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 September 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.
119,266 shares
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES September 30, December 31,
CONSOLIDATED BALANCE SHEETS 1998 1997
------------- ------------
(Dollars in thousands except per share data) (Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ................................ $ 27,530 $ 28,381
Federal funds sold ..................................... 17,950 10,240
Investment securities:
Held-to-maturity, at amortized cost (fair value
$78,159 and $57,294, respectively) ................... 76,714 56,281
Available-for-sale, at fair value (amortized
cost $90,919 and $100,978 respectively) .............. 76,714 123,852
Loans .................................................. 367,266 349,353
Less allowance for loan losses ......................... (6,156) (5,971)
Net loans .............................................. 361,110 343,382
Premises and equipment ................................. 18,573 18,157
Intangible assets ...................................... 5,440 5,506
Accrued interest receivable ............................ 5,690 4,205
Other assets ........................................... 1,487 748
--------- ---------
Total assets ............................. $ 623,750 $ 590,752
========= =========
LIABILITIES
Deposits:
Noninterest-bearing ............................... $ 71,704 $ 66,565
Interest-bearing .................................. 455,967 446,763
--------- ---------
Total deposits ......................................... 527,671 513,328
--------- ---------
Short-term borrowings .................................. 7,217 6,826
Long-term obligations .................................. 23,000 4,750
Accrued interest payable ............................... 4,793 4,394
Other liabilities ...................................... 4,941 6,470
--------- ---------
Total liabilities ............................ 567,622 535,768
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES September 30, December 31,
CONSOLIDATED BALANCE SHEETS (continued) 1998 1997
------------- ------------
(Dollars in thousands except per share data) (Unaudited)
<S> <C> <C>
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value;
408,728 shares authorized; 404,094 and 404,946
shares issued and outstanding at September
30, 1998 and December 31, 1997 ................. 1,972 1,976
Series C non-cumulative preferred stock, no par value;
43,631 shares authorized; 42,923 and 43,631
shares issued and outstanding at September 30,
1998 and December 31, 1997 ....................... 575 578
Common stock, $5 par value; 158,485 shares authorized;
119,266 and 119,918 shares issued and outstanding
at September 30, 1998 and December 31, 5967 ...... 596 600
Surplus ................................................ 10,000 10,000
Retained earnings ...................................... 30,883 26,733
Unrealized gain on securities available-for-sale,
net of taxes ..................................... 12,102 15,097
--------- ---------
Total shareholders' equity ..................... 56,128 54,984
--------- ---------
Total liabilities and shareholders' equity $ 623,750 $ 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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands except share and per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans ....................................... $ 7,956 $ 7,637 $ 23,256 $ 21,734
Investment securities:
U. S. Government ........................ 1,774 1,586 5,243 4,764
State, county and municipal ............. 433 479 1,365 1,581
Other ................................... 42 218 588 602
-------- -------- -------- --------
Total investment securities
interest income ................. 2,249 2,283 7,196 6,947
Federal funds sold .......................... 310 69 657 274
-------- -------- -------- --------
Total interest income ....................... 10,515 9,989 31,109 28,955
Interest expense:
Deposits ............................. 4,688 4,649 14,047 13,506
Short-term borrowings ................ 82 105 223 229
Long-term obligations ................ 316 91 787 211
-------- -------- -------- --------
Total interest expense .......... 5,086 4,845 15,057 13,946
-------- -------- -------- --------
Net interest income ............. 5,429 5,144 16,052 15,009
Provision for loan losses ............. 20 -- 140 60
-------- -------- -------- --------
Net interest income after
provision for loan losses ....... 5,409 5,144 15,912 14,949
Noninterest income:
Investment securities gains, net ....... -- 1 1,788 3,535
Service charges on deposit accounts .... 802 768 2,387 2,093
Other service charges and fees ......... 302 213 830 637
Insurance commissions .................. 18 23 55 70
Gain on sale of loans .................. 38 31 10 25
Other .................................. 232 130 474 255
-------- -------- -------- --------
Total noninterest income ........ 1,392 1,166 5,544 6,615
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES (Unaudited) (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME (continued) Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands except share and per share data)
<S> <C> <C> <C> <C>
Noninterest expense:
Personnel ............................. 2,415 2,280 7,134 6,532
Data processing ....................... 513 411 1,411 1,229
Intangibles amortization .............. 375 461 1,162 1,306
Occupancy ............................. 390 351 1,140 1,012
Furniture and equipment ............... 375 373 1,103 1,141
FDIC insurance assessment ............. 12 28 87 83
Charitable contributions .............. -- 1 1 4,075
Other ................................. 1,038 969 2,981 2,640
-------- -------- -------- --------
Total noninterest expense ...... 5,118 4,874 15,019 18,018
-------- -------- -------- --------
Income before income taxes .................. 1,683 1,436 6,437 3,546
Income taxes ................................ 470 30 1,730 240
-------- -------- -------- --------
Net income ...................... $ 1,213 $ 1,406 $ 4,707 $ 3,306
======== ======== ======== ========
Per share information:
Net income applicable to common shares ... $ 9.27 $ 10.87 $ 36.76 $ 25.05
Cash dividends declared on common shares . 0.38 0.38 1.13 1.12
Weighted average common shares outstanding 119,794 119,918 119,855 119,918
======== ======== ======== ========
</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)
Nine months ended September 30,
(Thousands) 1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................. $ 4,707 $ 3,306
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ....................... 140 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) (6)
Loss on sale and abandonment of premises
and equipment ................................ 28 112
Gain on sale of loans ........................... (10) (25)
Net accretion of discounts on investments ....... (53) (66)
Amortization of intangibles ..................... 1,162 1,306
Depreciation .................................... 1,029 762
Net increase in accrued interest receivable ..... (1,485) (1,119)
Net increase in accrued interest payable ........ 399 1,397
Net increase in other assets .................... (1,279) (3,127)
Net increase (decrease) in other liabilities .... (120) 600
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................... 2,730 3,742
------- --------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of
investment securities available-for-sale ..... 25,625 9,105
Proceeds from maturities and issuer calls of
investment securities held-to-maturity ....... 4,678 35,610
Proceeds from sales of investment securities
availab1e-for-sale ........................... 1,976 --
Purchases of investment securities held-to-maturity ... (21,804) (26,114)
Purchases of investment securities available-for-sale . (14,420) (13,364)
Net increase in loans ................................. (1,477) (35,291)
Additions to premises and equipment ................... (1,194) (3,531)
Net cash (paid) received for bank and branches acquired (6,050) 17,996
------- --------
NET CASH USED IN INVESTING ACTIVITIES ....................... (12,666) (15,589)
------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Nine months ended September 30,
(Thousands) 1998 1997
-------- --------
<S> <C> <C>
FINANCING ACTIVITIES:
Net (increase) decrease in demand and interest
bearing and deposits ......................... 1,500 (8,224)
Net (decrease) increase in time deposits ............... (2,778) 14,880
Proceeds from issuance of long-term obligations ........ 23,000 5,000
Payments of long-term obligations ...................... (4,750) (1,200)
Net proceeds of short-term borrowings .................. 391 2,036
Cash dividends paid .................................... (436) (436)
Purchase and retirement of stock ....................... (132) (16)
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................... 16,795 12,040
------- --------
NET INCREASE IN CASH EQUIVALENTS ............................ $ 6,859 $ 193
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR .......... 38,621 32,465
------- --------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD .............. $ 45,480 $ 32,658
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID
DURING THE PERIOD FOR:
Interest ............................................... $ 14,658 $ 12,549
Income taxes ........................................... $ 2,386 $ 899
======= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Change in unrealized gain on securities
available-for-sale ............................. $ (2,995) $ 3,338
======= ========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands except per share data)
Preferred Stock Common Stock
------------------------------------- -----------------
Series B Series C
------------------- ---------------- Retained
Shares Amount Shares Amount Shares Amount Surplus Earnings
--------- -------- ------- ------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 407,752 $1,986 43,631 $578 119,918 $600 $10,000 $20,718
Net income 3,306
Retirement of stock (1,408) (6) (10)
Cash dividends:
Common stock ($1.12 per share) (134)
Preferred B ($.67 per share) (273)
Preferred C ($.67 per share) (29)
Change in unrealized gain on
securities available-for-sale,
net of taxes
======= ====== ====== ==== ======= ==== ======= =======
Balance, September 30, 1997 406,344 $1,980 43,631 $578 119,918 $600 $10,000 $23,578
======= ====== ====== ==== ======= ==== ======= =======
Balance, December 31, 1997 404,946 $1,976 43,631 $578 119,918 $600 $10,000 $26,733
Net income 4,707
Retirement of stock (852) (4) (708) (3) (652) (4) (121)
Cash dividends:
Common stock ($1.13 per share) (135)
Preferred B ($.66 per share) (272)
Preferred C ($.66 per share) (29)
Change in unrealized gain on
securities available-for-sale,
net of taxes
======= ====== ====== ==== ======= ==== ======= =======
Balance, September 30, 1998 404,094 $1,972 42,923 $575 119,266 $596 $10,000 $30,883
======= ====== ====== ==== ======= ==== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized
gain on
securities
available- Total
for-sale, Shareholders'
net of taxes Equity
------------ ------
<S> <C> <C>
Balance, December 31, 1996 $10,896 $44,778
Net income 3,306
Retirement of stock (16)
Cash dividends:
Common stock ($1.12 per share) (134)
Preferred B ($.67 per share) (273)
Preferred C ($.67 per share) (29)
Change in unrealized gain on
securities available-for-sale,
net of taxes 3,338 3,338
======= =======
Balance, September 30, 1997 $14,234 $50,970
======= =======
Balance, December 31, 1997 $15,097 $54,984
Net income 4,707
Retirement of stock (132)
Cash dividends:
Common stock ($1.13 per share) (135)
Preferred B ($.66 per share) (272)
Preferred C ($.66 per share) (29)
Change in unrealized gain on
securities available-for-sale,
net of taxes (2,995) (2,995)
======= =======
Balance, September 30, 1998 $12,102 $56,128
======= =======
</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 January 29, 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 nine months ended September 30, 1998, BancShares acquired the rights
to service over $50.0 million in mortgage loans from an affiliate institution
for which BancShares recorded over $500,000 in mortgage servicing rights (see
note 8). At September 30, 1998, unamortized MSR's were $699,000. At December 31,
1997, unamortized MSR's were $137,000. There was no valuation allowance for
MSR's at September 30, 1998 or at December 31, 1997.
<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 September 30, 1998 December 31, 1997
--------------------------------------------- --------------------------------------------
(In thousands) Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY:
U. S. Government $57,473 528 (1) $58,000 $33,969 122 $ - $34,091
Obligations of states
and political subdivisions 19,141 916 20,057 22,212 890 23,102
Corporate debenture 100 2 - 102 100 1 101
---------- ========== ---------- ---------- ---------- ---------- ---------- ----------
76,714 1,446 (1) 78,159 56,281 1,013 - 57,294
========== ========== ========== ========== ========== ========== ========== ==========
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government 69,977 573 (6) 70,544 82,471 130 (9) 82,592
Marketable equity securities 10,536 17,106 27,642 8,119 22,183 (8) 30,294
Obligations of states
and political subdivisions 8,540 630 - 9,170 8,411 527 - 8,938
Mortgage-backed securities 1,866 34 - 1,900 1,977 51 - 2,028
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
90,919 18,343 (6) 109,256 100,978 22,891 (17) 123,852
========== ========== ========== ========== ========== ========== ========== ==========
Totals $167,633 $19,789 ($7) $187,415 $157,259 $23,904 ($17) $181,146
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Note 3. LOANS
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Commercial, financial and agricultural ... $ 90,108 $ 84,281
Real estate:
Construction ....................... 5,300 5,209
Mortgage:
One to four family residential 113,923 106,444
Commercial ................... 59,738 58,056
Equityline ................... 30,265 27,759
Other ........................ 26,863 27,868
Consumer ................................. 36,223 35,780
Lease financing .......................... 4,846 3,956
-------- --------
Total loans ............................ $367,266 $349,353
======== ========
Loans held for sale ...................... $ 3,958 $ 3,019
Loans serviced for others ................ $158,889 $ 78,426
</TABLE>
Note 4. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1998 1997
------- --------
<S> <C> <C>
Balance at beginning of year .... $ 5,971 $ 6,163
Allowance from bank acquisition 269 --
Provision for loan losses ..... 140 60
Loans charged off ............. (294) (261)
Loan recoveries ............... 70 151
------- -------
Balance at end of the period .... $ 6,156 $ 6,113
======= =======
</TABLE>
<PAGE>
Note 5. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Land ......................... $ 3,719 $ 3,377
Buildings and improvements ... 14,713 14,292
Furniture and equipment ...... 6,590 6,387
Construction-in-progress ..... 306 90
-------- --------
25,328 24,146
Less: accumulated depreciation (6,755) (5,989)
-------- --------
$ 18,573 $ 18,157
======== ========
</TABLE>
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. Since BancShares had no potentially
dilutive securities during 1998 or 1997, the computation of basic and diluted
earnings per share is the same.
<TABLE>
<CAPTION>
Note 6. EARNINGS PER COMMON SHARE
(Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income ........................... $ 1,213 $ 1,406 $ 4,707 $ 3,306
Less preferred dividends ........... ($ 103) ($ 102) ($ 301) ($ 302)
--------- --------- --------- ---------
Net income applicable to common shares $ 1,110 $ 1,304 $ 4,406 $ 3,004
========= ========= ========= =========
Weighted average common shares
outstanding during the period ...... 119,794 119,918 119,855 119,918
========= ========= ========= =========
</TABLE>
<PAGE>
Note 7. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("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 nine months ended September 30, 1998 comprehensive income, which
consists of net income plus changes in net unrealized gains and losses, net of
applicable tax effects, was $1.7 million. During the nine months ended September
30, 1997, comprehensive income was 6.6 million.
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 September
30, 1998, beneficially owned 32,294 shares, or 27.08%, of BancShares'
outstanding common stock and 22,171 shares, or 5.49%, of BancShares' outstanding
Series B preferred stock. At the same date, the second significant shareholder
beneficially owned 27,577 shares, or 23.12%, of BancShares' outstanding common
stock, and 17,205 shares, or 4.26%, of BancShares' Series B preferred stock. The
above totals include 17,205 Series B preferred shares, or 4.26%, 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 September 30, 1998, the first significant shareholder
beneficially owned 2,536,759 shares, or 28.49%, of the Corporation's outstanding
Class A common stock and the second significant shareholder owned 1,554,290
shares, or 17.45%, of the Corporation's outstanding Class A common stock. At
September 30, 1998, the first significant shareholder beneficially owned 635,792
shares, or 38.84%, of the Corporation's outstanding Class B common stock and the
second significant shareholder owned 190,271 shares, or 11.06%, 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 October 1998,
BancShares acquired the Gates, North Carolina office of First-Citizens Bank &
Trust Company containing approximately $5.3 million in deposits.
<PAGE>
The following table lists the various charges paid to the Corporation during the
nine months ended:
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1998 1997
----------- ------------
<S> <C> <C>
Data and item processing $1,720 $1,355
Forms, supplies and equipment 180 133
Trustee for employee benefit plans 56 48
Consulting fees 58 57
Trust investment services 15 17
Internal auditing services 1 41
Other services 66 61
------ ------
$2,096 $1,712
======= ======
</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 $8.6 million at September 30, 1998 and $10.1 million at
December 31, 1997.
During the nine months ended September 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 $15.6 million, purchased $16.7 million of loans and
recorded $362,000 in intangible assets.
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 - NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS ENDED
SEPTEMBER 30, 1997
INTRODUCTION
In the first nine months of 1998, the net income of BancShares increased $1.4
million from $3.3 million in the first nine months of 1997 to $4.7 million in
the first nine months of 1998, an increase of 42.38%. This increase resulted
primarily from the sale of available-for-sale securities, resulting in a
realized gain of $1.8 million. In 1997 the realized gains from the donation of
available-for-sale securities were more than offset by the related contribution
expense. No similar contribution was made in the nine months ended September 30,
1998. 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 nine months ended September
30, 1998.
Per share net income available to common shares for the first nine months of
1998 was $36.76, an increase of $11.71, or 46.75%, from $25.05 in 1997. The
return on average equity increased to 14.59%, for the period ended September 30,
1998, from 10.40% for the period ended September 30, 1997 and the return on
average assets increased to 1.28%, for the period ended September 30, 1998, from
0.85% for the period ended September 30, 1997.
At September 30, 1998, BancShares' assets totaled $623.8 million, an increase of
$33.0 million, or 5.59%, from the $590.8 million reported at December 31, 1997.
During this nine month period, net loans increased $17.7 million, or 5.16%, from
$343.4 million to $361.1 million. During the nine months ended September 30,
1998 investment securities increased $5.8 million, or 3.24% from $180.1 million
at December 31, 1997 to $186.0 million at September 30, 1998. Total deposits
increased $14.4 million, or 2.79% from $513.3 million at December 31, 1997 to
$527.7 million at September 30, 1998. The above increases resulted principally
from the 1998 acquisitions discussed below.
ACQUISITIONS
In May 1997 Southern acquired $11.9 million of the deposits of the Aurora
office, $4.1 million of the deposits of the Hamilton office and $5.1 million of
the deposits of the Aulander office of a North Carolina commercial bank.
Southern purchased $852,000 of the loans of the Aurora office, $412,000 of the
loans of the Hamilton office and $180,000 of the loans of the Aulander office.
Southern 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.
In May 1998, Southern acquired $16.7 million of the loans and $15.6 million of
the deposits of Enfield Savings Bank ("ESB"). Southern recorded intangible
assets of $362,000 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 nine months ended September 30, 1998 to the nine months
ended September 30, 1997 are accordingly impacted by the above transactions.
<PAGE>
INTEREST INCOME
Interest and fees on loans increased $1.6 million, or 7.00%, from $21.7 million
for the nine months ended September 30, 1997 to $23.3 million for the nine
months ended September 30, 1998. This increase was due to increased loan volume.
Average loans for the nine months ended September 30, 1998 were $361.0 million,
an increase of 6.99% from $337.4 million for the prior year nine month period.
The yield on the loan portfolio was 8.56% in the nine months ended September 30,
1997 and 8.53% in the nine months ended September 30, 1998.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased $249,000 or 3.58%, from $6.9 million in the nine months
ended September 30, 1997 to $7.2 million in the nine months ended September 30,
1998. This increase was due to an increase in the volume of average investment
securities for the nine months ended September 30, 1998 to $160.1 million as
compared to $150.1 million for the same 1997 period. The yield on investment
securities was 5.98% for the nine-month period ended September 30, 1997 and
5.90% for the nine-month period ended September 30, 1998.
Interest income on federal funds sold increased $383,000 or 139.78%, from
$274,000 for the nine months ended September 30, 1997 to $657,000 for the nine
months ended September 30, 1998. This increase in income resulted primarily from
an increase in the average federal funds sold to $15.8 million for the nine
months ended September 30, 1998 from an average of $6.9 million for the nine
months ended September 30, 1997. Average federal funds sold yields were 5.48%
for the nine months ended September 30, 1998 down from 5.65% for the nine months
ended September 30, 1997.
Total interest income increased $2.1 million, or 7.44%, from $29.0 million for
the nine months ended September 30, 1997 to $31.1 million for the nine months
ended September 30, 1998. This increase was primarily the result of volume
increases that more than offset a 13 basis point decrease in average earning
asset yields.
Average earning asset yields for the nine months ended September 30, 1998
decreased to 7.66% from the 7.79% yield on average earning assets for the nine
months ended September 30, 1997. Average earning assets increased from $494.4
million in the nine months ended September 30, 1997 to $536.9 million in the
period ended September 30, 1998. This $42.5 million increase in the average
earning assets resulted primarily from the acquisitions discussed above.
INTEREST EXPENSE
Total interest expense increased $1.2 million or 7.97%, from $13.9 million in
the nine months ended September 30, 1997 to $15.1 million for the nine months
ended September 30, 1998. The principal reason for this increase was the
acquisitions discussed above. BancShares' total cost of funds decreased from
4.22% for the nine months ended September 30, 1997 to 4.11% for the nine months
ended September 30, 1998. Average interest bearing deposits were $459.3 million
in the nine months ended September 30, 1998, an increase of $29.2 million from
the $430.1 million average in the nine months ending September 30, 1997. The
increase in interest-bearing liabilities was primarily the result of the
afore-mentioned acquisitions and the June 1998 issuance of $23.0 million of
capital securities discussed above. BancShares recorded $632,000 of interest
expense in the nine months ended September 30, 1998 related to the newly issued
capital securities.
<PAGE>
NET INTEREST INCOME
Net interest income increased $1.1 million or 6.95%, from $15.0 million for the
nine months ended September 30, 1997 to $16.1 million for the nine months ended
September 30, 1998. This increase was primarily due to the impact of the
acquisitions discussed above.
The net interest spread for the nine months ended September 30, 1998 was 3.55%,
an increase of 5 basis points from the 3.50% interest spread at September 30,
1997.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the nine months ended September 30, 1998 management recorded $140,000 as
provision for loan losses. Management made a $60,000 addition to the provision
for loan losses for the nine months ended September 30, 1997.
During the first nine months of 1998 management charged-off loans totaling
$294,000 and received recoveries of $70,000, resulting in net charge-offs of
$224,000. During the same period in 1997, $261,000 in loans were charged-off and
recoveries of $151,000 were received, resulting in net charge-offs of $110,000.
The following table presents comparative Asset Quality ratios of the company:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- -----
<S> <C> <C>
Ratio of annualized net loans charged off
to average loans .............. 0.06% 0.07%
Allowance for loan losses
to loans ..................... 1.68% 1.71%
Non-performing loans
to loans .................... 0.40% 0.20%
Non-performing loans and assets
to total assets ............. 0.24% 0.13%
Allowance for loan losses
to non-performing loans ..... 419.35% 857.90%
</TABLE>
The ratio of annualized net charge-offs to average loans outstanding decreased
to 0.06% for the nine months ended September 30, 1998 from 0.07% for the year
ended December 31, 1997. The allowance for loan losses represented 1.68% of
loans at September 30, 1998. The allowance for loan losses represented 1.71% of
loans at December 31, 1997. Loans increased $17.9 million, or 5.13%, from $349.4
million at December 31, 1997 to $367.3 million at September 30, 1998.
The ratio of nonperforming loans to loans, net of unearned income increased from
0.20% at December 31, 1997 to 0.40% at September 30, 1998. Nonperforming loans
and assets to total assets increased to 0.24% at September 30, 1998 from 0.13%
at December 31, 1997. The allowance for loan losses to nonperforming loans
represented 419.35% of nonperforming loans at September 30, 1998, a decrease
<PAGE>
from the 857.90% at December 31, 1997. The above performance declines resulted
primarily from an increase in nonperforming loans to $1,468,000 at September 30,
1998 from $696,000 at December 31, 1997. The nonperforming loans at September
30, 1998 included $150,000 of nonaccrual loans, $1,318,000 of accruing loans 90
days or more past due and no restructured loans. BancShares had $81,000 of
assets classified as other real estate at September 30, 1998. BancShares had
$48,000 of assets classified as other real estate at December 31, 1997.
Management considers the September 30, 1998 allowance for loan losses to be
adequate to cover the losses and risks inherent in the loan portfolio at
September 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 $150,000 at September 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 nine months ended September 30, 1998 as compared to the prior year nine
months. During the nine months ended September 30, 1997, BancShares realized
securities gains of $3.5 million arising from the charitable contribution of
marketable equity securities. During the nine months ended September 30, 1998,
securities gains arising from the sale of investment securities were $1.8
million.
Income from service charges on deposit accounts, other service charges and fees,
insurance commissions and other noninterest income not detailed above increased
$676,000 or 21.95%, from $3.1 million for the nine months ended September 30,
1997 to $3.8 million for the nine months ended September 30, 1998 principally as
a result of increased deposit volume arising from the acquisitions discussed
above.
NONINTEREST EXPENSE
BancShares had a decrease in charitable contribution expense of $4.1 million for
the nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997, principally related to the 1997 available-for-sale
securities donation discussed above.
<PAGE>
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 $1.1 million or
7.70%, from $13.9 million in the nine months ended September 30, 1997 to $15.0
million in the nine months ended September 30, 1998.
This increase was primarily due to an increase in personnel expense of $602,000,
or 9.22%, from $6.5 million at September 30, 1997 to $7.1 million at September
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 nine months ended September 30, 1998, BancShares had income tax expense
of $1.7 million, an increase of $1.5 million from $240,000 in the prior year
period. The majority of this increase is due to the low 1997 effective tax rate
that resulted from the 1997 charitable donation of available-for-sale
securities. The resulting effective tax rate based on the accrual for the nine
months ended September 30, 1998 was 26.88%. The effective tax rate for the nine
months ended September 30, 1997 was 6.77%. The effective tax rate in 1998 of
26.88% 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 - THIRD QUARTER OF 1998 VS. THIRD QUARTER OF 1997
INTRODUCTION
In the third quarter of 1998, the net income of BancShares decreased $193,000
from $1.4 million in the third quarter of 1997 to $1.2 million in the third
quarter of 1998, a decrease of 13.73%. One branch acquisition in 1998 and three
1997 branch acquisitions resulted in increased net interest income for the
quarter ended September 30, 1998, increased noninterest income in the quarter
ended September 30, 1998, and increased personnel expense and other related
operating expenses in the quarter ended September 30, 1998.
The tax benefits of the 1997 first quarter contribution of available-for-sale
securities continued to result in significantly lower income taxes on the 1997
third quarter income before income taxes. This effect was partially offset by an
increase in net income resulting from the 1998 and 1997 branch acquisitions.
Net income available to common shares per share for the third quarter of 1998
was $9.27 per common share, a decrease of $1.60, or 14.72%, from $10.87 for the
1997 third quarter.
INTEREST INCOME
Interest and fees on loans increased $319,000, or 4.18%, from $7.6 million for
the quarter ended September 30, 1997 to $8.0 million for the quarter ended
September 30, 1998. This increase was due to increased loan volume. Average
loans for the quarter ended September 30, 1998 were $369.8 million, an increase
of 4.85% from $352.7 million for the prior year quarter. The yield on the loan
portfolio was 8.58% in the quarter ended September 30, 1997 and 8.45% in the
quarter ended September 30, 1998.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities decreased $34,000, or 1.49%, from $2.3 million in the quarter ended
September 30, 1997 to $2.2 million in the quarter ended September 30, 1998. This
decrease was due to a decrease in the yield of the investment portfolio to 5.80%
for the quarter ended September 30, 1998 from 5.91% for the quarter ended
September 30, 1997 that more than offset the increase in the volume of average
investment securities for the quarter ended September 30, 1998 to $160.8 million
as compared to $146.5 million for the quarter ended September 30, 1997.
Interest income on federal funds sold increased $241,000, or 349.28%, from
$69,000 for the quarter ended September 30, 1997 to $310,000 for the quarter
ended September 30, 1998. This increase in income resulted primarily from the
increase in the average federal funds sold to $21.7 million for the quarter
ended September 30, 1998 from $4.9 million for the quarter ended September 30,
1997. Average federal funds sold yields were 5.63% for the quarter ended
September 30, 1998 and 5.79% for the quarter ended September 30, 1997.
Total interest income increased $526,000, or 5.27%, from $10.0 million for the
quarter ended September 30, 1997 to $10.5 million for the quarter ended
September 30, 1998. This increase was the result of volume increases more than
offsetting a decrease in average interest earning asset yields. Average interest
earning asset yields for the quarter ended September 30, 1998 decreased to 7.57%
from the 7.77% yield on average earning assets for the quarter ended September
30, 1997. Average earning assets increased from $504.1 million in the quarter
ended September 30, 1997 to $552.3 million in the quarter ended September 30,
1998. This $48.2 million increase in the average earning assets resulted
primarily from the acquisitions discussed above.
<PAGE>
INTEREST EXPENSE
Total interest expense increased $241,000 or 4.97%, from $4.8 million in the
quarter ended September 30, 1997 to $5.1 million for the quarter ended September
30, 1998. The principal reason for the increase was the acquisitions discussed
above. BancShares' total cost of funds decreased from 4.24% for the quarter
ended September 30, 1997 to 4.12% for the quarter ended September 30, 1998.
Average interest bearing deposits were $453.7 million in the quarter ended
September 30, 1998, an increase of $16.7 million from the $437.0 million in the
quarter ended September 30, 1997. The increase in interest-bearing liabilities
was primarily the result of the 1997 and 1998 branch purchases discussed above
and the issuance of $23.0 million of capital securities in June 1998. BancShares
recorded $474,000 of interest expense in the quarter ended September 30, 1998
related to the capital securities.
NET INTEREST INCOME
Net interest income increased $285,000, or 5.54%, from $5.1 million for the
quarter ended September 30, 1997 to $5.4 million for the quarter ended September
30, 1998. This increase was primarily due to the increased earning asset volume
resulting from the acquisitions discussed above.
The net interest spread for the quarter ended September 30, 1998 was 3.45%, a
decrease of 8 basis points from the 3.53% interest spread for the quarter ended
September 30, 1997.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the quarter ended September 30, 1998 management recorded $20,000 as
provision for loan losses. Management made no addition to the provision for loan
losses for the quarter ended September 30, 1997. During the third quarter of
1998 Southern had net charge-offs of $157,000. During the same period in 1997
net charge-offs were $36,000.
NONINTEREST INCOME
Income from service charges on deposit accounts, other service charges and fees,
insurance commissions and other noninterest income increased $226,000, or
19.38%, from $1.2 million for the quarter ended September 30, 1997 to $1.4
million for the quarter ended September 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 $244,000, or 5.01%, from $4.9 million in the quarter
ended September 30, 1997 to $5.1 million in the quarter ended September 30,
1998.
This increase was primarily due to an increase in personnel expense of $135,000,
or 5.92%, from $2.3 million for the quarter ended September 30 1997 to $2.4
million, for the quarter ended September 30, 1998 and increased occupancy,
furniture and equipment expense and other volume related expenses resulting from
the branch acquisitions discussed above.
<PAGE>
INCOME TAXES
In the quarter ended September 30, 1998 BancShares had income tax expense of
$470,000, an increase of $440,000, or 1,466.7%, from $30,000 for the quarter
ended September 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 effective tax rate for the quarter ended
September 30, 1998 was 27.93%. The resulting effective tax rate based on the
accruals for the quarter ended in September 1997 was 2.09%. The effective tax
rate in 1998 of 27.93 % differs from the federal statutory rate of 35.00%
primarily due to tax exempt income as previously discussed.
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 nine months ended September 30, 1997, BancShares borrowed an additional
$5.0 million and contributed it as capital to Southern which improved each of
Southern's capital ratios.
In June 1998, the Trust 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. Capital Securities of $13.1 million 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 September 30, 1998 was 8.36%. 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 September 30, 1998, Southern's Total RBC
ratio was 17.39%. 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.
<PAGE>
The unrealized gains on securities available for sale, net of taxes of $12.1
million at September 30, 1998, and $15.1 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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Risk-based capital:
Tier 1 capital $ 49,318 $ 33,999
Total capital 53,295 37,876
Risk-adjusted assets 306,444 295,654
Average tangible assets 590,266 564,633
Tier 1 capital ratio (1) 16.09% 11.50%
Total capital ratio (1) 17.39% 12.81%
Leverage capital ratio (1) 8.36% 6.02%
</TABLE>
(1) These ratios exceed the minimum ratios required for a bank to be
classified as "well capitalized" as defined by the FDIC.
At September 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 30.86% at September 30, 1998 and
37.15% at December 31, 1997.
<PAGE>
The Statement of Cash Flows discloses the principal sources and uses of cash
from operating, investing and financing activities for the nine months ended
September 30, 1998 and for the nine months ended September 30, 1997. 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 September 30, 1998 jumbo time deposits represented 10.91% of total
deposits. At December 31, 1997 jumbo time deposits represented 10.33% 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
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.
<PAGE>
In October 1998, the FASB issued Statement 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This statement allows mortgage banking firms to
account for certain securities and other interests retained after securitizing
mortgage loans that were held for sale based on the intent and ability to hold
or sell such investments. This statement is effective for the first fiscal
quarter beginning after December 15, 1998. BancShares plans to adopt this
statement on January 1, 1999 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.
Year 2000 Issue
Introduction
The year 2000 issue confronting BancShares and its suppliers, customers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the year 2000. Many existing computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these programs and computers will recognize "00" as the year 1900 rather than
the year 2000. These problems may also arise from other sources as well, such as
the use of special codes and conventions in software that make use of the date
field.
Awareness
Financial institution regulators recently have increased their focus upon Year
2000 compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on year
2000.
These statements require financial institutions to, among other things, examine
the year 2000 implications of their reliance on vendors and with respect to data
exchange and the potential impact of the year 2000 issue on their customers,
suppliers and borrowers. These statements also require each federally regulated
financial institution to survey its exposure, measure its risk and prepare a
plan to address the year 2000 issue. In addition, the federal banking regulators
have issued safety and soundness guidelines to be followed by insured depository
institutions, such as the Bank, to assure resolution of any year 2000 problems.
The federal banking agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and, thus, that an institution's failure to address appropriately the year
2000 issue could result in supervisory action, including the reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.
<PAGE>
Risks
Like most financial service providers, BancShares and its operations may be
significantly affected by the year 2000 issue due to its dependence on
information technology and date-sensitive data. Computer hardware and software
and other equipment, both within and outside BancShares' direct control, and
third parties with whom BancShares electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated, and
BancShares could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the year 2000 issue could
adversely affect the viability of BancShares' suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the year
2000 issue could result in a significant adverse impact on BancShares'
operations and, in turn, its financial condition and results of operations.
State of Readiness
During October 1997, BancShares developed its plan to address the year 2000
issue. A substantial portion of BancShares' data processing functions are
performed by First-Citizens Bank & Trust Company ("FCB") on its mainframe
systems and/or on systems supported by FCB, which also provides similar services
to several other financial institutions. See "Related Parties." Therefore,
BancShares' plan for addressing the year 2000 issue divides information
technology systems ("IT Systems") into groups which include (i) FCB's mainframe
systems used for processing BancShares' data ("Group A Systems"), (ii)
BancShares' non-mainframe systems which are supported by FCB ("Group B
Systems"), and (iii) BancShares' separate non-mainframe systems ("Group C
Systems"). BancShares' year 2000 plan also addresses non-information technology
systems ("Non-IT Systems"). As to Group A Systems and Group B Systems,
BancShares' year 2000 plan necessarily is designed to be implemented jointly
with FCB. FCB has retained an outside consultant to plan and direct its year
2000 compliance efforts, and BancShares participates in a committee made up of
representatives of the consultant, FCB and each of the financial institutions
for which FCB provides data processing services. This committee meets
periodically to monitor the status of FCB's compliance efforts. Periodic
progress reports are made to BancShares' Board of Directors.
The following paragraphs summarize the phases of BancShares' year 2000 plan:
Assessment Phase
During the assessment phase, a year 2000 corporate inventory and business risk
assessment was made (jointly with FCB in the case of Group A Systems and Group B
Systems, and separately in the case of Group C Systems and Non-IT Systems) to
quantify the extent of BancShares' year 2000 exposure and identify systems that
required remediation. Each Group B and C application or system was given two
separate codes; a Priority Code and a Status Code. The Priority Code quantifies
the importance of each asset to BancShares' daily operations. The Status Code
represents the current claim of compliance by the asset's vendor. Used in
concert, these codes prioritize the remediation, testing and contingency
planning processes. This phase is complete.
<PAGE>
Remediation and Testing Phase
With respect to IT Systems, this phase contemplates the implementation of
modifications, upgrades or system replacements determined to be necessary to
achieve year 2000 compliance and the testing of modified or upgraded systems to
determine their functionality and operating capability. As to Group A Systems
and Group B Systems, FCB's outside consultant is responsible for coordinating
necessary modifications, upgrades or replacements. This phase has been completed
for all Group A Systems and is scheduled to be completed by December 31, 1998
for higher priority Group B Systems, and during the first and second quarters of
1999 for remaining Group B Systems. As to Group C Systems, BancShares' staff is
coordinating remediation (which, in most cases, entails the installation of
upgrades provided by outside vendors) and testing. This phase has been completed
for substantially all systems, with completion of this phase scheduled for the
fourth quarter of 1998.
Validation Phase
The validation phase contemplates testing, in an isolated environment, of the
ability of new and modified systems, which have been determined to be
functional, to accurately process date sensitive data beginning January 1, 2000.
Validation testing on Group A Systems and Group B Systems is being conducted by
FCB's outside consultant and is expected to be completed by December 31, 1998.
BancShares' staff is conducting validation testing on Group C Systems which is
expected to be substantially completed by December 31, 1998 on most systems and
during the first quarter of 1999 in the case of certain systems.
Implementation Phase
Under BancShares' plan, once new and modified systems, that require testing,
have been tested for functionality, they are being put into production.
BancShares' target is to have substantially completed the validation and
implementation phases with respect to substantially all systems by December 31,
1998.
Non-IT Systems, Third Party Service Providers and Loan Customers
Activities under BancShares' plan with respect to Non-IT Systems (including
security systems, office equipment, etc.) primarily involve identifying
potential year 2000 problems and insuring that outside vendors provide necessary
upgrades or replacements. Each system has been assigned to an officer of
BancShares whose responsibility it is to communicate with the vendor of that
system and coordinate remediation. As needed, Validation testing for Non-IT
Systems is planned for the first quarter of 1999.
During early 1998, BancShares identified those borrowing customers whose
existing aggregate borrowings from BancShares met certain criteria based on
aggregate credit exposure, loan collateral, and whose businesses were of a
nature that they could be adversely affected by the year 2000 issue. A meeting
was held individually with each such borrowing customer to assess the customer's
plan for and progress toward addressing the year 2000 issue. Follow-up meetings
are being held with each customer whose assessment indicated a higher than
typical level of risk. With respect to new and renewed loans, an assessment of
year 2000 risk and steps being taken by the customer to address the year 2000
issue have been made a part of the credit approval process.
<PAGE>
Costs
BancShares is expensing all costs associated with required system changes as
those costs are incurred, and such costs are being funded through operating cash
flows. Because a substantial portion of BancShares' data processing functions
are performed by FCB on its mainframe systems and/or on systems supported by
FCB, FCB is bearing a substantial portion of the expenses related to the
remediation and testing of systems that affect BancShares. BancShares has
budgeted $200,000 for its separate year 2000 project expenses. Expenses actually
incurred through September 30, 1998 were not material. BancShares does not
expect significant increases in future data processing costs relating to year
2000 compliance.
Contingency Plans
During the assessment phase, BancShares began to identify a back-up or
contingency plan for systems or non-IT assets which may be affected by year
2000. Virtually all of BancShares' systems are dependent upon third party
vendors or service providers, therefore, contingency plans include selecting a
new vendor or service provider and converting to their system. In the event a
current vendor's system fails during the validation phase and it is determined
that the vendor is unable or unwilling to correct the failure, BancShares will
convert to a new system. In each case, realistic trigger dates have been
established to allow for orderly and successful conversions. Preliminary
Contingency plans for system failures on or after January 1, 2000 have been
developed. These plans will be refined when the validation and testing phases
are complete.
Other matters
In October 1998, BancShares acquired the Gates, North Carolina office of FCB
containing $5.3 million in deposits (see note 8 of notes to consolidated
financial statements). In December 1998, BancShares plans to acquire, subject to
regulatory approval, the Red Springs, North Carolina office of First Union
National Bank containing approximately $17.0 million in deposits. BancShares has
received regulatory approval to open de novo branches in three 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.
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: November 10, 1998 ----------------------
John C. Pegram, Jr., President
/s/David A. Bean
Dated: November 10, 1998 ----------------
David A. Bean,
Secretary/Treasurer
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