SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999 Commission File No. 0-10852
SOUTHERN BANCSHARES (N.C.), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1538087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
121 East Main Street Mount Olive, North Carolina 28365
( Address of Principal Executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (919) 658-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of the Registrant's common stock as of
the close of the period covered by this report.
119,186 shares
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES March 31, December 31,
CONSOLIDATED BALANCE SHEETS 1999 1998
--------- ---------
(Dollars in thousands except per share data)
<S> <C> <C>
ASSETS
Cash and due from banks ...................................... $ 26,283 $ 37,419
Federal funds sold ........................................... 18,570 19,535
Investment securities:
Available-for-sale, at fair value (amortized cost $101,621
and $92,012, respectively) ............................. 115,701 109,227
Held-to-maturity, at amortized cost (fair value $88,979
and $93,511, respectively) ............................. 88,111 92,340
Loans ........................................................ 363,745 364,489
Less allowance for loan losses ............................... (5,898) (5,962)
--------- ---------
Net loans .................................................... 357,847 358,527
Premises and equipment ....................................... 19,189 18,902
Intangible assets ............................................ 6,362 6,972
Accrued interest receivable .................................. 4,868 4,571
Other assets ................................................. 2,002 1,932
--------- ---------
Total assets ................................... $ 638,933 $ 649,425
========= =========
LIABILITIES
Deposits:
Noninterest-bearing ..................................... $ 74,047 $ 77,550
Interest-bearing ........................................ 475,180 479,202
--------- ---------
Total deposits ............................................... 549,227 556,752
Short-term borrowings ........................................ 5,418 5,124
Long-term obligations ........................................ 23,000 23,000
Accrued interest payable ..................................... 3,587 4,505
Other liabilities ............................................ 3,201 4,011
--------- ---------
Total liabilities .................................. 584,433 593,392
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES March 31, December 31,
CONSOLIDATED BALANCE SHEETS 1999 1998
--------- ---------
(Dollars in thousands except per share data)
<S> <C> <C>
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value;
408,728 shares authorized; 398,653 shares issued and
outstanding at March 31, 1999 and December 31, 1998,
respectively ........................................... 1,942 1,942
Series C non-cumulative preferred stock, no par value; 43,631
shares authorized; 40,373 shares issued and outstanding
at March 31, 1999 and December 31, 1998, respectively 562 562
Common stock, $5 par value; 158,485 shares authorized;
119,186 and 119,266 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively ..... 596 596
Surplus ...................................................... 10,000 10,000
Retained earnings ............................................ 32,107 31,571
Accumulated other comprehensive income ....................... 9,293 11,362
--------- ---------
Total shareholders' equity ........................... 54,500 56,033
--------- ---------
Total liabilities and shareholders' equity ..... $ 638,933 $ 649,425
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31,
1999 1998
--------- --------
(Dollars in thousands except share and per share data)
<S> <C> <C>
Interest income:
Loans .................................................................. $ 7,439 $ 7,532
Investment securities:
U. S. Government ................................................... 1,891 1,735
State, county and municipal ........................................ 434 481
Other .............................................................. 186 161
--------- --------
Total investment securities interest income ................ 2,511 2,377
Federal funds sold ..................................................... 277 184
--------- --------
Total interest income .................................................. 10,227 10,093
Interest expense:
Deposits ........................................................ 4,378 4,656
Short-term borrowings ........................................... 48 70
Long-term obligations ........................................... 517 76
--------- --------
Total interest expense .................................... 4,943 4,802
--------- --------
Net interest income ............................... 5,284 5,291
Provision for loan losses ........................................ 60 60
--------- --------
Net interest income after provision for loan losses 5,224 5,231
Noninterest income:
Service charges on deposit accounts ............................... 807 762
Other service charges and fees .................................... 297 246
Insurance commissions ............................................. 18 19
Gain (loss) on sale of loans ...................................... (61) 1
Investment securities gains, net .................................. 1 1,788
Other ............................................................. 76 117
--------- --------
Total noninterest income .................................... 1,138 2,933
Noninterest expense:
Personnel ........................................................ 2,733 2,285
Data processing .................................................. 492 432
Intangibles amortization ......................................... 610 384
Occupancy ........................................................ 382 378
Furniture and equipment .......................................... 358 332
FDIC insurance assessment ........................................ 29 37
Other ............................................................ 826 940
--------- --------
Total noninterest expense ................................. 5,430 4,788
--------- --------
Income before income taxes ............................................. 932 3,376
Income taxes ........................................................... 240 809
--------- --------
Net income ...................................... 692 2,567
--------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31,
1999 1998
--------- --------
(Dollars in thousands except share and per share data)
<S> <C> <C>
Other comprehensive income net of tax:
Unrealized (losses) gains arising during period ..................... (2,069) 787
Less: reclassification adjustment for gains included in net income .. -- 1,180
--------- --------
Comprehensive (loss) income ..................................... $ (1,377) $ 2,174
========= ========
Per share information:
Earnings per common share ........................................... $ 4.99 $ 20.58
Cash dividends declared on common shares ............................ 0.38 0.38
Weighted average common shares outstanding .......................... 119,250 119,918
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Dollars in thousands except per share data)
(Unaudited)
Preferred Stock Common Stock Accumulated
------------------------------------ ---------------- Other Total
Series B Series C Compre- Share-
------------------ ---------------- Retained hensive holders'
Shares Amount Shares Amount Shares Amount Surplus Earnings Income Equity
------ ------ ------ ------ ------ ------ ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 405,645 $1,976 43,631 $578 119,918 $600 $10,000 $26,733 $15,097 $54,984
Net income 2,567 2,567
Cash dividends:
Common stock ($.38 per share) (46) (46)
Preferred B ($.22 per share) (89) (89)
Preferred C ($.22 per share) (10) (10)
Unrealized loss on securities
available-for-sale, net of tax (393) (393)
------- ------ ------ ---- ------- ---- ------- ------- ------- -------
Balance, March 31, 1998 405,645 $1,976 43,631 $578 119,918 $600 $10,000 $29,155 $14,704 $57,013
======= ====== ====== ==== ======= ==== ======= ======= ======= =======
Balance, December 31, 1998 398,653 $1,942 40,373 $562 119,266 $596 $10,000 $31,571 $11,362 $56,033
Net income 692 692
Retirement of stock (80) (14) (14)
Cash dividends:
Common stock ($.38 per share) (45) (45)
Preferred B ($.22 per share) (88) (88)
Preferred C ($.22 per share) (9) (9)
Unrealized loss on securities
available-for-sale, net of tax (2,069) (2,069)
------- ------ ------ ---- ------- ---- ------- ------- ------- -------
Balance, March 31, 1999 398,653 $1,942 40,373 $562 119,186 $596 $10,000 $32,107 $9,293 $54,500
======= ====== ====== ==== ======= ==== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
(Thousands) 1999 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................... $ 692 $ 2,567
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ................................ 60 60
Gains on sales and issuer calls of securities ............ (1) (1,788)
Loss on sale and abandonment of premises and equipment ... 2 3
Net accretion on discounts on investments ................ (20) (19)
Amortization of intangibles .............................. 610 384
Depreciation ............................................. 362 334
Net increase in accrued interest receivable .............. (297) (574)
Net decrease in accrued interest payable ................. (918) (462)
Net increase in other assets ............................. (70) (25)
Net increase (decrease) in other liabilities ............. 256 (39)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ 676 441
-------- --------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment
securities available-for-sale .............................. 6,090 16,000
Proceeds from maturities and issuer calls of investment
securities held-to-maturity ................................ 11,196 1,198
Proceeds from sales of investment securities available-for-sale -- 1,975
Purchases of investment securities held-to-maturity ............ (6,967) (15,803)
Purchases of investment securities available-for-sale .......... (15,678) (6,463)
Net decrease (increase) in loans ............................... 620 (4,868)
Purchases of fixed assets ...................................... (651) (165)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES ................................ (5,390) (8,126)
-------- --------
FINANCING ACTIVITIES:
Net decrease in demand and interest-bearing demand deposits ..... (9,631) (1,954)
Net increase in time deposits ................................... 2,106 4,603
Payments of long-term obligations ............................... -- (450)
Net proceeds (repayments) of short-term borrowed funds .......... 294 (590)
Cash dividends paid ............................................. (142) (145)
Purchase and retirement of stock ................................ (14) --
-------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES ..................... (7,387) 1,464
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................ $(12,101) $ (6,221)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR ................... 56,954 38,621
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD ....................... $ 44,853 $ 32,400
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three months ended March 31,
(Thousands) 1999 1998
--------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest ........................................................ $ 5,861 $ 5,264
Income taxes .................................................... $ 145 $ 844
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on securities available-for-sale ..................... $ (3,135) $ (597)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SOUTHERN BANCSHARES (N. C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary Of Significant Accounting Policies
Basis of Financial Statement Presentation
Southern BancShares (N. C.), Inc. ("BancShares") is the holding company for
Southern Bank and Trust Company ("Southern"), which operates 45 banking offices
in eastern North Carolina, and Southern Capital Trust I (the "Trust"), a
statutory business trust that issued $23.0 million of 8.25% Capital Securities
("the Capital Securities") in June 1998 maturing in 2028. Southern, which began
operations January 29, 1901, has a wholly-owned subsidiary, Goshen, Inc. which
acts as agent for credit life and credit accident and health insurance written
in connection with loans made by Southern. BancShares and Southern are
headquartered in Mount Olive, North Carolina.
The consolidated financial statements in this report are unaudited. In the
opinion of management, all adjustments (none of which were other than normal
accruals) necessary for a fair presentation of the financial position and
results of operations for the periods presented have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The statements should be read in conjunction
with the consolidated financial statements and accompanying notes for the year
ended December 31, 1998, incorporated by reference in the 1998 Annual Report on
Form 10-K.
Principles Of Consolidation
The consolidated financial statements include the accounts of BancShares and its
wholly-owned subsidiaries, Southern and the Trust. The statements also include
the accounts of Goshen, Inc., a wholly-owned subsidiary of Southern. BancShares'
financial resources are primarily provided by dividends from Southern. All
significant intercompany balances have been eliminated in consolidation.
Cash And Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and federal funds sold. Federal funds are purchased and sold for
one day periods.
Reclassifications
Certain prior period balances have been reclassified to conform to the current
period presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Dollars in thousands
Note 2. Investment securities
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited)
--------------------------------------------- --------------------------------------------
(In thousands) Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY:
U. S. Government $68,061 197 (129) $68,129 $72,070 360 ($41) $72,389
Obligations of states
and political subdivisions 19,950 800 (1) 20,749 20,170 850 21,020
Corporate debenture 100 1 - 101 100 2 102
------- ------ ------- -------- ------- ------ ----- -------
88,111 998 (130) 88,979 92,340 1,212 (41) 93,511
======= ====== ======= ======== ======= ====== ====== =======
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government 75,006 212 (242) 74,976 71,046 369 (135) 71,280
Marketable equity securities 10,747 13,575 - 24,322 10,747 16,867 (487) 27,127
Obligations of states
and political subdivisions 14,248 508 - 14,756 8,539 573 (1) 9,111
Mortgage-backed securities 1,620 36 (9) 1,647 1,680 38 (9) 1,709
------- ------- -------- -------- ------- ------ ------ --------
101,621 14,331 (251) 115,701 92,012 17,847 (632) 109,227
======= ======= ======== ======== ======= ====== ====== ========
</TABLE>
Note 3. LOANS
<TABLE>
<CAPTION>
(Unuadited)
(Dollars in thousands) March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural ......... $ 89,113 $ 86,980
Real estate:
Construction ............................. 6,367 5,276
Mortgage:
One to four family residential ..... 100,739 113,984
Commercial ......................... 63,821 62,446
Equityline ......................... 27,488 28,698
Other .............................. 38,739 26,846
Consumer ....................................... 34,327 36,775
Lease financing ................................ 3,151 3,484
-------- --------
Total loans .................................. $363,745 $364,489
======== ========
Loans held for sale ............................ $ 5,102 $ 6,858
Loans serviced for others ...................... $173,011 $163,455
</TABLE>
<PAGE>
Note 4. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(Dollars in thousands) (Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
------ -------
<S> <C> <C>
Balance at beginning of year $5,962 $5,971
Provision for loan losses 60 60
Loans charged off (186) (41)
Loan recoveries 62 26
------ ------
Balance at end of the period $5,898 $6,016
====== ======
</TABLE>
Note 5. Earnings Per Common Share
Earnings per common share are computed by dividing income applicable to common
shares by the weighted average number of common shares outstanding during the
period. Income applicable to common shares represents net income reduced by
dividends paid to preferred shareholders. Since BancShares had no potentially
dilutive securities during 1999 or 1998, the computation of basic and diluted
earnings per share is the same.
Note 5. EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
(Unaudited)
(Dollars in thousands) Three Months Ended March 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income ................................... $ 692 $ 2,567
Less: Preferred dividends .................. (97) (99)
--------- ---------
Net income applicable to common shares ....... $ 595 $ 2,468
========= =========
Weighted average common shares
outstanding during the period .............. 119,250 119,918
========= =========
</TABLE>
Note 6. Acquisitions
During the third quarter of 1999, subject to regulatory approval, Southern plans
to acquire the Ahoskie branch office of First-Citizens Bank & Trust Company
("FCB"), a related party. In connection with that transaction, Southern expects
to assume total deposit liabilities of approximately $16.0 million, to purchase
approximately $8.0 million of loans and to record approximately $1.4 million in
intangible assets.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FIRST THREE MONTHS OF 1999 VS. FIRST THREE MONTHS OF 1998
INTRODUCTION
In the first three months of 1999, the net income of BancShares decreased $1.9
million from $2.6 million in the first three months of 1998 to $692,000 in the
first three months of 1999, a decrease of 73.04%. This decrease resulted
primarily from the 1998 sale of available-for-sale securities, resulting in a
realized gain before tax of $1.8 million. One branch acquisition each in May
1998, October 1998 and December 1998 resulted in increased net interest income,
increased other noninterest income and increased personnel expense and other
related operating expenses for the three months ended March 31, 1999.
Per share net income available to common shares for the first three months of
1999 was $4.99, a decrease of $15.59, or 75.75%, from $20.58 in 1998. The return
on average equity decreased to 4.96%, for the period ended March 31, 1999, from
17.95% for the period ended March 31, 1998 and the return on average assets
decreased to 0.43%, for the period ended March 31, 1999, from 1.72% for the
period ended March 31, 1998.
At March 31, 1999, BancShares' assets totaled $638.9 million, a decrease of
$10.5 million, or 1.62%, from the $649.4 million reported at December 31, 1998.
During this three month period, loans decreased $744,000, or 0.20%, from $364.5
million to $363.7 million. During the three months ended March 31, 1999
investment securities increased $2.2 million, or 1.11% from $201.6 million at
December 31, 1998 to $203.8 million at March 31, 1999. Total deposits decreased
$7.5 million, or 1.35% from $556.8 million at December 31, 1998 to $549.2
million at March 31, 1999. The above changes resulted principally from the
seasonal impact of the agricultural markets served by Southern .
ACQUISITIONS
In May 1998, Southern acquired $16.7 million of the loans and $18.0 million of
the deposits of Enfield Savings Bank ("ESB"). Southern simultaneously sold
$3,000 of the ESB loans and $2.4 million of the ESB deposits to FCB. Southern
recorded net intangible assets of $363,000 for the ESB acquisition.
In October 1998, Southern acquired $226,000 of the loans and $5.3 million of the
deposits of the Gates office of FCB. Southern recorded intangible assets of
$186,000 for the Gates acquisition.
In December 1998, Southern acquired $76,000 of the loans and $16.4 million of
the deposits of the Red Springs office of First Union National Bank. Southern
recorded intangible assets of $1.7 million for the Red Springs acquisition.
These acquisitions were accounted for as purchases, and, therefore, the results
of operations prior to the purchases are not included in the consolidated
financial statements. The proforma impact of the acquisitions and dispositions,
as though they had been made at the beginning of the period presented, is not
material to BancShares' consolidated financial statements.
Southern had no acquisitions in the three months ended March 31, 1999. The
comparisons of the three months ended March 31, 1999 to the three months ended
March 31, 1998 are accordingly impacted by the above transactions.
<PAGE>
INTEREST INCOME
Interest and fees on loans decreased $93,000, or 1.23%, from $7.5 million for
the three months ended March 31, 1998 to $7.4 million for the three months ended
March 31, 1999. This decrease was due to lower overall interest rates . Average
loans for the three months ended March 31, 1999 were $363.5 million, an increase
of 3.24% from $352.1 million for the prior year three month period. The yield on
the loan portfolio was 8.56% in the three months ended March 31, 1998 and 8.19%
in the three months ended March 31, 1999.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased $134,000 or 5.64%, from $2.4 million in the three months
ended March 31, 1998 to $2.5 million in the three months ended March 31, 1999.
This increase was due to an increase in the volume of average investment
securities for the three months ended March 31, 1999 to $190.3 million as
compared to $160.8 million for the same 1998 period. The yield on investment
securities was 5.91% for the three-month period ended March 31, 1998 and 5.35%
for the three-month period ended March 31, 1999.
Interest income on federal funds sold increased $93,000 or 50.54%, from $184,000
for the three months ended March 31, 1998 to $277,000 for the three months ended
March 31, 1999. This increase in income resulted primarily from an increase in
the average federal funds sold to $23.3 million for the three months ended March
31, 1999 from an average of $13.7 million for the three months ended March 31,
1998. Average federal funds sold yields were 4.76% for the three months ended
March 31, 1999 down from 5.37% for the three months ended March 31, 1998.
Total interest income increased $134,000 or 1.33%, from $10.1 million for the
three months ended March 31, 1998 to $10.2 million for the three months ended
March 31, 1999. This increase was primarily the result of volume increases that
more than offset a 47 basis point decrease in average earning asset yields.
Average earning asset yields for the three months ended March 31, 1999 decreased
to 7.12% from the 7.59% yield on average earning assets for the three months
ended March 31, 1998. Average earning assets increased from $531.8 million in
the three months ended March 31, 1998 to $577.1 million in the period ended
March 31, 1999. This $45.3 million increase in the average earning assets
resulted primarily from the acquisitions discussed above.
INTEREST EXPENSE
Total interest expense increased $141,000 or 2.94%, from $4.8 million in the
three months ended March 31, 1998 to $4.9 million for the three months ended
March 31, 1999. The principal reason for this increase was the increase in
long-term obligations interest related to the $23.0 million of 8.25% Capital
Securities issued by the Trust in June, 1998. BancShares recorded $517,000 of
interest expense in the three months ended March 31, 1999 related to the capital
securities. BancShares' total cost of funds decreased from 4.14% for the three
months ended March 31, 1998 to 3.96% for the three months ended March 31, 1999.
Average interest-bearing deposits were $474.9 million in the three months ended
March 31, 1999, an increase of $21.8 million from the $453.1 million average in
the three months ending March 31, 1998. The increase in interest-bearing
liabilities was primarily the result of the afore mentioned acquisitions and
capital securities discussed above.
<PAGE>
NET INTEREST INCOME
Net interest income was $5.3 million for both the three months ended March 31,
1998 and the three months ended March 31, 1999.
The interest rate spread for the three months ended March 31, 1999 was 3.15%, a
decrease of 30 basis points from the 3.45% interest rate spread for the three
months ended March 31, 1998.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the three months ended March 31, 1999 management recorded $60,000 as
provision for loan losses. Management also made a $60,000 addition to the
provision for loan losses for the three months ended March 31, 1998.
During the first three months of 1999 management charged-off loans totaling
$186,000 and received recoveries of $62,000, resulting in net charge-offs of
$124,000. During the same period in 1998, $41,000 in loans were charged-off and
recoveries of $26,000 were received, resulting in net charge-offs of $15,000.
The following table presents comparative Asset Quality ratios of BancShares:
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Ratio of annualized net loans charged off
to average loans 0.14% 0.12%
Allowance for loan losses
to loans 1.62% 1.64%
Non-performing loans
to loans 0.75% 0.28%
Non-performing loans and assets
to total assets 0.50% 0.17%
Allowance for loan losses
to non-performing loans 214.86% 588.00%
</TABLE>
The ratio of annualized net charge-offs to average loans outstanding increased
to 0.14% for the three months ended March 31, 1999 from 0.12% for the year ended
December 31, 1998. The allowance for loan losses represented 1.62% of loans at
March 31, 1999. The allowance for loan losses represented 1.64% of loans at
December 31, 1998. Loans decreased $744,000, or 0.20% from $364.5 million at
December 31, 1998 to $363.7 million at March 31, 1999.
The ratio of nonperforming loans to loans, increased from 0.28% at December 31,
1998 to 0.75% at March 31, 1999. Nonperforming loans and assets to total assets
increased to 0.50% at March 31, 1999 from 0.17% at December 31, 1998. The
allowance for loan losses to nonperforming loans represented 214.86% of
nonperforming loans at March 31, 1999, a decrease from the 588.00% at December
31, 1998. The above performance declines resulted primarily from an increase in
<PAGE>
nonperforming loans to $2,745,000 at March 31, 1999 from $971,000 at December
31, 1998. The nonperforming loans at March 31, 1999 included $832,000 of
nonaccrual loans, $1,913,000 of accruing loans 90 days or more past due and no
restructured loans. BancShares had $454,000 of assets classified as other real
estate at March 31, 1999. BancShares had $84,000 of assets classified as other
real estate at December 31, 1998.
Management considers the March 31, 1999 allowance for loan losses to be adequate
to cover the losses and risks inherent in the loan portfolio at March 31, 1999
and will continue to monitor its portfolio and to adjust the relative level of
the allowance as needed. BancShares' impaired loans were approximately $832,000
at March 31, 1999 and $166,000 at December 31, 1998.
Management actively maintains a current loan watch list and knows of no other
loans which are material and (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources, or (ii) represent material
credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Southern's allowance for loan losses
and losses on other real estate owned. Such agencies may require Southern to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
NONINTEREST INCOME
During the three months ended March 31, 1998, BancShares realized securities
gains of $1.8 million arising from the sale of available-for-sale securities.
The decrease of such gains during the quarter ended March 31, 1999 was the
primary reason for the decrease in noninterest income.
NONINTEREST EXPENSE
Noninterest expense including personnel, occupancy, furniture and equipment,
data processing, FDIC insurance and state assessments, printing and supplies and
other expenses, increased $642,000 or 13.41%, from $4.8 million in the three
months ended March 31, 1998 to $5.4 million in the three months ended March 31,
1999.
This increase was primarily due to an increase in personnel expense of $448,000,
or 19.61%, from $2.3 million at March 31, 1998 to $2.7 million at March 31, 1999
and increased occupancy, furniture and equipment expense and other expenses
resulting principally from the branch acquisitions in May 1998, October 1998 and
December 1998 discussed above.
<PAGE>
INCOME TAXES
In the three months ended March 31, 1999, BancShares had income tax expense of
$240,000, a decrease of $569,000 from $809,000 in the prior year period. The
majority of this decrease is due to the 1998 securities gain discussed above.
The resulting effective tax rate for the three months ended March 31, 1999 was
25.75%. The effective tax rate for the three months ended March 31, 1998 was
23.96%. The effective tax rate in 1999 of 25.75% differs from the federal
statutory rate of 35.00% primarily due to tax exempt income.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Sufficient levels of capital are necessary to sustain growth and absorb losses.
To this end, the Federal Reserve Board, which regulates BancShares, and the
Federal Deposit Insurance Corporation, which regulates Southern, have
established minimum capital guidelines for the institutions they supervise.
In June 1998, the Trust issued $23.0 million of 8.25% Capital Securities
maturing in 2028. The Trust invested the $23.0 million proceeds in Junior
Subordinated Debentures issued by BancShares (the "Junior Debentures"), which
upon consolidation of BancShares are eliminated. The Junior Debentures, with a
maturity of 2028, are the primary assets of the Trust. With respect to the
Capital Securities, BancShares irrevocably and unconditionally guarantees the
Trust's obligations. Capital Securities of $13.1 million are included in Tier I
capital for Southern's regulatory capital adequacy requirements.
In June 1998, BancShares paid off the remaining balance of a long-term
obligation, $4.3 million, and contributed an additional $12.0 million in capital
to Southern which also improved each of Southern's capital ratios.
Regulatory guidelines define minimum requirements for Southern's leverage
capital ratio. Leverage capital equals total equity less goodwill and certain
other intangibles and is measured relative to total adjusted assets as defined
by regulatory guidelines. According to these guidelines, Southern's leverage
capital ratio at March 31, 1999 was 8.22%. At December 31, 1998, Southern's
leverage capital ratio was 8.44%. Both of these ratios are greater than the
level designated as "well capitalized" by the FDIC.
Southern is also required to meet minimum requirements for Risk Based Capital
("RBC"). Southern's assets, including loan commitments and other off-balance
sheet items, are weighted according to federal guidelines for the risk
considered inherent in each asset. At March 31, 1999, Southern's Total RBC ratio
was 17.17%. At December 31, 1998 the RBC ratio was 17.10%. Both of these ratios
are greater than the level designated as "well capitalized" by the FDIC.
The regulatory capital ratios reflect increases in assets and liabilities from
the acquisitions Southern has made. Each of the acquisitions required the
payment of a premium for the deposits received. Each of these premiums resulted
in increased intangible assets on BancShares' financial statements, which is
deducted from total equity in the ratio calculations.
The accumulated other comprehensive income was $9.3 million at March 31, 1999,
and $11.4 million at December 31, 1998. Comprehensive income consists entirely
of unrealized gains on securities available-for-sale, net of taxes. Although a
part of total shareholders' equity, comprehensive income is not included in the
calculation of either the RBC or leverage capital ratios pursuant to regulatory
definitions of these capital requirements. The following table presents capital
adequacy calculations and ratios of Southern:
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
--------- ----------
(Dollars in thousands)
<S> <C> <C>
Risk-based capital:
Tier 1 capital ................ $ 50,259 $ 49,198
Total capital ................. 54,339 53,234
Risk-adjusted assets .......... 316,403 311,341
Average tangible assets ....... 611,531 582,955
Tier 1 capital ratio (1)....... 15.88% 15.80%
Total capital ratio (1) ....... 17.17% 17.10%
Leverage capital ratio (1) .... 8.22% 8.44%
</TABLE>
- --------------
(1) These ratios exceed the minimum ratios required for a bank to be
classified as "well capitalized" as defined by the FDIC.
At March 31, 1999 and December 31, 1998, BancShares was also in compliance with
its regulatory capital requirements and all of its regulatory capital ratios
exceeded the minimum ratios required by the regulators to be classified as "well
capitalized".
LIQUIDITY
Liquidity refers to the ability of Southern to generate sufficient funds to meet
its financial obligations and commitments at a reasonable cost. Maintaining
liquidity ensures that funds will be available for reserve requirements,
customer demand for loans, withdrawal of deposit balances and maturities of
other deposits and liabilities. Past experiences help management anticipate
cyclical demands and amounts of cash required. These obligations can be met by
existing cash reserves or funds from maturing loans and investments, but in the
normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include cash and due from banks, federal
funds sold and investment securities available-for-sale. The liquidity ratio,
which is defined as cash plus short term available-for-sale securities divided
by deposits plus short term liabilities, was 34.35% at March 31, 1999 and 30.78%
at December 31, 1998.
The Statement of Cash Flows discloses the principal sources and uses of cash
from operating, investing and financing activities for the three months ended
March 31, 1999 and for the three months ended March 31, 1998. BancShares has no
brokered deposits. Jumbo time deposits are considered to include all time
deposits of $100,000 or more. BancShares has never aggressively bid on these
deposits. Almost all jumbo time deposit customers have other relationships with
Southern, including savings, demand and other time deposits, and in some cases,
loans. At March 31, 1999 jumbo time deposits represented 11.47% of total
deposits. At December 31, 1998 jumbo time deposits represented 10.79% of total
deposits.
<PAGE>
Management believes that BancShares has the ability to generate sufficient
amounts of cash to cover normal requirements and any additional needs which may
arise, within realistic limitations, and management is not aware of any known
demands, commitments or uncertainties that will affect liquidity in a material
way.
ACCOUNTING AND OTHER MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier application of all provisions of this
statement is encouraged. BancShares plans to adopt this statement on January 1,
2000 and does not anticipate any material effect on its consolidated financial
statements.
In October 1998, the FASB issued Statement 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This statement allows mortgage banking firms to
account for certain securities and other interests retained after securitizing
mortgage loans that were held for sale based on the intent and ability to hold
or sell such investments. This statement was effective for the first fiscal
quarter beginning after December 15, 1998. BancShares adopted this statement
effective January 1, 1999.
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.
<PAGE>
Year 2000 Issue
Introduction
The year 2000 issue confronting BancShares and its suppliers, customers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the year 2000. Many existing computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these programs and computers will recognize "00" as the year 1900 rather than
the year 2000. These problems may also arise from other sources as well, such as
the use of special codes and conventions in software that make use of the date
field.
Awareness
Financial institution regulators recently have increased their focus upon year
2000 compliance issues and have issued guidance concerning the responsibilities
of Senior Management and Directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on year
2000 issue.
These statements require financial institutions to, among other things, examine
the year 2000 implications of their reliance on vendors and with respect to data
exchange and the potential impact of the year 2000 issue on their customers,
suppliers and borrowers. These statements also require each federally regulated
financial institution to survey its exposure, measure its risk and prepare a
plan to address the year 2000 issue. In addition, the federal banking regulators
have issued safety and soundness guidelines to be followed by insured depository
institutions, such as the Bank, to assure resolution of any year 2000 problems.
The federal banking agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and, thus, that an institution's failure to address appropriately the year
2000 issue could result in supervisory action, including the reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties. Southern has
addressed, or is in the process of addressing, each of these areas as discussed
below.
<PAGE>
Risks
Like most financial service providers, BancShares and its operations may be
significantly affected by the year 2000 issue due to its dependence on
information technology and date-sensitive data. Computer hardware and software
and other equipment, both within and outside BancShares' direct control, and
third parties with whom BancShares electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated, and
BancShares could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the year 2000 issue could
adversely affect the viability of BancShares' suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the year
2000 issue could result in a significant adverse impact on BancShares'
operations and, in turn, its financial condition and results of operations.
<PAGE>
State of Readiness
During October 1997, BancShares developed its plan to address the year 2000
issue. A substantial portion of BancShares' data processing functions are
performed by First-Citizens Bank & Trust Company ("FCB") on its mainframe
systems and/or on systems supported by FCB, which also provides similar services
to several other financial institutions. Therefore, BancShares' plan for
addressing the year 2000 issue divides information technology systems ("IT
Systems") into groups which include (i) FCB's mainframe systems used for
processing BancShares' data ("Group A Systems"), (ii) BancShares' non-mainframe
systems which are supported by FCB ("Group B Systems"), and (iii) BancShares'
separate non-mainframe systems ("Group C Systems"). BancShares' year 2000 plan
also addresses non-information technology systems ("Non-IT Systems"). As to
Group A Systems and Group B Systems, BancShares' year 2000 plan necessarily is
designed to be implemented jointly with FCB. FCB has retained an outside
consultant to plan and direct its year 2000 compliance efforts, and BancShares
participates in a committee made up of representatives of the consultant, FCB
and each of the financial institutions for which FCB provides data processing
services. This committee meets periodically to monitor the status of FCB's
compliance efforts.
Periodic progress reports are made to BancShares' Board of Directors.
The following paragraphs summarize the phases of BancShares' year 2000 plan:
Assessment Phase
During the assessment phase, a year 2000 corporate inventory and business risk
assessment was made (jointly with FCB in the case of Group A Systems and Group B
Systems, and separately in the case of Group C Systems and Non-IT Systems) to
quantify the extent of BancShares' year 2000 exposure and identify systems that
required remediation. Each Group B and C application or system was given two
separate codes; a Priority Code and a Status Code. The Priority Code quantifies
the importance of each asset to BancShares' daily operations. The Status Code
represents the current claim of compliance by the asset's vendor. Used in
concert, these codes prioritize the remediation, testing and contingency
planning processes. This phase is complete.
<PAGE>
Remediation and Testing Phase
With respect to IT Systems, this phase contemplates the implementation of
modifications, upgrades or system replacements determined to be necessary to
achieve year 2000 compliance and the testing of modified or upgraded systems to
determine their functionality and operating capability. As to Group A Systems
and Group B Systems, FCB's outside consultant is responsible for coordinating
necessary modifications, upgrades or replacements. This phase has been completed
for all Group A and B Systems. As to Group C Systems, BancShares' staff is
coordinating remediation (which, in most cases, entails the installation of
upgrades provided by outside vendors) and testing. This phase has been completed
for substantially all systems, with completion of this phase scheduled for the
second quarter of 1999.
Validation Phase
The validation phase contemplates testing, in an isolated environment, of the
ability of new and modified systems, which have been determined to be
functional, to accurately process date sensitive data beginning January 1, 2000.
Validation testing on Group A Systems and Group B Systems is being conducted by
FCB's outside consultant and is expected to be completed by June 30, 1999.
BancShares' staff is conducting validation testing on Group C Systems which is
expected to be substantially completed by June 30, 1999.
Implementation Phase
Under BancShares' plan, once new and modified systems that require testing have
been tested for functionality, they are put into production. BancShares' target
is to have substantially completed the validation and implementation phases for
all systems by June 30, 1999.
Non-IT Systems, Third Party Service Providers and Loan Customers
Activities under BancShares' plan with respect to Non-IT Systems (including
security systems, office equipment, etc.) primarily involve identifying
potential year 2000 problems and insuring that outside vendors provide necessary
upgrades or replacements. Each system has been assigned to an officer of
BancShares whose responsibility it is to communicate with the vendor of that
system and coordinate remediation. As needed, validation testing for Non-IT
Systems is planned for the second quarter of 1999.
During early 1998, BancShares identified those borrowing customers whose
existing aggregate borrowings from BancShares met certain criteria based on
aggregate credit exposure, loan collateral, and whose businesses were of a
nature that they could be adversely affected by the year 2000 issue. A meeting
was held individually with each such borrowing customer to assess the customer's
plan for and progress toward addressing the year 2000 issue. Follow-up meetings
are being held with each customer whose assessment indicated a higher than
typical level of risk. With respect to new and renewed loans, an assessment of
year 2000 risk and steps being taken by the customer to address the year 2000
issue have been made a part of the credit approval process.
Costs
BancShares is expensing all costs associated with required system changes as
those costs are incurred, and such costs are being funded through operating cash
flows. Because a substantial portion of BancShares' data processing functions
are performed by FCB on its mainframe systems and/or on systems supported by
FCB, FCB is bearing a substantial portion of the expenses related to the
remediation and testing of systems that affect BancShares. BancShares has
budgeted $200,000 for its separate year 2000 project expenses. Expenses actually
incurred through March 31, 1999 were not material. BancShares does not expect
significant increases in future data processing costs relating to year 2000
compliance.
Contingency Plans
During the assessment phase, BancShares began to identify a back-up or
contingency plan for systems or non-IT assets which may be affected by year
2000. Virtually all of BancShares' systems are dependent upon third party
vendors or service providers; therefore, contingency plans include selecting a
new vendor or service provider and converting to their system. BancShares
believes its most likely worst case scenario will be a failure by certain
customers and vendors to achieve year 2000 readiness. For BancShares' most
reasonably likely worst case sceniaro, contingency plans are already active. In
the event a current vendor's system fails during the validation phase and it is
determined that the vendor is unable or unwilling to correct the failure,
BancShares will convert to a new system. In each case, realistic trigger dates
have been established to allow for orderly and successful conversions.
Preliminary contingency plans for system failures on or after January 1, 2000
have been developed. These plans will be refined when the validation and testing
phases are complete.
<PAGE>
Other matters
In March 1999, BancShares announced the planned acquisition, subject to
regulatory approval, of the Ahoskie, North Carolina office of FCB containing
approximately $16.0 million in deposits (see note 6of notes to consolidated
financial statements). BancShares has received regulatory approval to open de
novo branches in three new eastern North Carolina markets. These offices are
planned to open in 2000.
Management is not aware of any other trends, events, uncertainties, or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on BancShares' liquidity, capital resources or
other operations.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN BANCSHARES (N.C.), INC.
/s/John C. Pegram, Jr.
Dated: May 10, 1999 ----------------------
John C. Pegram, Jr.,
President and Chief Executive Officer
/s/David A. Bean
Dated: May 10, 1999 ----------------
David A. Bean,
Secretary, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 21,056
<INT-BEARING-DEPOSITS> 5,227
<FED-FUNDS-SOLD> 18,570
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,701
<INVESTMENTS-CARRYING> 88,111
<INVESTMENTS-MARKET> 88,979
<LOANS> 363,745
<ALLOWANCE> 5,898
<TOTAL-ASSETS> 638,933
<DEPOSITS> 549,227
<SHORT-TERM> 5,418
<LIABILITIES-OTHER> 6,788
<LONG-TERM> 23,000
0
2,504
<COMMON> 596
<OTHER-SE> 51,400
<TOTAL-LIABILITIES-AND-EQUITY> 638,933
<INTEREST-LOAN> 7,439
<INTEREST-INVEST> 2,788
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,227
<INTEREST-DEPOSIT> 4,378
<INTEREST-EXPENSE> 565
<INTEREST-INCOME-NET> 5,284
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 5,429
<INCOME-PRETAX> 932
<INCOME-PRE-EXTRAORDINARY> 932
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 692
<EPS-PRIMARY> 4.99
<EPS-DILUTED> 4.99
<YIELD-ACTUAL> 7.12
<LOANS-NON> 2,745
<LOANS-PAST> 1,913
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 832
<ALLOWANCE-OPEN> 5,962
<CHARGE-OFFS> 186
<RECOVERIES> 62
<ALLOWANCE-CLOSE> 5,898
<ALLOWANCE-DOMESTIC> 5,898
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
