<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 1997. 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 28365
Mount Olive, North Carolina (Zip Code)
(Address of Principal Executive offices)
Registrant's Telephone Number,
including Area Code: (919) 658-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Series B non-cumulative preferred stock, no par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X__ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
[ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 20, 1998: The Registrant's voting stock has no readily
ascertainable market value as of any date within the last sixty days or
otherwise for the reason that such stock is not regularly traded and has no
quoted prices. Therefore, the aggregate market value of the voting stock held
by non-affiliates is not determinable.
The number of shares outstanding of the Registrant's common stock as of March
20, 1998: Common Stock, $5.00 par value - 119,918 shares
Documents Incorporated by Reference
1. Part II Registrant's Annual Report to Shareholders
<PAGE>
PART I
ITEM 1 - BUSINESS:
General
Southern BancShares (N.C.), Inc., a Delaware corporation (hereinafter,
with all of its subsidiaries, referred to as the "Registrant" or BancShares"),
is a bank holding company pursuant to the provisions of the Bank Holding
Company Act of 1956, as amended. BancShares is the successor to Southern
BancShares (N.C.), Inc., a North Carolina corporation ("SBS") which was formed
in 1982 to become the parent company of Southern Bank and Trust Company
("Southern"), its principal operating subsidiary, which it acquired in late
1982. BancShares was formed in 1986 in order to affect the reincorporation in
Delaware of the holding company of Southern Bank by the merger of SBS into
BancShares, which was effective on December 28, 1986. All significant
activities of the Registrant and its subsidiary are banking related so that the
Registrant operates within one industry segment. Neither BancShares nor its
subsidiary has any foreign operations.
The operating subsidiary of BancShares is Southern Bank and Trust Company
("Southern"), which is engaged in commercial banking primarily in eastern North
Carolina. Southern's predecessor bank was organized on January 29, 1901, as
the Bank of Mount Olive. In 1913, it became the First National Bank and
remained so until 1936 when it rechartered as the Bank of Mount Olive. In
1967, Southern acquired its present name. Over the years, Southern's growth
has been generated principally through branching and by merging with four other
banks: Roanoke Chowan Bank, Roxobel, North Carolina in 1969, Merchants' and
Farmers' Bank, Macclesfield, North Carolina in 1973, Tarheel Bank & Trust Co.,
Gatesville, North Carolina in 1986 and Citizens Savings Bank, Rocky Mount,
North Carolina in 1993. Also in 1993, Southern acquired deposits in four
branches of two savings institutions and an office of NationsBank in
Pollocksville, North Carolina. In 1994 Southern acquired deposits in branches
in Scotland Neck, North Carolina and Turkey, North Carolina from First Citizens
Bank. In 1995 Southern acquired deposits in branches in Farmville, North
Carolina; Garland, North Carolina; Kill Devil Hills, North Carolina and
Salemburg, North Carolina from First Union National Bank. In 1995 Southern
also acquired the deposits of a branch in Kill Devil Hills, North Carolina
from First Citizens Bank. In 1996 Southern acquired deposits in a branch in
Windsor, North Carolina from First Citizens Bank, acquired deposits in a branch
in Edenton, North Carolina from United Carolina Bank and sold the deposits of
its branch in Scotland Neck, North Carolina to Triangle Bank. In 1997 Southern
acquired deposits in branches in Aulander, North Carolina, Aurora, North
Carolina and Hamilton, North Carolina from Wachovia Bank of North Carolina,
N.A. Refer to "Related Parties" in Note 15 on page 37 of the 1997 Annual
Report of Southern BancShares (N.C.), Inc. in Exhibit number 13 for additional
information regarding First Citizens Bank. In terms of total assets, at
December 31, 1997, Southern was the eleventh largest bank in North Carolina.
<PAGE>
Business
Southern conducts a general banking business designed to meet the needs of
the people of its market area. These services, all of which are offered at its
42 offices, include, among other items: taking deposits; cashing checks and
providing for individual and commercial cash needs; and providing numerous
checking and savings plans, including automatic transfer services, direct
deposit, and banking by mail.
Southern also makes commercial, consumer and mortgage loans at its 32 full
service offices and provides individual retirement account service, safe
deposit box rental, travelers' check service, and Master Card and Visa credit
card programs.
The Bank has twenty automatic teller machines; one each in Ahoskie, Ayden,
Belhaven, Bethel, Edenton, Farmville, LaGrange, Mount Olive, Murfreesboro,
Nashville, Plymouth, Roanoke Rapids, Warsaw, Whitakers and Windsor, North
Carolina and two in Kill Devil Hills and Rocky Mount North Carolina. Southern
has one satellite automatic teller machine at Duplin General Hospital in
Kenansville, North Carolina.
Southern does not operate in the international financing market.
Southern 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.
Statistical Information
Certain statistical information with respect to BancShares' business is
included in the information incorporated herein under "Item 7" below.
Supervision and Regulation
The business and operations of BancShares and Southern are subject to
extensive federal and state governmental regulation and supervision.
BancShares is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956 as amended (the "BHCA"), and is subject to
supervision and examination by and the regulations and reporting requirements
of the Federal Reserve. Under the BHCA, the activities of BancShares are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or engaging in any other activity
which the Federal Reserve determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
<PAGE>
The BHCA prohibits BancShares from acquiring direct or indirect control of
more than 5 percent of the outstanding voting stock or substantially all of the
assets of any financial institution, or merging or consolidating with another
bank holding company or savings bank holding company, without prior approval of
the Federal Reserve. Additionally, the BHCA prohibits BancShares from engaging
in, or acquiring ownership or control of more than 5 percent of the outstanding
voting stock of any company engaged in, a nonbanking activity unless such
activity is determined by the Federal Reserve to be so closely related to
banking as to be properly incident thereto. In approving an application by
BancShares to engage in a non-banking activity, the Federal Reserve must
consider whether that activity can reasonably be expected to produce benefits
to the public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.
There are a number of obligations and restrictions imposed by law on a
bank holding company and its insured depository institution subsidiaries that
are designed to minimize potential loss to depositors and the FDIC insurance
funds. For example, if a bank holding company's insured depository institution
subsidiary becomes "undercapitalized," the bank holding company is required to
guarantee (subject to certain limits) the subsidiary's compliance with the
terms of any capital restoration plan filed with its appropriate federal
banking agency. Also, a bank holding company is required to serve as a source
of financial strength to its depository institution subsidiaries and to commit
resources to support such institutions in circumstances where it might not do
so, absent such policy. Under the BHCA, the Federal Reserve has the authority
to require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary upon the Federal Reserve's determination that
such activity or control constitutes a serious risk to the financial soundness
and stability of a depository institution subsidiary of the bank holding
company.
<PAGE>
As a result of its ownership of a North Carolina-chartered commercial
bank, BancShares also is registered with and subject to examination and
regulation by the North Carolina Commissioner of Banks under the state's bank
holding company laws.
Southern is a North Carolina commercial bank and its deposits are insured
by the FDIC. It is subject to supervision and examination by and the
regulations and reporting requirements of the North Carolina Commissioner of
Banks (the "Commissioner") and the FDIC.
Southern is subject to legal limitations on the amounts of dividends it is
permitted to pay. Prior approval of the Commissioner is required if the total
of all dividends declared by Southern in any calendar year exceeds its net
profits (as defined by statute) for that year combined with its retained net
profits (as defined by statute) for the preceding two calendar years, less any
required transfers to surplus. As an insured depository institution, Southern
also is prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, it would become
"undercapitalized" (as such term is defined in the Federal Deposit Insurance
Act).
Under current federal law, certain transactions between a depository
institution and its affiliates are governed by Section 23A and 23B of the
Federal Reserve Act. An affiliate of a depository institution is any company
or entity that controls, is controlled by or is under common control with the
institution, and, in a holding company context, the parent holding company of a
depository institution and any companies which are controlled by such parent
holding company are affiliates of the depository institution. Generally,
Sections 23A and 23B (i) limit the extent to which a depository institution or
its subsidiaries may engage in covered transactions with any one affiliate, and
(ii) require that such transactions be on terms and under circumstances
substantially the same, or at least as favorable, to the institution or the
subsidiary as those provided to a nonaffiliate.
Southern is subject to various other state and federal laws and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit and equal credit, fair credit reporting laws and laws relating to branch
banking. As an insured institution, Southern is prohibited from engaging as a
principal in activities that are not permitted for national banks unless (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund and (ii) the institution is, and continues
to be, in compliance with all applicable capital standards. Insured
institutions also are prohibited from directly acquiring or retaining any
equity investment of a type or in an amount not permitted for national banks.
The Federal Reserve, the FDIC and the Commissioner all have broad powers
to enforce laws and regulations applicable to BancShares and Southern and to
require corrective action of conditions affecting the safety and soundness of
Southern. Among others, these powers include cease and desist orders, the
imposition of civil penalties and the removal of officers and directors.
<PAGE>
Capital Requirements
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines which require a minimum ratio of total capital to
risk-weighted assets of 8 percent. At least half of the total capital is
required to be Tier I capital. In addition to the risk-based capital
guidelines, the Federal Reserve has adopted a minimum leverage capital ratio
under which a bank holding company must maintain a level of Tier I capital to
average total consolidated assets of at least 3 percent in the case of a bank
holding company which has the highest regulatory examination rating and is not
contemplating significant growth or expansion. All other bank holding
companies are expected to maintain a leverage capital ratio of a least 1
percent to 2 percent above the stated minimum.
Southern is also subject to capital requirements imposed by the FDIC.
Under the FDIC's regulations, insured institutions that receive the highest
rating during the examination process and are not anticipating or experiencing
any significant growth are required to maintain a minimum leverage ratio of 3
percent of Tier I capital to average total consolidated assets. All other
insured institutions are required to maintain a minimum ratio of 1 percent or 2
percent above the stated minimum, with a minimum leverage ratio of not less
than 4 percent. The FDIC also requires Southern to have a ratio of total
capital to risk-weighted assets of at least 8 percent.
Insurance Assessments
Southern is subject to insurance assessments imposed by the FDIC.
During 1995 the FDIC reduced the Bank Insurance Fund ("BIF") assessment rates
for the highest rated banks to .04 percent, but left unchanged the .31 percent
rate for the weakest banks; and, effective January 1, 1996, the FDIC again
reduced BIF assessments to a range of 0 percent to .27 percent. These recent
premium reductions do not affect the deposit premiums paid on Savings
Association Insurance Fund ("SAIF") insured deposits. The actual assessment to
be paid by each insured institution is based on the institution's assessment
risk classification, which is determined based on whether the institution is
considered "well capitalized", "adequately capitalized" or "under capitalized",
as such terms have been defined in applicable federal regulations, and whether
the institution is considered by its supervisory agency to be financially sound
or to have supervisory concerns. The FDIC also is authorized to impose one or
more special assessments in any amount deemed necessary to enable repayment of
amounts borrowed by the FDIC from the United States Treasury Department.
<PAGE>
The Deposit Insurance Funds Act of 1996 ("DIFA96") required the FDIC to
impose a one-time special assessment on SAIF-assessable deposits, including
those held by BIF-member OAKAR ("OAKAR") institutions such as Southern to
capitalize the SAIF to its target Designated Reserve Ratio. Southern was
accordingly assessed $569 thousand in September 1996.
The DIFA96 also required that, beginning January 1, 1997, BIF banks and
OAKAR institutions would begin to be charged a separate assessment for the
Financing Corporation ("FICO") funding requirements. The FICO rate is not tied
to the FDIC risk classification and is subject to change by the FDIC within
certain limitations.
The FICO rate for the first quarter of 1998 is set at an annual rate of
6.28 basis points of OAKAR adjusted deposits as defined by the FDIC and 1.256
basis points of BIF adjusted deposits. At September 30, 1997 the FICO
assessable OAKAR deposit base for Southern was $99 million and the BIF deposit
base was $398 million. If Southern's deposits remained at these levels and the
FDIC maintained the same rates, the expense for the FICO obligation for
Southern would be approximately $112 thousand for 1998.
Change in Control
State and federal law restricts the amount of voting stock of a bank
holding company, or a bank, that a person may acquire without the prior
approval of banking regulators.
Pursuant to North Carolina law, no person may, directly or indirectly,
purchase or acquire voting stock of any bank holding company or bank which
would result in the change of control of that entity unless the Commissioner
first shall have approved that proposed transaction. A person will be deemed
to have acquired "control" of a bank holding company or bank if that person,
directly or indirectly, (i) owns, controls or has the power to vote 10 percent
or more of the voting stock of the bank holding company or bank, or (ii)
possesses the power to direct or cause the direction of its management and
policy. Federal law imposes additional restrictions on acquisitions of stock
in bank holding companies and insured banks. Under the federal Change in Bank
Control Act and regulations thereunder, a person or group acting in concert
must give advance notice to the Federal Reserve or the FDIC before directly or
indirectly acquiring the power to direct the management or policies of, or to
vote 25 percent or more of any class of voting securities of, any bank holding
company or insured bank. Upon receipt of such notice, the federal regulator
either may approve or disapprove the acquisition.
Under the Act, a change in control is presumed to occur if, among other
things, a person or group acquires more than 10 percent of any class of voting
stock of a holding company or insured bank and, after such acquisition, the
acquirer will be the largest shareholder.
<PAGE>
Interstate Banking and Branching
Federal law permits adequately capitalized and managed bank holding
companies to acquire control of the assets of banks in any state (the
"Interstate Banking Law"). Acquisitions will be subject to anti-trust
provisions that cap at 10 percent the portion of the total deposits of insured
depository institutions in the United States that a single bank holding company
may control, and generally cap at 30 percent the portion of the total deposits
of insured depository institutions in a state that a single bank holding
company may control. Under certain circumstances, states have the authority
to increase or decrease the 30 percent cap, and states may set minimum age
requirements of up to five years on target banks within their borders.
Beginning June 1, 1997, and subject to certain conditions, the Interstate
Banking Law permited interstate branching by allowing a bank to merge with a
bank located in a different state. The Interstate Banking Law also permits
banks to establish branches in other states, by opening new branches or
acquiring existing branches of other banks, if the laws of those other states
specifically permit that form of interstate branching. North Carolina has
adopted statutes which, subject to conditions contained therein, specifically
authorize out-of-state bank holding companies and banks to acquire or merge
with North Carolina banks and to establish or acquire branches in North
Carolina.
Economic Considerations
As a bank holding company whose primary asset is the capital stock of a
commercial bank, BancShares is directly affected by regulatory measures
affecting the banking industry in general. Additionally, since BancShares'
banking business is centered in eastern North Carolina, the general state of
the economy of eastern North Carolina, especially the agricultural sector, has
a direct effect on its business and profitability.
Among governmental regulators of primary importance is the Federal Reserve
which acts as the nation's central bank and can directly affect money supply
and thereby affect Southern's lending ability by increasing or decreasing its
interest costs and availability of funds. An important function of the Federal
Reserve is to regulate the national supply of bank credit in order to combat
recession and curb inflationary pressures. Among the instruments of monetary
policy used by the Federal Reserve to implement these objectives are open
market operations in U. S. Government securities, changes in the discount rate
and surcharge, if any, on member bank borrowings, and changes in reserve
requirements against bank deposits. These means are used in varying
combinations to influence overall growth of bank loans, investments and
deposits and may also affect interest rates charged on loans or paid for
deposits.
Southern is not a member of the Federal Reserve System, but is subject to
reserve requirements imposed on non-member banks by the Federal Reserve. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future.
<PAGE>
Competition
The banking laws of North Carolina allow statewide branching; therefore,
commercial banking in the state is highly competitive. Southern competes
directly in many of its markets with one or more of the largest banking
organizations in North Carolina. Such competitors range in size to over $200
billion in consolidated resources (including resources represented by banking
organizations in other states owned by or which control certain of such
competitors), have broader geographic markets and higher lending limits and
offer more services than Southern, and can, therefore, make more effective use
of media advertising, support services and electronic technology than can
BancShares or Southern.
Year 2000
In 1997 BancShares developed a plan to deal with the "Year 2000 issue".
Refer to "Accounting and Other Matters" on pages 14 through 15 of the 1997
Annual Report of Southern BancShares (N.C.), Inc. in Exhibit number 13 for
additional information regarding the Year 2000 issue.
Employees
At December 31, 1997, Southern employed 295 full-time employees and 14
part-time employees. It is not a party to any collective bargaining agreements
and considers relations with its employees to be good. BancShares and Goshen
do not have any separate employees.
<PAGE>
Statistical Information
I. AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
<TABLE>
<CAPTION>
(Dollars in thousands, taxable-equivalent)
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) (2) $340,195 $29,225 8.59% $310,389 $26,878 8.66% $270,563 $24,338 9.00%
Taxable investment securities 126,829 7,532 5.94% 125,068 7,899 6.32% 107,279 6,292 5.87%
Nontaxable investment securities (3) 24,581 2,130 8.67% 25,914 2,290 8.84% 23,760 2,202 9.27%
Federal funds sold 11,526 623 5.41% 6,895 402 5.83% 14,378 810 5.63%
Other 4,840 269 5.56% 1,526 62 4.06% - - -
_______ ______ ____ _______ _______ ____ _______ ______ _____
Total interest earning assets 507,971 39,779 7.83% 469,792 37,531 7.99% 415,980 33,642 8.01%
______ ______ ______
Non-interest earning assets:
Cash and due from banks 17,730 15,726 15,381
Premises and equipment, net 17,457 13,498 10,974
Other 24,078 20,525 14,164
______ ______ _____
Total assets $567,236 $519,541 $456,499
======= ======= =======
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits $76,080 1,234 1.62% $70,443 1,227 1.74% $59,926 1,262 2.11%
Savings deposits 87,577 2,259 2.58% 83,761 2,202 2.63% 79,486 2,238 2.82%
Time deposits 270,863 14,736 5.44% 247,575 13,504 5.45% 217,752 11,910 5.47%
Short-term borrowings 6,295 303 4.81% 8,160 400 4.90% 6,280 336 5.35%
Long-term obligations 4,539 295 6.50% 2,021 117 5.79% 3,153 309 9.80%
_______ ______ ____ _______ ______ ____ _______ _____ ____
Total interest bearing liabilities 445,354 18,827 4.23% 411,960 17,450 4.24% 366,597 16,055 4.38%
______ ______ ______
Non-interest bearing liabilities:
Demand deposits 63,783 57,773 50,088
Other 12,396 9,574 5,157
Shareholders' equity 45,703 40,234 34,657
_______ _______ _______
Total liabilities and equity $567,236 $519,541 $456,499
======= ======= =======
Interest rate spread (4) 3.60% 3.75% 3.63%
Net interest income and
Net interest margin (5) $20,952 4.12% $20,081 4.28% $17,587 3.85%
</TABLE>
(1) Includes non-accrual loans
(2) Interest income includes related loan fee amounts which were immaterial.
(3) The average rate on nontaxable investment securities has been adjusted to a
tax equivalent yield using a 34% tax rate.
(4) Interest rate spread is the difference between earning asset yield and
interest bearing liability rate.
(5) Net interest margin is net interest income divided by average earning
assets.
II. AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,1997 Increase(Decrease)
AMOUNT AMOUNT AMOUNT
TOTAL ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
CHANGE TO CHANGE TO CHANGE TO CHANGE
1996-1997 IN VOLUME IN RATE RATE/VOLUME
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net $2,347 $2,581 ($217) ($17)
Taxable investment securities (183) 339 (506) (16)
Non-taxable investment securities (161) (144) (18) 1
Federal funds sold 221 270 (29) (20)
_____ _____ _____ ____
Total interest income 2,224 3,046 (770) (52)
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits (479) 98 (535) (42)
Savings deposits 57 100 (42) (1)
Time deposits 1,718 1,269 421 28
Short-term borrowings (97) (91) (7) 1
Long-term obligations 178 146 14 18
_____ _____ ____ ___
Total interest expense 1,377 1,522 (149) 4
Net interest income $847 $1,524 ($621) ($56)
December 31, 1996 Increase(Decrease)
AMOUNT AMOUNT AMOUNT
TOTAL ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
CHANGE TO CHANGE TO CHANGE TO CHANGE
1995-1996 IN VOLUME IN RATE RATE/VOLUME
ASSETS
Interest earning assets:
Loans, net $2,540 $3,584 $(920) $(124)
Taxable investment securities 2,602 1,075 1,277 250
Non-taxable investment securities (1,291) 56 (1,327) (20)
Federal funds sold (408) (421) 29 (16)
_____ _____ _____ ____
Total interest income 3,443 4,294 (941) 90
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits (35) 222 (222) (35)
Savings deposits (36) 121 (151) (6)
Time deposits 1,594 1,631 (44) 7
Short-term borrowed funds 64 101 (28) (9)
Long-term obligations (192) (111) (126) 45
_____ _____ _____ ____
Total interest expense 1,395 1,964 (571) 2
Net interest income $2,048 $2,330 ($370) $88
==== ===== ===== ====
Average loan balances include nonaccrual loans. BancShares earns
tax-exempt interest on certain loans and investment securities due to the
borrower or issuer being either a governmental agency or a quasi-governmental
agency. Yields related to loans and securities exempt from both federal and
state income taxes, federal income taxes only, or state income taxes only, are
stated on a taxable-equivalent basis assuming a statutory federal income tax
rate of 34 percent for all periods. The taxable equivalent adjustment was
$2,024, $740 and $477 for the years 1997, 1996 and 1995, respectively.
</TABLE>
III. INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities
(dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury and U.S. Government agencies and corporations $118,589 $108,592 $97,831
States and political subdivisions 31,150 35,086 33,999
Other 30,394 25,011 16,976
______ ______ ______
Total $180,133 $168,689 $148,806
======= ======= =======
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1997 (dollars in thousands) and the weighted average yields of
such securities. (Note that nontaxable investment securities have not been
adjusted to a tax equivalent basis and unrealized gain (loss) on available for
sale is not included.)
<TABLE>
<CAPTION>
Maturing
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies (1) $46,484 5.74% $69,956 5.90% - - $1,977 6.66%
States and political subdivisions 5,709 6.93% 7,973 6.98% 9,036 6.25% 7,906 5.41%
Other (2) 8,119 4.41% - - - - 100 6.75%
______ ____ ______ ____ ______ _____ _____ ____
$60,312 5.68% $77,929 6.01% $9,036 6.25% $9,983 5.67%
====== ====== ===== ======
</TABLE>
(1) Mortgage-backed securities are included in the obligations of U.S.
Government agencies and spread within the columns according to their
anticipated repayment schedules.
(2) The "Within One Year" column of the "Other" category includes marketable
equity securities held by BancShares. Accordingly, the yield on these
securities represents anticipated dividend income rather than interest
income.
IV. LOAN PORTFOLIO
Analysis of loans by type and maturity
The table below classifies loans by major category (dollars in thousands):
<TABLE>
<CAPTION> December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $84,281 $70,881 $57,398 $36,343 $23,672
Real Estate:
Construction 5,209 2,470 1,533 3,221 1,851
Mortgage:
One to four family residential 106,444 113,915 111,372 108,804 110,258
Commercial 58,056 52,686 43,580 41,090 45,470
Equityline 27,759 18,654 13,828 10,858 8,868
Other 27,868 21,615 20,535 17,261 16,464
Consumer 35,780 35,512 37,548 33,762 30,149
Lease Financing 5,385 2,370 2,410 1,447 -
_______ _______ ______ ______ ______
350,782 318,103 288,204 252,786 236,732
Less: unearned income (1,429) (348) (244) (175) -
_______ _______ _______ _______ _______
$349,353 $317,755 $287,960 $252,611 $236,732
======= ======= ======= ======= =======
</TABLE>
The following table identifies the maturities of all loans as of December 31,
1997 and addresses the sensitivity of these loans to changes in interest
rates.
<TABLE>
<CAPTION>
Within After One Year But After Five Total
One Year Within Five Years Years
_________ ________________ _________ _________
<S> <C> <C> <C> <C>
Commercial and financial $ 28,593 $ 43,692 $ 11,996 $ 84,281
Real estate:
Construction 2,228 2,500 481 5,209
One to four family residential 25,547 60,241 20,656 106,444
Commercial 12,772 32,594 12,690 58,056
Equityline 1,164 5,751 20,844 27,759
Other 9,407 14,303 4,158 27,868
Consumer 24,091 11,069 620 35,780
Lease Financing 783 3,280 1,322 5,385
_________ _________ _________ _________
Total $104,585 $ 173,430 $ 72,767 $ 350,782
========= ========= ========= =========
Fixed rate $ 49,436 $ 129,593 $32,216 $211,245
Variable rate 55,149 43,837 40,551 139,537
_________ _________ _________ _________
Total $104,585 $ 173,430 $ 72,767 $ 350,782
========= ========= ========= =========
</TABLE>
Non-accrual, past-due, and restructured loans
The following analysis identifies other real estate owned and loans that were
either non-accruing, past-due or restructured. Loans are placed on a
non-accrual basis when they become 90 days past due and the ability of the
borrower to comply with the present terms is doubtful.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 230 $ 147 $ 50 $ 77 $ 44
Restructured loans - 8 - 204 221
Accruing loans past-due 90 days or more 466 343 508 234 183
_____ _____ _____ _____ _____
Total non-performing loans $ 696 $ 498 $ 558 $ 515 $ 448
Other real estate owned 48 - 86 1,339 1,020
_____ _____ _____ _____ _____
Total non-performing loans and assets $ 744 $ 498 $ 644 $ 1,854 $ 1,468
===== ===== ===== ===== =====
</TABLE>
The amount of interest which would have been recorded in 1997 on
non-accrual loans had they been in accordance with the original terms
throughout the period was immaterial.
V. SUMMARY OF LOAN LOSS EXPERIENCE
Analysis of the allowance for loan losses:
The table presented below summarizes activity in the allowance for loan
losses for the five years ended (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Allowance for loan losses - beginning of year $ 6,163 $ 6,321 $ 6,653 $ 6,717 $ 3,553
Charge-offs:
Commercial, financial, and agricultural 47 5 - 26 10
Real estate:
Construction - - - - -
Mortgage:
One to four residential 86 106 34 89 141
Commercial - - - - -
Equityline - - - - -
Other 23 - 209 - 240
Consumer 307 428 220 181 358
Lease Financing - - - - -
_____ _____ _____ _____ _____
Total charge-offs 463 539 463 296 749
_____ _____ _____ _____ _____
Recoveries:
Commercial, financial, and agricultural 13 - 54 29 74
Real estate:
Construction - 19 - - -
Mortgage:
One to four residential 59 131 19 27 48
Commercial - - - - -
Equityline - - - 15 -
Other - - - 20 8
Consumer 139 91 58 141 126
Lease Financing - - - - -
_____ _____ _____ _____ _____
Total recoveries 211 241 131 232 256
Net charge-offs (recoveries) 252 298 332 64 493
Additions charged to operations 60 140 - - 300
Addition from Citizens Savings Bank - - - - 3,357
_____ _____ _____ _____ _____
Allowance for loan losses - end of year $ 5,971 $ 6,163 $ 6,321 $ 6,653 $ 6,717
======= ======= ======= ======= =======
Average loans outstanding during the year $340,195 $310,389 $270,563 $242,217 $191,360
======= ======= ======= ======= =======
Ratio of net charge-offs (recoveries) to average loans outstanding 0.07% 0.10% 0.12% 0.03% 0.26%
</TABLE>
The allowances for loan losses is increased by charges to the provision
for loan losses and reduced by loans charged off net of recoveries. Southern's
provision is the amount necessary to maintain the allowance at a level
considered adequate to provide for possible loan losses based on management's
internal evaluation of the loan portfolio, as well as prevailing and
anticipated economic conditions.
Allocation of the allowance for loan losses:
The composition of the allowance by loan category shown in the table below
is based upon management's evaluation of the loan portfolio, past history, and
prevailing economic conditions:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
% of loans % of loans % of loans % of loans % of loans
in each in each in each in each in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $2,149 24% $2,214 22% $1,264 20% $774 14% $672 10%
Real estate:
Construction 60 1% 76 1% 63 1% 247 1% 53 1%
Mortgage:
1 to 4 residential 1,194 30% 1,245 36% 2,188 39% 2,813 43% 3,134 47%
Commercial 537 17% 566 17% 853 15% 1,061 16% 1,284 19%
Equityline 239 8% 204 6% 260 5% 277 4% 257 4%
Other 239 8% 248 6% 408 7% 460 8% 462 6%
Consumer 1,493 10% 1,537 11% 1,222 13% 1,021 13% 855 13%
Lease Financing 60 2% 73 1% 63 - - 1% - -
_____ ___ _____ ___ _____ ___ _____ ___ _____ ___
$5,971 100% $6,163 100% $6,321 100% $6,653 100% $6,717 100%
===== === ===== === ===== === ===== === ===== ===
</TABLE>
VI. DEPOSITS
The average monthly volume of deposits, which is considered representative
of BancShares' operations, and the average rates paid on such deposits are
presented below (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
Average Average Average Average Average Average
Balances Rates Balances Rates Balances Rates
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $63,783 - $57,773 - $50,088 -
Interest bearing demand 76,080 0.98% 70,443 1.74% 59,926 2.11%
Savings 87,577 2.58% 83,761 2.63% 79,486 2.82%
Time deposits 270,863 5.62% 247,575 5.45% 217,752 5.47%
_______ _______ ______
Total deposits $498,303 $459,552 $407,252
======= ======= ======
</TABLE>
Maturities of $100,000 or more time certificates of deposit at December
31, 1997 are summarized as follows (dollars in thousands):
<TABLE>
<CATEGORY>
Maturity Category
<S> <C>
Three months or less $20,339
Over three through six months 10,430
Over six months through twelve months 14,720
Over one year through five years 7,269
Over five years 246
_______
$53,004
=======
</TABLE>
VII. RETURN ON EQUITY AND ASSETS
The following table presents certain ratios of the Company:
<TABLE>
<CAPTION> December 31,
1997 1996 1995
<S> <C> <C> <C>
Return on assets (net income divided by average total assets) 1.17% 0.84% 0.86%
Return on equity - including Series B and C preferred
(net income divided by average total equity) 14.47% 10.85% 11.29%
Dividend payout ratio
(Dividends paid divided by net income) 8.85% 13.45% 13.57%
Equity to assets ratio - including Series B and C preferred
(Average equity divided by average total assets) 8.06% 7.74% 7.59%
</TABLE>
VIII. CAPITAL ADEQUACY
The following table presents certain calculations of BancShares' capital and
related ratios:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands)
1997 1996 1995
<S> <C> <C> <C>
Total Shareholders' Equity $54,984 $44,778 $37,163
Leverage Capital 34,380 27,891 23,369
Tier I Capital 34,380 27,891 23,369
Total Capital 38,449 31,861 26,831
Leverage Capital Ratio (1) 6.07% 5.46% 5.60%
Tier I Capital Ratio 11.43% 9.33% 8.87%
Total Capital Ratio (2) 12.78% 10.66% 10.19%
</TABLE>
(1) Bank holding companies operating at the 3% minimum are expected to have
well diversified risk profiles, including no undue interest rate risk,
excellent asset quality, high liquidity and strong earnings. Bank holding
companies not meeting these requirements are expected to maintain a
leverage ratio somewhat higher than the 3% minimum applicable to the
highest rated companies.
(2) The minimum ratio of qualifying total capital to risk weighted assets is
8%, of which 4% must be Tier 1 capital, which is common equity, retained
earnings, and a limited amount of perpetual preferred stock, less certain
intangibles.
IX. RATE OF INTERNAL CAPITAL GENERATION
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
Return on average assets (based on net income) 1.17% 0.84% 0.86%
Average equity as a percentage of total average assets 8.06% 7.74% 7.59%
Return on average equity 14.47% 10.85% 11.29%
Dividend payout ratio 8.85% 13.45% 13.57%
(Dividends paid divided by net income)
Earnings retention 91.15% 86.55% 86.43%
(Net income less dividends divided by net income)
Rate of internal capital generation 13.19% 9.39% 9.76%
(Return on average equity ratio times earnings
retention ratio)
</TABLE>
X. INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31, 1997
Non-Rate
1-30 31-90 91-180 181-365 Sensitive
Days Days Days Days & Over
Sensitive Sensitive Sensitive Sensitive 1 Year Total
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned income $82,232 $68,584 $16,151 $28,290 $154,096 $349,353
Investment Securities 38,654 16,178 5,249 26,869 93,183 180,133
Temporary Investments 10,240 - - - - 10,240
Other - 5,200 - - - 5,200
_______ ______ ______ ______ _______ _______
Total interest earning assets $131,126 $89,962 $21,400 $55,159 $247,279 $544,926
======= ====== ====== ====== ======= =======
Interest-Bearing Liabilities:
Savings and core time deposits $200,515 $39,330 $50,300 $60,382 $43,232 $393,759
Time deposits of $100,000 and more 9,579 10,760 10,430 14,720 7,515 53,004
Short-term borrowing 6,826 - - - - 6,826
Long-term obligations - 4,750 - - - 4,750
_______ ______ ______ ______ _______ _______
Total interest bearing liabilites $216,920 $54,840 $60,730 $75,102 $50,747 $458,339
======= ====== ====== ====== ======= =======
Interest sensitive Gap $(85,794) $35,122 $(39,330) $(19,943) $196,532 $ 86,587
======= ====== ====== ====== ======= =======
</TABLE>
Interest sensitivity is continually changing. The table above reflects
Bancshares' gap position at December 31, 1997 and does not necessarily
represent its position on any other dates.
XI. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
(Dollars in Thousands)
1997 1996
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Repurchase Agreements
At December 31 $4,761 5.62% $3,838 6.71%
Average during year 4,819 4.18% 2,934 4.04%
Maximum month-end balance during year 5,929 4,507
U.S. Treasury tax and loan accounts
At December 31 $2,065 5.25% $1,226 5.15%
Average during year 997 5.85% 1,052 5.09%
Maximum month-end balance during year 2,215 1,300
</TABLE>
ITEM 2 - PROPERTIES
BancShares does not own or lease any real property. Except for four
tracts of land that are leased and upon which are constructed leasehold
improvements for the conduct of its banking business, Southern owns all of the
real property utilized in its operations.
Southern's home office is located at 121 East Main Street, Mount Olive,
North Carolina. At December 31, 1997 there were 42 Southern offices in North
Carolina. These offices are listed in BancShares' 1997 Annual Report.
ITEM 3 - LEGAL PROCEEDINGS:
There are no material legal proceedings to which BancShares or its
subsidiaries are a party or to which any of their property is subject, other
than ordinary, routine litigation incidental to the business of commercial
banking.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS:
None.
<PAGE>
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS:
Information is included on page 15 of the Registrant's 1997 Annual
Report in Exhibit 13 incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA:
Information is included in table 1, Five-Year Financial Summary,
Selected Balances and Ratios, on page 4 of Registrant's 1997 Annual Report in
Exhibit number 13 incorporated herein by reference.
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Information is included on pages 4 through 16 of Registrant's 1997
Annual Report in Exhibit number 13 incorporated herein by reference.
Item 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Information is included under the section "Market Risk" on pages 11
and 12 of the Registrant's 1997 Annual Report in Exhibit number 13 incorporated
herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The following financial statements and independent auditors' report
are incorporated herein by reference, on the page numbers indicated, in the
1997 Annual Report of Southern BancShares (N.C.), Inc. included in exhibit
number 13 herein.
Independent Auditors' Report 17
Consolidated Balance Sheets as of December 31, 1997 and 1996 18
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 19
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 20
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995 21
Notes To Consolidated Financial Statements 22-38
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES:
None
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information under the captions "PROPOSAL 1: ELECTION OF DIRECTORS"
and "Executive Officers" on pages 5 through 7 and page 9 of Registrant's
definitive Proxy Statement dated March 20, 1998, is incorporated herein by
reference.
ITEM 11 - EXECUTIVE COMPENSATION:
The information under the captions "Compensation of Directors",
"Compensation Committee Interlocks and Insider Participation", "Committee
Report on Executive Compensation", "Pension Plan", and "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements" on pages 7
through 9 and page 11 of the Registrant's definitive Proxy Statement dated
March 20, 1998, is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information under the captions "PRINCIPAL HOLDERS OF VOTING
SECURITIES" and "OWNERSHIP OF VOTING SECURITIES BY MANAGEMENT" on pages 2
through 5 of the Registrant's definitive Proxy Statement dated March 20,
1998, is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information contained in "Transactions with Management" on pages 12
through 13 of the Registrant's definitive Proxy Statement dated March 20, 1998,
is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) 1. Financial Statements
The following consolidated financial statements of Southern
BancShares (N.C.), Inc. and subsidiary, and Independent Auditors'
Report thereon, are incorporated herein by reference from
Registrant's 1997 Annual Report to Shareholders.
. Independent Auditors' Report
. Consolidated Balance Sheets at December 31, 1997 and 1996
. Consolidated Statements of Income for the years ended December
31, 1997, 1996 and 1995
. Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
. Consolidated Statements of Changes in Shareholders' equity for
the years ended December 31, 1997, 1996 and 1995
. Notes to Consolidated Financial Statements
2. Financial statement schedules are omitted because of the absence
of conditions under which they are required or because the
required information is contained in the consolidated financial
statements or related notes thereto which are incorporated herein
by reference from Registrant's 1997 Annual Report to Shareholders.
3. Exhibits
The following exhibits are filed or incorporated herewith as part
of this report on Form 10-K:
Exhibit Description of Exhibits
Number
3.1 Certificate of Incorporation and Certificate of
Amendment to the Certificate of Incorporation of the
Registrant (filed as exhibits 3.1, and 3.2 respectively,
to Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (No. 33-8581) filed October 20,
1986 and incorporated herein by reference)
3.2 Registrant's Bylaws (filed as Exhibit 3. to the
Registrant's 1992 Annual Report on Form 10-K and
incorporated herein by reference)
4 Southern Bank and Trust Company Indenture dated February
27, 1971 (filed as exhibit 4 to the Registrant's
Registration Statement on Form S-14 (No. 2-78327) filed
July 7, 1982 and incorporated herein by reference)
10.1* Non-Competition and Consulting Agreement between R. S.
Williams and Southern Bank and Trust Company (filed as
exhibit 10.1 to the Registrant's 1989 Annual Report on
Form 10-K and incorporated herein by reference)
10.2* Eighth Amendment to Noncompetition and Consulting
Agreement between R. S. Williams and Southern Bank and
Trust Company (filed herewith)
10.3* Assignment and Assumption Agreement and First Amendment
of Noncompetition and Consultation Agreement between
First-Citizens Bank & Trust Company, Southern Bank and
Trust Company and M. J. McSorley (filed as exhibit 10.3
to the Registrant's 1989 Annual Report on Form 10-K and
incorporated herein by reference)
13 Registrant's 1997 Annual Report to Shareholders (filed
herewith)
22 Subsidiaries of the Registrant (filed herewith)
99.1** Registrant's definitive Proxy Statement dated March 20,
1998 for the 1998 Annual Shareholders' Meeting
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the fourth quarter of the
year ended December 31, 1997.
* Denotes a Management Contract or compensatory plan or arrangement in
which an executive officer or director of the Company participates
** Not being refiled
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DATED: MARCH 19, 1998 SOUTHERN BANCSHARES (N.C.), INC.
/s/ R. S. Williams
By: ____________________________________________________
R. S. Williams, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/R. S. Williams Chairman of the Board of March 20, 1998
R. S. Williams Directors
/s/David A. Bean Treasurer (principal March 19, 1998
David A. Bean financial and accounting
officer)
/s/Bynum R. Brown Director March 23, 1998
Bynum R. Brown
/s/William H. Bryan Director March 25, 1998
William H. Bryan
/s/D. Hugh Carlton Director March 23, 1998
D. Hugh Carlton
/s/Robert J. Carroll Director March 20, 1998
Robert J. Carroll
/s/Hope H. Connell Director March 20, 1998
Hope H. Connell
/s/J. Edwin Drew Director March 23, 1998
J. Edwin Drew
/s/Moses B. Gillam, Jr Director March 26, 1998
Moses B. Gillam, Jr.
/s/Leroy C. Hand, Jr. Director March 23, 1998
LeRoy C. Hand, Jr.
/s/Frank B. Holding Director March 19, 1998
Frank B. Holding
/s/M. J. McSorley Director March 23, 1998
M. J. McSorley
/s/W. B. Midyette, Jr. Director March 23, 1998
W. B. Midyette, Jr.
/s/W. Hunter Morgan Director March 23, 1998
W. Hunter Morgan
/s/Charles I. Pierce Director March 26, 1998
Charles I. Pierce, Sr.
/s/W. A. Potts Director March 24, 1998
W. A. Potts
/s/Charles L. Revelle, Jr. Director March 23, 1998
Charles L. Revelle, Jr.
/s/ Charles O. Sykes Director March 25, 1998
Charles O. Sykes
/s/John N. Walker Director March 23, 1998
John N. Walker
STATE OF NORTH CAROLINA
COUNTY OF WAYNE
EIGHTH AMENDMENT TO NONCOMPETITION AND CONSULTING AGREEMENT
THIS EIGHTH AMENDMENT TO NONCOMPETITION AND CONSULTING AGREEMENT
"(Eighth Amendment"), made and entered into as of the 31st day of December,
1997, by and between SOUTHERN BANK AND TRUST COMPANY, A North Carolina banking
corporation with its principal place of business in Mount Olive, Wayne County,
North Carolina (hereinafter referred to as "Southern") and Robert S.
Williams, a resident of Wayne County, North Carolina (hereinafter referred to
as "Consultant");
W I T N E S E T H:
WHEREAS, by a Noncompetition and Consulting Agreement and Release, made
and entered into as of the 31st day of December, 1989, by and between the
parties hereto (the "Agreement"), Southern agreed to pay to Consultant
$3,033.33 per month for a noncompetition arrangement and $300.00 per month for
his advisory and consulting services, as well as various other benefits and
compensation, and to make available to Consultant office space, secretarial
assistance and other equipment and facilities, plus reimbursement for his
out-of-pocket expenses incurred in carrying out his consulting obligations
pursuant to the Agreement, which Agreement was to be effective from January
1, 1990 through December 31, 1990 and which was subsequently extended on the
28th day of December 1990 for a term of one (1) year or until December 31,
1991; and which was subsequently extended on the 31st day of December 1991 for
a term of one (1) year or until December 31, 1992; and which was subsequently
extended on the 31st day of December 1992 for a term of one (1) year or until
December 31, 1993; and which was subsequently extended on the 31st day of
December 1993 for a term of one (1) year or until December 31, 1994; and which
was subsequently extended on the 31st day of December 1994 for a term of one
(1) year or until December 31, 1995; and which was subsequently extended on the
31st day of December 1995 for a term of one (1) year or until December 31,
1996: and subsequently extended on the 31st day of December 1996 for a term of
one (1) year or until December 31, 1997:
WHEREAS, Southern and Consultant desire to extend the Agreement for an
additional calendar year, now enter into this Eighth Amendment to evidence
their understanding of said extension and amendment.
NOW, THEREFORE, for and in consideration of the mutual promises between
the parties made and other good and valuable considerations, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby do agree as
follows:
1. The Agreement made and entered into as of the 31st day of December,
1989, by and between Southern and Consultant, is hereby amended to continue in
effect for an additional term of one year, to be effective from January 1, 1998
through December 31, 1998.
2. Paragraph 5 of the Agreement, "Covenant Not To Compete," is hereby
amended to provide that the monthly consideration for such Covenant shall be
$2,533.33, with the first such payment to be made on or before January 30,
1996, and each successive monthly payment thereafter to be made on or before
the 30th day of each month through and including December 30, 1996. And
continue each month through and including December 30, 1997. And continue each
month through and including December 30, 1998.
3. All of the other terms and conditions of said Agreement shall remain in
full force and effect.
IN TESTIMONY WHEREOF, Southern has caused this eighth Amendment to be
executed in its corporate name by its President, attested by its Secretary and
its corporate seal to be hereto affixed, all within the authority duly given by
its Board of Directors, and Consultant has hereunto set his hand and adopted as
his seal the typewritten word ``SEAL'' appearing beside his name, all as of the
day and year first above written.
SOUTHERN BANK AND TRUST COMPANY
By:/s/John C. Pegram
_____________________________
John C. Pegram, President
Attest:
/s/ David A. Bean, Secretary
__________________________
David A. Bean, Secretary
/s/ Robert S. Williams (SEAL)
____________________________
Robert S. Williams
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC.
1997 ANNUAL REPORT
MISSION STATEMENT
The mission of our Company is to provide quality financial services to
individuals and small businesses in our defined trade areas at a reasonable
profit while at all times maintaining high quality assets, high levels of
liquidity, reasonable capital, and a well trained staff that is willing and
eager to fulfill this mission.
THIS REPORT HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION.
<PAGE>
Chairman's Letter______________________________________________________________
March 20, 1998
For Southern BancShares, 1997 was a year of major accomplishments. Your
Company made significant strides in technology, customer service, and lending.
Net income increased $2.2 million, or 50 percent, from $4.4 million in 1996 to
$6.6 million in 1997. This increase was principally the result of gains on the
sale of available-for-sale securities and a reduction in income taxes resulting
from the donation of available-for-sale securities. Total deposits of your
Company at December 31, 1997, totaled $513 million compared to $481 million at
year-end 1996, a 7 percent increase. Total loans of your Company at December
31, 1997, totaled $349 million compared to $318 million at year-end 1996, a 10
percent increase. Total consolidated assets of your Company at December 31,
1997, totaled $591 million compared to $541 million at year-end 1996, a 9
percent increase.
Net interest income increased 5 percent during 1997, while noninterest
expenses increased 27 percent. To a large extent, we credit balance sheet
growth for the increase in net interest income, while higher acquisition
related personnel and operating costs and additional funding of a charitable
foundation caused most of the increase in noninterest expenses. The 1997
personnel expenses include a full year of expenses for one acquired location
each in June and August of 1996, a partial year of expenses for three branches
acquired in May 1997 and one new branch opened in August 1997.
Charitable contribution expenses increased $3.5 million in 1997. In 1996,
BancShares initially funded a foundation to support charitable organizations by
donating securities which resulted in a $0.5 million contribution expense and
$0.5 million gain on investments. In 1997, BancShares provided additional
funding to the foundation by the donation of securities resulting in a $4.1
million contribution expense. The donation and the sale of securities
available-for-sale resulted in $5.6 million of investment gains.
These overall results are particularly gratifying because they were
accomplished in a year during which your Company made important progress and
investments in new product delivery systems, continued staff training, branch
acquisitions and new branches as discussed below.
Acquisitions
During 1997, your Company entered into strategic acquisitions that
improved its position in several North Carolina markets and expanded its
services to customers in new North Carolina markets. The acquisition of the
Aulander, Aurora and Hamilton offices of Wachovia Bank in May allowed your
Company to expand its presence in the existing Aurora market and allowed the
Company to enter the new markets of Aulander and Hamilton. In 1997 your Company
also opened a second location in Rocky Mount.
An agreement has been entered into to purchase the Enfield branch of
Enfield Savings Bank. This transaction, subject to regulatory approval, is
expected to be completed in the second quarter of 1998 and should result in an
increase in total deposits of approximately $21 million in a new market for
your Company. As of March 20, 1998 your Company had 42 branches serving 39
North Carolina communities.
Product Delivery Systems
As your Company expanded its geographic presence, it also continued to
improve the efficiency of its product delivery systems to meet the needs of all
of its customers. The Company began offering personal computer banking to its
customers in 1997 and established an internet web-site containing bank history,
product and service information, banking locations and E-mail capabilities at
www.southernbank.com. During 1997, construction of new main offices in Warsaw
and Windsor were completed and the Automated Teller Machine (ATM) network was
expanded to provide 24 hour service to a total of 19 communities.
The Year Ahead
I believe that the North Carolina economy in general should continue to
outpace most of the nation in 1998 and that the economic base of the market
service area of your Company will continue to support economic growth.
The management of your Company understands that, in order to be the best
bank for our customers in our market service areas, we must put our customers
needs first in each of the products, policies and procedures under which we
operate.
Your Company believes that its investments in quality personnel, modern
technology, extensive education, expansion of its service market areas and
improvements in customer product delivery systems will help it realize its goal
of being the first choice in its markets for all financial services.
I am pleased with the overall results accomplished in 1997 and I thank our
shareholders, staff, customers and friends for their confidence in, loyalty to
and support of Southern Bank and Trust Company.
Sincerely,
R. S. Williams
Chairman of the Board
2
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BUSINESS:
Southern BancShares (N.C.), Inc., a Delaware corporation (hereinafter,
with all of its subsidiaries, referred to as "BancShares"), is a bank holding
company pursuant to the provisions of the Bank Holding Company Act of 1956, as
amended. BancShares is the successor to Southern BancShares (N.C.), Inc., a
North Carolina corporation ("SBS") which was formed in 1982 to become the
parent company of Southern Bank and Trust Company ("Southern"), its principal
operating subsidiary, which it acquired in late 1982. BancShares was formed in
1986 in order to effect the reincorporation in Delaware of the holding company
of Southern by the merger of SBS into BancShares, which was effective on
December 28, 1986. All significant activities of the Registrant and its
subsidiary are banking related so that the Registrant operates within one
industry segment. Neither BancShares nor its subsidiary has any foreign
operations, nor does either company operate in the international financing
market.
Southern conducts a general banking business designed to meet the needs of
the people of its market area. These services, all of which are offered at its
42 offices, include, among other items: taking deposits; cashing checks and
providing for individual and commercial cash needs; and providing numerous
checking and savings plans, including automatic transfer services, direct
deposit, and banking by mail.
Southern also makes commercial, consumer and mortgage loans at its 31 full
service offices and provides individual retirement account service, safe
deposit box rental, travelers' check service, and MasterCard and Visa credit
card programs.
Southern has twenty automatic teller machines; one each in Ahoskie, Ayden,
Belhaven, Bethel, Edenton, Farmville, LaGrange, Mount Olive, Murfreesboro,
Nashville, Plymouth, Roanoke Rapids, Warsaw, Whitakers and Windsor, North
Carolina and two in Kill Devil Hills, North Carolina and Rocky Mount, North
Carolina. Southern has one satellite automatic teller machine at Duplin General
Hospital in Kenansville, North Carolina.
Southern 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 Bank.
FORM 10-K
BancShares' Annual Report on Form 10-K is available on the internet at
htpp://www.sec.gov/cgi-bin/srch-edgar or a copy is available by providing a
written request to David A. Bean, Secretary, Southern BancShares (N.C.), Inc.,
Post Office Box 729, Mount Olive, North Carolina 28365-0729. A copy of
BancShares' Annual Report on Form 10-K for 1997, including Financial Statements
and Schedules thereto will be provided without charge to any shareholder making
such request.
3
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Management's Discussion and Analysis of Financial Condition and
Results of Operations:_________________________________________________________
INTRODUCTION
This discussion provides information concerning changes in the consolidated
financial condition and results of operations of Southern BancShares (N.C.),
Inc. ("BancShares") and its subsidiary, Southern Bank and Trust Company
("Southern"), for 1997, 1996 and 1995. The comments are intended to supplement
and should be reviewed in conjunction with the consolidated financial
statements, related notes and selected financial data presented elsewhere
herein.
<TABLE>
<CAPTION>
Table 1
Five-Year Financial Summary, Selected Balances and Ratios
(Dollars in thousands, except share data and ratios)
December 31,
_____________________________________________________
1997 1996 1995 1994 1993
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $ 39,055 36,776 32,894 27,164 22,418
Interest expense 18,827 17,450 16,055 11,044 8,803
______ ______ ______ ______ ______
Net interest income 20,228 19,326 16,839 16,120 13,615
Provision for loan losses 60 140 - - 300
Net interest income ______ ______ ______ ______ ______
after provision for loan losses 20,168 19,186 16,839 16,120 13,315
Noninterest income 9,849 4,508 4,028 2,888 3,197
Noninterest expense 23,064 18,203 15,661 13,918 10,978
______ ______ ______ ______ ______
Income before income taxes 6,953 5,491 5,206 5,090 5,534
Income taxes 340 1,127 1,293 1,402 1,741
______ ______ ______ ______ ______
Net income $ 6,613 4,364 3,913 3,688 3,793
====== ====== ====== ====== ======
Selected Year-End Balances
Total assets $ 590,752 540,758 496,980 408,035 411,604
Investment securities and federal funds sold 190,373 179,709 164,526 123,852 145,732
Loans 349,353 317,755 287,960 252,611 236,732
Interest earning assets 544,926 499,164 452,486 376,463 382,464
Deposits 513,328 480,566 449,002 367,522 375,061
Interest bearing liabilities 458,339 422,941 396,631 326,442 338,515
Shareholders' equity 54,984 44,778 37,163 30,965 24,650
Common shares outstanding 119,918 119,918 119,918 121,767 130,031
Selected Average Balances
Total assets $567,236 519,541 456,499 407,554 326,232
Investment securities and federal funds sold 162,936 157,779 145,417 131,923 114,321
Loans 340,195 310,389 270,563 242,217 191,360
Interest earning assets 507,971 469,792 415,980 374,140 305,681
Deposits 498,303 459,552 407,252 367,618 294,264
Interest bearing liabilities 445,354 411,960 366,597 331,104 263,097
Shareholders' equity 45,703 40,234 34,657 28,445 23,126
Common shares outstanding 119,918 119,918 121,226 123,521 130,312
Profitability Ratios (averages)
Return on average total assets 1.17% 0.84 0.86 0.90 1.16
Return on average shareholders' equity 14.47 10.85 11.29 12.97 16.40
Dividend payout ratio (1) 8.85 13.45 13.57 12.80 11.65
Liquidity and Capital Ratios (averages)
Loans to deposits 68.27% 67.54 66.44 65.89 65.03
Shareholders' equity to total assets 8.06 7.74 7.59 6.98 7.09
Per share of common stock
Net income (2) $51.77 33.00 28.90 27.04 26.72
Cash dividends 1.50 1.50 1.00 1.00 1.00
Book value (3) 458.51 373.41 309.90 254.30 189.57
(1) Total common and preferred dividends paid for the year ended December 31 divided by net income for the year ended
December 31.
(2) Net income less preferred dividends paid for the year ended December 31 divided by the average number of common shares
outstanding for the year ended December 31. BancShares adoption of Statement 128, "Earnings per Share," had no effect on
its earnings per share disclosure since BancShares has no dilutive securities.
(3) Shareholders' equity at December 31 divided by the number of common shares outstanding at December 31.
4
</TABLE>
<PAGE>
ACQUISITIONS
In May 1997 BancShares acquired the Aulander, North Carolina, the Aurora,
North Carolina and the Hamilton, North Carolina offices of Wachovia Bank of
North Carolina, N.A. These acquisitions were accounted for as purchases, and,
therefore, the results of operations prior to purchase of the financial
institutions are not included in the consolidated financial statements. The
acquisitions were as follows:
<TABLE>
<CAPTION>
Table 2
Branch Transactions Transaction Loans Deposits
(dollars in thousands) Date Acquired Acquired
___________ ________ ________
<S> <C> <C> <C>
Wachovia Bank of North Carolina, N.A. - Aulander, NC May 1997 $ 180 $5,117
Wachovia Bank of North Carolina, N. A. - Aurora, NC May 1997 852 11,838
Wachovia Bank of North Carolina, N. A. - Hamilton, NC May 1997 412 4,106
______ _______
1997 acquisition totals $1,444 $21,061
====== =======
In June 1996 BancShares acquired the Windsor, North Carolina office of
First-Citizens Bank & Trust Company and sold its Scotland Neck office to
Triangle Bank. In August 1996 BancShares acquired the Edenton, North Carolina
office of United Carolina Bank. These acquisitions were accounted for as
purchases, so the results of operations prior to the purchase of the financial
institutions are not included in the consolidated financial statements. The
1996 acquisitions and divestitures were as follows:
Branch Transactions Loans Deposits
(dollars in thousands) Transaction Acquired Acquired
Date (Sold) (Sold)
___________ ________ ________
First Citizens Bank & Trust - Windsor, NC June 1996 $ 83 $7,348
Triangle Bank - Scotland Neck, NC June 1996 (42) (4,037)
United Carolina Bank - Edenton, NC August 1996 5,304 6,085
______ ______
Net 1996 acquisition totals $5,345 $9,396
====== ======
</TABLE>
RESULTS OF OPERATIONS
Earnings
For 1997 net income of $6.6 million represented a 50 percent increase from
1996 net income of $4.4 million. Net income for 1995 was $3.9 million. The
increase in 1997 net income was principally the result of gains on the sale of
available-for-sale securities and a reduction in income taxes resulting from
the donation of available-for-sale securities. Excluding the impact of
securities gains and charitable contributions, income before income taxes
decreased by approximately $158 thousand between 1996 and 1997, principally due
to increased costs associated with expansion in existing and new markets.
The increase in 1996 net income was principally the result of increased
net interest income resulting from the 1996 full year impact of June 1995
acquisitions. Net income per average share of common stock increased to $51.77
in 1997, from $33.00 in 1996, due to increased earnings. Net income per average
share of common stock increased to $33.00 in 1996, from $28.90 in 1995 due to
increased earnings and a decrease in the average shares outstanding for 1996.
Net Interest Income
The greatest portion of BancShares' earnings is from net interest income,
which is the difference between interest income on interest earning assets and
interest paid on deposits and other interest bearing liabilities. The primary
factors affecting net interest income are changes in the volume and
yields/rates on earning assets and interest bearing liabilities, and the
ability to respond to changes in interest rates through asset/liability
management. In 1997 net interest income was $20.2 million as compared to $19.3
million in 1996, an increase of $0.9 million or 5 percent. In 1996 net interest
5
<PAGE>
income was $19.3 million as compared to $16.8 million in 1995, an increase of
$2.5 million or 15 percent. The 1997 increase was primarily attributable to
increased loan revenue from a 10 percent increase in average loan balances
outstanding from $310 million in 1996 to $340 million in 1997. The yields
received on average loans for 1997 decreased to 8.59 percent from 8.66 percent
for 1996. The rates paid on interest bearing liabilities decreased 1 basis
point during 1997 and the average interest bearing deposits increased 8 percent
between 1996 and 1997 resulting in an 8 percent increase in total interest
expense.
The 1996 increase was primarily attributable to increased loan revenue
from a 14 percent increase in average loan balances outstanding from $271
million in 1995 to $310 million in 1996. The yields received on average loans
for 1996 decreased to 8.66 percent from 9.00 percent for 1995. The rates paid
on interest bearing liabilities decreased 14 basis points during 1996 and the
average interest bearing deposits increased 12 percent between 1995 and 1996
resulting in a 9 percent increase in total interest expense.
Loans produced the largest component of interest income, amounting to
$29.2 million in 1997, $26.9 million in 1996 and $24.3 million in 1995. This
represented an increase in 1997 of 9 percent. For the year ended December 31,
1996, interest income on loans increased 10 percent. During 1997 average loans
outstanding increased $30 million or 10 percent. This average increase was
primarily due to loan growth in the existing branch network and the impact of
the 1997 branch acquisitions as set forth in Table 2. The 1996 increase in
interest income was primarily due to loan growth in the existing branch network
and the impact of the 1996 branch acquisitions discussed above. In 1997, the
average yield on loans decreased to 8.59 percent from 8.66 percent in 1996.
This decrease resulted from overall lower market interest rates during most of
1997. The 1995 average yield was 9.00 percent.
Earnings from investments and federal funds sold provided the balance of
interest income, contributing $9.8 million in 1997, $9.9 million in 1996, and
$8.6 million in 1995. In 1997, BancShares realized lower yields on investment
securities and federal funds sold and maintained larger average balances for
each period. In 1996, BancShares realized higher yields on investment
securities and federal funds sold and larger average balances. Average
investment securities and federal funds sold was $163 million in 1997, an
increase from $158 million in 1996. The 1997 average increase was principally
the result of the acquisitions made in May 1997.
Total 1997 interest expense for BancShares increased 8 percent after
increasing in 1996 by 9 percent. The principal component of BancShares'
interest expense, interest paid on deposits, totaled $18.2 million in 1997,
$16.9 million in 1996 and $15.4 million in 1995. BancShares' deposit base
increased 7 percent in 1997, primarily as a result of the 1997 acquisitions.
The cost of interest bearing deposits also increased in 1997 primarily as a
result of the 1997 acquisitions. The cost of interest bearing deposits
increased in 1996 principally as a result of deposit growth within the branch
network excluding the 1996 acquisitions. The average effective rates paid on
interest bearing liabilities were 4.23 percent, 4.24 percent, and 4.38 percent
in 1997, 1996, and 1995 respectively. During 1993, BancShares borrowed $5.5
million to purchase a savings bank. During 1997, BancShares utilized long term
borrowings to provide a $5.0 million injection of capital into its subsidiary
and to refinance the remaining balance of the 1993 borrowings. The 1993 debt
was being repaid at $100 thousand per month plus interest. These debts are to
be repaid at $450 thousand per quarter plus interest. Interest on these debts
was $295 thousand in 1997, $117 thousand in 1996 and $309 thousand in 1995. The
outstanding debt at December 31, 1997 was $4.8 million.
BancShares' interest rate spread was 3.60 percent, 3.75 percent and 3.63
percent on a tax equivalent basis in 1997, 1996 and 1995, respectively.
BancShares' ability to maintain a favorable spread between interest income and
interest expense is a major factor in generating earnings; therefore, it is
necessary to effectively manage earning assets and interest bearing
liabilities.
Noninterest Income
Noninterest income which consists primarily of securities gains, service
charges, commissions, fees and gains on sales of loans, increased $5.3 million
in 1997. Total noninterest income was $9.8 million in 1997, as compared to
$4.5 million in 1996 and $4.0 million in 1995. Total noninterest income for
1997 includes securities gains of $5.6 million related to the funding of a
charitable foundation by the contribution of available-for-sale equity
securities and the sale of available-for-sale securities. Service charges on
deposit accounts increased $254 thousand, or 9 percent, in 1997 to $2.9
million, from $2.7 million in 1996. This increase was primarily attributable
to the full year impact of the accounts subject to service charges acquired in
June and August 1996 and the May acquisitions of 1997. Service charges on
deposit accounts increased $317 thousand, or 14%, in 1996, from $2.3 million in
1995 to $2.7 million for 1996. This increase was primarily attributable to the
full year impact of the accounts subject to service charges acquired in June
1995 and the June and August acquisitions of 1996.
BancShares had an increase in 1997 in other service charges and fees of
$88 thousand. BancShares had an increase in 1996 in other service charges and
fees of $135 thousand.
During 1997, the remaining noninterest income decreased $0.1 million from
$0.6 million in 1996 to $0.5 million in 1997. This decrease was primarily
attributable to a gain of $213 thousand on the sale of a branch in 1996.
During 1996, the remaining noninterest income decreased $0.4 million from $1.0
million in 1995 to $0.6 million in 1996. This decrease was primarily
attributable to a favorable one time $410 thousand settlement of a law suit in
1995.
6
<PAGE>
Noninterest expense
Noninterest expense includes personnel, intangibles amortization, data
processing, occupancy, furniture and equipment, Federal Deposit Insurance
Corporation ("FDIC") assessments, printing, supplies, legal and professional
fees, postage and other miscellaneous operating expenses. Noninterest expense
was $23.1 million in 1997 compared to $18.2 million in 1996 and $15.7 million
in 1995. In 1997 BancShares recorded $4.1 million of charitable contributions
expense related to the funding of a charitable foundation. Control of
noninterest expense is an important aspect in managing net income. The 1995,
1996 and 1997 acquisitions should enhance the future operating results of
BancShares. However, for the following ten years, earnings will be reduced as
BancShares amortizes intangibles resulting from assets acquired.
The most significant element of BancShares' noninterest expense is
personnel costs. In 1997, salaries and benefits represented $8.8 million, or
38 percent, of total noninterest expense. The personnel costs of 1997 include
the impact of a full year of the costs related to the acquisitions made in June
and August 1996 and a partial year of costs for the acquisitions made in May
1997. In 1996, salaries and benefits represented $8.0 million, or 44 percent,
of total noninterest expense. The personnel costs of 1996 include the impact
of a full year of the costs related to the acquisitions made in June 1995 and a
partial year of costs for the acquisitions made in June and August, 1996. In
1995, salaries and benefits represented $6.9 million, or 44 percent, of total
noninterest expense. The personnel costs of 1995 included the impact of a full
year of the costs related to the acquisitions made in the last quarter of 1994
and the partial year costs for the acquisitions made in June, 1995.
The 1997 noninterest expense, other than personnel and charitable
contributions, was $10.2 million, an increase of $0.6 million, or 6 percent,
from $9.6 million in 1996. Occupancy expenses increased from $0.9 million in
1995 to $1.2 million in 1996 to $1.4 million in 1997. These increases of 33
percent and 17 percent, respectively, are principally the result of additional
expenditures incurred as a result of the 1995, 1996 and 1997 acquisitions, the
replacements of aging branch facilities and the 1997 opening of a second
location in Rocky Mount, North Carolina. Furniture and fixture expenses
increased from $1.1 million in 1995 to $1.3 million in 1996 and to $1.6 million
in 1997. These increases of 18 percent and 23 percent, respectively, reflect
the additional equipment expenses incurred as a result of the acquisitions in
1995, 1996 and 1997 and the opening of the second Rocky Mount branch in 1997.
Data processing costs represent charges by vendors that perform data
processing services for Southern. Southern has contracts with four such
companies. Data processing fees are primarily based upon per item or per
account charges. Data processing costs in 1997 were $1.6 million, an increase
of 14 percent, over 1996 data processing expenses of $1.4 million. This
increase was the result of the 1996 and 1997 acquisitions and volume increases
in the existing branch system. Data processing costs in 1996 were $1.4
million, an increase of 8 percent, over 1995 data processing expenses of $1.3
million. This increase was the result of the 1995 and 1996 acquisitions and
volume increases in the existing branch system.
Intangibles amortization in 1997 was $1.8 million, a 13 percent increase
over the 1996 intangibles amortization. Intangibles amortization in 1996 was
$1.6 million, a 14 percent increase over the 1995 intangibles amortization of
$1.4 million. The 1997 amortization included a full year's amortization for the
1996 acquisitions and partial year amortizations for the acquisitions made in
May 1997. The 1996 amortization included a full year's amortization for the
1995 acquisitions and partial year amortizations for the acquisitions made in
June and August 1996. The 1995 amortization included a full year's
amortization for the 1994 acquisitions and partial year amortizations for the
acquisitions made in June 1995.
Southern has deposits insured under both of the FDIC's insurance funds,
the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund
("SAIF"). In July 1995, the FDIC and other regulatory agencies proposed a plan
to recapitalize the SAIF, and Congress mandated a one-time assessment for all
SAIF insured deposits on September 30, 1996. Congress required that 80% of
Southern's SAIF insured deposits as reported on Southern's March 31, 1995 call
report and 100% of SAIF insured deposits purchased by Southern after March 31,
1995 be assessed at .657 percent. On September 30, 1996 Southern had
approximately $87 million of SAIF-insured deposits based on the above formula
and recorded a $569 thousand charge to earnings on September 30, 1996 as a
one-time FDIC SAIF insurance expense. The decrease in 1997 and the increase in
1996 FDIC assessment expenses of $660 thousand and $121 thousand, respectively,
for FDIC premiums, resulted primarily from the 1996 one-time assessment
discussed above and the 1995 reduction in deposit premiums for Bank deposits
for all Banks combined with the full year assessment for the deposit growth
from the 1995 and 1996 acquisitions respectively and the partial year
assessment for the 1997 acquisitions.
BancShares expects that under current FDIC assessment guidelines that it
will not incur any FDIC deposit insurance assessments for 1998. However,
beginning in 1997 the FDIC began collecting from all banks an assessment for
Financing Corporation ("FICO") funding requirements. Accordingly, BancShares
expects a 1998 FDIC FICO assessment expense of approximately $112 thousand,
based on the FDIC FICO assessment rates in effect for the first quarter of
1998.
Charitable contributions increased $3.5 million, to $4.1 million in 1997
from $0.6 million in 1996 after increasing $0.4 million from $0.2 million in
1995. Charitable contributions expense for 1997 includes $4.1 million related
to the additional funding of a charitable foundation through the contribution
of available-for-sale securities. Charitable contributions expense for 1996
includes $0.5 million related to the contribution of available-for-sale
securities to a charitable foundation.
7
<PAGE>
Other miscellaneous noninterest operating expenses were $3.7 million, $3.3
million and $3.2 million for 1997, 1996 and 1995 respectively. Included in
other miscellaneous noninterest operating expenses were losses resulting from
the abandonment/replacement of premises and equipment for aging branch
facilities of $0.3 million, $0.1 million and $0.3 million for 1997, 1996, and
1995 respectively.
In 1997, 1996, and 1995, BancShares had taxable income for book purposes
that resulted in income tax expense of $0.3 million, $1.1 million and $1.3
million respectively. Decreases in these expenses are primarily the result of
an increase in tax-exempt income for 1996 and 1995. The 1997 decrease is
principally a result of the 1997 contribution of available-for-sale securities
to the charitable foundation discussed above.
FINANCIAL CONDITION
Earning and Nonearning Assets
Earning assets consist of loans, investment securities, and short-term
investments that earn interest. Average earning assets during 1997 were $508
million, an increase of 8 percent from the 1996 average of $470 million. This
increase was due primarily to growth within the existing branch system. The
1997 full year average impact of the June and August 1996 acquisitions and the
partial year impact of the May 1997 acquisitions increased average earning
assets to a much lesser extent. The cash received in the acquisitions was
ultimately invested primarily in loans and short-term investments.
Average earning assets during 1996 were $470 million, an increase of 13
percent from the 1995 average of $416 million. This increase was due primarily
to the 1996 full year average impact of the June 1995 acquisitions and the
partial year impact of the June 1996 and August 1996 acquisitions. The cash
received in the acquisitions was ultimately invested primarily in loans and
short-term investments including federal funds.
Average non-interest earning assets during 1997 were $59 million, an
increase of 18 percent from the 1996 average of $50 million. This increase was
due primarily to the 1997 full year average impact of the June and August 1996
acquisitions and the partial year impact of the May 1997 acquisitions. Average
non-interest earning assets during 1996 were $50 million, an increase of 22
percent from the 1995 average of $41 million. The principal nonearning asset
for BancShares is cash and due from banks. Cash and due from banks averaged $18
million in 1997, $16 million in 1996 and $15 million in 1995.
Return on total average assets was 1.17 percent in 1997 as compared to
0.84 percent in 1996 and 0.86 percent in 1995. The increase in 1997 was
principally the result of gains on the sale of available-for-sale securities.
The decrease in 1996 was principally the result of increased average assets.
Interest Bearing and Noninterest Bearing Liabilities
Interest bearing liabilities consists of deposits, short term borrowed
funds and long-term notes payable. Average interest bearing liabilities during
1997 were $445 million, an increase of 8 percent from the 1996 average of $412
million. This increase was due primarily to the 1997 full year impact of the
June and August 1996 acquisitions and the partial year 1997 impact of the May
1997 acquisitions. The principal interest bearing liabilities of BancShares
are interest bearing deposits. Average noninterest bearing liabilities during
1997 were $76 million, an increase of 13 percent from the 1996 average of $67
million. This increase was also due primarily to the 1997 full year impact of
the June and August 1996 acquisitions and the partial year 1997 impact of the
May 1997 acquisitions. Noninterest bearing demand deposits are the principal
noninterest bearing liability. The cost of total interest bearing liabilities
was 4.23 percent in 1997 as compared to 4.24 percent in 1996. The decrease in
1997 was principally the result of a generally lower deposit interest rate
market in 1997.
Average interest bearing liabilities during 1996 were $412 million, an
increase of 12 percent from the 1995 average of $367 million. This increase
was due primarily to the 1996 full year impact of the June 1995 acquisitions
and the partial year 1996 impact of the June and August 1996 acquisitions.
Average noninterest bearing liabilities during 1996 were $67 million, an
increase of 22 percent from the 1995 average of $55 million. Noninterest
bearing demand deposits are the principal noninterest bearing liability. This
increase was also due primarily to the 1996 full year impact of the June 1995
acquisitions and the partial year 1996 impact of the June and August 1996
acquisitions. The cost of total interest bearing liabilities was 4.24 percent
in 1996 as compared to 4.38 percent in 1995. The decrease in 1996 was
principally the result of a generally lower deposit interest rate market in
1996.
Loans
As of December 31, 1997, loans, net of allowance for loan losses, totaled
$343 million compared to $312 million at year-end 1996. A portion of the
growth was related to the current year acquisitions, as discussed above. The
loan portfolio grew $1.4 million through these acquisitions. The remaining
increase was attributed to normal loan growth, particularly the real estate
mortgage and commercial loan portfolios. Both portfolios grew approximately
$13 million. There were no significant loan promotions in the current year nor
were there any significant changes made to underwriting standards.
8
<PAGE>
Rate sensitivity and liquidity in the loan portfolio are achieved by
making loans with adjustable interest rates and shorter maturities. This
allows Southern to adjust its pricing structure with changes in interest rates.
At the end of 1997, 56 percent of the loan portfolio was due to mature or be
available for repricing of interest rates during 1998.
Investments
Management's asset/liability strategies include maintaining an investment
securities portfolio with appropriate maturities to preclude the necessity of
selling investment securities for purposes of liquidity.
Traditionally, BancShares has maintained a larger investment portfolio
than its peers. BancShares traditionally has carried unrealized gains on
investments significantly greater than the average of its peers in North
Carolina primarily due to its investments in marketable equity securities. At
the end of 1997 and 1996, BancShares' subsidiary, Southern, had one of the
highest ratios of Market Value to Book Value for its investment securities in
the state of North Carolina.
BancShares accounts for investment securities under the provisions of
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities," which
requires that investments in debt and equity securities be classified in three
categories and accounted for as follows: debt securities that BancShares has
the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; debt and equity securities
that are bought and held principally for the purpose of selling them in the
near term are classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings; debt and equity securities
not classified as either held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. Securities available-for-sale consist of
certain debt and marketable equity securities not classified as trading
securities nor as securities held-to-maturity, and consist of securities which
may be sold in response to changes in interest rates, prepayment risk,
regulatory capital requirements and liquidity needs.
At December 31, 1997 the fair value of available-for-sale securities
exceeded the carrying value by $22.9 million, deferred taxes related to these
available-for-sale securities were $7.8 million and shareholders' equity
included $15.1 million for the net unrealized gain related to these
available-for-sale securities. At December 31, 1996 the fair value of
available-for-sale securities exceeded the carrying value by $16.5 million,
deferred taxes related to these available-for-sale securities were $5.6 million
and shareholders' equity included $10.9 million for the net unrealized gain
related to these available-for-sale securities. BancShares does not maintain a
trading account.
On December 17, 1996, the board of directors of Southern Bank and Trust
Company approved the contribution of 7,500 shares of marketable equity
securities to the Southern Bank Foundation. These investments had an average
cost basis of $78 thousand and, on December 17, 1996, a fair value of $536
thousand. Southern recorded a securities gain of $458 thousand and a charitable
contribution expense of $536 thousand related to this transaction.
On February 14, 1997, the board of directors of Southern Bank and Trust
Company approved the contribution of 48,250 shares of marketable equity
securities to the Southern Bank Foundation. These investments had an average
cost basis of $542 thousand and, on February 5, 1997, a fair value of $4,071
thousand. Southern recorded a 1997 securities gain of $3,529 thousand and
charitable contribution expense of $4,071 thousand related to this transaction.
ASSET QUALITY
Provision and allowance for loan losses
Because the loan portfolio represents BancShares' largest earning asset,
BancShares continually monitors the quality of its loan portfolio. Southern
operates in an area dominated by agriculture and, accordingly, many loans are
made to commercial enterprises or to consumers who are directly or indirectly
supported by the region's agricultural economy. In 1997, BancShares
charged-off loans net of recoveries of $252 thousand. This represents a
decrease of $46 thousand from 1996 net charge-offs of $298 thousand. This
decrease is primarily the result of decreased gross charge-offs in 1997.
Recoveries of loans previously charged off also decreased in 1997. The
percentage of charge-offs (net of recoveries) to average outstanding loans was
0.07 percent in 1997, 0.10 percent in 1996 and 0.12 percent in 1995.
The ratio of total non-performing loans to total loans increased from 0.16
percent at December 31, 1996 to 0.20 percent at December 31,1997, principally
due to increases in non-performing loans (nonaccrual, restructured, and
accruing loans greater than 90 days past due) to $696 thousand at December 31,
1997, compared to $498 thousand at December 31, 1996. The ratio of
non-performing loans and assets to total assets increased to 0.13 percent at
December 31, 1997 from 0.09 percent a year before. This increase was primarily
the result of increased non-performing loans. At December 31, 1997 BancShares
had $48 thousand of assets classified as other real estate. At December 31,
1996 BancShares had no assets classified as other real estate.
Accrual of interest is discontinued on a loan when management believes the
borrower's financial condition is such that collection of principal or interest
is doubtful. Loans are returned to the accrual status when the factors
indicating doubtful collectibility cease to exist.
9
<PAGE>
Management considers a loan to be impaired when based on current
information or events, it is probable that a borrower will be unable to pay all
amounts due according to contractual terms of the loan agreement. Impaired
loans are valued using either the discounted expected cash flow method or the
value of the collateral. When the ultimate collectibility of the impaired
loan's principal is doubtful, all cash receipts are applied to principal. Once
the recorded principal balance has been reduced to zero, future cash receipts
are applied to interest income, to the extent that any interest has been
foregone. Future cash receipts are recorded as recoveries of any amounts
previously charged-off.
At December 31, 1997 and 1996, Southern had nonaccrual loans of $230
thousand and $147 thousand, respectively. At December 31, 1997 and 1996,
Southern had restructured loans of $0 and $8 thousand, respectively. At
December 31, 1997 and 1996, Southern had accruing loans past due 90 days or
more totaling $466 thousand and $343 thousand, respectively. The amounts of
foregone interest on nonaccrual and restructured loans for the years ended
December 31, 1997, 1996 and 1995 were not material for the periods presented.
At December 31, 1997 and 1996, Southern's impaired loans, as determined under
Statement 114, were less than the nonaccrual and restructured loan amounts
presented above.
There are certain loans classified for regulatory purposes as substandard
or special mention that have not been disclosed in the nonperforming asset
amounts above. Such loans do not represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources. Such classified loans also
do not represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
The allowance for loan losses represented 858 percent of non-performing
loans at December 31, 1997. This was a decrease of 380 basis points from the
1,238 percent ratio at December 31, 1996. The allowance for loan losses
represented 1.71 percent and 1.94 percent of loans outstanding at year end 1997
and 1996, respectively. Southern's provision for loan losses charged against
earnings was $60 thousand in 1997, $140 thousand in 1996 and $0 in 1995.
Management considers the December 31, 1997 allowance for loan losses
adequate to cover the losses inherent in the loan portfolio. Management's
periodic evaluation of the adequacy of the allowance is based on Southern's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's experience, the estimated value of
any underlying collateral, current economic conditions and other risk factors.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
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.
LIQUIDITY, MARKET RISK AND INTEREST SENSITIVITY
Liquidity
Liquidity refers to the ability of BancShares to generate sufficient funds
to meet its financial obligations and commitments at a reasonable cost. One of
BancShares' objectives is to maintain a high level of liquidity, and this goal
continues to be met. Maintaining liquidity ensures that funds will be
available for reserve requirements, customer demand for loans, withdrawal of
deposit balances and maturities of other deposits and liabilities. These
events may take place daily or at other intervals in the normal operation of
the business. Past experiences helps management anticipate cyclical demands
and amounts of cash required. These obligations can be met by existing cash
reserves or funds from maturing loans and investments, but in the normal course
of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including:
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include available-for-sale investment
securities, federal funds sold, and cash and due from banks. These assets
represented 32 percent of total deposits at December 31, 1997, an increase from
29 percent at December 31, 1996.
Southern's liquidity ratio, which is defined as net cash plus short term
and marketable securities divided by net deposits and short term liabilities,
was 34 percent at December 31, 1997, compared to 27 percent and 39 percent at
year-end 1996 and 1995 respectively.
BancShares has traditionally maintained a high level of liquidity,
characteristic of the high ratio of investment securities to total assets
and/or total deposits that BancShares maintains. Although loans increased with
the 1996 and 1997 acquisitions, BancShares' ability to manage its liquidity was
enhanced with the addition of a mortgage loan department acquired in 1993.
With this acquisition, BancShares has the ability to sell mortgage loans held
for sale, if needed, for liquidity or other asset/liability management
requirements.
Any maturing investments whose funds are not immediately necessary to
sustain BancShares' liquidity, will be invested in similar instruments or used
to fund any increased loan demand. Investments scheduled to mature within the
one year time frame represented 50 percent, 49 percent and 41 percent of the
total investment securities portfolio at December 31, 1997, 1996 and 1995,
respectively.
10
<PAGE>
Included in investments maturing within one year are investments in
marketable equity securities held by BancShares with fair values of $30
million, $25 million and $17 million in 1997, 1996 and 1995, respectively.
Although these investments do not "mature" in the next twelve months, they are
available-for-sale and could be sold at management's discretion.
Since the volume of investments actually maturing during 1998 is
comparable to the volumes that matured during 1997 and 1996, the effect on net
interest margin and operating results for 1998 should also be similar to
effects realized in 1997 and 1996.
The consolidated statements of cash flows disclose the principal sources
and uses of cash from operating, investing and financing activities for 1997,
1996, and 1995. In 1997, operating activities of BancShares provided cash
flows of $9.8 million. Net income of $6.6 million, adjusted for non-cash
operating activities, provided the majority of cash generated from operations.
Decreases in other assets of $1.8 million and decreases in other liabilities of
$1.3 million, increased and decreased, respectively, the contribution of net
income to BancShares' cash flow. Investing activities, including lending,
utilized $19.8 million of BancShares' cash flow. Loans originated, net of
principal collected, used $30.4 million. BancShares received $18.0 million in
cash in connection with the branches purchased from another financial
institution in 1997.
Net additional cash inflows of $16.2 million resulted from financing
activities. Net deposit inflows of $11.7 million were improved by an increase
in short term borrowed funds of $1.8 million and by an increase of $3.4 million
in long term obligations and reduced by payments for cash dividends and
retirements of stock totaling $0.6 million.
In 1996, operating activities of BancShares provided cash flows of $7.4
million. Net income of $4.4 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Decreases
in other assets of $1.7 million and increases in other liabilities of $2.3
million, increased the contribution of net income to BancShares' cash flow.
Investing activities, including lending, utilized $41.8 million of BancShares'
cash flow. Loans originated, net of principal collected, used $24.7 million.
BancShares received $3.4 million in cash in connection with the branches
purchased from other financial institutions in 1996. Net additional cash
inflows of $24.0 million resulted from financing activities. Net deposit
inflows of $22.2 million were improved by an increase in short term borrowed
funds of $3.6 million and reduced by the $1.2 million repayment oflong term
obligations, payments for cash dividends and retirements of stock totaling $599
thousand.
In 1995, operating activities of BancShares provided cash flows of $9.6
million. Net income of $3.9 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Increases
in other assets of $114 thousand and increases in other liabilities of $2.2
million, increased the contribution of net income to BancShares' cash flow.
Investing activities, including lending, utilized $12.0 million of BancShares'
cash flow. Loans originated, net of principal collected, used $33.1 million.
BancShares received $46.1 million in cash in connection with the branches
purchased from other financial institutions in 1995. In 1995, net additional
cash outflows of $28.1 million resulted from financing activities. Net deposit
inflows of $30.6 million were reduced by the $1.2 million repayment of long
term obligations, a decrease in short term borrowed funds of $497 thousand and
payments for cash dividends and retirements of stock totaling $784 thousand.
Southern has no brokered deposits. Jumbo certificates of deposit ("CD's")
are considered to include all CD's of $100 thousand or more. Southern does not
and has never aggressively bid on these deposits. Southern does not seek nor
does it accept deposits from outside of its general trade area. Almost all of
Southern's Jumbo CD customers have other relationships with Southern, including
savings, demand and other time deposits, and in some cases, loans. At December
31, 1997 and 1996, Jumbo CD's represented 10.3 percent and 9.0 percent,
respectively, of total deposits.
In the opinion of management, BancShares has the ability to generate
sufficient amounts of cash to cover normal requirements and any additional
needs which may arise, within realistic limitations, and management is not
aware of any known demands, commitments or uncertainties that will affect
liquidity in a material way.
Market Risk
Market risk reflects the risk of economic loss resulting from adverse
changes in market price and interest rates. This risk of loss can be reflected
in either diminished current market values or reduced potential net interest
income in future periods.
BancShares' market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. The structure of BancShares'
loan and deposit portfolios is such that a significant decline in the prime
rate may adversely impact net market values and net interest income.
Management seeks to manage this risk through the use of shorter term
maturities. The composition and size of the investment portfolio is managed so
as to reduce the interest rate risk in the deposit and loan portfolios while at
the same time maximizing the yield generated from the portfolio.
The table below presents in tabular form the contractual balances and the
estimated fair value of financial instruments at their expected maturity dates
as of December 31, 1997. The expected maturity categories take into
consideration historical prepayment experience as well as management's
expectations based on the interest rate environment as of December 31, 1997.
For core deposits without contractual maturity (i.e.,interest bearing checking,
savings and money market accounts), the table presents principal cash flows as
maturing in 1998 since they are subject to immediate repricing. Weighted
average variable rates are based on the implied forward rates in the yield
curve as of December 31, 1997.
11
<PAGE>
<TABLE>
<CAPTION>
Maturing in Years ended December 31
-------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total Fair Value
Assets _______ _______ _______ _______ _______ ________ _________ __________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
Fixed Rate $49,436 $40,406 $29,803 $26,304 $33,081 $32,215 $211,245 $210,268
Average rate (%) 8.37% 8.96% 8.04% 8.28% 7.56% 7.90% 8.23%
Variable rate 55,149 20,429 7,890 8,143 7,375 40,551 139,537 139,537
Average rate (%) 9.06% 9.94% 8.99% 8.89% 8.73% 9.21% 9.20%
Investment securities
Fixed rate 82,487 73,358 1,196 1,021 1,063 15,951 175,076 176,089
Average rate (%) 5.64% 5.96% 8.35% 8.58% 8.37% 8.21% 6.10%
Variable rate - 1,400 - - - 3,657 5,057 5,057
Average rate (%) - 9.34% - - - 9.34% 9.34%
Liabilities
Savings and interest
bearing checking
Fixed rate 167,843 - - - - - 167,843 167,843
Average rate (%) 2.13% - - - - - 2.13%
Certificates of deposit
Fixed rate 223,080 32,214 15,708 338 - - 271,340 272,107
Average rate (%) 5.33% 5.72% 5.90% 5.90% - - 5.41%
Variable rate 5,088 2,492 - - - - 7,580 7,580
Average rate (%) 4.77% 4.85% - - - - 4.83%
Long-term debt
Variable rate 1,800 1,800 1,150 - - - 4,750 4,750
Average rate (%) 6.71% 6.71% 6.71% - - - 6.71%
</TABLE>
Interest Sensitivity
Deregulation of interest rates and short-term, interest bearing deposits
which are more volatile, have created a need for shorter maturities of earning
assets. As a result, an increasing percentage of commercial, installment and
mortgage loans are being made with variable rates or shorter maturities to
increase liquidity and interest rate sensitivity.
The difference between interest sensitive asset and interest sensitive
liability repricing within time periods is referred to as the interest rate
sensitivity gap. Gaps are identified as either positive (interest sensitive
assets in excess of interest sensitive liabilities) or negative (interest
sensitive liabilities in excess of interest sensitive assets).
As of December 31, 1997, BancShares had a negative one year cumulative gap
position of 19%. BancShares has interest earning assets of $298 million
maturing or repricing within one year and interest bearing liabilities of $408
million repricing or maturing within one year. This is primarily the result of
stable core deposits being used to fund longer term interest earning assets,
such as loans and investment securities. A negative gap position implies that
interest bearing liabilities (deposits) will reprice at a faster rate than
interest earning assets (loans and investments). In a falling rate
environment, this position will generally have a positive effect on earnings,
while in a rising rate environment this position will generally have a negative
effect on earnings.
BancShares' savings and core time deposits of $394 million include
interest bearing checking accounts of $67 million. These deposits are
considered as repricing in the earliest period because the rate can be changed
weekly. However, history has shown that the decreases in the interest rates
paid on these deposits have little, if any, effect on their movement out of
Southern. Therefore, in reality, they are not sensitive to changes in market
rates and could be considered in the Non-Rate Sensitive column. If this change
were made, BancShares' rate sensitive assets and rate sensitive liabilities
would be more closely matched at the end of the one year period.
12
<PAGE>
Inflation
The effect of inflation on financial institutions differs from the impact
on other types of businesses. Since assets and liabilities of banks are
primarily monetary in nature, they are more affected by changes in interest
rates than by the rate of inflation.
Inflation generates increased credit demand and fluctuation in interest
rates. Although credit demand and interest rates are not directly tied to
inflation, each can significantly impact net interest income. As in any
business or industry, expenses such as salaries, equipment, occupancy, and
other operating expenses are also subject to the upward pressures created by
inflation.
Since the rate of inflation has been relatively stable during the last
several years, the impact of inflation on the earnings presented in this report
is insignificant.
CAPITAL RESOURCES
Shareholders' Equity and Capital Adequacy
Sufficient levels of capital are necessary to sustain growth and absorb
losses. To this end, the Federal Reserve Board ("FRB"), which regulates
BancShares, and the FDIC, which regulates Southern, has established capital
adequacy guidelines. These guidelines relate to a company's Leverage Capital,
and Tier 1 and Total Risk Based Capital ("RBC"). In 1997, BancShares
experienced an increase in all of its regulatory capital ratios.
For BancShares, Leverage Capital consists of total equity less intangible
assets. When Leverage Capital is divided by the average total consolidated
assets of the previous quarter, the Leverage Ratio is the result. As of
December 31, 1997, BancShares' Leverage Ratio was 6.07 percent, up from 5.46
percent and 5.60 percent, respectively, at year end 1996 and 1995. For
regulatory purposes, a 5.00 percent Tier 1 Leverage Ratio represents a well
capitalized financial institution.
Within the RBC calculations, BancShares' assets, including commitments to
lend and other off-balance sheet items, are weighted according to Federal
regulatory guidelines for the risk considered inherent in the assets.
BancShares' Tier 1 RBC ratio as of December 31, 1997 was 11.43 percent which
is, along with a ratio of 9.33 percent and 8.87 percent for 1996 and 1995,
respectively, representative of a well-capitalized institution. The
calculation of the Total RBC ratio allows, in BancShares' circumstances, the
inclusion of BancShares' allowance for loan losses in capital, but only to a
maximum of 1.25 percent of risk weighted assets. As of December 31, 1997
BancShares' Total RBC ratio was 12.78 percent, which is representative of a
well-capitalized institution. The Total RBC ratio for 1996 and 1995 were 10.66
percent and 10.19 percent, respectively, both of which were also representative
of a well capitalized financial institution.
These ratios will only improve if BancShares' capital increases at a rate
proportionately faster than liabilities. Management is aware that growth must
be controlled. The projected 1998 acquisition of the branch office discussed
below may appear to be contrary to this policy but management is also aware
that the process of expanding market share by normal business development
processes can be very difficult and expensive. Management believes that
improvement in its overall market share within an existing trade area is
valuable in the long run and should be pursued by BancShares, when it can be
done prudently.
BancShares' primary source of new capital is earnings. In 1997, equity
capital increased through retention of earnings by $6.0 million, by $3.8
million in 1996 and by $3.4 million in 1995. BancShares' internal capital
generation rate was 13.19 percent in 1997, 9.39 percent in 1996, and 9.76
percent in 1995. As of December 31, 1997, shareholders' equity totaled $55
million compared to $45 million in 1996. The shareholders' equity for 1997 and
1996 included, as discussed above, $15 million and $11 million, respectively,
of net unrealized securities gains as a result of BancShares' adoption of SFAS
115.
The ratio of average shareholders' equity to average total assets was 8.06
percent in 1997 and 7.74 percent in 1996. The 1997 increase was primarily the
result of the substantial increase in unrealized gain on available-for-sale
securities.
Retention of sufficient earnings to maintain an adequate capital position
that provides BancShares with expansion capabilities is an important factor in
determining dividends. During 1997, BancShares paid $585 thousand in
dividends, versus $587 thousand in 1996 and $531 thousand in 1995. As a
percentage of net income, dividends were 8.85 percent in 1997, 13.45 percent in
1996 and 13.57 percent in 1995. The 1997 percentage decrease was principally
the result of increased earnings resulting from the sale of available-for-sale
securities.
Economy of Eastern North Carolina
BancShares is headquartered and operates primarily in rural eastern North
Carolina. Economic information from state and national sources indicates that
the seventeen counties served by Southern lag the median figures of North
Carolina in the areas of per capita income, family income, and population
growth rates. Between 1980 and 1990, Southern's market counties experienced a
negative net migration of the population. Only in the area of unemployment is
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<PAGE>
Southern's market area in slightly better shape than the rest of eastern North
Carolina, but this may be related to the negative growth during the same period
and the agricultural nature of the area.
On a positive note, the most recent annual economic projections for North
Carolina prepared and published by North Carolina State University, indicate an
improving economy in most of the regions of the state served by Southern. The
analysis includes data covering retail sales, construction and employment.
From the ratios and other information discussed above, the management of
BancShares recognizes that future growth in BancShares will likely not come
from people moving into the markets served by BancShares. Southern must win
customers from other institutions or purchase customers in existing markets, as
it did in 1995, 1996 and 1997, or expand into new markets as it did in 1995,
1996 and 1997.
BancShares does anticipate some offices of other institutions becoming
available in the near future, and presently plans one acquisition, a $21
million deposit branch in Enfield, North Carolina. This acquisition is
projected to be completed in the second quarter of 1998.
Agriculture
The tobacco industry contributes significantly to the economy of eastern
North Carolina and especially in the seventeen eastern North Carolina counties
where Southern operates. Management remains aware of the on-going pressure
placed on the tobacco industry.
For several decades tobacco has come under increasing criticism for
potential health risks. Because of the these criticisms, many businesses and
municipalities have instituted "Smoke Free" policies, increasing the
possibility of reduced tobacco production, sales and usage. Recent lawsuits by
certain states, have targeted the tobacco industry with responsibility for the
costs of ongoing medical treatment for smoking-related illnesses of citizens of
those states. Should the courts find in favor of the states, the tobacco
farmers in our market area could ultimately be affected.
ACCOUNTING AND OTHER MATTERS
In June 1997, the FASB issued SFAS No. 130,"Reporting Comprehensive
Income" ("Statement 130"). Statement 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. It does not address issues of
recognition or measurement for comprehensive income and its components. The
provisions of Statement 130 are effective for fiscal years beginning after
December 15, 1997. BancShares plans to adopt this statement in fiscal 1998 and
will make the necessary disclosures of comprehensive income for periods
beginning in 1998.
In June 1997, the FASB issued SFAS No. 131,"Disclosures about Segments of
an Enterprise and Related Information" ("Statement 131"). Statement 131
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate and their major customers. The provisions of Statement 131 are
effective for fiscal years beginning after December 15, 1997. Adoption of this
pronouncement is not expected to have a material effect on BancShares'
consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement standardizes
the disclosure requirements of pensions and other postretirement benefits.
This statement does not change any measurement or recognition provisions, and
thus will no t materially impact BancShares. This statement is effective for
fiscal years beginning after December 15, 1997.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect
of the proposed statements on the consolidated financial statements of
BancShares and monitors the status of changes to issued exposure drafts and to
proposed effective dates.
In 1997 BancShares developed a plan to deal with the "Year 2000 issue" and
contracted with an industry consultant to review its overall exposure to the
year 2000 issue. The year 2000 issue relates to computer programs written
using two digits rather than four to define the applicable year. In 1997
management reviewed the results of the consultant's analysis of BancShares'
data processing year 2000 exposure and committed the human resources and the
financial resources for BancShares to complete its resolution of the year 2000
issue in 1998. The total cost of the year 2000 conversion project for
BancShares is estimated to be $200 thousand and is being funded through
operating cash flows. BancShares is expensing all costs associated with the
required systems changes as the costs are incurred. As of December 31, 1997,
$3 thousand had been expensed. As discussed in note 15 to the consolidated
financial statements, 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,
14
<PAGE>
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.
Management is not aware of any other known trends, events, uncertainties,
or current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on BancShares' liquidity, capital
resources or other operations.
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is no active trading market for BancShares' common or preferred
stock although isolated transactions occur from time to time. Prices for
BancShares' common and preferred stock listed in the Selected Quarterly Data
table are based on management's knowledge of the most recent sales prices for
specific transactions of each security.
The approximate number of record holders of BancShares' outstanding common
stock at December 31, 1997 was 339. Dividends paid to shareholders of
BancShares are dependent upon dividends received by BancShares from Southern.
Southern is restricted as to dividend payout by state laws applicable to banks
and may pay dividends only out of undivided profits. Should at any time its
surplus be less than 50 percent of its paid-in capital stock, Southern may not
declare a dividend until it has transferred from undivided profits to surplus
25 percent of its undivided profits or any lesser percentage that may be
required to restore its surplus to an amount equal to 50 percent of its
paid-in capital stock.
Additionally, dividends paid by Southern may be limited by the need to
retain sufficient earnings to satisfy minimum capital requirements imposed by
the Federal Deposit Insurance Corporation. Dividends on BancShares' common
stock may be paid only after dividends on preferred Series "B" and "C" shares
have been paid. Common share dividends are based upon BancShares'
profitability and are paid at the discretion of the Board of Directors.
Management does not expect any of the foregoing restrictions to materially
limit its ability to pay dividends comparable to those paid in the past.
Common shareholders are entitled to one vote per share and both classes of
preferred stockholders are entitled to one vote for each 38 shares owned of a
class.
FORWARD LOOKING STATEMENTS
The foregoing discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations
or beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
" estimate," "plan," "project," or other statements concerning opinions or
judgment of BancShares and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but
are not limited to, the financial success or changing strategies of BancShares'
customers, actions of government regulators, the level of market interest
rates, and general economic conditions.
15
<PAGE>
<TABLE>
<CAPTION>
Selected Quarterly Data_________________________________________________
1997 1996
______________________________________________________________
Fourth Third Second First Fourth Third Second First
______ ______ ______ ______ ______ ______ ______ ______
(thousands except per share data and ratios)
SUMMARY OF OPERATIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $10,100 $9,989 $9,711 $9,255 $9,469 $9,321 $9,102 $8,884
Interest expense 4,881 4,845 4,738 4,363 4,313 4,345 4,344 4,448
______ _____ _____ _____ _____ _____ _____ _____
Net interest income 5,219 5,144 4,973 4,892 5,156 4,976 4,758 4,436
Provision for loan losses - - - 60 60 60 20 -
______ _____ _____ _____ _____ _____ _____ _____
Net interest income after
provision for loan losses 5,219 5,144 4,973 4,832 5,096 4,916 4,738 4,436
Noninterest income 3,234 1,166 979 4,470 1,426 1,018 1,013 1,051
Noninterest expense 5,046 4,874 4,679 8,465 4,813 5,068 4,222 4,100
______ _____ _____ _____ _____ _____ _____ _____
Income before income taxes 3,407 1,436 1,273 837 1,709 866 1,529 1,387
Income taxes 100 30 130 80 36 221 415 455
______ _____ _____ _____ _____ _____ _____ _____
Net income $3,307 $1,406 $1,143 $ 757 $1,673 $ 645 $1,114 $ 932
====== ====== ====== ====== ====== ====== ====== ======
Net income applicable to
common shares $3,203 $1,303 $1,045 $ 657 $1,569 $ 541 $1,015 $ 832
====== ====== ====== ====== ====== ====== ====== ======
PER SHARE OF STOCK
Net income per common share 26.71 10.87 8.71 5.48 13.09 4.51 8.46 6.94
Cash dividends - common 0.38 0.38 0.37 0.37 0.38 0.37 0.375 0.375
Cash dividends - preferred B 0.23 0.23 0.22 0.22 0.23 0.23 0.22 0.22
Cash dividends - preferred C 0.23 0.23 0.22 0.22 0.23 0.23 0.22 0.22
Common sales price
High 175.00 175.00 175.00 175.00 175.00 175.00 175.00 110.00
Low 175.00 175.00 175.00 175.00 175.00 175.00 110.00 110.00
Preferred B sales price
High 11.25 11.25 11.25 11.25 11.25 11.25 10.80 10.00
Low 11.25 11.25 11.25 11.25 11.25 10.80 10.00 10.00
Preferred C sales price
High 11.25 11.25 11.25 11.25 11.25 11.25 10.80 10.00
Low 11.25 11.25 11.25 11.25 11.25 10.80 10.00 10.00
16
</TABLE>
<PAGE>
Independent Auditors'
Report_____________________________________________
The Board of Directors and Shareholders
Southern BancShares (N.C.), Inc.:
We have audited the accompanying consolidated balance sheets of Southern
BancShares (N.C.), Inc. and subsidiary (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of income, cash flows and
changes in shareholders' equity for each of the years in the three-year period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
BancShares (N.C.), Inc. and subsidiary as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
February 20, 1998
17
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Consolidated Balance Sheets____________________________________________________
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
December 31
___________________
1997 1996
ASSETS _______ _______
<S> <C> <C>
Cash and due from banks $28,381 $21,445
Federal funds sold 10,240 11,020
Investment securities:
Held-to-maturity, at amortized cost (fair
value $57,294 and $64,559, respectively) 56,281 63,676
Available-for-sale, at fair value
(amortized cost $100,978 and $88,504, respectively) 123,852 105,013
Loans, net of unearned income 349,353 317,755
Less allowance for loan losses (5,971) (6,163)
_______ _______
Net loans 343,382 311,592
Premises and equipment 18,157 15,439
Accrued interest receivable 4,205 3,999
Intangible assets 5,506 5,991
Other assets 748 2,583
_______ _______
Total assets $590,752 $540,758
======= =======
LIABILITIES
Deposits:
Noninterest-bearing $ 66,565 $ 64,089
Interest-bearing 446,763 416,477
_______ _______
Total deposits 513,328 480,566
Short-term borrowings 6,826 5,064
Long-term obligations 4,750 1,400
Accrued interest payable 4,394 3,204
Other liabilities 6,470 5,746
_______ _______
Total liabilities 535,768 495,980
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock,
no par value; 408,728 shares authorized;
404,946 and 407,752 shares issued and
outstanding at December 31, 1997 and 1996,
respectively 1,976 1,986
Series C non-cumulative preferred stock,
no par value; 43,631 shares authorized;
43,631 shares issued and outstanding at
December 31,1997 and 1996 578 578
Common stock, $5 par value; 158,485 shares
authorized; 119,918 shares issued and
outstanding at December 31, 1997 and 1996 600 600
Surplus 10,000 10,000
Retained earnings 26,733 20,718
Unrealized gain on securities available-for-sale,
net of tax 15,097 10,896
______ ______
Total shareholders' equity 54,984 44,778
_______ _______
Total liabilities and shareholders' equity $590,752 $540,758
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Consolidated Statements of Income______________________________________________
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
Year ended December 31,
________________________
1997 1996 1995
______ ______ ______
Interest income:
<S> <C> <C> <C>
Loans $29,225 $26,878 $24,338
Investment securities:
U. S. Government 6,353 6,756 5,365
State, county and municipal 2,057 2,163 2,135
Other 797 577 246
Total investment securities _____ _____ _____
interest income 9,207 9,496 7,746
Federal funds sold 623 402 810
______ ______ ______
Total interest income 39,055 36,776 32,894
Interest expense:
Deposits 18,229 16,933 15,410
Short-term borrowings 303 400 336
Long-term obligations 295 117 309
______ ______ ______
Total interest expense 18,827 17,450 16,055
Net interest income 20,228 19,326 16,839
Provision for loan losses 60 140 -
Net interest income after ______ ______ ______
provision for loan losses 20,168 19,186 16,839
Noninterest income:
Service charges on deposit accounts 2,918 2,664 2,347
Other service charges and fees 868 780 645
Investment securities gains, net 5,567 460 1
Insurance commissions 90 145 99
Gain (loss) on sale of loans 52 (158) 39
Other 354 617 897
_____ _____ _____
Total noninterest income 9,849 4,508 4,028
Noninterest expense:
Personnel 8,763 7,975 6,892
Intangibles amortization 1,755 1,638 1,362
Data processing 1,598 1,440 1,334
Furniture and equipment 1,633 1,314 1,111
Occupancy 1,388 1,203 941
FDIC insurance assessment 112 772 651
Charitable contributions 4,076 589 173
Other 3,739 3,272 3,197
______ ______ ______
Total noninterest expense 23,064 18,203 15,661
Income before income taxes 6,953 5,491 5,206
Income taxes 340 1,127 1,293
_____ _____ _____
Net income $6,613 $4,364 $3,913
Per share information: ===== ===== =====
Net income applicable to common shares $51.77 $33.00 $28.90
Cash dividends declared on common shares 1.50 1.50 1.00
Weighted average common shares outstanding 119,918 119,918 121,226
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Consolidated Statements of Cash Flows__________________________________________
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
_____________________________________
1997 1996 1995
OPERATING ACTIVITIES: ______ ______ ______
<S> <C> <C> <C>
Net income $6,613 $4,364 $3,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 140 -
Contribution expense for donation of marketable equity securities 4,071 536 -
Gain on contribution of marketable equity securities (3,529) (458) -
Gains on sales and issuer calls of securities (2,038) (2) (1)
Loss on sale and abandonment of premises and equipment 317 55 315
Net accretion on investments (88) (66) (40)
Amortization of intangibles 1,755 1,638 1,362
Depreciation 1,139 963 811
Net increase in accrued interest receivable (206) (28) (603)
Net (decrease) increase in accrued interest payable 1,190 (287) 1,810
Net decrease (increase) in other assets 1,839 (1,666) (114)
Net (decrease) increase inother liabilities (1,339) 2,275 2,184
_____ _____ _____
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,784 7,464 9,637
_____ _____ _____
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of
investment securities available-for-sale 25,798 111 81
Proceeds from maturities and issuer calls of
investment securities held-to-maturity 43,856 53,749 50,457
Proceeds from sales of investment securities available-for-sale 2,246 105 -
Purchases of investment securities held-to-maturity (37,261) (11,414) (53,850)
Purchases of investment securities available-for-sale (38,134) (58,592) (18,650)
Net increase in loans (30,406) (24,748) (33,141)
Proceeds from sales of premises and equipment - 12 -
Additions to premises and equipment (3,899) (4,472) (2,906)
Net cash received for branches acquired 17,966 3,380 46,056
______ ______ ______
NET CASH USED IN INVESTING ACTIVITIES (19,834) (41,869) (11,953)
______ ______ ______
FINANCING ACTIVITIES:
Net (decrease) increase in demand and
interest bearing demand deposits (4,658) 15,455 18,226
Net increase in time deposits 16,360 6,713 12,330
Net proceeds (repayments) of long-term obligations 3,350 (1,200) (1,200)
Net proceeds (repayments) of short-term borrowed funds 1,762 3,595 (497)
Cash dividends paid (585) (587) (531)
Purchase and retirement of stock (23) (12) (253)
______ ______ ______
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,206 23,964 28,075
______ ______ ______
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6,156 (10,441) 25,759
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF YEAR 32,465 42,906 17,147
______ ______ ______
CASH AND CASH EQUIVALENTS AT THE END OF YEAR $38,621 $32,465 $42,906
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING
THE YEAR FOR:
Interest $17,637 $17,737 $14,245
Income taxes $ 1,776 $ 1,085 $ 1,764
====== ====== ======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Unrealized gain on securities available-for-sale $6,365 $5,833 $4,650
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995___________________________
(Dollars in thousands except per share data)
<TABLE>
<CAPTION> Unrealized
gain on
Preferred Stock Common securities
Series B Series C Stock available- Total
_______________ ____________ _____________ _______ Retained for-sale Shareholders'
Shares Amount Shares Amount Shares Amount Surplus Earnings net of taxes Equity
______ ______ ______ ____ _______ ___ _______ _______ ______ _______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 413,389 $2,014 43,959 $582 121,767 $609 $10,000 $13,783 $3,977 $30,965
Net income - - - - - - - 3,913 - 3,913
Purchase and retirement of stock (4,661) (23) (328) (4) (1,849) (9) - (217) - (253)
Cash dividends:
Common stock ($1.00 per share) - - - - - - - (121) - (121)
Preferred B ($.90 per share) - - - - - - - (370) - (370)
Preferred C ($.90 per share) - - - - - - - (40) - (40)
Change in unrealized gain on
available-for-sale securities,
net of taxes - - - - - - - - 3,069 3,069
_______ _____ ______ ___ _______ ___ ______ ______ _____ ______
BALANCE, DECEMBER 31, 1995 408,728 $1,991 43,631 $578 119,918 $600 $10,000 $16,948 $7,046 $37,163
Net income - - - - - - - 4,364 - 4,364
Purchase and retirement of stock (976) (5) - - - - - (7) - (12)
Cash dividends:
Common stock ($1.50 per share) - - - - - - - (180) - (180)
Preferred B ($.90 per share) - - - - - - - (368) - (368)
Preferred C ($.90 per share) - - - - - - - (39) - (39)
Change in unrealized gain on
available-for-sale securities,
net of taxes - - - - - - - 3,850 - 3,850
_______ _____ ______ ___ _______ ___ ______ ______ _____ ______
BALANCE, DECEMBER 31, 1996 407,752 $1,986 43,631 $578 119,918 $600 $10,000 $20,718 $10,896 $44,778
Net income - - - - - - - 6,613 - 6,613
Purchase and retirement of stock (2,806) (10) - - - - - (13) - (23)
Cash dividends:
Common stock ($1.50 per share) - - - - - - - (180) - (180)
Preferred B ($.90 per share) - - - - - - - (366) - (366)
Preferred C ($.90 per share) - - - - - - - (39) - (39)
Change in unrealized gain on
available-for-sale securities,
net of taxes - - - - - - - 4,201 - 4,201
_______ _____ ______ ___ _______ ___ ______ ______ _____ ______
BALANCE, DECEMBER 31, 1997 404,946 $1,976 43,631 $578 119,918 $600 $10,000 $26,733 $15,097 $54,984
======= ===== ====== === ======= === ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Notes to Consolidated Financial Statements_____________________________________
(Dollars in thousands)
Note 1 Summary of Significant Accounting Policies
BancShares
Southern BancShares (N.C.), Inc. ("BancShares") is the holding company for
Southern Bank and Trust Company ("Southern"), which operates 42 banking offices
in eastern North Carolina. Southern, which began operations in January, 1901,
has a non-bank subsidiary, Goshen, Inc., whose insurance agency operations
complement the operations of its parent. Southern and BancShares are
headquartered in Mount Olive, North Carolina.
Principles of Consolidation
The consolidated financial statements include the accounts of BancShares and
its wholly-owned subsidiary, Southern. 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 and there
are no material differences between the results of operations or financial
position of BancShares and of Southern. All significant intercompany balances
have been eliminated in consolidation.
Basis of Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The most significant estimates made by
BancShares in the preparation of its consolidated financial statements are the
determination of the allowance for loan losses, the valuation of other real
estate, the valuation allowance for deferred tax assets and fair value
estimates for financial instruments.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold. Federal funds are purchased and
sold for one day periods.
Investment Securities
BancShares accounts for investment securities under the provisions of Statement
of Financial Accounting Standards ("Statement") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Statement 115 requires
that investments in certain debt and equity securities be classified as either:
held-to-maturity (reported at amortized cost), trading (reported at fair value
with unrealized gains and losses included in earnings), or available-for-sale
(reported at fair value with unrealized gains and losses excluded from earnings
and reported, net of related income taxes, as a separate component of
shareholders' equity).
BancShares'investment securities are classified in two categories and accounted
for as follows:
- - Securities held-to-maturity: Securities held-to-maturity consist of debt
instruments for which BancShares has the positive intent and ability to
hold to maturity, and are reported at amortized cost.
- - Securities available-for-sale: Securities available-for-sale consist of
certain debt and marketable equity securities not classified as trading
securities nor as securities held-to-maturity, and consist of securities
which may be sold in response to changes in interest rates, prepayment
risk, regulatory capital requirements and liquidity needs. BancShares does
not hold any trading securities.
22
<PAGE>
Gains and losses on the sale and contribution of securities available-for-sale
are determined using the specific-identification method. Premiums and
discounts are amortized into income on a level yield basis.
Loans
Loans are stated at principal amounts outstanding, reduced by unearned income
and an allowance for loan losses.
Southern originates certain residential mortgages with the intent to sell.
Such loans held-for-sale are included in loans in the accompanying consolidated
balance sheets at the lower of cost or fair value as determined by outstanding
commitments from investors or current quoted market prices.
Interest income on substantially all loans is recognized in a manner that
approximates the level yield method when related to the principal amount
outstanding. Accrual of interest is discontinued on a loan when management
believes the borrower's financial condition is such that collection of
principal or interest is doubtful. Loans are returned to the accrual status
when the factors indicating doubtful collectibility cease to exist.
Management considers a loan to be impaired when based on current information or
events, it is probable that a borrower will be unable to pay all amounts due
according to contractual terms of the loan agreement. Impaired loans are
valued using either the discounted expected cash flow method or the collateral
or the collateral value. When the ultimate collectibility of the impaired
loan's principal is doubtful, all cash receipts are applied to principal. Once
the recorded principal balance has been reduced to zero, future cash receipts
are applied to interest income, to the extent that any interest has been
foregone. Future cash receipts are recorded as recoveries of any amounts
previously charged-off.
Southern provides an allowance for loan losses on a reserve basis and includes
in operating expenses a provision for loan losses determined by management.
The allowance is reduced by charge-off's and increased by subsequent
recoveries. Management's periodic evaluation of the adequacy of the allowance
is based on Southern's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's experience,
the estimated value of any underlying collateral, current economic conditions
and other risk factors. Allowances for loan losses related to loans that are
identified as impaired are based on discounted cash flows using the loans'
initial interest rates or the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance, homogenous loans that
are collectively evaluated for impairment (such as credit card, residential
mortgage and consumer installment loans) are excluded from this impairment
evaluation, and their allowance for loan losses is calculated in accordance
with the allowance for loan losses policy discussed above.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review 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.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the
straight-line method over the estimated lives of the assets.
Depreciation of buildings and improvements, and furniture and equipment is
provided over the estimated useful lives of the assets. Estimated useful lives
range from 15 to 31.5 years for buildings and improvements and 3 to 10 years
for furniture and equipment.
Intangible Assets
Intangible assets amounted to $5,506 and $5,991 in 1997 and 1996, respectively.
Such assets are generally amortized on an accelerated basis over a period of 10
years. Intangible assets are subject to periodic review and are adjusted for
any impairment of value.
23
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued) ________________________
(Dollars in thousands)
Note 1. Summary of Significant Accounting Policies - continued
Income Taxes
BancShares uses the asset and liability method to account for deferred income
taxes. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
financial reporting basis and the income tax basis of BancShares' assets and
liabilities at enacted rates expected to be in effect when such amounts are
realized or settled.
BancShares files a consolidated federal income tax return with Southern and its
subsidiaries. The method of allocating federal income tax expense is
determined under a tax allocation agreement between BancShares and the
subsidiaries. This allocation agreement specifies that income tax expense will
be computed for subsidiaries on a separate company basis.
Recognition of deferred tax assets is based on management's belief that it is
"more likely than not" that the tax benefit associated with certain temporary
differences, operating loss carry forwards and tax credits will be realized. A
valuation allowance is recorded for deferred tax assets when the "more likely
than not" standard is not met.
Earnings Per Common Share
In February 1997, the FASB issued Statement 128, "Earnings per Share".
Statement 128 establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. This statement simplifies the standards for computing
EPS previously found in APB Opinion No. 15, "Earnings per Share", and makes
them comparable to international EPS standards. Statement 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Statement 128
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Statement 128
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods, with earlier application not permitted.
Additionally, once adopted, restatement of all prior-period EPS data presented
was required. Adoption of this pronouncement did not have an effect on
BancShares' consolidated financial statements since BancShares has no dilutive
securities.
Earnings per common share are computed by dividing income applicable to common
shares by the weighted average number of common shares outstanding during the
period. Income applicable to common shares represents net income reduced by
dividends paid to preferred shareholders.
Earnings per common share are calculated based on the following amounts for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
______ ______ ______
<S> <C> <C> <C>
Net income $6,613 $4,364 $3,913
Less: Preferred dividends (405) (407) (410)
_____ _____ _____
Net income applicable to common shares $6,208 $3,957 $3,503
===== ===== =====
Weighted average common shares
outstanding during the period 119,918 119,918 121,226
======= ======= =======
</TABLE>
24
<PAGE>
New Accounting Standards
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income".
Statement 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. It does not address issues of recognition or measurement for
comprehensive income and its components. The provisions of Statement 130 are
effective for fiscal years beginning after December 15, 1997. BancShares plans
to adopt this statement in fiscal 1998 and will make the necessary disclosures
of comprehensive income for periods beginning in 1998.
In June 1997, the FASB issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information". Statement 131 requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements issued to shareholders. It also requires
that public business enterprises report certain information about their
products and services, the geographic areas in which they operate and their
major customers. The provisions of Statement 131 are effective for fiscal
years beginning after December 15, 1997. Adoption of this pronouncement is not
expected to have a material effect on BancShares' consolidated financial
statements.
In February 1998, the FASB issued Statement 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement standardizes the
disclosure requirements of pensions and other postretirement benefits. This
statement does not change any measurement or recognition provisions, and thus
will not materially impact BancShares. This statement is effective for fiscal
years beginning after December 15, 1997.
Note 2. Investment Securities
The amortized cost and estimated fair values of investment securities at
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
________ ________ ________ ________ ________ ______ _______ _______
SECURITIES HELD-TO-MATURITY:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government $33,969 122 - 34,091 $36,311 91 - 36,402
Obligations of states and
political subdivisions 22,212 890 - 23,102 27,165 799 (4) 27,960
Corporate securities 100 1 - 101 200 - (3) 197
______ _____ ______ ______ ______ ___ ____ ______
56,281 1,013 - 57,294 63,676 890 (7) 64,559
______ _____ ______ ______ ______ ___ ____ ______
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government 82,471 130 (9) 82,592 70,121 - (15) 70,106
Marketable equity securities 8,119 22,183 (8) 30,294 8,612 6,296 (97) 24,811
Obligations of states and
political subdivisions 8,411 527 - 8,938 7,647 278 (4) 7,921
Mortgage-backed securities 1,977 51 - 2,028 2,124 106 (55) 2,175
______ _____ ______ ______ ______ ______ ____ ______
100,978 22,891 (17) 123,852 88,504 16,680 (171) 105,013
______ _____ ______ ______ ______ ______ ____ ______
TOTALS $157,259 23,904 (17) 181,146 $152,180 17,570 (178) 169,572
======= ====== ====== ======= ======= ====== === =======
</TABLE>
Securities with a par value of $53,015 were pledged at December 31, 1997 to
secure public deposits and for other purposes as required by law and
contractual arrangements.
25
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued) ________________________
(Dollars in thousands)
Note 2. Investment Securities - continued
The amortized cost and estimated fair value of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
Held-to-maturity securities: _______ ______
<S> <C> <C>
Due in one year or less $ 6,584 $ 6,595
Due after one year through five years 40,060 40,356
Due after five years through ten years 6,911 7,331
Due after ten years 2,726 3,012
______ ______
56,281 57,294
====== ======
Available-for-sale securities:
Due in one year or less 45,609 45,649
Due after one year through five years 37,869 37,978
Due after five years through ten years 2,124 2,277
Due after ten years 5,280 5,626
Mortgage-backed securities 1,977 2,028
Marketable equity securities 8,119 30,294
_______ _______
$100,978 $123,852
======= =======
</TABLE>
On December 17, 1996, the board of directors of Southern approved the
contribution of 7,500 shares of marketable equity securities to the Southern
Bank Foundation. These investments had a cost basis of $78 and a fair value of
$536 on that date, resulting in the recognition of a realized securities gain
of $458. BancShares recorded charitable contribution expense of $536 related
to this transaction.
On February 14, 1997, the board of directors of Southern approved the
contribution of 48,250 shares of marketable equity securities to the Southern
Bank Foundation. These investments had a cost basis of $542 and a fair value
of $4,071 on that date, resulting in the recognition of a realized securities
gain of $3,529. BancShares recorded charitable contribution expense of $4,071
related to this transaction.
Sales of securities available-for-sale having a cost basis of $216 resulted in
gross realized gains of $2,030 for 1997. There were no sales of securities
available-for-sale during the years ended December 31, 1996 and 1995.
Excluding the gains discussed above, gains on investment securities in 1997,
1996 and 1995 were attributable to issuer calls of debt securities.
Note 3. Loans
<TABLE>
<CAPTION>
Loans by type were as follows:
December 31,
____________
1997 1996
____ ____
<S> <C> <C>
Commercial, financial and agricultural $ 84,281 $ 70,881
Real estate - construction 5,209 2,470
Real estate - mortgage 220,127 206,870
Consumer 35,780 35,512
Lease financing 5,385 2,370
_______ _______
Total loans 350,782 318,103
Less unearned income (1,429) (348)
_______ _______
Total loans lessunearned income $349,353 $317,755
======= =======
Loans held for sale $ 3,019 $ 4,143
Loans serviced for others $ 78,426 $ 73,202
</TABLE>
26
<PAGE>
On December 31, 1997 and 1996, total loans to directors, executive officers and
related individuals and organizations were $1,469 and $4,734, respectively.
During 1997, $208 of new loans were made to this group and repayments totaled
$3,473. There were no restructured or nonaccrual loans to directors, executive
officers or related individuals and organizations. All extensions of credit
to such persons have been made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time in comparable transactions with others and did not
involve more than normal risks of collectibility.
Note 4. Allowance for Loan Losses
Transactions in the allowance for loan losses for the three years ended
December 31 were:
<TABLE>
<CAPTION>
December 31,
___________
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Balance at beginning of year $6,163 $6,321 $6,653
Provision for loan losses 60 140 -
Loans charged off (463) (539) (463)
Loan recoveries 211 241 131
_____ _____ _____
Balance at end of the year $5,971 $6,163 $6,321
===== ===== =====
</TABLE>
At December 31, 1997 and 1996, Southern had nonaccrual loans of $230 and $147,
respectively. At December 31, 1997 and 1996, Southern had restructured loans
of $0 and $8, respectively. At December 31, 1997 and 1996, Southern had
accruing loans past due 90 days or more totaling $466 and $343, respectively.
The amounts of foregone interest on nonaccrual and restructured loans for the
years ended December 31, 1997, 1996 and 1995 were not material for the periods
presented. At December 31, 1997 and 1996, Southern's impaired loans, as
determined under Statement 114, were less than the nonaccrual and restructured
loan amounts presented above, and no additional allowances for loan losses were
required as a result of the application of Statement 114 to these impaired
loans.
Note 5. Premises and Equipment
<TABLE>
<CAPTION>
The components of premises and equipment were as follows:
December 31,
_____________
1997 1996
____ ____
<S> <C> <C>
Land $ 3,377 $ 2,783
Buildings and improvements 14,292 9,262
Furniture and equipment 6,387 5,804
Construction-in-progress 90 3,467
______ ______
24,146 21,316
Less: accumulated depreciation (5,989) (5,877)
______ ______
$18,157 $15,439
====== ======
</TABLE>
Note 6. Income Taxes
<TABLE>
<CAPTION>
The components of income tax expense (benefit) for the years ended December 31
were:
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Current:
Federal $1,737 $1,348 $1,040
State 8 21 6
_____ _____ _____
1,745 1,369 1,046
_____ _____ _____
Deferred:
Federal (1,405) (242) 247
_____ _____ _____
$ 340 1,127 $1,293
===== ===== = =====
</TABLE>
27
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued) ________________________
(Dollars in thousands)
Note 6. Income Taxes - continued
A reconciliation of the expected tax expense, based on the Federal statutory
rate of 34 percent, to the actual tax expense for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Amount of tax computed at Federal
statutory rate of 34 percent $2,364 $ 1,867 $ 1,770
Increase (decrease) in taxes
resulting from:
Tax exempt income (943) (792) (625)
Amortization of intangible assets 172 167 190
Nontaxable gain on securities donated (1,200) (162) -
State income tax (net of federal benefit) 5 14 4
Other, net (58) 33 (46)
_____ _____ _____
$ 340 $ 1,127 $ 1,293
===== ===== =====
Effective tax rate 5% 21% 25%
===== ===== =====
</TABLE>
Significant components of BancShares' deferred tax liabilities and (assets) are
as follows:
<TABLE>
<CAPTION>
December 31,
_______________
1997 1996
____ ____
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 741 $ 703
Leased assets 164 134
Investment securities 7,777 5,613
Other 264 279
_____ _____
Gross deferred tax liabilities 8,946 6,729
_____ _____
Deferred tax assets:
Allowance for loan losses (1,594) (1,574)
Intangible assets (696) (446)
Other (1,245) (57)
_____ _____
Gross deferred tax assets (3,535) (2,077)
_____ _____
Net deferred tax liability $ 5,411 $ 4,652
===== =====
</TABLE>
No valuation allowance for deferred tax assets was required at December 31,
1997 or 1996. Management has determined that it is more likely than not that
the net deferred tax asset can be supported by carrybacks to federal taxable
income in the carryback period. A portion of the change in the net deferred
tax liability relates to unrealized gains on securities available-for-sale.
The related deferred tax charges of approximately $2,164 and $1,983 for the
years ended December 31, 1997 and 1996, respectively, have been recorded
directly to shareholders' equity as a reduction of the related unrealized gains
on securities available-for-sale.
28
<PAGE>
Note 7. Deposits
<TABLE>
<CAPTION>
Deposits at December 31 are summarized as follows:
1997 1996
____ ____
<S> <C> <C>
Demand $ 66,565 $ 64,089
Checking with interest 66,695 66,554
Savings 51,087 51,969
Money market accounts 50,061 45,027
Time 278,920 252,927
_______ _______
Total deposits $513,328 $480,566
======= =======
</TABLE>
Total time deposits with a denomination of $100 or more were $53,004 and
$45,566 at December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
At December 31, 1997, the scheduled maturities of time deposits were:
<S> <C> <C>
1998 $ 228,168
1999 34,706
2000 15,708
2001 338
2002 and thereafter -
_______
Total time deposits $278,920
=======
</TABLE>
Note 8. Short-Term Borrowings and Long-Term Obligations
Short-Term Borrowings
<TABLE>
<CAPTION>
Short-term borrowings at December 31 were:
1997 1996
____ ____
<S> <C> <C>
U.S. Treasury tax and loan accounts $2,065 $1,226
Repurchase agreements 4,761 3,838
_____ _____
Total short-term borrowings $6,826 $5,064
===== =====
</TABLE>
The U. S. Treasury tax and loan accounts averaged $997 and $1,052 in 1997 and
1996, respectively. The highest month-end balance of the U. S. Treasury tax
and loan accounts in 1997 and 1996 was $2,215 and $1,300, respectively. The
average rate on U. S. Treasury tax and loan deposits in 1997 and 1996 was 5.85
and 5.09 percent, respectively.
The repurchase agreements averaged $4,819 and $2,934 in 1997 and 1996,
respectively. The highest month-end balance of the repurchase agreements in
1997 and 1996 was $5,929 and $4,507, respectively. The average rate on
repurchase agreements in 1997 and 1996 was 4.18 and 4.04 percent, respectively.
At December 31, 1997 investment securities with a book value of $11,028 were
pledged for repurchase agreements. The securities collateralizing the
repurchase agreements have been delivered to a third party •custodian for
safekeeping.
29
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued) ________________________
(Dollars in thousands)
Note 8. Short-Term Borrowings and Long-Term Obligations - continued
Long-Term Obligations
The $4,750 note payable to a bank at December 31, 1997, was negotiated in 1997
by BancShares to provide additional capital to its subsidiary, and is secured
by investment securities. Interest is payable quarterly at the 90 day LIBOR
rate plus 70 basis points. Future principal payments as of December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $1,800
1999 1,800
2000 1,150
_____
$4,750
=====
</TABLE>
Note 9. Acquisitions
BancShares has consummated numerous acquisitions in recent years. All of the
transactions have been accounted for as purchases, with the results of
operations not included in BancShares' consolidated statements of income until
after the transaction date. The pro forma impact of the acquisitions, as
though they had been made at the beginning of the periods presented, is not
material to BancShares' consolidated financial statements.
The following table provides information regarding the acquisitions that have
been consummated during the three-year period ending December 31, 1997:
<TABLE>
<CAPTION>
Deposit
Assets Liabilities Resulting
Date Institution/Location Acquired Assumed Intangible
___________ ____________________________________ ________ ___________ __________
<S> <C> <C> <C> <C>
May 1997 Wachovia Bank of North Carolina, N.A. $5,083 $5,117 $179
Aulander, North Carolina
May 1997 Wachovia Bank of North Carolina, N.A. 11,803 11,838 947
Aurora, North Carolina
May 1997 Wachovia Bank of North Carolina, N.A. 4,073 4,106 144
Hamilton, North Carolina
August 1996 United Carolina Bank 6,085 6,085 419
Edenton, North Carolina
June 1996 First Citizens Bank 7,352 7,348 539
Windsor, North Carolina
June 1995 First Union National Bank 18,041 18,039 774
Farmville, North Carolina
June 1995 First Union National Bank 9,299 9,297 399
Garland, North Carolina
June 1995 First Union National Bank 8,057 8,057 345
Kill Devil Hills, North Carolina
June 1995 First Union National Bank 12,427 12,425 533
Salemburg, North Carolina
June 1995 First Citizens Bank 3,109 3,107 62
Kill Devil Hills, North Carolina
</TABLE>
30
<PAGE>
Note 10. Retirement Plans
Southern has a noncontributory, defined benefit pension plan which covers
substantially all full-time employees. Employees who qualify under length of
service and other requirements participate in the noncontributory defined
benefit pension plan. Under the plan, retirement benefits are based on years
of service and average earnings. The policy is to fund the maximum amount
allowable for federal income tax purposes. The plan's assets consist primarily
of investments in a related bank's common trust funds, which include listed
common stocks and fixed income securities (see Note 15). It is Southern's
policy to determine the service cost and projected benefit obligation using the
Projected Unit Credit Cost method.
Pension expense is included in personnel expense and includes the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Service benefits earned during the period $298 $255 $191
Interest cost on projected benefit obligation 418 373 338
Return on assets (818) (309) (865)
Net amortization and deferral 493 2 540
___ ___ ___
Net periodic pension cost $391 $321 $204
=== === ===
</TABLE>
<TABLE>
<CAPTION>
The funded status of the plan as of December 31 was as follows:
1997 1996
____ ____
<S> <C> <C>
Accumulated benefit obligation, including
vested benefits of $4,508 and $3,873, respectively $ 4,853 $ 4,031
===== =====
Projected benefit obligation $(6,598) $(5,417)
Plan assets, at fair value 5,943 4,936
Plan assets in excess of (less than) projected _____ _____
benefit obligation (655) (481)
Unrecognized prior service cost 81 90
Unrecognized net loss 530 409
Unrecognized transition asset (225) (265)
_____ _____
Prepaid (accrued) pension expense $ (269) $ (247)
===== =====
</TABLE>
The projected benefit obligation was determined using an assumed discount rate
of 7.25 percent at December 31, 1997, 1996 and 1995, respectively, an assumed
long-term rate of compensation increase of 4.25 percent at December 31, 1997,
1996 and 1995, respectively, and an assumed long-term rate of return on plan
assets of 8.25 percent, 8.25 percent and 8.50 percent at December 31, 1997,
1996 and 1995, respectively.
Employees are also eligible to participate in a matching savings plan after one
year of service. During 1997 Southern made participating contributions to this
plan of $220 compared to $198 during 1996 and $173 during 1995.
Note 11. Regulatory Requirements and Restrictions
BancShares and its banking subsidiary are subject to certain requirements
imposed by state and federal banking statutes and regulations. These
regulations establish guidelines for minimum capital levels, restrict certain
dividend payments and require the maintenance of noninterest-bearing reserve
balances at the Federal Reserve Bank. Such reserves averaged $9,760 during
1997 of which $8,489 was satisfied by vault cash and the remainder by amounts
held in the Federal Reserve Bank.
Various regulatory agencies have implemented guidelines that evaluate capital
based on risk adjusted assets. An additional capital computation evaluates
tangible capital based on tangible assets. Minimum capital requirements set
31
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued) ________________________
(Dollars in thousands)
Note 11. Regulatory Requirements and Restrictions - continued
forth by the regulators require a Tier 1 capital ratio of no less than 4
percent of risk-adjusted assets, a total capital ratio of no less than 8
percent of risk-adjusted assets, and a leverage capital ratio of no less than 4
percent of average tangible assets. To meet the Federal Deposit Insurance
Corporation's ("FDIC") "well capitalized" standards, the Tier 1 and total
capital ratios must be at least 6 percent and 10 percent, respectively.
Failure to meet minimum capital requirements may result in certain actions by
regulators that could have a direct material effect on the consolidated
financial statements. As of December 31, 1997, Southern was considered to be
"well capitalized" by the FDIC.
<TABLE>
<CAPTION>
Southern's capital ratios as of December 31, 1997 and 1996 are set forth below:
1997 1996
____ ____
<S> <C> <C>
Risk-based capital:
Tier 1 capital $ 33,999 $ 27,891
Total capital 37,876 31,861
Risk-adjusted assets 295,654 298,862
Average tangible assets 564,633 510,574
Tier 1 capital ratio 11.50% 9.33%
Total capital ratio 12.81% 10.66%
Leverage capital ratio 6.02% 5.46%
</TABLE>
The primary source of funds for the dividends paid by BancShares to its
shareholders is dividends received from its banking subsidiary. Southern is
restricted as to dividend payout by state laws applicable to banks and may pay
dividends only out of retained earnings. Should at anytime its surplus be less
than 50% of its paid-in capital stock, Southern may not declare a dividend
until it has transferred from retained earnings to surplus 25% of its undivided
profits or any lesser percentage that may be required to restore its surplus to
an amount equal to 50% of its paid-in capital stock. Additionally, dividends
paid by Southern may be limited by the need to retain sufficient earnings to
satisfy minimum capital requirements imposed by the FDIC. Dividends on
BancShares' common shares may be paid only after dividends on preferred Series
"B" and "C" shares have been paid. Common share dividends are based upon
BancShares' profitability and paid at the discretion of the Board of Directors.
Management does not expect any of the foregoing restrictions to materially
limit its ability to pay dividends comparable to those paid in the past. At
December 31, 1997, Southern had available for the payment of dividends
undivided profits of approximately $8.8 million, unless declaration of
dividends for such amount would reduce the regulatory capital of Southern below
the minimum levels discussed above. At December 31, 1997, approximately $39.4
million of BancShares' investment in Southern was restricted as to transfer to
BancShares without obtaining prior regulatory approval.
Common shareholders are entitled to one vote per share and both classes of
preferred shareholders are entitled to one vote for each 38 shares owned of a
class.
Note 12. Commitments, Contingencies and Concentration of Credit Risk
In the normal course of business there are various commitments and contingent
liabilities outstanding, such as guarantees, commitments to extend credit,
etc., which are not reflected in the accompanying financial statements.
Southern is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit and
undisbursed advances on customer lines of credit. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheet.
32
<PAGE>
Southern is exposed to credit loss, in the event of nonperformance by the other
party to the financial instrument, for commitments to extend credit and standby
letters of credit which is represented by the contractual notional amount of
those instruments. Southern uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit and undisbursed advances on customer lines of
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many commitments expire without being drawn, the total commitment amounts
do not necessarily represent future cash requirements. Southern evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by Southern, upon extension of credit is based on
management's credit evaluation of the borrower. Collateral held varies but may
include trade accounts receivable, property, plant, and equipment and
income-producing commercial properties.
Standby letters of credit are commitments issued by Southern to guarantee the
performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers.
Outstanding standby letters of credit as of December 31, 1997 and 1996 amounted
to $1,324 and $1,260, respectively. Outstanding commitments were $53,763 and
$48,878 at December 31, 1997 and 1996, respectively. Undisbursed advances on
customer lines of credit were $29,602 and $22,084 at December 31, 1997 and
1996, respectively. Southern does not anticipate any losses as a result of
these transactions.
Southern grants agribusiness, commercial and consumer loans to customers
primarily in eastern North Carolina. Although Southern has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the agricultural industry and in particular the
tobacco segment thereof. For several decades tobacco has come under increasing
criticism for potential health risks. Management is unable to predict the
impact of the contingencies inherent in this market segment as it relates to
Southern.
BancShares is also involved in various legal actions arising in the normal
course of business. Management is of the opinion that the outcome of such
actions will not have a material adverse effect on the consolidated financial
condition of BancShares.
BancShares has deposits insured under both of the FDIC insurance funds, the
Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund
("SAIF"). In July 1995, the FDIC and other regulatory agencies proposed a plan
to recapitalize the SAIF, and Congress mandated a one-time assessment for all
SAIF-insured deposits on September 30, 1996. BancShares had approximately
$87,000 of SAIF-insured deposits subject to the one-time assessment and
recorded $569 on September 30, 1996 as a one-time FDIC insurance expense.
33
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued) ________________________
(Dollars in thousands)
Note 13. Parent Company Financial Statements
Presented below are the condensed balance sheets (parent company only) of
Southern BancShares (N.C.), Inc. as of December 31, 1997 and 1996 and condensed
statements of income and cash flows for each of the three years ended December
31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
December 31,
CONDENSED BALANCE SHEETS _________________
1997 1996
____ ____
<S> <C> <C>
ASSETS
Cash $ 33 $ 46
Investment securities available-for-sale 15,572 6,188
Investment in subsidiary 47,700 41,322
______ ______
Total assets $63,305 $47,556
====== ======
Liabilities and Shareholders' Equity
Accrued liabilities $ 3,562 $ 1,378
Accrued interest payable 9 -
Note payable 4,750 1,400
______ ______
Total liabilities 8,321 2,778
Shareholders' equity 54,984 44,778
______ ______
Total liabilities and shareholders' equity $63,305 $47,556
====== ======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME Year ended December 31,
_________________________
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Dividends from bank subsidiary $5,458 $2,637 $2,507
Other dividends 80 78 44
_____ _____ _____
Total income 5,538 2,715 2,551
Interest expense (295) (117) (309)
Miscellaneous income (expense) (49) (42) 6
Income before equity in undistributed income _____ _____ _____
of subsidiary 5,194 2,556 2,248
Equity in undistributed income of subsidiary 1,419 1,808 1,665
_____ _____ _____
Net income $6,613 $4,364 $3,913
===== ===== =====
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
_______________________
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $6,613 $4,364 $3,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (1,419) (1,808) (1,665)
Increase in accrued liabilities - 642 153
Dividend income in the form of investment securities (2,753) - -
Increase (decrease) in interest payable 9 (39) 9
_____ _____ _____
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,450 3,159 2,410
_____ _____ _____
INVESTING ACTIVITIES:
Purchase of investments (205) (1,318) (444)
Investments in subsidiaries (5,000) - -
_____ _____ _____
NET CASH USED IN INVESTING ACTIVITIES (5,205) (1,318) (444)
_____ _____ _____
FINANCING ACTIVITIES:
Dividends paid (585) (587) (531)
Purchase and retirement or redemption of stock (23) (12) (253)
Principal additions (payments) on note payable 3,350 (1,200) (1,200)
_____ _____ _____
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES 2,742 (1,799) (1,984)
_____ _____ _____
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13) 42 (18)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 46 4 22
_____ _____ _____
CASH AND CASH EQUIVALENTS AT THE END OF YEAR $ 33 $ 46 $ 4
===== ===== =====
</TABLE>
Note 14. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and due from banks, federal funds sold, and accrued interest receivable
The carrying amounts for cash and due from banks, federal funds sold and
accrued interest receivable are equal to their fair values due to the short
term nature of these financial instruments.
Investment securities
Fair values of investment securities are based on quoted market prices. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans receivable
For variable-rate loans that are performing, fair values are based on carrying
values. The fair values of fixed rate loans that are performing are estimated
by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of nonperforming loans is based on the
book value of each loan, less an applicable reserve for credit losses. This
35
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued) ________________________
(Dollars in thousands)
Note 14. Fair Value of Financial Instruments - continued
reserve for credit losses is determined on a loan by loan basis for
nonperforming assets based on one or a combination of the following: external
appraisals, internal assessments using available market information and
specific borrower information, or discounted cash flow analysis.
Deposits
The fair value of demand deposits, savings accounts and money market deposits
is the amount payable on demand at year end. The fair value of certificates of
deposit is estimated by discounting the future cash flows using the current
rates paid for similar deposits.
Short-term borrowings and accrued interest payable
The carrying amounts for short-term borrowings and accrued interest payable are
equal to the fair values due to the short term nature of these financial
instruments.
Long-term obligations
The carrying amount for the long-term obligation is considered to be equal to
its fair value since the underlying note bears interest at a variable rate.
Commitments
Southern's commitments to extend credit have no carrying value and are
generally at variable rates and/or have relatively short terms to expiration.
Accordingly, these financial instruments are deemed to have no material fair
value.
Fair value estimates are made by management at specific points in time based on
relevant information about the financial instrument and the market. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time BancShares' entire holdings of a particular
financial instrument nor are potential taxes and other expenses that would be
incurred in an actual sale considered. Because no market exists for a
significant portion of BancShares' financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions and/or the methodology used
could significantly affect the estimates disclosed. Similarly, the fair values
disclosed could vary significantly from amounts realized in actual
transactions.
Fair value estimates are based on existing on-and-off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, BancShares has premises and equipment
which are not considered financial instruments. Accordingly, the value of
these assets has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates.
36
<PAGE>
<TABLE>
<CAPTION>
The estimated fair values of BancShares' financial instruments at December 31
are as follows:
1997 1996
____________________ ____________________
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
________ __________ ________ __________
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 28,381 $ 28,381 $ 21,445 $ 21,445
Federal funds sold 10,240 10,240 11,020 11,020
Investment securities:
Held-to-maturity 56,281 57,294 63,676 64,559
Available-for-sale 123,852 123,852 105,013 105,013
Loans 343,382 349,805 311,592 322,746
Accrued interest receivable 4,205 4,205 3,999 3,999
Financial liabilities:
Deposits $513,328 $514,095 $480,566 $481,091
Short-term borrowings 6,826 6,826 5,064 5,064
Long-term obligations 4,750 4,750 1,400 1,400
Accrued interest payable 4,394 4,394 3,204 3,204
</TABLE>
Note 15. Related Parties
BancShares has entered into various service contracts with another bank holding
company and its subsidiary (the "Corporation"). The Corporation ha s two
significant shareholders, which are also significant shareholders of
BancShares. The first significant shareholder is a director of BancShares and
at December 31, 1997 beneficially owned 32,284 shares, or 26.92 percent, of
BancShares' outstanding common stock and 22,171 shares, or 5.47 percent, of
BancShares' outstanding Series B preferred stock. At the same date, the second
significant shareholder beneficially owned 27,577 shares, or 23.00 percent, of
BancShares' outstanding common stock, and 17,205 shares, or 4.24 percent, of
BancShares' Series B preferred stock. The above totals include 17,205 Series B
preferred shares, or 4.24 percent, that are considered to be beneficially owned
by both of the shareholders and, therefore, are included in each of their
totals.
These two significant shareholders are directors and executive officers of the
Corporation and at December 31, 1997, beneficially owned 2,548,519 shares, or
26.46 percent, and 1,157,052 shares, or 12.01 percent, respectively, of the
Corporation's outstanding Class A common stock, and 632,146 shares, or 36.04
percent, and 190,191 shares, or 10.84 percent, respectively, of the
Corporation' s outstanding Class B common stock. The above totals include
258,136 Class A common shares, or 2.68 percent, and 41,825 Class B Common
shares, or 2.38 percent, that are considered to be beneficially owned by both
of the shareholders and, therefore, are included in each of their totals. A
subsidiary of the Corporation is First-Citizens Bank & Trust Company ("First
Citizens"). As more fully discussed elsewhere herein, Southern acquired
branches from First Citizens in 1996 and 1995.
<TABLE>
<CAPTION>
The following table lists the various charges paid to the Corporation during
the years ended December 31,
1997 1996 1995
______ ______ ______
<S> <C> <C> <C>
Data and item processing $1,840 $1,828 $1,477
Forms, supplies and equipment 220 300 180
Trustee for employee benefit plans 66 62 57
Consulting fees 79 79 69
Trust investment services 22 24 24
Internal auditing services 41 165 132
Other services 94 143 64
_____ _____ _____
$2,362 $2,601 $2,003
===== ===== =====
</TABLE>
Data and item processing expenses include courier services, proof and encoding,
microfilming, check storage, statement rendering and item processing forms.
BancShares also has a correspondent relationship with the Corporation.
Correspondent account balances with the Corporation included in cash and due
from banks totaled $10,071, $8,673 and $16,167 at December 31, 1997, 1996 and
1995, respectively.
37
<PAGE>
Southern BancShares (N.C.), Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued) ________________________
(Dollars in thousands)
Note 16. Subsequent Events
Southern has entered into an agreement, subject to regulatory approval, to buy
a branch from another bank. The effect on BancShares will be an increase of
approximately $21 million in deposits. This transaction is scheduled to be
completed in the second quarter of 1998.
Southern has received approval from the regulatory authorities to open de novo
branches in two new eastern North Carolina markets. These branches are planned
to open in 1999.
38
<PAGE>
Directors_____________________________________________________________________
Bynum R. Brown
Murfreesboro, NC
President and Owner,Bynum R. Brown Agency, Inc.
(Real Estate and Insurance)
Secretary-Treasurer, RoanokeValley Nursing Home, Inc.
William H. Bryan
Mt. Olive, NC
President, Director and Treasurer Mount Olive Pickle Company, Inc.
(Manufacturer of Pickle and Pepper Products)
D. Hugh Carlton
Warsaw, NC
President, Carlton Insurance Agency, Inc.
(Insurance)
Robert J. Carroll
Gates, NC
President and Owner, Carroll's Garage, Inc.
(Truck and Farm Equipment Dealer)
Hope H. Connell
Raleigh, NC
Senior Vice President, First-Citizens Bank & Trust Company
J. Edwin Drew
Macclesfield, NC
Retired Physician
Former President, J. Edwin Drew, M.D., P.A.
Moses B. Gillam, Jr.
Windsor, NC
Partner, Gillam and Gillam, Attorneys
LeRoy C. Hand
Camden, NC
Retired Physician, former President, Albemarle Emergency Associates, P.A.
Frank B. Holding
Smithfield, NC
Executive Vice Chairman of the Board, First-Citizens Bank & Trust Company and
First Citizens BancShares
M. J. McSorley
Mount Olive, NC
Vice Chairman, Southern Bank and Trust Company; Vice President, Southern
BancShares (N.C.), Inc.
W. B. Midyette, Jr.
Bath, NC
Retired Farmer
W. Hunter Morgan
Sunbury, NC
President, Kellogg-Morgan Agency, Inc.
(Insurance)
Charles I. Pierce, Sr.
Ahoskie, NC
President, Pierce Printing Co., Inc.
(Commercial Printers)
W. A. Potts
Mount Olive, NC
Vice Chairman, Southern BancShares (N.C.), Inc.
(Retired Veterinarian)
Former President, W. A. Potts, DVM, P.A.
Charles L. Revelle, Jr.
Murfreesboro, NC
Chairman of the Board and former President, Revelle Agri-Products, Inc.; Vice
President, Revelle Builders of N. C., Inc.; President, Revelle Equipment Co.,
Inc. (Agribusiness)
Charles O. Sykes
Mount Olive, NC
President, Mount Olive Livestock Market, Inc.
(Livestock Auction Market and Dealer)
John N. Walker
Mount Olive, NC
President Emeritus, Mount Olive Pickle Company, Inc.
R. S. Williams
Mount Olive, NC
Chairman of the Board and Consultant, Southern BancShares (N.C.), Inc. and
Southern Bank and Trust Company
39
<PAGE>
Officers_______________________________________________________________________
Officers of Southern BancShares (N.C.), Inc.
R. S. Williams, Chairman of the Board
John C. Pegram, Jr., President
M. J. McSorley, Vice President
David A. Bean, Secretary and Treasurer
Paul A. Brewer, Assistant Secretary
R.D. Ray, Assistant Treasurer
Executive Officers of Southern Bank and Trust Company
R. S. Williams, Chairman of the Board
M. J. McSorley, Vice Chairman
John C. Pegram, Jr., President and Chief Executive Officer
Paul A. Brewer, Senior Vice President
R. D. Ray, Senior Vice President
David A. Bean, Vice President, Controller and Secretary
40
<PAGE>
<TABLE>
<CAPTION>
Southern Bank Offices____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Branch County Branch County Branch County
Ahoskie Hertford Farmville Pitt Plymouth Washington
507 E. Main St. 107 E. Church St. 612 Washington St.
Ahoskie, NC 27910-0825 Farmville, NC 27828-0146 Plymouth, NC 27962-1023
(252) 332-5149 (252) 753-2161 (252) 793-1115
Askewville Bertie Garland Sampson Pollocksville Jones
104 W. Askewville St. 96 South Ingold Ave. 214 Main St.
Windsor, NC 27983-0529 Garland, NC 28441-0397 Pollocksville, NC 28573-0171
(252) 794-3029 (910) 529-3651 (252) 224-5191
Aulander Bertie Gatesville Gates Roanoke Rapids Halifax
119 S. Commerce St. 203 Main St. 1580 E. 10th St.
Aulander, NC 27805-0129 Gatesville, NC 27938-0203 Roanoke Rapids, NC 27870-4109
(252) 345-4061 (252) 357-0190 (252) 535-3043
Aurora Beaufort Grantham Wayne Robersonville Martin
298 North Fifth St. 3382 U.S. 13 South 111 N. Main St.
Aurora, NC 27806-0427 Goldsboro, NC 27530-0729 Robersonville, NC 27871-0369
(252) 322-4161 (919) 689-2300 (252) 795-3041
Ayden Pitt Hamilton Martin Rocky Mount Nash
1107 W. 3rd St. 100 S. Front Street 230 Sunset Ave.
Ayden, NC 28513-0368 Hamilton, NC 27840-0425 Rocky Mount, NC 27802-0428
(252) 736-6138 (252) 798-6971 (252) 977-2825
Bath Beaufort Kill Devil Hills North Dare Rocky Mount Nash
Highway 92 3105 N. Croatan Highway 3690 Sunset Ave.
Bath, NC 27808-0217 Kill Devil Hills, NC 27948-2036 Rocky Mount, NC 27802-0428
(252) 923-8381 (252) 441-2871 (252) 443-7800
Belhaven Beaufort Kill Devil Hills South Dare Roxobel Bertie
106 E. Main St. 1906 S. Croatan Highway 113 South Main St.
Belhaven, NC 27810-0087 Kill Devil Hills, NC 27948-0329 Roxobel, NC 27872-0159
(252) 943-2184 (252) 441-6355 (252) 344-5641
Bethel Pitt LaGrange Lenoir Salemburg Sampson
124 N. Main St. 208 S. Caswell St. 102 South Main St.
Bethel, NC 27812-0819 LaGrange, NC 28551-0248 Salemburg, NC 28385-0160
(252) 825-0031 (252) 566-4020 (910) 525-4149
Calypso Duplin Lewiston Bertie Seven Springs Wayne
104 West Trade St. 127 Main St. Main St.
Calypso, NC 28325-0729 Lewiston-Woodville, NC 27849-0190 Seven Springs, NC 28578-0060
(919) 658-7070 (252) 348-2561 (919) 569-3161
Deep Run Lenoir Macclesfield Edgecombe Turkey Sampson
Highway 11 & SR 1144 105 N. Railroad St. 45 Union Rd.
Deep Run, NC 28525-0126 Macclesfield, NC 27852-0339 Turkey, NC 28393-0375
(252) 568-4141 (252) 827-2111 (910) 592-7321
Dudley Wayne Mount Olive Wayne Warsaw Duplin
Highway 117 Alternate South 100 North Center St. 114 N. Pine St.
Dudley, NC 28333-0729 Mount Olive, NC 28365-0729 Warsaw, NC 28398-0896
(919) 734-5375 (919) 658-7000 (910) 293-7176
Edenton Chowan Mount Olive Wayne Whitakers Nash
1207 N. Broad St 800 North Breazeale Ave. 101 N. White St.
Edenton, NC 27932-0546 Mount Olive, NC 28365-0729 Whitakers, NC 27891-0130
(252) 482-7466 (919) 658-7100 (252) 437-0611
Edenton Chowan Murfreesboro Hertford Windsor Bertie
101 W. Queen St 336 East Main St 101 N. King St.
Edenton, NC 27932-0868 Murfreesboro, NC 27855-0277 Windsor, NC 27983-0529
(252) 482-8466 (252) 398-4174 (252) 794-3011
Faison Duplin Nashville Nash Winton Hertford
110 W. Center St South 209 Barnes St. 301 N. Main St.
Faison, NC 28341-0628 Nashville, NC 27856-0758 Winton, NC 27986-0278
(910) 267-4351 (252) 459-2117 (252) 358-3111
</TABLE>
41
<PAGE>
General Information____________________________________________________________
Shareholders' Meeting
The Annual Meeting of Shareholders will be held on Wednesday, April 15, 1998 at
3:00 P. M. at the Goldsboro Country Club, 1500 South Slocumb Street, Goldsboro,
North Carolina.
Stock Transfer Agent and Registrar
Southern Bank and Trust Company
121 East Main Street
Mount Olive, North Carolina 28365-0729
General Counsel
Ward and Smith, P.A.
New Bern, North Carolina 28563-0867
Auditors
KPMG Peat Marwick LLP
Raleigh, North Carolina 27601
Form 10-K
Copies of Southern BancShares' Annual Reports on Form 10-K are available on the
internet at http://www.sec.gov/cgi-bin/srch-edgar or upon written request to
Secretary, Southern BancShares (N.C.), Inc. Post Office Box 729, Mount Olive,
North Carolina 28365-0729. A copy of Southern BancShares' Annual Report on Form
10-K for 1997, including Financial Statements and Schedules thereto, will be
provided without charge to any shareholder making such request.
Equal Opportunity Employer
Southern Bank and Trust Company is an equal opportunity employer
Member FDIC
42
<PAGE>
The following are subsidiaries of Southern BancShares (N.C.), Inc. :
Subsidiary State of Incorporation
Southern Bank and Trust Company North Carolina
Goshen, Inc. North Carolina
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 28,381
<SECURITIES> 190,373
<RECEIVABLES> 4,205
<ALLOWANCES> 5,971
<INVENTORY> 0
<CURRENT-ASSETS> 218,754
<PP&E> 24,146
<DEPRECIATION> 5,989
<TOTAL-ASSETS> 590,752
<CURRENT-LIABILITIES> 529,298
<BONDS> 0
0
2,554
<COMMON> 600
<OTHER-SE> 51,830
<TOTAL-LIABILITY-AND-EQUITY> 590,752
<SALES> 39,055
<TOTAL-REVENUES> 48,904
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,064
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 18,827
<INCOME-PRETAX> 6,953
<INCOME-TAX> 340
<INCOME-CONTINUING> 6,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,613
<EPS-PRIMARY> 51.77
<EPS-DILUTED> 51.77
</TABLE>
