SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998. Commission File No. 0-10852
SOUTHERN BANCSHARES (N.C.), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1538087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
121 East Main Street Mount Olive, North Carolina 28365
(Address of Principal Executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (919) 658-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of the Registrant's common stock as of
the close of the period covered by this report.
119,796 shares
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES June 30, December 31,
CONSOLIDATED BALANCE SHEETS 1998 1997
--------- ---------
(Dollars in thousands except per share data) (Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks ............................................................. $ 31,378 $ 28,381
Federal funds sold .................................................................. 11,375 10,240
Investment securities:
Held-to-maturity, at amorttized cost (fair value $70,027 and $57,294, respectively) 69,105 56,281
Available-for-sale, at fair value (amortized cost $92,477 and $100,978, respectively) 112,583 123,852
Loans ............................................................................... 374,875 349,353
Less allowance for loan losses ...................................................... (6,293) (5,971)
--------- ---------
Net loans ........................................................................... 368,582 343,382
Premises and equipment .............................................................. 18,022 18,157
Intangible assets ................................................................... 5,266 5,506
Accrued interest receivable ......................................................... 4,630 4,205
Other assets ........................................................................ 1,419 748
--------- ---------
Total assets .......................................................... $ 622,360 $ 590,752
========= =========
LIABILITIES
Deposits:
Noninterest-bearing ............................................................ $ 68,275 $ 66,565
Interest-bearing ............................................................... 456,591 446,763
--------- ---------
Total deposits ...................................................................... 524,866 513,328
Long-term obligations ............................................................... 23,000 4,750
Short-term borrowings ............................................................... 7,123 6,826
Accrued interest payable ............................................................ 4,530 4,394
Other liabilities ................................................................... 6,792 6,470
--------- ---------
Total liabilities ......................................................... 566,311 535,768
--------- ---------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares
authorized; 404,586 and 404,946 shares issued and outstanding at June 30,
1998 and December 31, 1997, respectively ....................................... 1,974 1,976
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized and
43,631 shares issued and outstanding at June 30, 1998 and December 31, 1997
Common stock, $5 par value; 158,485 shares authorized and 119,796 and 119,918
shares issued and outstanding at June 30, 1998 and December 31, 1997,
respectively ................................................................. 599 600
Surplus ............................................................................. 10,000 10,000
Retained earnings ................................................................... 29,916 26,733
Unrealized gain on securities available-for-sale, net of tax ........................ 12,982 15,097
--------- ---------
Total shareholders' equity .................................................. 56,049 54,984
--------- ---------
Total liabilities and shareholders' equity ............................ $ 622,360 $ 590,752
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES (Unaudited) (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(Dollars in thousands except share and per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans .................................................................... $ 7,768 $ 7,191 $ 15,300 $ 14,097
Investment securities:
U. S. Government ..................................................... 1,734 1,590 3,469 3,178
State, county and municipal .......................................... 451 569 932 1,102
Other ................................................................ 385 266 546 384
--------- --------- --------- ---------
Total investment securities interest income .................. 2,570 2,425 4,947 4,664
Federal funds sold ....................................................... 163 95 347 205
--------- --------- --------- ---------
Total interest income .................................................... 10,501 9,711 20,594 18,966
Interest expense:
Deposits .......................................................... 4,703 4,548 9,359 8,857
Long-term obligations ............................................. 395 118 471 120
Short-term borrowings ............................................. 71 72 141 124
--------- --------- --------- ---------
Total interest expense ...................................... 5,169 4,738 9,971 9,101
--------- --------- --------- ---------
Net interest income ................................. 5,332 4,973 10,623 9,865
Provision for loan losses .......................................... 60 -- 120 60
--------- --------- --------- ---------
Net interest income after provision for loan losses . 5,272 4,973 10,503 9,805
Noninterest income:
Investment securities gains, net .................................... -- -- 1,788 3,534
Service charges on deposit accounts ................................. 823 677 1,585 1,325
Other service charges and fees ...................................... 282 216 528 424
Insurance commissions ............................................... 18 30 37 47
Gain (loss) on sale of loans ........................................ (29) 4 (28) (6)
Other ............................................................... 125 52 242 125
--------- --------- --------- ---------
Total noninterest income ...................................... 1,219 979 4,152 5,449
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES (Unaudited) (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(Dollars in thousands except share and per share data)
<S> <C> <C> <C> <C>
Noninterest expense:
Personnel .......................................................... 2,434 2,164 4,719 4,252
Data processing .................................................... 466 465 898 818
Intangibles amortization ........................................... 403 443 787 845
Occupancy .......................................................... 372 336 750 661
Furniture and equipment ............................................ 396 384 728 768
FDIC insurance assessment .......................................... 38 28 75 55
Charitable contributions ........................................... 1 2 1 4,074
Other .............................................................. 1,003 857 1,943 1,671
--------- --------- --------- ---------
Total noninterest expense ................................... 5,113 4,679 9,901 13,144
--------- --------- --------- ---------
Income before income taxes ............................................... 1,378 1,273 4,754 2,110
Income taxes ............................................................. 451 130 1,260 210
--------- --------- --------- ---------
Net income ........................................ $ 927 $ 1,143 $ 3,494 $ 1,900
========= ========= ========= =========
Per share information:
Net income applicable to common shares ................................ $ 6.91 $ 8.71 $ 27.49 $ 14.19
Cash dividends declared on common shares .............................. 0.37 0.37 0.75 0.74
Weighted average common shares outstanding ............................ 119,855 119,918 119,886 119,918
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
(Thousands) 1998 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................................................ $ 3,494 $ 1,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ..................................................... 120 60
Contribution expense for donation of marketable equity securities ............. -- 4,071
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 ........................ 34 32
Loss on sale of loans ......................................................... 28 6
Net accretion of discounts on investments ..................................... (39) (44)
Amortization of intangibles ................................................... 708 845
Depreciation .................................................................. 673 486
Net increase in accrued interest receivable ................................... (425) (527)
Net increase in accrued interest payable ...................................... 136 1,360
Net (increase) decrease in other assets ....................................... (478) 1,794
Net increase (decrease) in other liabilities .................................. 104 (456)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................................. 2,567 5,993
-------- --------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities available-for-sale 23,360 3,105
Proceeds from maturities and issuer calls of investment securities held-to-maturity . 3,906 26,177
Proceeds from sales of investment securities available-for-sale ..................... 1,976 --
Purchases of investment securities held-to-maturity ................................. (16,064) (17,764)
Purchases of investment securities available-for-sale ............................... (10,433) (12,264)
Net increase in loans ............................................................... (8,957) (27,700)
Additions to premises and equipment ................................................. (303) (2,700)
Net cash (paid) received for bank and branches acquired ............................. (6,070) 19,730
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ..................................................... (12,585) (11,416)
-------- --------
FINANCING ACTIVITIES:
Net decrease in demand and interest bearing demand deposits .......................... (3,985) (14,195)
Net (decrease) increase in time deposits ............................................. (98) 16,469
Proceeds of long-term obligations .................................................... 23,000 5,000
Payments of long-term obligations .................................................... (4,750) (750)
Net proceeds of short-term borrowings ................................................ 297 1,668
Cash dividends paid .................................................................. (289) (287)
Purchase and retirement of stock ..................................................... (25) (15)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................................................. 14,150 7,890
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
(Thousands) 1998 1997
-------- ---------
<S> <C> <C>
NET INCREASE IN CASH EQUIVALENTS .......................................................... $ 4,132 $ 2,467
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR ........................................ 38,621 32,465
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD ............................................ $ 42,753 $ 34,932
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest ............................................................................. $ 9,835 $ 7,740
Income taxes ......................................................................... $ 1,335 $ 799
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities available-for-sale, net of taxes ..................... $ (2,115) $ 644
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Dollars in thousands except per share data)
Preferred Stock Common Stock
-------------------------------------------- ----------------------
Series B Series C
------------------- --------------------
Shares Amount Shares Amount Shares Amount Surplus
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ..... 407,752 $ 1,986 43,631 $ 578 119,918 $ 600 $ 10,000
Net income .....................
Retirement of stock ............ (1,408) (6)
Cash dividends:
Common stock ($.74 per share)
Preferred B ($.44 per share)
Preferred C ($.44 per share)
Change in unrealized gain on
securities available-for-sale,
net of taxes .................
======== ======== ====== ======== ======== ======== ========
Balance, June 30, 1997 ......... 406,344 $ 1,980 43,631 $ 578 119,918 $ 600 $ 10,000
======== ======== ====== ======== ======== ======== ========
Balance, December 31, 1997 ..... 404,946 $ 1,976 43,631 $ 578 119,918 $ 600 $ 10,000
Net income .....................
Retirement of stock ............ (360) (2) (122) (1)
Cash dividends:
Common stock ($.75 per share)
Preferred B ($.44 per share)
Preferred C ($.44 per share)
Change in unrealized gain on
securities available-for-sale,
net of taxes .................
======== ======== ====== ======== ======== ======== ========
Balance, June 30, 1998 ......... 404,586 $ 1,974 43,631 $ 578 119,796 $ 599 $ 10,000
======== ======== ====== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized
gain on
securities
available- Total
Retained for-sale, Shareholders'
Earnings net of taxes Equity
-------- ------------ ------
<S> <C> <C> <C>
Balance, December 31, 1996 ..... $ 20,718 $ 10,896 $ 44,778
Net income ..................... 1,900 1,900
Retirement of stock ............ (9) (15)
Cash dividends:
Common stock ($.74 per share) (89) (89)
Preferred B ($.44 per share) (179) (179)
Preferred C ($.44 per share) (19) (19)
Change in unrealized gain on
securities available-for-sale,
net of taxes ................. 644 644
======== ======== ========
Balance, June 30, 1997 ......... $ 22,322 $ 11,540 $ 47,020
======== ======== ========
Balance, December 31, 1997 ..... $ 26,733 $ 15,097 $ 54,984
Net income ..................... 3,494 3,494
Retirement of stock ............ (22) (25)
Cash dividends:
Common stock ($.75 per share) (91) (91)
Preferred B ($.44 per share) (179) (179)
Preferred C ($.44 per share) (19) (19)
Change in unrealized gain on
securities available-for-sale,
net of taxes ................. (2,115) (2,115)
======== ======== ========
Balance, June 30, 1998 ......... $ 29,916 $ 12,982 $ 56,049
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SOUTHERN BANCSHARES (N. C.), INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 1. Summary Of Significant Accounting Policies
Basis of Financial Statement Presentation
Southern BancShares (N. C.), Inc. ("BancShares") is the holding company for
Southern Bank and Trust Company ("Southern"), which operates 43 banking offices
in eastern North Carolina, and Southern Capital Trust I (the "Trust"), a
statutory business trust that issued $23.0 million of 8.25% Capital Securities
("the Capital Securities") in June 1998 maturing in 2028. Southern, which began
operations in January, 1901, has a wholly-owned subsidiary, Goshen, Inc. which
acts as agent for credit life and credit accident and health insurance written
in connection with loans made by Southern. BancShares and Southern are
headquartered in Mount Olive, North Carolina.
The consolidated financial statements in this report 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 periods presented have been included.
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
statements should be read in conjunction with the consolidated financial
statements and accompanying notes for the year ended December 31, 1997,
incorporated by reference in the 1997 Annual Report on Form 10-K.
Principles Of Consolidation
The consolidated financial statements include the accounts of BancShares and,
its wholly-owned subsidiaries, Southern and the Trust. The statements also
include the accounts of Goshen, Inc., a wholly-owned subsidiary of Southern.
BancShares' financial resources are primarily provided by dividends from
Southern. All significant intercompany balances have been eliminated in
consolidation.
Cash And Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due form banks and federal funds sold. Federal funds are purchased and sold for
one day periods.
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.
<PAGE>
Mortgage Servicing Rights
The estimated value of the right to service mortgage loans for others ("MSR's")
is included in other assets on BancShares' consolidated balance sheet.
Capitalization of the MSR's occurs when the underlying loans are sold or
securitized or when rights to service mortgage loans from others are acquired.
Capitalized MSR's are amortized against income over the projected servicing life
of the underlying loans. Capitalized MSR's are periodically reviewed for
impairment based on the excess of the carrying amount of such rights over their
fair value.
For purposes of measuring impairment, capitalized MSR's are stratified on the
basis of one or more of the predominant risk characteristics of the underlying
loans, including loan type, term, interest rate and origination date. Fair value
is estimated using current commitment prices from investors or current quoted
market prices to sell similar products.
During the six months ended June 30, 1998, BancShares acquired the rights to
service $51 million in mortgage loans from an affiliate institution (see note 8)
for $522,000. At June 30, 1998 and December 31, 1997, unamortized MSR's were
$482,000 and $137,000 respectively. There was no valuation allowance for MSR's
at June 30, 1998 or December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Dollars in thousands except share and per share data)
Note 2. Investment securities June 30, 1998 December 31, 1997
--------------------------------------- --------------------------------------------
(In thousands) Gross Gross Estimated Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized
Cost Gains Losses Value Cost Gains
--------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY:
U. S. Government ............ $ 49,468 118 (27) $ 49,559 $ 33,969 122
Obligations of states
and political subdivisions 19,537 831 20,368 22,212 890 23,102
Corporate securities ......... 100 -- -- 100 100 1
--------- ========= --------- --------- --------- ---------
69,105 949 (27) 70,027 56,281 1,013
========= ========= ========= ========= ========= =========
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government ............ 71,473 143 (3) 71,613 82,471 130
Marketable equity securities . 10,080 19,447 29,527 8,119 22,183 (8)
Obligations of states
and political subdivisions 9,036 486 (1) 9,521 8,411 527
Mortgage-backed securities .... 1,888 43 (9) 1,922 1,977 51
--------- --------- --------- --------- --------- ---------
92,477 20,119 (13) 112,583 100,978 22,891
========= ========= ========= ========= ========= =========
Totals ....................... $ 161,582 $ 21,068 ($ 40) $ 182,610 $ 157,259 $ 23,904
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Estimated
Unrealized Market
Losses Value
---------- ---------
<S> <C> <C>
SECURITIES HELD-TO-MATURITY:
U. S. Government ............ $ -- $ 34,091
Obligations of states
and political subdivisions
Corporate securities ......... 101
--------- ---------
-- 57,294
========= =========
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government ............ (9) 82,592
Marketable equity securities . 30,294
Obligations of states
and political subdivisions -- 8,938
Mortgage-backed securities .... -- 2,028
--------- ---------
(17) 123,852
========= =========
Totals ....................... ($ 17) $ 181,146
========= =========
</TABLE>
<PAGE>
Note 3. LOANS
(Dollars in thousands) June 30, December 31,
1998 1997
-------- --------
Commercial, financial and agricultural ........... $ 92,040 $ 84,281
Real estate:
Construction ............................... 4,263 5,209
Mortgage:
One to four family residential ....... 116,936 106,444
Commercial ........................... 60,928 58,056
Equityline ........................... 30,580 27,759
Other ................................ 26,110 27,868
Consumer ......................................... 35,075 35,780
Lease financing .................................. 4,646 3,956
-------- --------
Total loans .................................... $370,578 $349,353
======== ========
Loans held for sale .............................. $ 4,247 $ 3,019
Loans serviced for others ........................ $141,026 $ 78,426
Note 4. ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
Six Months Ended June 30,
--------------------------
1998 1997
-------- --------
Balance at beginning of year ............. $ 5,971 $ 6,163
Allowance from bank acquisition ........ 269 --
Provision for loan losses .............. 120 60
Loans charged off ...................... (119) (178)
Loan recoveries ........................ 52 104
------- -------
Balance at end of the period ............. $ 6,293 $ 6,149
======= =======
Note 5. PREMISES AND EQUIPMENT (Dollars in thousands)
June 30, December 31,
1998 1997
-------- ---------
Land ....................................... $ 3,425 $ 3,377
Buildings and improvements ................. 14,446 14,292
Furniture and equipment .................... 6,523 6,387
Construction-in-progress ................... 136 90
-------- --------
24,530 24,146
Less: accumulated depreciation ............. (6,508) (5,989)
-------- --------
$ 18,022 $ 18,157
======== ========
<PAGE>
Note 6. Earnings Per Common Share
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. BancShares had no potentially dilutive
securities during 1998 or 1997, so there is no difference in the computation of
basic and diluted earnings per share for the periods presented.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
------------------------- ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income ........................... $ 927 $ 1,143 $ 3,494 $ 1,900
Less preferred dividends ........... ($ 99) ($ 98) ($ 198) ($ 198)
--------- --------- --------- ---------
Net income applicable to common shares $ 828 $ 1,045 $ 3,296 $ 1,702
========= ========= ========= =========
Weighted average common shares
outstanding during the period ...... 119,855 119,918 119,886 119,918
========= ========= ========= =========
</TABLE>
Note 7. Comprehensive Income
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.
Accordingly, BancShares adopted Statement 130 in 1998.
During the six months ended June 30, 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 $1.4 million and 2.5 million respectively.
Note 8. 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, who also are significant shareholders of BancShares.
The first significant shareholder is a director of BancShares and, at June 30,
1998, beneficially owned 32,294 shares, or 26.96%, of BancShares' outstanding
common stock and 22,171 shares, or 5.47%, of BancShares' outstanding Series B
preferred stock. At the same date, the second significant shareholder
beneficially owned 27,577 shares, or 23.02%, of BancShares' outstanding common
stock, and 17,205 shares, or 4.25%, of BancShares' Series B preferred stock. The
above totals include 17,205 Series B preferred shares, or 4.25%, that are
considered to be beneficially owned by both of the shareholders and, therefore,
are included in each of their totals.
<PAGE>
These two significant shareholders are directors and executive officers of the
Corporation and at June 30, 1998, beneficially owned 2,556,234 shares, or
28.70%, and 1,556,415 shares, or 17.56%, respectively, of the Corporation's
outstanding Class A common stock, and 639,471 shares, or 37.17%, and 160,049
shares, or 9.30%, respectively, of the Corporation's outstanding Class B common
stock. The above totals include 540,170 Class A common shares, or 6.07%, and
110,668 Class B Common shares, or 6.43 %, 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
("First Citizens"). Southern sold a branch to First Citizens in the second
quarter of 1998. In the last quarter of 1998, BancShares expects to acquire,
subject to regulatory approval, the Gates, North Carolina office of
First-Citizens Bank & Trust Company containing approximately $5.0 million in
deposits.
The following table lists the various charges paid to the Corporation during the
six months ended:
<TABLE>
<CAPTION>
(Dollars in thousands)
Six Months Ended June 30,
-------------------------
1998 1997
------ ------
<S> <C> <C>
Data and item processing ....................... $1,087 $ 867
Forms, supplies and equipment .................. 155 93
Trustee for employee benefit plans ............. 36 31
Consulting fees ................................ 38 38
Trust investment services ...................... 10 11
Internal auditing services ..................... 1 40
Other services ................................. 46 42
------ ------
$1,373 $1,122
====== ======
</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 $6.5 million at June 30, 1998 and $10.1 million at December
31, 1997.
During the six months ended June 30, 1998, BancShares acquired the rights to
service mortgage loans, as discussed in note 1 above, from an affiliate
institution which shares the same two significant shareholders as both
BancShares and the Corporation.
Note 9. Acquisitions
Effective May 15, 1998, Southern acquired one banking office of Enfield Savings
Bank, SSB, ("ESB"), a state-chartered savings bank headquartered in Enfield,
North Carolina. In connection with that transaction, Southern assumed aggregate
deposit liabilities of approximately $15.6 million and purchased approximately
$16.4 million of loans.
<PAGE>
Note 10. Trust Preferred Offering
On June 10, 1998 Southern Capital Trust I, (the "Trust"), a wholly-owned
statutory business trust of BancShares, issued $23.0 million of 8.25% Capital
Securities maturing in 2028. The Trust invested the $23.0 million proceeds in
Junior Subordinated Debentures issued by BancShares (the "Junior Debentures"),
which upon consolidation of BancShares is eliminated. The Junior Debentures,
with a maturity of 2028, are the primary assets of the Trust. With respect to
the Capital Securities, BancShares irrevocably and unconditionally guarantees
the Trust's obligations. A portion of the Capital Securities are included in
Tier I capital for regulatory capital adequacy requirements.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - SIX
MONTHS ENDED 1998 VS. SIX MONTHS ENDED 1997
INTRODUCTION
In the first six months of 1998, the net income of BancShares increased $1.6
million from $1.9 million in the first six months of 1997 to $3.5 million in the
first six months of 1998, an increase of 83.89%. This increase resulted
primarily from a 1997 charitable contribution expense of $4.1 million related to
the contribution of marketable securities to a charitable foundation in the six
months ended June 30, 1997. This expense was partially offset by the resulting
reduction in income tax expense of approximately $350,000 arising from the
charitable contribution and the related securities gain of $3.5 million.
Additionally in the six months ended June 30, 1998 BancShares sold
available-for-sale securities resulting in a realized gain of $1.8 million. One
branch acquisition in May 1998, three branch acquisitions in May 1997 and the
opening of a new branch in September 1997 resulted in increased net interest
income, increased other noninterest income and increased personnel expense and
other related operating expenses for the six months ended June 30, 1998.
Losses on the sales of mortgage loans held-for-sale increased $22,000 in the six
months ended June 30, 1998 compared to the six months ended June 30, 1997. A
donation of available-for-sale securities in the first six months of 1997
resulted in a significant increase in charitable contributions expense which was
more than offset by the resulting investment securities gains and resulting
reduction in income taxes.
Per share net income available to common shares for the first six months of 1998
was $27.49, an increase of $13.30, or 93.73 %, from $14.19 in 1997. The return
on average equity increased to 16.58%, for the period ended June 30, 1998, from
9.37% for the period ended June 30, 1997 and the return on average assets
increased to 1.36%, for the period ended June 30, 1998, from 0.75% for the
period ended June 30, 1997.
At June 30, 1998, BancShares' assets totaled $622.4 million, an increase of
$31.6 million, or 5.35%, from the $590.8 million reported at December 31, 1997.
During this six month period, net loans increased $25.2 million, or 7.34%, from
$343.4 million to $368.6 million. During the six months ended June 30, 1998
investment securities increased $1.6 million, or 0.86% from $180.1 million at
December 31, 1997 to $181.7 million at June 30, 1998. Total deposits increased
$11.5 million, or 2.25% from $513.3 million at December 31, 1997 to $524.9
million at June 30, 1998. The above increases resulted principally from the 1998
acquisitions discussed below.
ACQUISITIONS
Southern acquired $11.9 million, $4.1 million and $5.1 million, respectively, of
the deposits of the Aurora, Hamilton and Aulander offices of a North Carolina
commercial bank in May 1997. Southern purchased $852,000, $412,000 and $180,000
of the loans of the respective branches and paid a premium of $1.3 million, or
approximately 6.03%, for the deposits of the three branches. This acquisition
was accounted for as a purchase, and, therefore, the results of operations prior
to the purchase are not included in the consolidated financial statements.
<PAGE>
In May 1998, Southern acquired $16.7 million of the loans and $15.6 million of
the deposits of ESB. Southern recorded goodwill of $468,000 for the ESB
acquisition. This acquisition was accounted for as a purchase, and, therefore,
the results of operations prior to the purchase are not included in the
consolidated financial statements.
The comparisons of the six months ended June 30, 1998 to the six months ended
June 30, 1997 are accordingly impacted by the above transactions.
INTEREST INCOME
Interest and fees on loans increased $1.2 million, or 8.53%, from $14.1 million
for the six months ended June 30, 1997 to $15.3 million for the six months ended
June 30, 1998. This increase was due to increased loan volume. Average loans for
the six months ended June 30, 1998 were $361.4 million, an increase of 9.58%
from $329.8 million for the prior year six month period. The yield on the loan
portfolio was 8.77% in the six months ended June 30, 1997 and 8.46% in the six
months ended June 30, 1998.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased $283,000 or 6.07%, from $4.7 million in the six months
ended June 30, 1997 to $4.9 million in the six months ended June 30, 1998. This
increase was due to an increase in the volume of average investment securities
for the six months ended June 30, 1998 to $159.8 million as compared to $151.8
million for the same 1997 period. The yield on investment securities was 5.99%
for the six-month period ended June 30, 1997 and 5.94% in the six-month period
ended June 30, 1998.
Interest income on federal funds sold increased $142,000 or 69.27%, from
$205,000 for the six months ended June 30, 1997 to $347,000 for the six months
ended June 30, 1998. This increase in income resulted primarily from an increase
in the average federal funds sold to $12.9 million for the six months ended June
30, 1998 from an average of $7.9 million for the six months ended June 30, 1997.
Average federal funds sold yields were 5.43% for the six months ended June 30,
1998 up from 5.24% for the six months ended June 30, 1997.
Total interest income increased $1.6 million, or 8.58%, from $19.0 million for
the six months ended June 30, 1997 to $20.6 million for the six months ended
June 30, 1998. This increase was primarily the result of volume increases that
more than offset an overall decrease in average earning asset yields.
Average earning asset yields for the six months ended June 30, 1998 decreased to
7.63% from the 7.85% yield on average earning assets for the six months ended
June 30, 1997. Average earning assets increased from $489.4 million in the six
months ended June 30, 1997 to $534.1 million in the period ended June 30, 1998.
This $44.7 million increase in the average earning assets resulted primarily
from the acquisitions discussed above.
INTEREST EXPENSE
Total interest expense increased $870,000 or 9.56%, from $9.1 million in the six
months ended June 30, 1997 to $10.0 million for the six months ended June 30,
1998. The principal reason for this increase was the acquisitions discussed
above. BancShares' total cost of funds decreased from 4.20% at June 30, 1997 to
<PAGE>
4.18% at June 30, 1998. Average interest bearing deposits were $453.5 million in
the six months ended June 30, 1998, an increase of $26.3 million from the $427.2
million average in the six months ending June 30, 1997. The increase in
interest-bearing liabilities was primarily the result of the branch purchases
discussed above. BancShares recorded $158,000 of interest expense in the six
months ended June 30, 1998 related to the newly issued capital securities
discussed above.
NET INTEREST INCOME
Net interest income increased $758,000 or 7.68%, from $9.9 million for the six
months ended June 30, 1997 to $10.6 million for the six months ended June 30,
1998. This increase was primarily due to the impact of the acquisitions
discussed above, which increased interest earning assets more than
interest-bearing liabilities.
The net interest margin at June 30, 1998 was 3.45%, a decrease of 20 basis
points from the 3.65% interest margin at June 30, 1997.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the six months ended June 30, 1998 management added $120,000 as a volume
related addition to the provision for loan losses. Management made a $60,000
addition to the provision for loan losses for the six months ended June 30,
1997.
During the first six months of 1998 management charged-off loans totaling
$119,000 and received recoveries of $52,000, resulting in net charge-offs of
$67,000. During the same period in 1997, $178,000 in loans were charged-off and
recoveries of $104,000 were received, resulting in net charge-offs of $74,000.
The following table presents comparative Asset Quality ratios of the company:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Ratio of annualized net loans charged off
to average loans ....................... 0.04% 0.07%
Allowance for loan losses
to loans .............................. 1.68% 1.71%
Non-performing loans
to loans ............................. 0.22% 0.20%
Non-performing loans and assets
to total assets ...................... 0.14% 0.13%
Allowance for loan losses
to non-performing loans .............. 772.15% 857.90%
</TABLE>
<PAGE>
The ratio of net annualized charge-offs to average loans outstanding decreased
to 0.04% for the six months ended June 30, 1998 from 0.07% for the year ended
December 31, 1997 primarily due to increased loans. The allowance for loan
losses represented 1.68% and 1.71% of loans, net of unearned income, at June 30,
1998 and December 31, 1997, respectively. Loans increased $21.2 million, or
6.08%, from December 31, 1997 to June 30, 1998.
The ratio of nonperforming loans to loans, net of unearned income increased from
0.20% at December 31, 1997 to 0.22% at June 30, 1998. Nonperforming loans and
assets to total assets increased to 0.14% at June 30, 1998 from 0.13% at
December 31, 1997. The allowance for loan losses to nonperforming loans
represented 772.15% of nonperforming loans at June 30, 1998, a decrease from the
857.90% at December 31, 1997. The above performance declines resulted primarily
from an increase in nonperforming loans to $815,000 at June 30, 1998 from
$696,000 at December 31, 1997. The nonperforming loans at June 30, 1998 included
$105,000 of nonaccrual loans, $666,000 of accruing loans 90 days or more past
due and $44,000 of restructured loans. BancShares had $81,000 of assets
classified as other real estate at June 30, 1998. BancShares had no assets
classified as other real estate at June 30, 1997. BancShares had $48,000 of
assets classified as other real estate at December 31, 1997.
Management considers the June 30, 1998 allowance for loan losses adequate to
cover the losses and risks inherent in the loan portfolio at June 30, 1998 and
will continue to monitor its portfolio and to adjust the relative level of the
allowance as needed. BancShares' impaired loans were approximately $105,000 at
June 30, 1998.
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.
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 Southern's allowance for loan losses
and losses on other real estate owned. Such agencies may require Southern to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
NONINTEREST INCOME
BancShares had a decrease of $1.7 million in net investment securities gains for
the six months ended June 30, 1998 as compared to the prior year six months,
principally related to the 1997 donation and 1998 sale of available-for-sale
securities discussed above.
BancShares had losses on the sale of mortgage loans of $28,000 in the six months
ended June 30, 1998 compared to $6,000 in losses on the sales of mortgage loans
in the six months ended June 30, 1997.
<PAGE>
Income from service charges on deposit accounts, other service charges and fees,
insurance commissions and other noninterest income not detailed above increased
$471,000 or 24.52%, from $1.9 million for the six months ended June 30, 1997 to
$2.4 million for the six months ended June 30, 1998 principally as a result of
the acquisitions discussed above.
NONINTEREST EXPENSE
BancShares had a decrease in charitable contribution expense of $4.1 million for
the six months ended June 30, 1998, as compared to the six months ended June 30,
1997, principally related to the 1997 available-for-sale securities donation
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 $830,000 or
9.15%, from $9.1 million in the six months ended June 30, 1997 to $9.9 million
in the six months ended June 30, 1998.
This increase was primarily due to an increase in personnel expense of $467,000,
or 10.98%, from $4.3 million at June 30 1997 to $4.7 million at June 30, 1998
and increased occupancy, furniture and equipment expense and other volume
related expenses resulting from the branch acquisitions in May 1997 and May 1998
and the September 1997 opening of the new branch discussed above.
INCOME TAXES
In the six months ended June 30, 1998 BancShares had income tax expense of $1.3
million, an increase of $1.1 million from $210,000 in the prior year period.
This increase was due both to increased profitability resulting from the sale of
the available-for-sale securities discussed above and the non-recurring tax
benefits in 1997 of the charitable donation in the six months ended June 30,
1997. The resulting effective tax rates based on the accruals for the six months
ended in June 1998 and 1997 were 26.50% and 9.95%, respectively. The effective
tax rate in 1998 of 26.50 % differs from the federal statutory rate of 35.00%
primarily due to tax exempt income.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1998 VS. SECOND QUARTER OF 1997
INTRODUCTION
In the second quarter of 1998, the net income of BancShares decreased $216,000
from $1.1 million in the second quarter of 1997 to $927,000 in the second
quarter of 1998, a decrease of 18.90%. One branch acquisition in 1998 and three
1997 branch acquisitions resulted in increased net interest income for the
quarter ended June 30, 1998, increased noninterest income in the quarter ended
June 30, 1998, and increased personnel expense and other related operating
expenses in the quarter ended June 30, 1998. Gains on the sales of mortgage
loans held-for-sale in the quarter ended June 30, 1997 were $4,000. In the
quarter ended June 30 1998 losses of $29,000 were realized on the sales of
mortgage loans held-for-sale.
The tax benefits of the 1997 first quarter contribution of available-for-sale
securities resulted in significantly lower income taxes on the 1997 second
quarter income before income taxes.
Net income available to common shares per share for the second quarter of 1998
was $6.91 per common share, a decrease of $1.80, or 20.67%, from $8.71 for the
1997 second quarter.
ACQUISITIONS
In May 1998 Southern acquired $15.6 million of the deposits of ESB. Southern
purchased $16.7 million of the loans of ESB. Southern recorded goodwill of
$468,000 for ESB. This acquisition was accounted for as a purchase, and
therefore, the results of operations prior to the purchase are not included in
the consolidated financial statements.
Southern acquired $11.9 million, $4.1 million and $5.1 million of the deposits
of the Aurora, Hamilton and Aulander offices of Wachovia Bank of North Carolina,
N.A. in May 1997. Southern purchased $852,000, $412,000 and $180,000 of the
loans of the respective branches and paid a total premium of approximately $1.3
million, or approximately 6.03%, for the deposits of the three branches. This
acquisition was accounted for as a purchase, and, therefore, the results of
operations prior to the purchase are not included in the financial statements.
The following comparisons of the quarter ended June 30, 1998 to the quarter
ended June 30, 1997 are accordingly impacted by the above transactions.
INTEREST INCOME
Interest and fees on loans increased $577,000, or 8.02%, from $7.2 million for
the quarter ended June 30, 1997 to $7.8 million for the quarter ended June 30,
1998. This increase was due to increased loan volume. Average loans for the
quarter ended June 30, 1998 were $361.4 million, an increase of 7.40% from
$336.5 million for the prior year quarter. The yield on the loan portfolio was
8.63% in the quarter ended June 30, 1997 and 8.54% in the quarter ended June 30,
1998.
<PAGE>
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased $145,000, or 5.98%, from $2.4 million in the quarter ended
June 30, 1997 to $2.6 million in the quarter ended June 30, 1998. This increase
was due to a slight increase in the yield of the investment portfolio to 5.89%
for the quarter ended June 30, 1998 from 5.87% for the quarter ended June 30,
1997 combined with an increase in the volume of average investment securities
for the quarter ended June 30, 1998 to $158.4 million as compared to $153.9
million for the quarter ended June 30, 1997.
Interest income on federal funds sold increased $68,000, or 71.58%, from $95,000
for the quarter ended June 30, 1997 to $163,000 for the quarter ended June 30,
1998. This increase in income resulted primarily from the increase in the
average federal funds sold to $12.1 million for the quarter ended June 30, 1998
from $7.2 million for the quarter ended June 30, 1997. Average federal funds
sold yields were 5.40% for the quarter ended June 30, 1998 and 5.34% for the
quarter ended June 30, 1997.
Total interest income increased $790,000, or 8.14%, from $9.7 million for the
quarter ended June 30, 1997 to $10.5 million for the quarter ended June 30,
1998. This increase was the result of volume increases more than offsetting a
slight overall decrease in average earning asset interest yields. Average
earning asset interest yields for the quarter ended June 30, 1998 decreased to
7.68% from the 7.73% yield on average earning assets for the quarter ended June
30, 1997. Average earning assets increased from $497.5 million in the quarter
ended June 30, 1997 to $545.6 million in the quarter ended June 30, 1998. This
$48.1 million increase in the average earning assets resulted primarily from the
acquisitions discussed above.
INTEREST EXPENSE
Total interest expense increased $431,000 or 9.10%, from $4.7 million in the
quarter ended June 30, 1997 to $5.2 million for the quarter ended June 30, 1998.
The principal reason for the increase was the acquisitions discussed above.
BancShares' total cost of funds decreased from 4.23% for the quarter ended June
30, 1997 to 4.17% for the quarter ended June 30, 1998. Average interest bearing
deposits were $453.8 million in the quarter ended June 30, 1998, an increase of
$20.8 million from the $433.0 million in the quarter ended June 30, 1997. The
increase in interest-bearing liabilities was primarily the result of the 1997
and 1998 branch purchases discussed above. BancShares recorded $158,000 of
interest expense in the quarter ended June 30, 1998 related to the Trust
discussed above.
NET INTEREST INCOME
Net interest income increased $359,000, or 7.22%, from $5.0 million for the
quarter ended June 30, 1997 to $5.3 million for the quarter ended June 30, 1998.
This increase was primarily due to the increased earning asset volume resulting
from the acquisitions discussed above.
The net interest margin for the quarter ended June 30, 1998 was 3.51%, an
increase of 1 basis point from the 3.50% interest margin for the quarter ended
June 30, 1997.
<PAGE>
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the quarter ended June 30, 1998 management added $60,000 as a volume related
addition to the provision for loan losses. Management made no addition to the
provision for loan losses for the quarter ended June 30, 1997. During the second
quarter of 1998 Southern had net charge-offs of $52,000. During the same period
in 1997 net charge-offs were $97,000.
NONINTEREST INCOME
BancShares had losses on the sale of mortgage loans of $29,000 in the quarter
ended June 30, 1998 compared to $4,000 in gains on the sales of mortgage loans
in the quarter ended June 30, 1997.
Income from service charges on deposit accounts, other service charges and fees,
insurance commissions and other noninterest income not detailed above increased
$273,000, or 28.00%, from $1.0 million for the quarter ended June 30, 1997 to
$1.2 million for the quarter ended June 30, 1998.
NONINTEREST EXPENSE
Noninterest expense including personnel, occupancy, furniture and equipment,
data processing, FDIC insurance and state assessments, printing and supplies and
other expenses, increased $434,000, or 9.28%, from $4.7 million in the quarter
ended June 30, 1997 to $5.1 million in the quarter ended June 30, 1998.
This increase was primarily due to an increase in personnel expense of $270,000,
or 12.48%, from $2.2 million for the quarter ended June 30 1997 to $2.4 million,
for the quarter ended June 30, 1998 and increased occupancy, furniture and
equipment expense and other volume related expenses resulting from the branch
acquisitions discussed above.
INCOME TAXES
In the quarter ended June 30, 1998 BancShares had income tax expense of
$451,000, an increase of $321,000, or 246.92%, from $130,000 for the quarter
ended June 30, 1997. This increase was due to non-recurring tax benefits in 1997
resulting from the donation of available-for-sale securities in the first
quarter of 1997 discussed above. The resulting effective tax rates based on the
accruals for the quarter ended in June 1998 and 1997 were 32.73% and 10.21%,
respectively. The effective tax rate in 1998 of 32.73 % differs from the federal
statutory rate of 35.00% primarily due to tax exempt income.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Sufficient levels of capital are necessary to sustain growth and absorb losses.
To this end, the Federal Reserve Board, which regulates BancShares, and the
Federal Deposit Insurance Corporation, which regulates Southern, have
established minimum capital guidelines for the institutions they supervise.
In the six months ended June 30, 1997, BancShares borrowed an additional $5.0
million and contributed it as capital to Southern which improved each of
Southern's capital ratios.
<PAGE>
In June 1998, the Trust issued $23.0 million of 8.25% Capital Securities in June
1998 maturing in 2028. The Trust invested the $23.0 million proceeds in Junior
Subordinated Debentures issued by BancShares (the "Junior Debentures"), which
upon consolidation of BancShares is eliminated. The Junior Debentures, with a
maturity of 2028, are the primary assets of the Trust. With respect to the
Capital Securities, BancShares irrevocably and unconditionally guarantees the
Trust's obligations. A portion of the Capital Securities are included in Tier I
capital for regulatory capital adequacy requirements.
In June 1998, BancShares paid off the remaining balance of the $5.0 long-term
obligation discussed above, $4.3 million, and contributed an additional $12.0
million in capital to Southern which also improved each of Southern's capital
ratios.
Regulatory guidelines define minimum requirements for Southern'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, Southern's leverage
capital ratio at June 30, 1998 was 8.32%. At December 31, 1997, Southern's
leverage capital ratio was 6.02%. Both of these ratios are greater than the
level designated as "well capitalized" by the FDIC.
Southern is also required to meet minimum requirements for Risk Based Capital
("RBC"). Southern'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 June 30, 1998, Southern's Total RBC ratio
was 15.94%. At December 31, 1997 the RBC 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 Southern 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 June 30, 1998 of $20.1
million and $22.9 million at December 31, 1997, although a part of total
shareholders' equity, are not included in the calculation of either the RBC or
leverage capital ratios pursuant to regulatory definitions of these capital
requirements. The following table presents capital adequacy calculations and
ratios of Southern:
June 30, December 31,
1998 1997
---------- ----------
(Dollars in thousands)
Risk-based capital:
Tier 1 capital ............... $ 47,560 $ 33,999
Total capital ................ 51,780 37,876
Risk-adjusted assets ......... 324,923 295,654
Average tangible assets ...... 571,885 564,633
Tier 1 capital ratio (1) ..... 14.64% 11.50%
Total capital ratio (1) ..... 15.94% 12.81%
Leverage capital ratio (1) .. 8.32% 6.02%
- -------------
(1) These ratios exceed the minimum ratios required for a bank to be
classified as "well capitalized" as defined by the FDIC.
<PAGE>
At June 30, 1998 and December 31, 1997, BancShares was also in compliance with
its regulatory capital requirements and all of its regulatory capital ratios
exceeded the minimum ratios required by the regulators to be classified as "well
capitalized".
LIQUIDITY
Liquidity refers to the ability of Southern 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.
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 29.46% at June 30, 1998 and
37.15% at December 31, 1997.
The Statement of Cash Flows discloses the principal sources and uses of cash
from operating, investing and financing activities for the six months ended June
30, 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 Southern, including savings,
demand and other time deposits, and in some cases, loans. At June 30, 1998 and
at December 31, 1997 jumbo time deposits represented 11.13% 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 June 1997, the FASB issued Statement 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 31, 1997. BancShares adopted
this statement for its annual financial statements beginning in fiscal 1998.
In June 1997, the FASB issued Statement 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
<PAGE>
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 31, 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 net income, but will result in altered
disclosures relating to pension obligations.
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1998. Earlier
application of all provisions of this statement is encouraged. BancShares plans
to adopt this statement on January 1, 2000 and does not anticipate any material
effect on its consolidated financial statements.
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. 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 June 30, 1998, excluding personnel costs,
$11,000 additional had been expensed.
As discussed above in Note 8, Related Parties, BancShares utilizes the mainframe
system of a related bank holding company and its subsidiary (the "Corporation")
for most of its mission-critical applications. These systems are currently being
remediated, replaced or retired as part of the Corporation's Year 2000
compliance program. BancShares is closely monitoring the Corporation's progress.
Based on discussions with management of the Corporation, BancShares management
does not expect significant increases in future data processing costs relating
to Year 2000 compliance.
<PAGE>
In the last quarter of 1998, BancShares expects to acquire, subject to
regulatory approval, the Gates, North Carolina office of First-Citizens Bank &
Trust Company containing approximately $5.0 million in deposits (see note 8 of
notes to consolidated financial statements). BancShares has received regulatory
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.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN BANCSHARES (N.C.), INC.
/s/John C. Pegram, Jr.
Dated: August 11, 1998 ----------------------
John C. Pegram, Jr., President
/s/David A. Bean
Dated: August 11, 1998 ----------------
David A. Bean,
Secretary/Treasurer
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