Plans if, immediately after the most recent acquisition of any equity interest
in the Issuer Trust, less than 25% of the value of each class of equity
interests in the Issuer Trust were held by Plans, other employee benefit plans
not subject to ERISA or Section 4975 of the Code (such as governmental, church
and foreign plans), and entities holding assets deemed to be "plan assets" of
any Plan (collectively, "Benefit Plan Investors"). No assurance can be given
that the value of the Capital Securities held by Benefit Plan Investors will be
less than 25% of the total value of such Capital Securities at the completion
of the initial offering or thereafter, and no monitoring or other measures will
be taken with respect to the satisfaction of the conditions to this exception.
All the Common Securities will be purchased and held directly by BancShares.
Under another exception contained in the Plan Assets Regulation, if the
Capital Securities qualify as "publicly offered securities" under the Plan
Assets Regulation, the assets of the Issuer Trust would not be deemed to be
"plan assets" by reason of a Plan's acquisition or holding of such securities.
The Capital Securities would qualify as "publicly offered securities" if, among
other things, they are offered pursuant to an effective registration statement,
are owned by 100 or more investors independent of the issuer and each other at
the time of the offering, and are subsequently registered under the Exchange
Act. It is expected that the 100 investor requirement will not be satisfied and
that the New Capital Securities will not be registered under the Exchange Act.
However, the Capital Securities are being offered pursuant to an effective
Registration Statement.
There can be no assurance that any of the exceptions set forth in the Plan
Assets Regulation will apply to the purchase of Capital Securities offered
hereby and, as a result, an investing Plan's assets could be considered to
include an undivided interest in the Junior Subordinated Debentures held by the
Issuer Trust. In the event that assets of the Issuer Trust are considered
assets of an investing Plan, the Trustees, BancShares and/or other persons, in
providing services with respect to the Junior Subordinated Debentures, could be
considered fiduciaries to such Plan and subject to the fiduciary responsibility
provisions of Title I of ERISA. In addition, certain transactions involving the
Issuer Trust and/or the Capital Securities could be deemed to constitute direct
or indirect prohibited transactions under ERISA and Section 4975 of the Code
with respect to a Plan. For example, if BancShares is a Party in Interest with
respect to an investing Plan (either directly or by reason of its ownership of
the Banks or other subsidiaries), extensions of credit between BancShares and
the Issuer Trust (as represented by the Junior Subordinated Debentures and the
Guarantee) would likely be prohibited by Section 406(a)(1)(B) of ERISA and
Section 4975(c)(1)(B) of the Code.
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief for direct or indirect prohibited
transactions resulting from the purchase or holding of the Capital Securities,
assuming that assets of the Issuer Trust were deemed to be "plan assets" of
Plans investing in the Trust (see above). Those class exemptions are PTCE 96-23
(for certain transactions determined by in-house asset managers), PTCE 91-38
(for certain transactions involving bank collective investment funds), PTCE
95-60 (for certain transactions involving insurance company general accounts),
PTCE 90-1 (for certain transactions involving insurance company pooled separate
accounts), and PTCE 84-14 (for certain transactions determined by independent
qualified asset managers).
Because of ERISA's prohibitions and those of Section 4975 of the Code, the
Capital Securities may not be purchased or held by any Plan, any entity whose
underlying assets include "plan assets" by reason of any Plan's investment in
the entity (a "Plan Asset Entity") or any other person investing "plan assets"
of any Plan, unless such purchase or holding is covered by the exemptive relief
provided by PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable
exemption. If a purchaser or holder of the Capital Securities that is a Plan or
a Plan Asset Entity elects to rely on an exemption other than PTCE 96-23,
95-60, 91-38, 90-1 or 84-14, BancShares and the Issuer Trust may require a
satisfactory opinion of counsel or other evidence with respect to the
availability of such exemption for such purchase and holding. Any purchaser or
holder of the Capital Securities that is a Plan or a Plan Asset Entity or is
purchasing such securities on behalf of or with "plan assets" will be deemed to
have represented by its purchase and holding thereof that (a) the purchase and
holding of the Capital Securities is covered by the exemptive relief provided
by PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another
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<PAGE>
applicable exemption, (b) BancShares and the Administrators are not
"fiduciaries," within the meaning of Section 3(21) of ERISA and the regulations
thereunder, with respect to such person's interest in the Capital Securities or
the Junior Subordinated Debentures, and (c) in purchasing the Capital
Securities, such person approves the purchase of the Junior Subordinated
Debentures and the appointment of the Issuer Trustees.
Insurance companies considering an investment in the Capital Securities
should note that the Small Business Job Protection Act of 1996 added new
Section 401(c) of ERISA relating to the status of the assets of insurance
company general accounts under ERISA and Section 4975 of the Code. Pursuant to
Section 401(c), the Department of Labor issued proposed regulations (the
"Proposed General Accounting Regulations") in December 1997 with respect to
insurance policies that are supported by an insurer's general account. The
Proposed General Accounting Regulations are intended to provide guidance on
which assets held by the insurer constitute "plan assets" of an ERISA Plan for
purposes of the fiduciary responsibility provisions of ERISA and Section 4975
of the Code.
Any plans or other entities whose assets include Plan assets subject to
ERISA or Section 4975 of the Code proposing to acquire Capital Securities
should consult with their own counsel.
Governmental Plans and certain church plans are not subject to ERISA, and
are also not subject to the prohibited transaction provisions of Section 4975
of the Code. However, state laws or regulations governing the investment and
management of the assets of such plans may contain fiduciary and prohibited
transaction provisions similar to those under ERISA and the Code discussed
above. Accordingly, fiduciaries of governmental and church plans, in
consultation with the advisers, should consider the impact of their respective
state laws on investments in the Capital Securities and the considerations
discussed above to the extent applicable.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, BancShares and the Issuer Trust have agreed that the Issuer Trust
will sell 2,000,000 Capital Securities to Wheat First Union, a division of
Wheat First Securities, Inc. (the "Underwriter"), and the Underwriter has
agreed to purchase that number of Capital Securities from the Issuer Trust.
Under the terms and conditions set forth in the Underwriting Agreement,
the Underwriter is committed to take and pay for all such Capital Securities
offered hereby, if any are taken.
The Underwriter proposes to offer the Capital Securities in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession of $0.20 per Capital Security. After the Capital Securities are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the Underwriter.
BancShares and the Issuer Trust have granted to the Underwriter an option,
exercisable not later than the earlier of (i) 30 days after the date of this
Prospectus, or (ii) prior to the effective date of any Tax Proposal, to
purchase up to an additional $3,000,000 aggregate Liquidation Amount of Capital
Securities (300,000 Capital Securities) at the public offering price, less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus, plus accrued interest, if any, from June 9, 1998. To the extent
that the Underwriter exercises such option, the Issuer Trust will be obligated,
pursuant to the option, to sell such additional Capital Securities to the
Underwriter. The Underwriter may exercise such option only to cover
over-allotments made in connection with the sale of Capital Securities offered
hereby. If purchased, the Underwriter will offer such additional Capital
Securities on the same terms as those on which the $20,000,000 aggregate
Liquidation Amount of the Capital Securities are being offered.
In connection with the offering of the Capital Securities, the Underwriter
and any selling group members and their respective affiliates may engage in
transactions effected in accordance with Rule 104 of the Commission's
Regulation M that are intended to stabilize, maintain or otherwise affect the
market price of the Capital Securities. Such transactions may include
over-allotment transactions in which the Underwriter creates a short position
for their own account by selling more Capital Securities than they are
committed to purchase from the Issuer Trust. In such a case, to cover all or
part of the short position, the Underwriter may exercise the over-allotment
option described above or may purchase Capital Securities in the open market
following completion of the initial offering of Capital Securities. The
Underwriter also may engage in stabilizing transactions in which it bids for,
and purchases, shares of the Capital Securities at a level above that which
might otherwise prevail in the open market for the purpose of preventing or
retarding a decline in the market price of the Capital Securities. The
Underwriter also may reclaim any selling concessions allowed to a dealer if the
Underwriter repurchases shares distributed by that dealer. Any of the foregoing
transactions may result in the maintenance of a price for the Capital
Securities at a level above that which might otherwise prevail in the open
market. Neither BancShares nor the Underwriter
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<PAGE>
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Capital Securities. The Underwriter is not required to engage in any of the
foregoing transactions and, if commenced, such transactions may be discontinued
at any time without notice.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures issued
by BancShares, the Underwriting Agreement provides that BancShares will pay as
Underwriters' Compensation for the Underwriter's arranging the investment
therein of such proceeds an amount of $0.375 per Capital Security for the
accounts of the Underwriter.
BancShares and the Issuer Trust have agreed that, during the period
beginning from the date of the Underwriting Agreement and continuing to and
including the earlier of (i) the termination of trading restrictions on the
Capital Securities, as communicated to BancShares by the Underwriter, and (ii)
180 days following the Closing Date, they will not offer, sell, contract to
sell or otherwise dispose of any additional securities of the Issuer Trust or
BancShares substantially similar to the Capital Securities or any securities
convertible into or exchangeable for or that represent the right to receive any
such similar securities, without the consent of the Underwriter, which consent
shall not be unreasonably withheld.
Prior to this offering, there has been no public market for the Capital
Securities. The Capital Securities have been approved for listing on AMEX,
subject to notice of issuance. However, no assurance can be given as to the
liquidity of or the existence of the trading market for the Capital Securities.
BancShares and the Issuer Trust have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
The Underwriter or its affiliates have provided from time to time, and
expect to provide in the future, investment or commercial banking services to
BancShares and its affiliates, for which the Underwriter or its affiliates have
received or will receive customary fees and commissions.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Capital
Securities, the enforceability of the Trust Agreement and the creation of the
Issuer Trust will be passed upon by Richards, Layton & Finger, P.A., special
Delaware counsel to BancShares and the Issuer Trust. Certain tax matters
relating to the Capital Securities and the Issuer Trust will be passed upon for
BancShares by Hunton & Williams, Richmond, Virginia, special tax counsel to
BancShares. The validity of the Guarantee and the Junior Subordinated
Debentures will be passed upon for BancShares by Ward and Smith, P.A., Raleigh,
North Carolina, General Counsel of BancShares, and for the Underwriter by
Alston & Bird LLP, Washington, D.C., special counsel to the Underwriter. Ward
and Smith, P.A. and Alston & Bird LLP, will rely as to certain matters of
Delaware law on the opinion of Richards, Layton & Finger, P.A.
EXPERTS
The consolidated balance sheets of Southern BancShares (N.C.), Inc. and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, cash flows and changes in shareholders' equity, for each
of the years in the three-year period ended December 31, 1997, have been
included herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
87
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(This Page Intentionally Left Blank)
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Page
-----
<S> <C>
Independent Auditors' Report ............................................................. F-2
Consolidated Balance Sheets as of March 31, 1998 (unaudited), and as of December 31, 1997 F-3
and 1996
Consolidated Statements of Income for the three months ended March 31, 1998 (unaudited),
and for each of the
years in the three-year period ended December 31, 1997 .................................. F-4
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997
(unaudited), and for
each of the years in the three-year period ended December 31, 1997 ...................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the three months ended
March 31, 1998
(unaudited), and for each of the years in the three-year period ended December 31, 1997 . F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Southern BancShares (N.C.), Inc.:
We have audited the accompanying consolidated balance sheets of Southern
BancShares (N.C.), Inc. and subsidiary (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of income, cash flows and
changes in shareholders' equity for each of the years in the three-year period
ended December 31, 1997. 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 Southern
BancShares (N.C.), Inc. and subsidiary as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
Raleigh, North Carolina
February 20, 1998
F-2
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share data)
<TABLE>
December 31,
March 31,
1998 1997 1996
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks .................................................. $ 24,175 $ 28,381 $ 21,445
Federal funds sold ....................................................... 8,225 10,240 11,020
Investment securities:
Held-to-maturity, at amortized cost (fair value $71,873, $57,294
and $64,559, respectively)............................................. 70,886 56,281 63,676
Available-for-sale, at fair value (amortized cost $91,477, $100,978
and $88,504, respectively)............................................. 113,754 123,852 105,013
Loans .................................................................... 354,206 349,353 317,755
Less allowance for loan losses .......................................... (6,016) (5,971) (6,163)
-------- -------- --------
Net loans ................................................................ 348,190 343,382 311,592
Premises and equipment ................................................... 17,985 18,157 15,439
Accrued interest receivable .............................................. 4,779 4,205 3,999
Intangible assets ........................................................ 5,122 5,506 5,991
Other assets ............................................................. 773 748 2,583
-------- -------- --------
Total assets .......................................................... $593,889 $590,752 $540,758
======== ======== ========
LIABILITIES
Deposits:
Noninterest-bearing ..................................................... $ 64,055 $ 66,565 $ 64,089
Interest-bearing ........................................................ 451,922 446,763 416,477
-------- -------- --------
Total deposits ........................................................... 515,977 513,328 480,566
Short-term borrowings .................................................... 6,236 6,826 5,064
Long-term obligations .................................................... 4,300 4,750 1,400
Accrued interest payable ................................................. 3,932 4,394 3,204
Other liabilities ........................................................ 6,431 6,470 5,746
-------- -------- --------
Total liabilities ..................................................... 536,876 535,768 495,980
-------- -------- --------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares
authorized; 404,946, 404,946 and 407,752 shares issued and outstanding at
March 31, 1998, December 31, 1997 and 1996, respectively ................ 1,976 1,976 1,986
Series C non-cumulative preferred stock, no par value; 43,631 shares
authorized; 43,631 shares issued and outstanding at March 31, 1998,
December 31, 1997 and 1996 .............................................. 578 578 578
Common stock, $5 par value; 158,485 shares authorized; 119,918 shares
issued and outstanding at March 31, 1998, December 31, 1997 and 1996 .... 600 600 600
Surplus .................................................................. 10,000 10,000 10,000
Retained earnings ........................................................ 29,155 26,733 20,718
Unrealized gain on securities available-for-sale, net of tax ............. 14,704 15,097 10,896
-------- -------- --------
Total shareholders' equity ............................................ 57,013 54,984 44,778
-------- -------- --------
Total liabilities and shareholders' equity ........................... $593,889 $590,752 $540,758
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share and per share data)
<TABLE>
Three months ended
March 31, Year ended December 31,
----------------------- -------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans .................................................... $ 7,532 $ 6,906 $ 29,225 $ 26,878 $ 24,338
Investment securities:
U. S. Government ........................................ 1,735 1,587 6,353 6,756 5,365
State, county and municipal ............................. 481 533 2,057 2,163 2,135
Other ................................................... 161 119 797 577 246
-------- -------- --------- -------- ---------
Total investment securities interest income .......... 2,377 2,239 9,207 9,496 7,746
Federal funds sold ....................................... 184 110 623 402 810
-------- -------- --------- -------- ---------
Total interest income .................................. 10,093 9,255 39,055 36,776 32,894
Interest expense:
Deposits ................................................. 4,656 4,309 18,229 16,933 15,410
Short-term borrowings .................................... 70 52 303 400 336
Long-term obligations .................................... 76 2 295 117 309
-------- -------- --------- -------- ---------
Total interest expense .................................. 4,802 4,363 18,827 17,450 16,055
-------- -------- --------- -------- ---------
Net interest income ..................................... 5,291 4,892 20,228 19,326 16,839
Provision for loan losses ................................ 60 60 60 140 --
-------- -------- --------- -------- ---------
Net interest income after provision for loan losses ..... 5,231 4,832 20,168 19,186 16,839
Noninterest income:
Service charges on deposit accounts ...................... 762 648 2,918 2,664 2,347
Other service charges and fees ........................... 246 208 868 780 645
Investment securities gains, net ......................... 1,788 3,534 5,567 460 1
Insurance commissions .................................... 19 17 90 145 99
Gain (loss) on sale of loans ............................. 1 (10) 52 (158) 39
Other .................................................... 117 73 354 617 897
-------- -------- --------- -------- ---------
Total noninterest income ................................ 2,933 4,470 9,849 4,508 4,028
Noninterest expense:
Personnel ................................................ 2,285 2,088 8,763 7,975 6,892
Intangibles amortization ................................. 395 402 1,755 1,638 1,362
Data processing .......................................... 432 353 1,598 1,440 1,334
Furniture and equipment .................................. 332 384 1,633 1,314 1,111
Occupancy ................................................ 378 333 1,388 1,203 941
FDIC insurance assessment ................................ 37 27 112 772 651
Charitable contributions ................................. -- 4,072 4,076 589 173
Other .................................................... 929 806 3,739 3,272 3,197
-------- -------- --------- -------- ---------
Total noninterest expense ............................... 4,788 8,465 23,064 18,203 15,661
-------- -------- --------- -------- ---------
Income before income taxes ............................. 3,376 837 6,953 5,491 5,206
Income taxes ........................................... 809 80 340 1,127 1,293
-------- -------- --------- -------- ---------
Net income ........................................... $ 2,567 $ 757 $ 6,613 $ 4,364 $ 3,913
======== ======== ========= ======== =========
Per share information:
Net income applicable to common shares ................... $ 20.58 $ 5.48 $ 51.77 $ 33.00 $ 28.90
Cash dividends declared on common shares ................. .38 .37 1.50 1.50 1.00
Weighted average common shares outstanding ............... 119,918 119,918 119,918 119,918 121,226
======== ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
March 31,
---------------------------
1998 1997
------------ --------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................................ $ 2,567 $ 757
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................................... 60 60
Contribution expense for donation of marketable equity securities ....... -- 4,072
Gain on contribution of marketable equity securities .................... -- (3,529)
Gains on sales and issuer calls of securities ........................... (1,788) (5)
Loss on sale and abandonment of premises and equipment .................. 3 27
Net accretion of discounts on investments ............................... (19) (21)
Amortization of intangibles ............................................. 384 402
Depreciation ............................................................ 334 245
Net increase in accrued interest receivable ............................. (574) (481)
Net (decrease) increase in accrued interest payable ..................... (462) 477
Net (increase) decrease in other assets ................................. (25) 864
Net (decrease) increase in other liabilities ............................ (39) (219)
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................................. 441 2,649
---------- -----------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities
available-for-sale ...................................................... 16,000 --
Proceeds from maturities and issuer calls of investment securities
held-to-maturity ........................................................ 1,198 14,703
Proceeds from sales of investment securities available-for-sale ........... 1,975 --
Purchases of investment securities held-to-maturity ....................... (15,803) (11,010)
Purchases of investment securities available-for-sale ..................... (6,463) (6,264)
Net increase in loans ..................................................... (4,868) (11,014)
Proceeds from sales of premises and equipment ............................. -- --
Additions to premises and equipment ....................................... (165) (1,226)
Net cash received for branches acquired ................................... -- --
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES ...................................... (8,126) (14,811)
---------- -----------
FINANCING ACTIVITIES:
Net (decrease) increase in demand and interest bearing demand deposits (1,954) (8,599)
Net increase in time deposits ............................................. 4,603 8,929
(Repayments) proceeds of long-term obligations ............................ (450) 4,700
Net (repayments) proceeds of short-term borrowings ........................ (590) 1,668
Cash dividends paid ....................................................... (145) (143)
Purchase and retirement of stock .......................................... -- --
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................................. 1,464 6,555
---------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .......................................................... (6,221) (5,607)
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF YEAR ..................................................... 38,621 32,465
---------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD ............................. $ 32,400 $ 26,858
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING
THE YEAR FOR:
Interest .................................................................. $ 5,264 $ 3,882
Income taxes .............................................................. $ 844 $ 96
========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized gain on securities available-for-sale ................ $ (597) $ (996)
========== ===========
Year ended December 31,
------------------------------------------
1997 1996 1995
------------ -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................................ $ 6,613 $ 4,364 $ 3,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................................... 60 140 --
Contribution expense for donation of marketable equity securities ....... 4,071 536 --
Gain on contribution of marketable equity securities .................... (3,529) (458) --
Gains on sales and issuer calls of securities ........................... (2,038) (2) (1)
Loss on sale and abandonment of premises and equipment .................. 317 55 315
Net accretion of discounts on investments ............................... (88) (66) (40)
Amortization of intangibles ............................................. 1,755 1,638 1,362
Depreciation ............................................................ 1,139 963 811
Net increase in accrued interest receivable ............................. (206) (28) (603)
Net (decrease) increase in accrued interest payable ..................... 1,190 (287) 1,810
Net (increase) decrease in other assets ................................. 1,839 (1,666) (114)
Net (decrease) increase in other liabilities ............................ (1,339) 2,275 2,184
---------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................................. 9,784 7,464 9,637
---------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities
available-for-sale ...................................................... 25,798 111 81
Proceeds from maturities and issuer calls of investment securities
held-to-maturity ........................................................ 43,856 53,749 50,457
Proceeds from sales of investment securities available-for-sale ........... 2,246 105 --
Purchases of investment securities held-to-maturity ....................... (37,261) (11,414) (53,850)
Purchases of investment securities available-for-sale ..................... (38,134) (58,592) (18,650)
Net increase in loans ..................................................... (30,406) (24,748) (33,141)
Proceeds from sales of premises and equipment ............................. -- 12 --
Additions to premises and equipment ....................................... (3,899) (4,472) (2,906)
Net cash received for branches acquired ................................... 17,966 3,380 46,056
---------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ...................................... (19,834) (41,869) (11,953)
---------- ----------- -----------
FINANCING ACTIVITIES:
Net (decrease) increase in demand and interest bearing demand deposits (4,658) 15,455 18,226
Net increase in time deposits ............................................. 16,360 6,713 12,330
(Repayments) proceeds of long-term obligations ............................ 3,350 (1,200) (1,200)
Net (repayments) proceeds of short-term borrowings ........................ 1,762 3,595 (497)
Cash dividends paid ....................................................... (585) (587) (531)
Purchase and retirement of stock .......................................... (23) (12) (253)
---------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................................. 16,206 23,964 28,075
---------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .......................................................... 6,156 (10,441) 25,759
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF YEAR ..................................................... 32,465 42,906 17,147
---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD ............................. $ 38,621 $ 32,465 $ 42,906
========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING
THE YEAR FOR:
Interest .................................................................. $ 17,637 $ 17,737 $ 14,245
Income taxes .............................................................. $ 1,776 $ 1,085 $ 1,764
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized gain on securities available-for-sale ................ $ 6,365 $ 5,833 $ 4,650
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(Dollars in thousands except share and per share data)
<TABLE>
Common
Preferred Stock Stock
Series B Series C
Shares Amount Shares Amount Shares Amount
----------- ------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 ................ 413,389 $2,014 43,959 $582 121,767 $609
Net income ................................ -- -- -- -- -- --
Purchase and retirement of stock .......... (4,661) (23) (328) (4) (1,849) (9)
Cash dividends:
Common stock ($1.00 per share) ........... -- -- -- -- -- --
Preferred B ($.90 per share) ............. -- -- -- -- -- --
Preferred C ($.90 per share) ............. -- -- -- -- -- --
Change in unrealized gain on available-
for-sale securities, net of taxes ........ -- -- -- -- -- --
------- ------ ------ ----- ------- -----
BALANCE, DECEMBER 31, 1995 ................ 408,728 $1,991 43,631 $578 119,918 $600
Net income ................................ -- -- -- -- -- --
Purchase and retirement of stock .......... (976) (5) -- -- -- --
Cash dividends:
Common stock ($1.50 per share) ........... -- -- -- -- -- --
Preferred B ($.90 per share) ............. -- -- -- -- -- --
Preferred C ($.90 per share) ............. -- -- -- -- -- --
Change in unrealized gain on available-
for-sale securities, net of taxes ........ -- -- -- -- -- --
------- ------- ------ ----- ------- -----
BALANCE, DECEMBER 31, 1996 ................ 407,752 $1,986 43,631 $578 119,918 $600
Net income ................................ -- -- -- -- -- --
Purchase and retirement of stock .......... (2,806) (10) -- -- -- --
Cash dividends:
Common stock ($1.50 per share) ........... -- -- -- -- -- --
Preferred B ($.90 per share) ............. -- -- -- -- -- --
Preferred C ($.90 per share) ............. -- -- -- -- -- --
Change in unrealized gain on available-
for-sale securities, net of taxes ........ -- -- -- -- -- --
------- ------- ------ ----- ------- -----
BALANCE, DECEMBER 31, 1997 ................ 404,946 $1,976 43,631 $578 119,918 $600
======= ======= ====== ===== ======= =====
Net income ................................ -- -- -- -- -- --
Cash dividends:
Common stock ($.38 per share) ............ -- -- -- -- -- --
Preferred B ($.22 per share) ............. -- -- -- -- -- --
Preferred C ($.22 per share) ............. -- -- -- -- -- --
Change in unrealized gain on available-
for-sale securities, net of taxes ........ -- -- -- -- -- --
------- ------- ------ ----- ------- -----
BALANCE, MARCH 31, 1998 ................... 404,946 $1,976 43,631 $578 119,918 $600
======= ======= ====== ===== ======= =====
Unrealized
gain on
securities
available- Total
Retained for-sale Shareholders'
Surplus Earnings net of taxes Equity
--------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 ................ $10,000 $13,783 $ 3,977 $30,965
Net income ................................ -- 3,913 -- 3,913
Purchase and retirement of stock .......... -- (217) -- (253)
Cash dividends:
Common stock ($1.00 per share) ........... -- (121) -- (121)
Preferred B ($.90 per share) ............. -- (370) -- (370)
Preferred C ($.90 per share) ............. -- (40) -- (40)
Change in unrealized gain on available-
for-sale securities, net of taxes ........ -- -- 3,069 3,069
------- ------- ------- -------
BALANCE, DECEMBER 31, 1995 ................ $10,000 $16,948 $ 7,046 $37,163
Net income ................................ -- 4,364 -- 4,364
Purchase and retirement of stock .......... -- (7) -- (12)
Cash dividends:
Common stock ($1.50 per share) ........... -- (180) -- (180)
Preferred B ($.90 per share) ............. -- (368) -- (368)
Preferred C ($.90 per share) ............. -- (39) -- (39)
Change in unrealized gain on available-
for-sale securities, net of taxes ........ -- -- 3,850 3,850
------- -------- ------- -------
BALANCE, DECEMBER 31, 1996 ................ $10,000 $20,718 $10,896 $44,778
Net income ................................ -- 6,613 -- 6,613
Purchase and retirement of stock .......... -- (13) -- (23)
Cash dividends:
Common stock ($1.50 per share) ........... -- (180) -- (180)
Preferred B ($.90 per share) ............. -- (366) -- (366)
Preferred C ($.90 per share) ............. -- (39) -- (39)
Change in unrealized gain on available-
for-sale securities, net of taxes ........ -- -- 4,201 4,201
------- -------- ------- -------
BALANCE, DECEMBER 31, 1997 ................ $10,000 $26,733 $15,097 $54,984
======= ======== ======= =======
Net income ................................ -- 2,567 -- 2,567
Cash dividends:
Common stock ($.38 per share) ............ -- (46) -- (46)
Preferred B ($.22 per share) ............. -- (89) -- (89)
Preferred C ($.22 per share) ............. -- (10) -- (10)
Change in unrealized gain on available-
for-sale securities, net of taxes ........ -- -- (393) (393)
------- -------- ------- -------
BALANCE, MARCH 31, 1998 ................... $10,000 $29,155 $14,704 $57,013
======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BancShares
Southern BancShares (N.C.), Inc. ("BancShares") is the holding company for
Southern Bank and Trust Company (the "Bank"), which operates 42 banking offices
in eastern North Carolina. The Bank, which began operations in January, 1901,
has a non-bank subsidiary, Goshen, Inc., whose insurance agency operations
complement the operations of its parent. The Bank and BancShares are
headquartered in Mount Olive, North Carolina.
Principles of Consolidation
The consolidated financial statements include the accounts of BancShares
and its wholly-owned subsidiary, the Bank. The statements also include the
accounts of Goshen, Inc. a wholly-owned subsidiary of the Bank. BancShares'
financial resources are primarily provided by dividends from the Bank and there
are no material differences between the results of operations or financial
position of BancShares and of the Bank. All significant intercompany balances
have been eliminated in consolidation.
Basis of Financial Statement Presentation
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 at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant
estimates made by BancShares in the preparation of its consolidated financial
statements are the determination of the allowance for loan losses, the
valuation of other real estate, the valuation allowance for deferred tax assets
and fair value estimates for financial instruments.
The consolidated financial statements as of March 31, 1998, and for the
three months ended March 31, 1998 and 1997, are unaudited. In the opinion of
management, all adjustments (none of which were other than normal accruals)
necessary for a fair presentation of the financial position and results of
operations for the interim periods presented have been included.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation. Such reclassifications had no effect on net income
or shareholders' equity as previously reported.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold. Federal funds are purchased and
sold for one day periods.
Investment Securities
BancShares accounts for investment securities under the provisions of
Statement of Financial Accounting Standards ("Statement") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Statement 115 requires
that investments in certain debt and equity securities be classified as either:
held-to-maturity (reported at amortized cost), trading (reported at fair value
with unrealized gains and losses included in earnings), or available-for-sale
(reported at fair value with unrealized gains and losses excluded from earnings
and reported, net of related income taxes, as a separate component of
shareholders' equity).
BancShares' investment securities are classified in two categories and
accounted for as follows:
o Securities held-to-maturity: Securities held-to-maturity consist of debt
instruments for which BancShares has the positive intent and ability to
hold to maturity, and are reported at amortized cost.
o Securities available-for-sale: Securities available-for-sale consist of
certain debt and marketable equity securities not classified as trading
securities nor as securities held-to-maturity, and consist of securities
which may be sold in
F-7
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
response to changes in interest rates, prepayment risk, regulatory capital
requirements and liquidity needs. BancShares does not hold any trading
securities.
Gains and losses on the sale and contribution of securities
available-for-sale are determined using the specific-identification method.
Premiums and discounts are amortized into income on a level yield basis.
Loans
Loans are stated at principal amounts outstanding, reduced by unearned
income and an allowance for loan losses.
The Bank originates certain residential mortgages with the intent to sell.
Such loans held-for-sale are included in loans in the accompanying consolidated
balance sheets at the lower of cost or fair value as determined by outstanding
commitments from investors or current quoted market prices.
Interest income on substantially all loans is recognized in a manner that
approximates the level yield method when related to the principal amount
outstanding. Accrual of interest is discontinued on a loan when management
believes the borrower's financial condition is such that collection of
principal or interest is doubtful. Loans are returned to the accrual status
when the factors indicating doubtful collectibility cease to exist.
Management considers a loan to be impaired when based on current
information or events, it is probable that a borrower will be unable to pay all
amounts due according to contractual terms of the loan agreement. Impaired
loans are valued using either the discounted expected cash flow method or the
collateral or the collateral value. When the ultimate collectibility of the
impaired loan's principal is doubtful, all cash receipts are applied to
principal. Once the recorded principal balance has been reduced to zero, future
cash receipts are applied to interest income, to the extent that any interest
has been foregone. Future cash receipts are recorded as recoveries of any
amounts previously charged-off.
The Bank provides an allowance for loan losses on a reserve basis and
includes in operating expenses a provision for loan losses determined by
management. The allowance is reduced by charge-off's and increased by
subsequent recoveries. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
experience, the estimated value of any underlying collateral, current economic
conditions and other risk factors. Allowances for loan losses related to loans
that are identified as impaired are based on discounted cash flows using the
loans' initial interest rates or the fair value of the collateral if the loan
is collateral dependent. Large groups of smaller balance, homogenous loans that
are collectively evaluated for impairment (such as credit card, residential
mortgage and consumer installment loans) are excluded from this impairment
evaluation, and their allowance for loan losses is calculated in accordance
with the allowance for loan losses policy discussed above.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and losses on other real estate owned. Such agencies may require the Bank to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated lives of the assets.
Depreciation of buildings and improvements, and furniture and equipment is
provided over the estimated useful lives of the assets. Estimated useful lives
range from 15 to 31.5 years for buildings and improvements and 3 to 10 years
for furniture and equipment.
F-8
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
Intangible Assets
Intangible assets amounted to $5,506 and $5,991 at December 31, 1997 and
1996, respectively. Such assets are generally amortized on an accelerated basis
over a period of 10 years. Intangible assets are subject to periodic review and
are adjusted for any impairment of value.
Income Taxes
BancShares uses the asset and liability method to account for deferred
income taxes. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
financial reporting basis and the income tax basis of BancShares' assets and
liabilities at enacted rates expected to be in effect when such amounts are
realized or settled.
BancShares files a consolidated federal income tax return with the Bank
and its subsidiaries. The method of allocating federal income tax expense is
determined under a tax allocation agreement between BancShares and the
subsidiaries. This allocation agreement specifies that income tax expense will
be computed for subsidiaries on a separate company basis.
Recognition of deferred tax assets is based on management's belief that it
is "more likely than not" that the tax benefit associated with certain
temporary differences, operating loss carry forwards and tax credits will be
realized. A valuation allowance is recorded for deferred tax assets when the
"more likely than not" standard is not met.
Earnings Per Common Share
In February 1997, the FASB issued Statement 128, "Earnings per Share."
Statement 128 establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. This statement simplifies the standards for computing
EPS previously found in APB Opinion No. 15, "Earnings per Share", and makes
them comparable to international EPS standards. Statement 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Statement 128
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Statement 128
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods, with earlier application not permitted.
Additionally, once adopted, restatement of all prior-period EPS data presented
was required. Adoption of this pronouncement did not have an effect on
BancShares' consolidated financial statements since BancShares has no dilutive
securities.
Earnings per common share are computed by dividing income applicable to
common shares by the weighted average number of common shares outstanding
during the period. Income applicable to common shares represents net income
reduced by dividends paid to preferred shareholders.
Earnings per common share are calculated based on the following amounts
for the years ended December 31:
<TABLE>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income ............................... $ 6,613 $ 4,364 $ 3,913
Less: Preferred dividends ................ (405) (407) (410)
-------- -------- --------
Net income applicable to common shares ... $ 6,208 $ 3,957 $ 3,503
======== ======== ========
Weighted average common shares outstanding
during the period ...................... 119,918 119,918 121,226
======== ======== ========
</TABLE>
New Accounting Standards
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income." Statement 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. It does not address issues of recognition or measurement
for comprehensive income and its components. The provisions of Statement 130
are effective for fiscal years beginning after December 15, 1997. BancShares
adopted this statement
F-9
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
in the first quarter of fiscal 1998. During the three months ended March 31,
1998 and 1997, comprehensive income, which consisted of net income and changes
in net unrealized gains and losses, net of applicable tax effects, amounted to
$2,174 (unaudited) and $100 (unaudited), respectively.
In June 1997, the FASB issued Statement 131, "Disclosures about Segments
of an Enterprise and Related Information." Statement 131 requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements issued to shareholders. It also requires
that public business enterprises report certain information about their
products and services, the geographic areas in which they operate and their
major customers. The provisions of Statement 131 are effective for fiscal years
beginning after December 15, 1997. Adoption of this pronouncement is not
expected to have a material effect on BancShares' consolidated financial
statements.
In February 1998, the FASB issued Statement 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement standardizes
the disclosure requirements of pensions and other postretirement benefits. This
statement does not change any measurement or recognition provisions, and thus
will not materially impact BancShares. This statement is effective for fiscal
years beginning after December 15, 1997.
NOTE 2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at
December 31 were as follows:
<TABLE>
1997
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-
MATURITY:
U. S. Government ..................... $ 33,969 122 -- 34,091
Obligations of states and political
subdivisions ....................... 22,212 890 -- 23,102
Corporate securities ................. 100 1 -- 101
-------- --- -- ------
56,281 1,013 -- 57,294
-------- ----- -- ------
SECURITIES AVAILABLE-
FOR-SALE:
U. S. Government ..................... 82,471 130 (9) 82,592
Marketable equity securities ......... 8,119 22,183 (8) 30,294
Obligations of states and political
subdivisions ....................... 8,411 527 -- 8,938
Mortgage-backed securities ........... 1,977 51 -- 2,028
-------- ------ -- ------
100,978 22,891 (17) 123,852
-------- ------ --- -------
TOTALS ................................ $157,259 23,904 (17) 181,146
======== ====== === =======
1996
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-
MATURITY:
U. S. Government ..................... $ 36,311 91 -- 36,402
Obligations of states and political
subdivisions ....................... 27,165 799 (4) 27,960
Corporate securities ................. 200 -- (3) 197
-------- --- --- ------
63,676 890 (7) 64,559
-------- --- --- ------
SECURITIES AVAILABLE-
FOR-SALE:
U. S. Government ..................... 70,121 -- (15) 70,106
Marketable equity securities ......... 8,612 16,296 (97) 24,811
Obligations of states and political
subdivisions ....................... 7,647 278 (4) 7,921
Mortgage-backed securities ........... 2,124 106 (55) 2,175
-------- ------ --- ------
88,504 16,680 (171) 105,013
-------- ------ ---- -------
TOTALS ................................ $152,180 17,570 (178) 169,572
======== ====== ==== =======
</TABLE>
Securities with a par value of $53,015 were pledged at December 31, 1997
to secure public deposits and for other purposes as required by law and
contractual arrangements.
F-10
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 2. INVESTMENT SECURITIES -- Continued
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
Amortized Fair
Cost Value
----------- ----------
<S> <C> <C>
Held-to-maturity securities:
Due in one year or less .................... $ 6,584 $ 6,595
Due after one year through five years ...... 40,060 40,356
Due after five years through ten years ..... 6,911 7,331
Due after ten years ........................ 2,726 3,012
-------- --------
$ 56,281 $ 57,294
======== ========
Available-for-sale securities:
Due in one year or less .................... 45,609 45,649
Due after one year through five years ...... 37,869 37,978
Due after five years through ten years ..... 2,124 2,277
Due after ten years ........................ 5,280 5,626
Mortgage-backed securities ................. 1,977 2,028
Marketable equity securities ............... 8,119 30,294
-------- --------
$100,978 $123,852
======== ========
</TABLE>
On December 17, 1996, the board of directors of the Bank approved the
contribution of 7,500 shares of marketable equity securities to the Southern
Bank Foundation. These investments had a cost basis of $78 and a fair value of
$536 on that date, resulting in the recognition of a realized securities gain
of $458. BancShares recorded charitable contribution expense of $536 related to
this transaction.
On February 14, 1997, the board of directors of the Bank approved the
contribution of 48,250 shares of marketable equity securities to the Southern
Bank Foundation. These investments had a cost basis of $542 and a fair value of
$4,071 on that date, resulting in the recognition of a realized securities gain
of $3,529. BancShares recorded charitable contribution expense of $4,071
related to this transaction.
Sales of securities available-for-sale having a cost basis of $216
resulted in gross realized gains of $2,030 for 1997. There were no sales of
securities available-for-sale during the years ended December 31, 1996 and
1995. Excluding the gains discussed above, gains on investment securities in
1997, 1996 and 1995 were attributable to issuer calls of debt securities.
F-11
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 3. LOANS
Loans by type were as follows:
<TABLE>
December 31,
------------------------
1997 1996
------------ -----------
<S> <C> <C>
Commercial, financial and agricultural ........ $ 84,281 $ 70,881
Real estate -- construction ................... 5,209 2,470
Real estate -- mortgage ....................... 220,127 206,870
Consumer ...................................... 35,780 35,512
Lease financing ............................... 5,385 2,370
-------- --------
Total loans ................................. 350,782 318,103
Less unearned income ....................... (1,429) (348)
-------- --------
Total loans less unearned income .......... $349,353 $317,755
======== ========
Loans held for sale ........................... $ 3,019 $ 4,143
Loans serviced for others ..................... $ 78,426 $ 73,202
</TABLE>
On December 31, 1997 and 1996, total loans to directors, executive
officers and related individuals and organizations were $1,469 and $4,734,
respectively. During 1997, $208 of new loans were made to this group and
repayments totaled $3,473. There were no restructured or nonaccrual loans to
directors, executive officers or related individuals and organizations. All
extensions of credit to such persons have been made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time in comparable transactions with
others and did not involve more than normal risks of collectibility.
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the three years ended
December 31 were:
<TABLE>
December 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year ......... $6,163 $6,321 $6,653
Provision for loan losses ............ 60 140 --
Loans charged off .................... (463) (539) (463)
Loan recoveries ...................... 211 241 131
------ ------ ------
Balance at end of the year ........... $5,971 $6,163 $6,321
====== ====== ======
</TABLE>
At December 31, 1997 and 1996, the Bank had nonaccrual loans of $230 and
$147, respectively. At December 31, 1997 and 1996, the Bank had restructured
loans of $0 and $8, respectively. At December 31, 1997 and 1996, the Bank had
accruing loans past 90 days or more totaling $466 and $343, respectively. The
amounts of foregone interest on nonaccrual and restructured loans for the years
ended December 31, 1997, 1996 and 1995 were not material for the periods
presented. At December 31, 1997 and 1996, the Bank's impaired loans, as
determined under Statement 114, were less than the nonaccrual and restructured
loan amounts presented above, and no additional allowances for loan losses were
required as a result of the application of Statement 114 to these impaired
loans.
F-12
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 5. PREMISES AND EQUIPMENT
The components of premises and equipment were as follows:
<TABLE>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Land ................................... $ 3,377 $ 2,783
Buildings and improvements ............. 14,292 9,262
Furniture and equipment ................ 6,387 5,804
Construction-in-progress ............... 90 3,467
-------- --------
24,146 21,316
Less: accumulated depreciation ......... (5,989) (5,877)
-------- --------
$ 18,157 $ 15,439
======== ========
</TABLE>
NOTE 6. INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31 were:
<TABLE>
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal ............... $ 1,737 $ 1,348 $1,040
State ................. 8 21 6
-------- ------- ------
1,745 1,369 1,046
-------- ------- ------
Deferred:
Federal ............... (1,405) (242) 247
-------- ------- ------
$ 340 1,127 $1,293
======== ======= ======
</TABLE>
A reconciliation of the expected tax expense, based on the Federal
statutory rate of 34 percent, to the actual tax expense for the years ended
December 31 is as follows:
<TABLE>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Amount of tax computed at Federal statutory rate of 34 percent ..... $ 2,364 $ 1,867 $ 1,770
Increase (decrease) in taxes resulting from:
Tax exempt income ................................................ (943) (792) (625)
Amortization of intangible assets ................................ 172 167 190
Nontaxable gain on securities donated ............................ (1,200) (162) --
State income tax (net of federal benefit) ........................ 5 14 4
Other, net ....................................................... (58) 33 (46)
-------- ------- -------
$ 340 $ 1,127 $ 1,293
======== ======= =======
Effective tax rate ................................................. 5% 21% 25%
======== ======= =======
</TABLE>
F-13
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 6. INCOME TAXES -- Continued
Significant components of BancShares' deferred tax liabilities and
(assets) are as follows:
<TABLE>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation ............................ $ 741 $ 703
Leased assets ........................... 164 134
Investment securities ................... 7,777 5,613
Other ................................... 264 279
-------- --------
Gross deferred tax liabilities ......... 8,946 6,729
-------- --------
Deferred tax assets:
Allowance for loan losses ............... (1,594) (1,574)
Intangible assets ....................... (696) (446)
Other ................................... (1,245) (57)
-------- --------
Gross deferred tax assets .............. (3,535) (2,077)
-------- --------
Net deferred tax liability ................ $ 5,411 $ 4,652
======== ========
</TABLE>
No valuation allowance for deferred tax assets was required at December
31, 1997 or 1996. Management has determined that it is more likely than not
that the net deferred tax asset can be supported by carrybacks to federal
taxable income in the carryback period. A portion of the change in the net
deferred tax liability relates to unrealized gains on securities
available-for-sale. The related deferred tax charges of approximately $2,164
and $1,983 for the years ended December 31, 1997 and 1996, respectively, have
been recorded directly to shareholders' equity as a reduction of the related
unrealized gains on securities available-for-sale.
NOTE 7. DEPOSITS
Deposits at December 31 are summarized as follows:
1997 1996
---------- ----------
Demand .......................... $ 66,565 $ 64,089
Checking with interest .......... 66,695 66,554
Savings ......................... 51,087 51,969
Money market accounts ........... 50,061 45,027
Time ............................ 278,920 252,927
-------- --------
Total deposits ................ $513,328 $480,566
======== ========
Total time deposits with a denomination of $100 or more were $53,004 and
$45,566 at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits were:
1998 .......................... $228,168
1999 .......................... 34,706
2000 .......................... 15,708
2001 .......................... 338
2002 and thereafter ........... --
--------
Total time deposits ........... $278,920
========
F-14
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 8. SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS
Short-Term Borrowings
Short-term borrowings at December 31 were:
<TABLE>
1997 1996
--------- ---------
<S> <C> <C>
U.S. Treasury tax and loan accounts .......... $2,065 $1,226
Repurchase agreements ........................ 4,761 3,838
------ ------
Total short-term borrowings ................ $6,826 $5,064
====== ======
</TABLE>
The Treasury tax and loan accounts averaged $997 and $1,052 in 1997 and
1996, respectively. The highest month-end balance of the Treasury tax and loan
accounts in 1997 and 1996 was $2,215 and $1,300, respectively. The average rate
on Treasury tax and loan deposits in 1997 and 1996 was 5.85 and 5.09 percent,
respectively.
The repurchase agreements averaged $4,819 and $2,934 in 1997 and 1996,
respectively. The highest month-end balance of the repurchase agreements in
1997 and 1996 was $5,929 and $4,507, respectively. The average rate on
repurchase agreements in 1997 and 1996 was 4.18 and 4.04 percent, respectively.
At December 31, 1997 investment securities with a book value of $11,028 were
pledged for repurchase agreements. The securities collateralizing the
repurchase agreements have been delivered to a third party custodian for
safekeeping.
Long-Term Obligations
The $4,750 note payable to a bank at December 31, 1997, was negotiated in
1997 by BancShares to provide additional capital to its subsidiary, and is
secured by investment securities. Interest is payable quarterly at the 90 day
LIBOR rate plus 70 basis points. Future principal payments as of December 31,
1997, are as follows:
<TABLE>
<S> <C>
1998 ......... $ 1,800
1999 ......... 1,800
2000 ......... 1,150
-------
$ 4,750
=======
</TABLE>
F-15
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 9. ACQUISITIONS
BancShares has consummated numerous acquisitions in recent years. All of
the transactions have been accounted for as purchases, with the results of
operations not included in BancShares' consolidated statements of income until
after the transaction date. The pro forma impact of the acquisitions, as though
they had been made at the beginning of the periods presented, is not material
to BancShares' consolidated financial statements.
The following table provides information regarding the acquisitions that
have been consummated during the three-year period ending December 31, 1997:
<TABLE>
Deposit
Assets Liabilities Resulting
Date Institution/Location Acquired Assumed Intangible
- ------------- --------------------------------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
May 1997 Wachovia Bank of North Carolina, N.A. $ 5,083 $ 5,117 $179
Aulander, North Carolina
May 1997 Wachovia Bank of North Carolina, N.A. 11,803 11,838 947
Aurora, North Carolina
May 1997 Wachovia Bank of North Carolina, N.A. 4,073 4,106 144
Hamilton, North Carolina
August 1996 United Carolina Bank 6,085 6,085 419
Edenton, North Carolina
June 1996 First Citizens Bank 7,352 7,348 539
Windsor, North Carolina
June 1995 First Union National Bank 18,041 18,039 774
Farmville, North Carolina
June 1995 First Union National Bank 9,299 9,297 399
Garland, North Carolina
June 1995 First Union National Bank 8,057 8,057 345
Kill Devil Hills, North Carolina
June 1995 First Union National Bank 12,427 12,425 533
Salemburg, North Carolina
June 1995 First Citizens Bank 3,109 3,107 62
Kill Devil Hills, North Carolina
</TABLE>
F-16
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 10. RETIREMENT PLANS
The Bank has a noncontributory, defined benefit pension plan which covers
substantially all full-time employees. Employees who qualify under length of
service and other requirements participate in the noncontributory defined
benefit pension plan. Under the plan, retirement benefits are based on years of
service and average earnings. The policy is to fund the maximum amount
allowable for federal income tax purposes. The plan's assets consist primarily
of investments in a related bank's common trust funds, which include listed
common stocks and fixed income securities (see Note 15). It is Southern's
policy to determine the service cost and projected benefit obligation using the
Projected Unit Credit Cost method.
Pension expense is included in personnel expense and includes the
following components:
<TABLE>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service benefits earned during the period .... $ 298 $ 255 $ 191
Interest cost on projected benefit obligation 418 373 338
Return on assets ............................. (818) (309) (865)
Net amortization and deferral ................ 493 2 540
------ ------ ------
Net periodic pension cost .................... $ 391 $ 321 $ 204
====== ====== ======
</TABLE>
The funded status of the plan as of December 31 was as follows:
<TABLE>
1997 1996
------------- -------------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $4,508 and
$3,873, respectively ................................................ $ 4,853 $ 4,031
========= =========
Projected benefit obligation .......................................... $ (6,598) $ (5,417)
Plan assets, at fair value ............................................ 5,943 4,936
--------- ---------
Plan assets in excess of (less than) projected benefit obligation ..... (655) (481)
Unrecognized prior service cost ....................................... 81 90
Unrecognized net loss ................................................. 530 409
Unrecognized transition asset ......................................... (225) (265)
--------- ---------
Prepaid (accrued) pension expense ..................................... $ (269) $ (247)
========= =========
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 7.25 percent at December 31, 1997, 1996 and 1995, respectively, an
assumed long-term rate of compensation increase of 4.25 percent at December 31,
1997, 1996 and 1995, respectively, and an assumed long-term rate of return on
plan assets of 8.25 percent, 8.25 percent and 8.50 percent at December 31,
1997, 1996 and 1995, respectively.
Employees are also eligible to participate in a matching savings plan
after one year of service. During 1997 the Bank made participating
contributions to this plan of $220 compared to $198 during 1996 and $173 during
1995.
NOTE 11. REGULATORY REQUIREMENTS AND RESTRICTIONS
BancShares and its banking subsidiary are subject to certain requirements
imposed by state and federal banking statutes and regulations. These
regulations establish guidelines for minimum capital levels, restrict certain
dividend payments and require the maintenance of noninterest-bearing reserve
balances at the Federal Reserve Bank. Such reserves averaged $9,760 during 1997
of which $8,489 was satisfied by vault cash and the remainder by amounts held
in the Federal Reserve Bank.
Various regulatory agencies have implemented guidelines that evaluate
capital based on risk adjusted assets. An additional capital computation
evaluates tangible capital based on tangible assets. Minimum capital
requirements set forth by the regulators require a Tier 1 capital ratio of no
less than 4 percent of risk-adjusted assets, a total capital ratio of no less
than 8 percent of risk-adjusted assets, and a leverage capital ratio of no less
than 4 percent of average tangible assets. To meet the Federal Deposit
Insurance Corporation's ("FDIC") "well capitalized" standards, the Tier 1 and
total capital ratios must
F-17
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 11. REGULATORY REQUIREMENTS AND RESTRICTIONS -- Continued
be at least 6 percent and 10 percent, respectively. Failure to meet minimum
capital requirements may result in certain actions by regulators that could
have a direct material effect on the consolidated financial statements. As of
December 31, 1997, the Bank was considered to be "well capitalized" by the
FDIC.
The Bank's capital ratios as of December 31, 1997 and 1996 are set forth
below:
<TABLE>
1997 1996
------------- -------------
<S> <C> <C>
Risk-based capital:
Tier 1 capital .................. $ 33,999 $ 27,891
Total capital ................... 37,876 31,861
Risk-adjusted assets ............ 295,654 298,862
Average tangible assets ......... 564,633 510,574
Tier 1 capital ratio ............ 11.50% 9.33%
Total capital ratio ............. 12.81% 10.66%
Leverage capital ratio .......... 6.02% 5.46%
</TABLE>
The primary source of funds for the dividends paid by BancShares to its
shareholders is dividends received from its banking subsidiary. The Bank is
restricted as to dividend payout by state laws applicable to banks and may pay
dividends only out of retained earnings. Should at anytime its surplus be less
than 50% of its paid-in capital stock, the Bank may not declare a dividend
until it has transferred from retained earnings to surplus 25% of its undivided
profits or any lesser percentage that may be required to restore its surplus to
an amount equal to 50% of its paid-in capital stock. Additionally, dividends
paid by the Bank may be limited by the need to retain sufficient earnings to
satisfy minimum capital requirements imposed by the FDIC. Dividends on
BancShares' common shares may be paid only after dividends on preferred Series
"B" and "C" shares have been paid. Common share dividends are based upon
BancShares' profitability and paid at the discretion of the Board of Directors.
Management does not expect any of the foregoing restrictions to materially
limit its ability to pay dividends comparable to those paid in the past. At
December 31, 1997, the Bank had available for the payment of dividends
undivided profits of approximately $8.8 million, unless declaration of
dividends for such amount would reduce the regulatory capital of the Bank below
the minimum levels discussed above. At December 31, 1997, approximately $39.4
million of BancShares' investment in the Bank was restricted as to transfer to
BancShares without obtaining prior regulatory approval.
Common shareholders are entitled to one vote per share and both classes of
preferred shareholders are entitled to one vote for each 38 shares owned of a
class.
NOTE 12. COMMITMENTS, CONTINGENCIES AND CONCENTRATION OF CREDIT RISK
In the normal course of business there are various commitments and
contingent liabilities outstanding, such as guarantees, commitments to extend
credit, etc., which are not reflected in the accompanying financial statements.
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit and
undisbursed advances on customer lines of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheet.
The Bank is exposed to credit loss, in the event of nonperformance by the
other party to the financial instrument, for commitments to extend credit and
standby letters of credit which is represented by the contractual notional
amount of those instruments. The Bank uses the same credit policies in making
these commitments and conditional obligations as it does for on-balance-sheet
instruments.
F-18
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 12. COMMITMENTS, CONTINGENCIES AND CONCENTRATION OF CREDIT
RISK -- Continued
Commitments to extend credit and undisbursed advances on customer lines of
credit are agreements to lend to a customer 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 commitments expire without being drawn, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank, upon extension of credit is based on
management's credit evaluation of the borrower. Collateral held varies but may
include trade accounts receivable, property, plant, and equipment and
income-producing commercial properties.
Standby letters of credit are commitments issued by the Bank to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers.
Outstanding standby letters of credit as of December 31, 1997 and 1996
amounted to $1,324 and $1,260, respectively. Outstanding commitments were
$53,763 and $48,878 at December 31, 1997 and 1996, respectively. Undisbursed
advances on customer lines of credit were $29,602 and $22,084 at December 31,
1997 and 1996, respectively. The Bank does not anticipate any losses as a
result of these transactions.
The Bank grants agribusiness, commercial and consumer loans to customers
primarily in eastern North Carolina. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the agricultural industry and in particular the
tobacco segment thereof. For several decades tobacco has come under increasing
criticism for potential health risks. Management is unable to predict the
impact of the contingencies inherent in this market segment as it relates to
the Bank.
BancShares is also involved in various legal actions arising in the normal
course of business. Management is of the opinion that the outcome of such
actions will not have a material adverse effect on the consolidated financial
condition of BancShares.
BancShares has deposits insured under both of the FDIC insurance funds,
the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund
("SAIF"). In July 1995, the FDIC and other regulatory agencies proposed a plan
to recapitalize the SAIF, and Congress mandated a one-time assessment for all
SAIF-insured deposits on September 30, 1996. BancShares had approximately
$87,000 of SAIF-insured deposits subject to the one-time assessment and
recorded $569 on September 30, 1996 as a one-time FDIC insurance expense.
NOTE 13. PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets (parent company only) of
BancShares as of December 31, 1997 and 1996 and condensed statements of income
and cash flows for each of the three years ended December 31, 1997, 1996 and
1995.
F-19
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 13. PARENT COMPANY FINANCIAL STATEMENTS -- Continued
Condensed Balance Sheets
<TABLE>
December 31,
-------------------
1997 1996
--------- ---------
<S> <C> <C>
Assets
Cash ............................................ $ 33 $ 46
Investment securities available-for-sale ........ 15,572 6,188
Investment in subsidiary ........................ 47,700 41,322
------- -------
Total assets ................................... $63,305 $47,556
======= =======
Liabilities and Shareholders' Equity
Accrued liabilities ............................. $ 3,562 $ 1,378
Accrued interest payable ........................ 9 --
Note payable .................................... 4,750 1,400
------- -------
Total liabilities .............................. 8,321 2,778
Shareholders' equity ............................ 54,984 44,778
------- -------
Total liabilities and shareholders' equity ..... $63,305 $47,556
======= =======
</TABLE>
Condensed Statements of Income
<TABLE>
Year ended December 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Dividends from bank subsidiary .............................. $5,458 $2,637 $2,507
Other dividends ............................................. 80 78 44
------ ------ ------
Total income .............................................. 5,538 2,715 2,551
Interest expense ............................................ (295) (117) (309)
Miscellaneous income (expense) .............................. (49) (42) 6
------ ------ ------
Income before equity in undistributed income of subsidiary 5,194 2,556 2,248
Equity in undistributed income of subsidiary ................ 1,419 1,808 1,665
------ ------ ------
Net income ................................................ $6,613 $4,364 $3,913
====== ====== ======
</TABLE>
F-20
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 13. PARENT COMPANY FINANCIAL STATEMENTS -- Continued
Condensed Statements of Cash Flows
<TABLE>
Year ended December 31,
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income .................................................... $ 6,613 $ 4,364 $ 3,913
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiary ............. (1,419) (1,808) (1,665)
Increase in accrued liabilities .............................. -- 642 153
Dividend income in the form of investment securities ......... (2,753) -- --
Increase (decrease) in interest payable ...................... 9 (39) 9
-------- -------- --------
Net Cash Provided By Operating Activities ...................... 2,450 3,159 2,410
-------- -------- --------
Investing Activities:
Purchase of investments ....................................... (205) (1,318) (444)
Investments in subsidiaries ................................... (5,000) -- --
-------- -------- --------
Net Cash Used In Investing Activities .......................... (5,205) (1,318) (444)
-------- -------- --------
Financing Activities:
Dividends paid ................................................ (585) (587) (531)
Purchase and retirement or redemption of stock ................ (23) (12) (253)
Principal additions (payments) on note payable ................ 3,350 (1,200) (1,200)
-------- -------- --------
Net Cash Provided (Used) in Financing Activities ............... 2,742 (1,799) (1,984)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ........... (13) 42 (18)
Cash and Cash Equivalents at the Beginning of Year ............. 46 4 22
-------- -------- --------
Cash and Cash Equivalents at the End of Year ................... $ 33 $ 46 $ 4
======== ======== ========
</TABLE>
F-21
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and due from banks, federal funds sold, and accrued interest
receivable
The carrying amounts for cash and due from banks, federal funds sold and
accrued interest receivable are equal to their fair values due to the short
term nature of these financial instruments.
Investment securities
Fair values of investment securities are based on quoted market prices. If
a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans receivable
For variable-rate loans that are performing, fair values are based on
carrying values. The fair values of fixed rate loans that are performing are
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. The fair value of nonperforming loans is based
on the book value of each loan, less an applicable reserve for credit losses.
This reserve for credit losses is determined on a loan by loan basis for
nonperforming assets based on one or a combination of the following: external
appraisals, internal assessments using available market information and
specific borrower information, or discounted cash flow analysis.
Deposits
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at year end. The fair value of
certificates of deposit is estimated by discounting the future cash flows using
the current rates paid for similar deposits.
Short-term borrowings and accrued interest payable
The carrying amounts for short-term borrowings and accrued interest
payable are equal to the fair values due to the short term nature of these
financial instruments.
Long-term obligations
The carrying amount for the long-term obligation is considered to be equal
to its fair value since the underlying note bears interest at a variable rate.
Commitments
The Bank's commitments to extend credit have no carrying value and are
generally at variable rates and/or have relatively short terms to expiration.
Accordingly, these financial instruments are deemed to have no material fair
value.
Fair value estimates are made by management at specific points in time
based on relevant information about the financial instrument and the market.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time BancShares' entire holdings of a particular
financial instrument nor are potential taxes and other expenses that would be
incurred in an actual sale considered. Because no market exists for a
significant portion of BancShares' financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions and/or the methodology used
could significantly affect the estimates disclosed. Similarly, the fair values
disclosed could vary significantly from amounts realized in actual
transactions.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, BancShares has premises and equipment which
are not considered financial instruments. Accordingly, the value
F-22
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
of these assets has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates.
The estimated fair values of BancShares' financial instruments at December
31 are as follows:
<TABLE>
1997 1996
----------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks ......... $ 28,381 $ 28,381 $ 21,445 $ 21,445
Federal funds sold .............. 10,240 10,240 11,020 11,020
Investment securities:
Held-to-maturity ............... 56,281 57,294 63,676 64,559
Available-for-sale ............. 123,852 123,852 105,013 105,013
Loans ........................... 343,382 349,805 311,592 322,746
Accrued interest receivable ..... 4,205 4,205 3,999 3,999
Financial liabilities:
Deposits ........................ $513,328 $514,095 $480,566 $481,091
Short-term borrowings ........... 6,826 6,826 5,064 5,064
Long-term obligations ........... 4,750 4,750 1,400 1,400
Accrued interest payable ........ 4,394 4,394 3,204 3,204
</TABLE>
NOTE 15. RELATED PARTIES
BancShares has entered into various service contracts with another bank
holding company and its subsidiary (the "Corporation"). The Corporation has two
significant shareholders, which are also significant shareholders of
BancShares. The first significant shareholder is a director of BancShares and
at December 31, 1997 beneficially owned 32,284 shares, or 26.92 percent, of
BancShares' outstanding common stock and 22,171 shares, or 5.47 percent, of
BancShares' outstanding Series B preferred stock. At the same date, the second
significant shareholder beneficially owned 27,577 shares, or 23.00 percent, of
BancShares' outstanding common stock, and 17,205 shares, or 4.24 percent, of
BancShares' Series B preferred stock. The above totals include 17,205 Series B
preferred shares, or 4.24 percent, that are considered to be beneficially owned
by both of the shareholders and, therefore, are included in each of their
totals.
These two significant shareholders are directors and executive officers of
the Corporation and at December 31, 1997, beneficially owned 2,548,519 shares,
or 26.46 percent, and 1,157,052 shares, or 12.01 percent, respectively, of the
Corporation's outstanding Class A common stock, and 632,146 shares, or 36.04
percent, and 190,191 shares, or 10.84 percent, respectively, of the
Corporation's outstanding Class B common stock. The above totals include
258,136 Class A common shares, or 2.68 percent, and 41,825 Class B Common
shares, or 2.38 percent, that are considered to be beneficially owned by both
of the shareholders and, therefore, are included in each of their totals. A
subsidiary of the Corporation is First-Citizens Bank & Trust Company ("FCB").
As more fully discussed elsewhere herein, the Bank acquired branches from FCB
in 1996 and 1995.
F-23
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in Thousands)
NOTE 15. RELATED PARTIES -- Continued
The following table lists the various charges paid to the Corporation
during the years ended December 31,
<TABLE>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Data and item processing .................... $1,840 $1,828 $1,477
Forms, supplies and equipment ............... 220 300 180
Trustee for employee benefit plans .......... 66 62 57
Consulting fees ............................. 79 79 69
Trust investment services ................... 22 24 24
Internal auditing services .................. 41 165 132
Other services .............................. 94 143 64
------ ------ ------
$2,362 $2,601 $2,003
====== ====== ======
</TABLE>
Data and item processing expenses include courier services, proof and
encoding, microfilming, check storage, statement rendering and item processing
forms. BancShares also has a correspondent relationship with the Corporation.
Correspondent account balances with the Corporation included in cash and due
from banks totaled $10,071, $8,673 and $16,167 at December 31, 1997, 1996 and
1995, respectively.
NOTE 16. SUBSEQUENT EVENTS
The Bank has entered into an agreement, subject to regulatory approval, to
buy a branch from another bank. The effect on BancShares will be an increase of
approximately $21 million in deposits. This transaction is scheduled to be
completed in the second quarter of 1998.
The Bank has received approval from the regulatory authorities to open de
novo branches in two new eastern North Carolina markets. These branches are
planned to open in 1999.
F-24
<PAGE>
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<PAGE>
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<PAGE>
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No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by BancShares, the Issuer Trust or by the Underwriter. Neither
the delivery of this Prospectus nor any sale made hereunder and thereunder
shall, under any circumstances, create an implication that there has been no
change in the affairs of BancShares or the Issuer Trust since the date hereof.
This Prospectus does not constitute an offer or solicitation by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to
anyone to whom it is unlawful to make such offer or solicitation.
--------------------------------
TABLE OF CONTENTS
<TABLE>
Page
---------
<S> <C>
Available Information ...................................... 4
Prospectus Summary ......................................... 5
Risk Factors ............................................... 10
Southern BancShares (N.C.), Inc. ........................... 17
Southern Capital Trust I ................................... 18
Accounting Treatment ....................................... 18
Use of Proceeds ............................................ 19
Consolidated Ratios of Earnings to Fixed Charges ........... 19
Capitalization ............................................. 20
Selected Consolidated Financial Data ....................... 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 22
Business ................................................... 47
Supervision and Regulation ................................. 49
Beneficial Ownership of Securities ......................... 54
Directors and Executive Officers ........................... 56
Executive Compensation ..................................... 58
Certain Relationships and Related Transactions ............. 59
Description of the Capital Securities ...................... 60
Description of the Junior Subordinated Debentures .......... 71
Description of the Guarantee ............................... 78
Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee ............... 80
Certain Federal Income Tax Consequences .................... 81
ERISA Considerations ....................................... 84
Underwriting ............................................... 86
Legal Matters .............................................. 87
Experts .................................................... 87
Southern BancShares (N.C.), Inc. and Subsidiary
Index to Consolidated Financial Statements .............. F-1
</TABLE>
$20,000,000
Southern Capital Trust I
8.25% Capital Securities
fully and unconditionally guaranteed,
as described herein, by
Southern BancShares
(N.C.), Inc.
--------------------------
PROSPECTUS
--------------------------
Wheat First Union
June 3, 1998
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