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, 1998 Commission File No. 0-10852
SOUTHERN BANCSHARES (N.C.), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1538087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
121 East Main Street 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 26, 1999: 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
26, 1999: Common Stock, $5.00 par value - 119,186 shares
Documents Incorporated by Reference
1. Portions of the Registrant's 1998 Annual Report to Shareholders are
incorporated by reference into Parts I and II.
2. Portions of the Registrant's definitive Proxy Statement dated March 26, 1999
for the 1999 Annual Meeting of Shareholders are incorporated by reference
into Part III.
<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 effect 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. BancShares has a wholly-owned subsidiary:
Southern Capital Trust I, a statutory business trust that issued $23.0 million
of 8.25% Capital Securities (the Capital Securities) in June 1998 maturing in
2028. 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 five 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, Citizens Savings Bank, Rocky Mount, North Carolina in
1993 and Enfield Savings Bank, Enfield, North Carolina in 1998. 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. In 1998 Southern acquired deposits of a branch in Gates,
North Carolina from First Citizens Bank and acquired deposits of a branch in Red
Springs, North Carolina from First Union National Bank. See Note 15 on pages 37
and 38 of BancShares' 1998 Annual Report, attached as Exhibit 13 to this Report,
for additional information regarding BancShares' relationship with First
Citizens Bank. In terms of total assets, at December 31, 1998, Southern was the
twelfth 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
45 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 34 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 nineteen 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 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 and sells such insurance to a subsidary of First
Citizens Bank. See Note 15 on pages 37 and 38 of BancShares' 1998 Annual Report
attached as Exhibit 13 to this report for additional information regarding
BancShares' relationship with First Citizens Bank.
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.
The BHCA prohibits BancShares from acquiring direct or indirect control of
more than 5 % 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% 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.
<PAGE>
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.
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 Sections 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
<PAGE>
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.
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%. 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 % 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 at least 1% to 2% 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% of
Tier I capital to average total consolidated assets. All other insured
institutions are required to maintain a minimum ratio of 1% or 2% above the
stated minimum, with a minimum leverage ratio of not less than 4%.
Insurance Assessments
Southern is subject to insurance assessments imposed by the FDIC. During 1996
the FDIC reduced the Bank Insurance Fund ("BIF") assessment rates to a range of
0.00 % to 0.27% for the highest rated banks to the weakest banks. This BIF
premium reduction did not affect the deposit premium 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.
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.
<PAGE>
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 1999 is set at an annual rate of
6.10 basis points of OAKAR adjusted deposits as defined by the FDIC and 1.220
basis points of BIF adjusted deposits. At December 31, 1998 the FICO assessable
OAKAR deposit base for Southern was $109.4 million and the BIF deposit base was
$437.8 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 $120 thousand for 1999.
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% 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% 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% of any class of voting stock of
a holding company or insured bank and, after such acquisition, the acquirer will
be the largest shareholder.
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 % of 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 % of 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% cap, and states may set minimum age requirements of up to
five years on target banks within their borders.
<PAGE>
Beginning June 1, 1997, and subject to certain conditions, the Interstate
Banking Law permitted 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.
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 $225
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.
In 1997 BancShares developed a plan to deal with the "Year 2000 issue". See
pages 13 through 15 of BancShares' 1998 Annual Report attached as Exhibit 13 to
this Report for additional information regarding the Year 2000 issue.
<PAGE>
Employees
At December 31, 1998, Southern employed 290 full-time employees and 34
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.
Statistical Information
Certain additional statistical information with respect to BancShares'
business is included in the information incorporated herein under "Part II, Item
7" below.
I. AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL AVERAGE BALANCES
AND AVERAGE RATES EARNED AND PAID
<TABLE>
<CAPTION>
Statistical Information
(Dollars in thousands)
I. AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL AVERAGE BALANCES
AND AVERAGE RATES EARNED AND PAID
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE
- - ------ ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) (2) $ 362,298 $ 31,000 8.56% $ 340,195 $ 29,225 8.59%
Taxable investment securities 141,193 8,085 5.73% 126,829 7,532 5.94%
Nontaxable investment securities (3) 22,842 1,982 8.68% 24,581 2,130 8.66%
Federal funds sold 18,321 972 5.31% 11,526 623 5.41%
Other interest earning assets 5,367 293 5.46% 4,840 269 5.56%
--------- -------- ------ --------- -------- ------
Total interest earning assets 550,021 42,332 7.70% 507,971 39,779 7.83%
-------- --------
Non-interest earning assets:
Cash and due from banks 19,250 17,730
Premises and equipment, net 18,304 17,457
Other 28,253 24,078
Total assets $ 615,828 $ 567,236
========= =========
LIABILITIES & EQUITY Interest bearing liabilities:
Demand deposits $ 78,283 $ 1,073 1.37% $ 76,080 $ 1,234 1.62%
Savings deposits 92,657 2,325 2.51% 87,577 2,259 2.58%
Time deposits 285,869 15,318 5.36% 270,863 14,736 5.44%
Short-term borrowed funds 6,531 292 4.47% 6,295 303 4.81%
Long-term obligations 15,056 1,320 8.77% 4,539 295 6.50%
--------- -------- ------ --------- -------- ------
Total interest bearing liabilities 478,396 20,328 4.25% 445,354 18,827 4.23%
-------- --------
Non-interest bearing liabilities:
Demand deposits 69,746 63,783
Other 11,263 12,396
Shareholders' equity 56,423 45,703
-------- ---------
Total liabilities and equity $ 615,828 $ 567,236
========= =========
Interest rate spread (4) 3.45% 3.60%
Net interest income and
Net interest margin (5) $ 22,004 4.00% $ 20,952 4.12%
======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
II. AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL ANALYSIS OF
CHANGES IN INTEREST DIFFERENTIAL
DECEMBER 31, 1996
----------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
------- -------- ----
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (1) (2)
Taxable investment securities $ 310,389 $ 26,878 8.66%
Nontaxable investment securities (3) 125,068 7,899 6.32%
Federal funds sold 25,914 2,290 8.84%
Other interest earning assets 6,895 402 5.83%
1,526 62 4.06%
Total interest earning assets --------- --------
469,792 37,531 7.99%
---------
Non-interest earning assets:
Cash and due from banks
Premises and equipment, net 15,726
Other 13,498
20,525
Total assets
$ 519,541
=========
LIABILITIES & EQUITY Interest bearing liabilities
Demand deposits
Savings deposits $ 70,443 1,227 1.74%
Time deposits 83,761 2,202 2.63%
Short-term borrowed funds 247,575 13,504 5.45%
Long-term obligations 8,160 400 4.90%
2,021 117 5.79%
--------- -------- ------
Total interest bearing liabilities
411,960 17,450 4.24%
---------
Non-interest bearing liabilities:
Demand deposits
Other 57,773
Shareholders' equity 9,574
40,234
---------
Total liabilities and equity
$ 519,541
========
Interest rate spread (4)
Net interest income and 3.75%
Net interest margin (5)
$ 20,081 4.27%
========
</TABLE>
(1) Includes non-accrual loans
(2) Interest income includes amortization of loan fees.
(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.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998 Increase (Decrease)
----------------------------------------------------------
AMOUNT AMOUNT AMOUNT
TOTAL ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
CHANGE TO CHANGE TO CHANGE TO CHANGE IN
1997-1998 IN VOLUME IN RATE RATE/VOLUME
--------- --------- ------- -----------
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans $1,775 $1,836 $(68) $7
Taxable investment securities 577 971 (355) (39)
Non-taxable investment securities (148) (151) 5 (2)
Federal funds sold 349 368 (12) (7)
------- ------- ----- -----
Total interest income 2,553 3,024 (430) (41)
------- ------- ----- -----
LIABILITIES & EQUITY Interest bearing liabilities:
Demand deposits (161) 36 (190) (7)
Savings deposits 66 131 (61) (4)
Time deposits 582 728 (135) (11)
Short-term borrowed funds 22 45 (22) (1)
Long-term obligations 992 771 67 154
------- ------- ----- -----
Total interest expense 1,501 1,711 (341) 131
------- ------- ----- -----
Net interest income $1,052 $1,313 $(89) $(172)
======= ======= ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1997 Increase (Decrease)
----------------------------------------------------------
AMOUNT AMOUNT AMOUNT
TOTAL ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
CHANGE TO CHANGE TO CHANGE TO CHANGE IN
1996-1997 IN VOLUME IN RATE RATE/VOLUME
--------- --------- ------- -----------
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans $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 borrowed funds (97) (91) (7) 1
Long-term obligations 178 146 14 18
------- ------- ----- ----
Total interest expense 1,377 1,522 (149) 4
------- ------- ----- ----
Net interest income $847 $1,524 $(621) $(56)
======= ======= ===== ====
</TABLE>
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 federal income taxes are stated on a
taxable-equivalent basis assuming a statutory federal income tax rate of 34% for
all periods. The taxable equivalent adjustment was $543 in 1998, $2,024 in 1997
and $740 in 1996.
<PAGE>
III. INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities
<TABLE>
<CAPTION>
December 31,
------------------------------------
(Dollars in thousands) 1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies (1) $143,350 $118,589 $108,592
States and political subdivisions 29,281 31,150 35,086
Other (2) 28,936 30,394 25,011
-------- -------- --------
Total $201,567 $180,133 $168,689
======== ======== ========
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1998 (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
securities 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) $73,904 5.81% $68,989 4.90% $11 5.65% $1,892 6.45%
States and political subdivisions 5,795 5.92% 8,057 6.37% 7,678 5.84% 7,179 5.41%
Other (2) 10,747 2.63% - - - - 100 6.75%
------- ---- ------- ---- ------ ---- ------ ----
$90,446 5.44% $77,046 5.05% $7,689 5.84% $9,171 5.62%
======= ======= ====== ======
</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.
<PAGE>
IV. LOAN PORTFOLIO
Analysis of loans by type and maturity
The table below classifies loans by major category (dollars in thousands):
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $86,980 $84,281 $70,881 $57,398 $36,343
Real estate:
Construction 5,276 5,209 2,470 1,533 3,221
Mortgage:
One to four family residential 113,984 106,444 113,915 111,372 108,804
Commercial 62,446 58,056 52,686 43,580 41,090
Equityline 28,698 27,759 18,654 13,828 10,858
Other 26,846 27,868 21,615 20,535 17,261
Consumer 36,775 35,643 35,512 37,548 33,762
Lease financing 3,484 3,956 2,022 2,166 1,272
-------- -------- -------- -------- --------
Total loans $364,489 $349,216 $317,755 $287,960 $252,611
======== ======== ======== ======== ========
</TABLE>
The following table identifies the maturities of all loans as of December 31,
1998 and addresses the sensitivity of these loans to changes in interest rates.
<TABLE>
<CAPTION>
(Dollars in thousands)
Within After One Year But After
One Year Within Five Years Five Years Total
-------- ----------------- ---------- -------
<S> <C> <C> <C> <C>
Commercial and Financial $68,103 $18,877 $ - $86,980
Real Estate:
Construction 4,383 893 - 5,276
One to four family residential 31,487 48,385 34,112 113,984
Commercial 17,250 26,509 18,687 62,446
Equityline 7,952 12,220 8,526 28,698
Other 7,439 12,794 6,613 26,846
Consumer 25,386 11,389 - 36,775
Lease Financing 519 2,114 851 3,484
-------- -------- ------- --------
Total $162,519 $133,181 $68,789 $364,489
======== ======== ======= ========
Fixed Rate $42,766 $107,631 $68,752 $219,149
Variable Rate 119,753 25,550 37 145,340
-------- -------- ------- --------
Total $162,519 $133,181 $68,789 $364,489
======== ======== ======= ========
</TABLE>
<PAGE>
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. Accrual of interest is
discontinued on a loan when management believes the borrowers' 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.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 166 $230 $147 $50 $77
Restructured loans 43 - 8 - 204
Accruing loans past-due 90 days or more 805 466 343 508 234
------ ---- ---- ---- ------
Total non-performing loans 1,014 696 498 558 515
Other real estate owned 84 48 - 86 1,339
------ ---- ---- ---- ------
Total non-performing loans and assets $1,098 $744 $498 $644 $1,854
====== ==== ==== ==== ======
</TABLE>
The amount of interest which would have been recorded in 1998 on
non-accrual loans, had they been in accordance with the original terms
throughout the period, was immaterial.
<PAGE>
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,
----------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses - beginning of year $5,971 $6,163 $6,321 $6,653 $6,717
Charge - offs:
Commercial, financial and agricultural 158 47 5 - 26
Real estate:
Mortgage:
One to four family residential 41 86 106 34 89
Commercial 15 - - - -
Equityline 32 - - - -
Other - 23 - 209 -
Consumer 298 307 428 220 181
-------- -------- -------- -------- --------
Total charge-offs 544 463 539 463 296
Recoveries:
Commercial, financial and agricultural 11 13 - 54 29
Real estate:
Construction - - 19 - -
Mortgage:
One to four family residential 20 59 131 19 27
Equityline 8 - - - 15
Other 5 - - - 20
Consumer 67 139 91 58 141
-------- -------- -------- -------- --------
Total recoveries 111 211 241 131 232
-------- -------- -------- -------- --------
Net charge-offs 433 252 298 332 64
Provision for loan losses 155 60 140 - -
Additions from bank acquisition 269 - - - -
-------- -------- -------- -------- --------
Allowance for loan losses - end of year $5,962 $5,971 $6,163 $6,321 $6,653
Average loans outstanding during the year $362,298 $340,195 $310,389 $270,563 $242,360
Ratio of net charge-offs to average loans outstanding 0.12% 0.07% 0.10% 0.12% 0.03%
</TABLE>
<PAGE>
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>
(Dollars in thousands) December 31,
----------------------------------------------------------------------------------
% of loans % of loans % of loans
in each in each in each
category to category to category to
1998 total loans 1997 total loans 1996 total loans
---- ----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $2,200 24% $2,149 24% $2,214 22%
Real estate:
Construction 100 2% 60 1% 76 1%
Mortgage:
One to four family residential 1,100 31% 1,194 30% 1,245 36%
Commercial 550 17% 537 17% 566 17%
Equityline 200 8% 239 8% 204 6%
Other 212 7% 239 8% 248 6%
Consumer 1,500 10% 1,493 10% 1,537 11%
Lease financing 100 1% 60 2% 73 1%
------ ------ ------ ------
$5,962 100% $5,971 100% $6,163 100%
====== === ====== ====== ====== ======
<CAPTION>
% of loans % of loans
in each in each
category to category to
1995 total loans 1994 total loans
---- ----------- ---- -----------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $1,264 20% $774 14%
Real estate:
Construction 63 1% 247 1%
Mortgage:
One to four family residential 2,188 39% 2,813 43%
Commercial 853 15% 1,061 16%
Equityline 260 5% 277 4%
Other 408 7% 460 8%
Consumer 1,222 13% 1,021 13%
Lease financing 63 - - 1%
------ ------ ------ ---
$6,321 100% $6,653 100%
====== ====== ====== ===
</TABLE>
<PAGE>
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>
Year ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996
(Dollars in thousands) ------------------------ ---------------------- ------------------------
Average Average Average Average Average Average
Balances Rates Balances Rates Balances Rates
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C>
Non-interest bearing demand $ 69,746 - $ 63,783 - $ 57,773 -
Interest bearing demand 78,283 1.37% 76,080 1.62% 70,443 1.74%
Savings 92,657 2.51% 87,577 2.58% 83,761 2.63%
Time deposits 285,869 5.36% 270,863 5.44% 247,575 5.45%
-------- -------- ---------
Total deposits $ 526,555 $498,303 $ 459,552
========= ======== =========
</TABLE>
Maturities of $100,000 or more time certificates of deposit at December 31,
1998 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Maturity Category
<S> <C>
Three months or less $25,728
Over three through six months 13,560
Over six months through twelve months 13,585
Over one year through five years 7,190
Over five years -
-------
$60,063
=======
</TABLE>
<PAGE>
VII. RETURN ON EQUITY AND ASSETS
The following table presents certain ratios of the Company:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Return on assets (net income divided by average total assets) 0.91% 1.17% 0.84%
Return on equity - including Series B and C preferred 9.92% 14.47% 10.85%
(net income divided by average total equity)
Dividend payout ratio (Dividends paid divided by net income) 10.38% 8.85% 13.45%
Equity to assets ratio - including Series B and C preferred 9.16% 8.06% 7.74%
(Average equity divided by average total assets)
</TABLE>
VIII. CAPITAL ADEQUACY
The following table presents certain calculations of BancShares' capital and
related ratios:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Total Shareholders' Equity $56,033 $54,984 $44,778
Tier 1 capital 51,240 34,380 27,891
Total capital (1) 65,666 38,449 31,861
Tier 1 capital ratio (2) 16.01% 11.43% 9.33%
Total capital ratio (2) 20.52% 12.78% 10.66%
</TABLE>
(1) The Capital Securities issued in 1998 are considered part of Tier I Capital.
(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.
<PAGE>
IX. RATE OF INTERNAL CAPITAL GENERATION
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Return on average assets (based on net income) 0.91% 1.17% 0.84%
Average equity as a percentage of total average assets 9.16% 8.06% 7.74%
Return on average equity 9.92% 14.47% 10.85%
Dividend payout ratio (Dividends paid divided by net income) 10.38% 8.85% 13.45%
Earnings retention 89.62% 91.15% 86.55%
(Net income less dividends divided by net income)
Rate of internal capital generation 8.89% 13.19% 9.39%
(Return on average equity times earnings retention ratio)
</TABLE>
<PAGE>
X. INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands)
31-Dec-98
----------------------------------------------------------------------------------
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 $ 93,298 $14,098 $14,943 $ - $242,150 $364,489
Investment Securities 5,197 17,212 17,266 43,546 118,346 201,567
Temporary Investments 19,535 - - - - 19,535
Other - 5,108 - - - 5,108
--------- -------- -------- -------- -------- --------
Total earning assets $118,030 $36,418 $32,209 $43,546 $360,496 $590,699
========= ======== ======== ======== ======== ========
Interest-Bearing Liabilities:
Savings and core time deposits $225,668 $45,392 $64,395 $33,998 $49,686 $419,139
Time deposits of $100,000 and more 10,776 14,952 13,560 13,585 7,190 60,063
Short-term borrowings 5,124 - - - - 5,124
Long-term obligations - - - - 23,000 23,000
--------- -------- -------- -------- -------- --------
Total interest bearing liabilites $241,568 $60,344 $77,955 $47,583 $79,876 $507,326
========= ======== ======== ======== ======== ========
Interest sensitive Gap $(123,538) $(23,926) $(45,746) $(4,037) $280,620 $83,373
========= ======== ======== ======== ======== ========
</TABLE>
Interest sensitivity is continually changing. The table above reflects
BancShares' gap position at December 31, 1998 and does not necessarily represent
its position on any other dates.
<PAGE>
XI. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
--------------------- -------------------- ---------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements
At December 31 $ 4,953 3.35% $ 4,761 5.62% $ 3,838 6.71%
Average during year 5,655 4.09% 4,819 4.18% 2,934 4.04%
Maximum month-end balance during year 6,459 5,929 4,507
U. S. Treasury tax and loan accounts
At December 31 $ 171 4.11% $ 2,065 5.25% $ 1,226 5.15%
Average during year 861 5.97% 997 5.85% 1,052 5.09%
Maximum month-end balance during year 2,206 2,215 1,300
</TABLE>
<PAGE>
ITEM 2 - PROPERTIES
BancShares does not own or lease any real property. Except for two 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, 1998 there were 45 Southern offices in North
Carolina. These offices are listed on page 41 of BancShares' 1998 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 required by this item is incorporated herein by reference
to the section captioned "Market for the Registrant's Common Stock and Related
Shareholder Matters" on page 15, and the Table captioned "Per Share of Stock" on
page 16 of the Registrant's 1998 Annual Report.
ITEM 6 - SELECTED FINANCIAL DATA:
Information required by this item is incorporated herein by reference
to the section captioned Table 1, Five-Year Financial Summary, Selected Balances
and Ratios, on page 4 of Registrant's 1998 Annual Report.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
Information required by this item is incorporated herein by reference
to the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 4 through 16 of the Registrant's
1998 Annual Report.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is incorporated herein by reference
to the section captioned "Market Risk" on page 10 of the Registrant's 1998
Annual Report.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The information required by this item is incorporated herein by
reference to the following financial statements, supplementary data, and
independent auditors' report on the indicated page numbers of the Registrant's
1998 Annual Report:
Independent Auditors' Report 17
Consolidated Balance Sheets as of December 31, 1998 and 1997 18
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 19
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 20
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996 21
Notes To Consolidated Financial Statements 22-38
<PAGE>
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",
"Section 16(a) Beneficial Ownership Reporting Compliance," and "Executive
Officers" on pages 5 through 7 and page 9 of Registrant's definitive Proxy
Statement dated March 26, 1999, is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION:
The information under the captions "Compensation of Directors",
"Compensation Committee Interlocks and Insider Participation", "Executive
Compensation", "Pension Plan", and "Employment Contracts, Termination of
Employment and Change-in-Control Arrangements" on pages 7 through 8 and pages 10
through 11 of the Registrant's definitive Proxy Statement dated March 26, 1999,
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 1 through 4 of the
Registrant's definitive Proxy Statement dated March 26, 1999, is incorporated
herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information contained in Footnote (3) to the table under the caption
"PROPOSAL 1: ELECTION OF DIRECTORS," and the information under the captions
"Compensation Committee Interlocks and Insider Participation" on page 8 and
"Transactions with Management" on pages 12 through 13 of the Registrant's
definitive Proxy Statement dated March 26, 1999, is incorporated herein by
reference.
<PAGE>
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 1998 Annual Report to Shareholders.
. Independent Auditors' Report
. Consolidated Balance Sheets at December 31, 1998 and 1997
. Consolidated Statements of Income for the years ended December
31, 1998, 1997 and 1996
. Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
. Consolidated Statements of Changes in Shareholders' equity for
the years ended December 31, 1998, 1997 and 1996
. 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 1998 Annual Report to Shareholders.
3. Exhibits
The following exhibits are filed or incorporated herewith as part
of this report on Form 10-K:
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
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) 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 as amended April 15, 1998 (filed herewith)
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* Ninth Amendment to Noncompetition and Consulting Agreement
between R. S. Williams and Southern Bank and Trust Company dated
December 31, 1998 (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)
10.4* Employment Agreement between Watson N. Sherrod, Jr. and Southern
Bank and Trust Company (filed herewith)
10.5 Amended and Restated Trust Agreement of Southern Capital Trust I
(filed as Exhibit 4.3 to Amendment No. 1 to Registrant's
Registration Statement on Form S-4 (No. 333-52107) filed June
3, 1998 and incorporated herein by reference).
10.6 Form of Guarantee Agreement (filed as Exhibit 4.5 to Amendment
No. 1 to Registrant's Registration Statement on Form S-4 (No.
333-52107) filed June 3, 1998 and incorporated herein by
reference).
10.7 Junior Subordinated Indenture between Registrant and Bankers
Trust Company, as Debenture Trustee (filed as Exhibit 4.6 to
Amendment No. 1 to Registrant's Registration Statement on Form
S-4 (No. 333-52107)filed June 3, 1998 and incorporated herein by
reference).
13 Registrant's 1998 Annual Report to Shareholders (filed herewith)
22 Subsidiaries of the Registrant (filed herewith)
27 Financial Data Schedule (filed herewith)
99.1** Registrant's definitive Proxy Statement dated March 26, 1999
for the 1999 Annual Shareholders' Meeting
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the fourth quarter of the year
ended December 31, 1998.
* Denotes a Management Contract or compensatory plan or arrangement in which
an executive officer or director of the Company participates
** Not being refiled
<PAGE>
SIGNATURES
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 16, 1999 SOUTHERN BANCSHARES (N.C.), INC.
By: /s/ R. S. Williams
------------------
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 16, 1999
- - ----------------- Directors
R. S. Williams
/s/David A. Bean Treasurer (principal March 15, 1999
- - ---------------- financial and accounting
David A. Bean officer)
/s/Bynum R. Brown Director March 19, 1999
- - -----------------
Bynum R. Brown
/s/William H. Bryan Director March 18, 1999
- - -------------------
William H. Bryan
/s/D. Hugh Carlton Director March 19, 1999
- - ------------------
D. Hugh Carlton
/s/Robert J. Carroll Director March 19, 1999
- - --------------------
Robert J. Carroll
/s/Hope H. Connell Director March 18, 1999
- - ------------------
Hope H. Connell
/s/J. Edwin Drew Director March 22, 1999
- - ----------------
J. Edwin Drew
/s/Sam E. Ewell, Jr. Director March 22, 1999
- - -------------------
Sam E. Ewell, Jr.
<PAGE>
/s/Moses B. Gillam, Jr. Director March 18, 1999
- - ----------------------
Moses B. Gillam, Jr.
/s/Leroy C. Hand, Jr. Director March 25, 1999
- - --------------------
LeRoy C. Hand, Jr.
/s/J. D. Hines Director March 22, 1999
- - --------------
J. D. Hines
/s/Frank B. Holding Director March 16, 1999
- - -------------------
Frank B. Holding
/s/George A. Hux Director March 22, 1999
- - ----------------
George A. Hux
/s/M. J. McSorley Director March 16, 1999
- - -----------------
M. J. McSorley
/s/W. B. Midyette, Jr. Director March 18, 1999
- - ---------------------
W. B. Midyette, Jr.
/s/W. Hunter Morgan Director March 19, 1999
- - -------------------
W. Hunter Morgan
/s/John C. Pegram, Jr. Director March 16, 1999
- - ---------------------
John C. Pegram, Jr.
/s/Charles I. Pierce Director March 24, 1999
- - ---------------------
Charles I. Pierce, Sr.
/s/W. A. Potts Director March 16, 1999
- - --------------
W. A. Potts
/s/Charles L. Revelle, Jr. Director March 19, 1999
- - -------------------------
Charles L. Revelle, Jr.
<PAGE>
/s/Watson N. Sherrod, Jr. Director March 22, 1999
- - ------------------------
Watson N. Sherrod, Jr.
/s/ Charles O. Sykes Director March 16, 1999
- - --------------------
Charles O. Sykes
/s/ Raymond M. Sykes Director March 23, 1999
- - --------------------
Raymond M. Sykes
/s/John N. Walker Director March 16, 1999
- - -----------------
John N. Walker
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibits
------ --------
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) 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 as amended April 15, 1998 (filed herewith)
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 Ninth Amendment to Noncompetition and Consulting Agreement
between R. S. Williams and Southern Bank and Trust Company dated
December 31, 1998 (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)
10.4 Employment Agreement between Watson N. Sherrod, Jr. and Southern
Bank and Trust Company (filed herewith)
10.5 Amended and Restated Trust Agreement of Southern Capital Trust I
(filed as Exhibit 4.3 to Amendment No. 1 to Registrant's
Registration Statement on Form S-4 (No. 333-52107) filed June
3, 1998 and incorporated herein by reference).
10.6 Form of Guarantee Agreement (filed as Exhibit 4.5 to Amendment
No. 1 to Registrant's Registration Statement on Form S-4 (No.
333-52107) filed June 3, 1998 and incorporated herein by
reference).
10.7 Junior Subordinated Indenture between Registrant and Bankers
Trust Company, as Debenture Trustee (filed as Exhibit 4.6 to
Amendment No. 1 to Registrant's Registration Statement on Form
S-4 No. 333-52107 filed June 3, 1998 and incorporated herein by
reference).
13 Registrant's 1998 Annual Report to Shareholders (filed herewith)
22 Subsidiaries of the Registrant (filed herewith)
27 Financial Data Schedule (filed herewith)
99.1 Registrant's definitive Proxy Statement dated March 26, 1999
for the 1999 Annual Shareholders' Meeting (not being refiled)
Exhibit 3.2
BYLAWS OF SOUTHERN BANCSHARES (N.C.), INC.
(As Amended April 15, 1998)
Index
ARTICLE I
Offices
Section 1. Principal Office
Section 2. Registered Offices
Section 3. Other Offices
ARTICLE II
Meetings of Shareholders
Section 1. Place of Meetings
Section 2. Annual Meetings
Section 3. Special Meetings
Section 4. Notice of Meetings
Section 5. Voting Lists
Section 6. Quorum
Section 7. Proxies
Section 8. Voting of Shares
Section 9. Informal Action By Shareholders
Section 10. Presiding Officer
ARTICLE III
Directors
Section 1. General Powers
Section 2. Number, Term and Qualifications
Section 3. Election of Directors
Section 4. Removal
Section 5. Vacancies
Section 6. Chairman of the Board
Section 7. Compensation
Section 8. Committees of the Board
ARTICLE IV
Meetings of Directors
Section 1. Regular Meetings
Section 2. Special Meetings
Section 3. Notice of Meetings
Section 4. Quorum
Section 5. Manner of Acting
Section 6. Informal Action by Directors
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ARTICLE V
Executive Committee
Section 1. Membership and General Powers
Section 2. Vacancies
Section 3. Removal
Section 4. Minutes
Section 5. Responsibility of Directors
ARTICLE VI
Officers
Section 1. Number
Section 2. Election and Term
Section 3. Removal
Section 4. Compensation
Section 5. Chairman of the Board, Vice Chairman of the
Board and President
Section 6. Additional Duties of President
Section 7. Vice Presidents
Section 8. Secretaries
Section 9. Assistant Secretaries
Section 10. Treasurer
Section 11. Assistant Treasurers
Section 12. Other Officers
Section 13. Bonds
ARTICLE VII
Contracts, Loans, Checks and Deposits
Section 1. Contracts
Section 2. Loans
Section 3. Checks and Drafts
Section 4. Deposits
ARTICLE VIII
Certificates of Stock and Their Transfer
Section 1. Certificates of Stock
Section 2. Transfer of Stock
Section 3. Fixing Record Date
Section 4. Lost Certificates
Section 5. Registered Shareholders
Section 6. Treasury Shares
<PAGE>
ARTICLE IX
General Provisions
Section 1. Dividends
Section 2. Seal
Section 3. Annual Statement
Section 4. Notice and Waiver of Notice
Section 5. Amendments
Section 6. Fiscal Year
Section 7. Indemnification
Section 8. Disallowance of Deductions
<PAGE>
BYLAWS OF SOUTHERN BANCSHARES (N.C.), INC.
(As Amended April 15, 1998)
ARTICLE I
Offices
Section 1. Principal Office: The principal office of the corporation
shall be located in Mount Olive, Wayne County, North Carolina.
Section 2. Registered Offices: The registered office of the corporation
required by law to be maintained in the State of Delaware shall be located in
Wilmington, New Castle County, Delaware. The registered office of the
corporation required by law to be maintained in the State of North Carolina may
be, but need not be, identical with the principal office.
Section 3. Other Offices: The corporation may have offices at such
other places, either within or without the State of Delaware, as the Board of
Directors from time to time may determine, or as the affairs of the corporation
may require.
ARTICLE II
Meetings of Shareholders
Section 1. Place of Meetings: All meetings of shareholders shall be
held at the principal office of the corporation or at such other place, either
within or without the State of Delaware, as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting or agreed
upon by a majority of the shareholders entitled to vote thereat.
Section 2. Annual Meetings: The annual meeting of shareholders shall be
held at the designated location on such date during the first six months of each
year as shall be determined by the Chairman of the Board, the President or the
Board of Directors. The purpose of such annual meeting shall be to elect
directors of the corporation and for the transaction of such other business as
may properly be brought before the meeting.
Section 3. Special Meetings: Special meetings of the shareholders may
be called at any time by the Chairman of the Board, Vice Chairman of the Board,
President or Secretary, and shall be called by the President or Secretary at the
request in writing of a majority of the Board of Directors. Such
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written request shall state the purpose or purposes of the proposed meeting.
Business transacted at any special meeting of shareholders shall be
limited to the purpose stated in the notice.
Section 4. Notice of Meetings: Written or printed notice stating the
place, day and hour of the meeting shall be delivered not less than ten nor more
than sixty days before the date thereof, either personally or by mail, by or at
the direction of the Chairman of the Board, Vice Chairman of the Board,
President, Secretary, or other person calling the meeting, to each shareholder
of record entitled to vote at such meeting.
In the case of an annual meeting, the notice of meeting need not
specifically state the business to be transacted thereat unless such a statement
is expressly required by the provisions of the General Corporation Law of the
State of Delaware.
In the case of a special meeting, the notice of meeting shall
specifically state the purpose or purposes for which the meeting is called. In
the case of a special meeting called by the written request of a majority of the
members of the Board of Directors or the written request of the holders of a
majority in amount of the entire capital stock of the corporation issued,
outstanding and entitled to vote, the notice also shall state that the meeting
is being called upon such written request.
When a meeting is adjourned for thirty (30) days or more, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each shareholder of record entitled
to vote at the meeting. When a meeting is adjourned for less than thirty (30)
days in any one adjournment, it is not necessary to give any notice of the
adjourned meeting other than by announcement of the time and place thereof at
the meeting at which the adjournment is taken.
Section 5. Voting Lists: The officer who has charge of the stock ledger
of the corporation shall prepare and make, at least ten days before every
meeting of shareholders, a complete list of the shareholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
shareholder and the number of shares registered in the name of each shareholder.
Such list shall be opened to the examination of any shareholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be
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held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any shareholder who is present.
Section 6. Quorum: The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business except as otherwise provided by the General Corporation
Law of the State of Delaware or by the Certificate of Incorporation of the
corporation. If, however, such quorum shall not be present or represented at any
meeting of the shareholders, the shareholders entitled to vote thereat, present
in person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting, at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified.
The shareholders present at a duly organized meeting may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Section 7. Proxies: Each shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent to corporate action in writing
without a meeting may vote in person or may authorize another person or persons
to act for him by proxy, but no such proxies shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period.
Section 8. Voting of Shares: Unless otherwise provided in the
Certificate of Incorporation and subject to the provisions of the General
Corporation Law of the State of Delaware, each shareholder shall at every
meeting of shareholders be entitled to one vote for each share of issued and
outstanding capital stock held by such shareholder. If the Certificate of
Incorporation provides for more or less than one vote for any share on any
matter, any reference in these Bylaws to a majority or other proportion of stock
shall refer to such majority or other proportion of the votes of such stock.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one which by express provision of the statutes or of the Certificate of
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Incorporation, a different vote is required in which case such express provision
shall govern and control the decision of such question.
Voting on all matters except the election of directors shall be by
voice vote or by a show of hands unless the holders of a majority of the shares
represented at the meeting shall, prior to the voting on any matter, demand a
ballot vote on that particular matter.
Section 9. Informal Action by Shareholders: Unless otherwise provided
in the Certificate of Incorporation, any action required to be taken at any
annual or special meeting of shareholders of the corporation, or any action
which may be taken at any annual or special meeting of such shareholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those shareholders who have not consented in writing.
Section 10. Presiding Officer: The succession order for purposes of
these Bylaws shall be: the Chairman of the Board, Vice Chairman of the Board,
President, Executive Vice President in order of seniority, Senior Vice President
in order of seniority, and Secretary. In the event neither the Chairman of the
Board, the Vice Chairman of the Board, nor the President is present, the
shareholders may elect a Chairman of the meeting.
ARTICLE III
Directors
Section 1. General Powers: The business and affairs of the corporation
shall be managed by the Board of Directors or by such Committees of the Board as
the Board may establish pursuant to these Bylaws. The directors shall have and
exercise full power in the management and conduct of the business and affairs of
the corporation and do all such lawful acts and things as are not by statute, or
by Certificate of Incorporation, or by these Bylaws directed or required to be
exercised or done by the shareholders.
Section 2. Number, Term and Qualifications: The number of directors of
the corporation shall be not less than five nor more than thirty. The directors,
by a majority vote of
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the remaining directors, though less than a quorum, or by the sole remaining
director, shall determine the exact number of directors, which shall be not less
than five nor more than thirty without a Bylaw modification. Each director shall
hold office until his death, resignation, retirement, removal, disqualification,
or until his successor is elected and qualified. Directors need not be residents
of the State of Delaware nor shareholders of the corporation; provided, however,
that not less than three fourths (3/4) of the directors shall be residents of
the State of North Carolina and stock ownership for qualification shall be
subject to North Carolina law.
Section 3. Election of Directors: Except as provided in Section 5 of
this Article, the directors shall be elected by written ballot at the annual
meeting of the shareholders and those persons who receive the highest number of
votes shall be deemed to have been elected.
Section 4. Removal: Any director may be removed from office, with or
without cause, by a vote of shareholders holding a majority of the shares
entitled to vote at an election of directors. If any directors are so removed,
new directors may be elected at the same meeting.
Section 5. Vacancies: Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority vote of the directors then in office, though less than a quorum,
or by a sole remaining director, and the directors so chosen shall hold office
until the next annual election and until their successors are duly elected and
shall qualify, unless sooner displaced. If there are no directors in office,
then an election of directors may be held in the manner provided by statute. If,
at the time of filling any vacancy or any newly created directorship, the
directors then in office shall constitute less than a majority of the whole
Board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any shareholder or shareholders owning at
least ten percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office.
Section 6. Chairman of the Board: There may be a Chairman of the Board
of Directors elected by the directors from their number at any meeting of the
Board. The Chairman shall preside at all meetings of the Board of directors and
perform such other duties as may be directed by the Board.
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Section 7. Compensation: The Board of Directors may compensate
directors for their services as such and may provide for the payment of all
expenses incurred by directors in attending regular and special meetings of the
Board. Members of special or standing committees of the Board of Directors may
be allowed like compensation for attending such committee meetings.
Section 8. Committees of the Board: The Board of Directors may, by
resolution adopted by a majority of the whole Board, designate one or more
committees of the Board, each committee to consist of two or more directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. Any such committee, to the extent provided in the
resolution and these Bylaws, shall have and may exercise the powers of the Board
of Directors in the management of the business and affairs of the corporation
and may authorize the seal of the corporation to be affixed to all papers which
may require it, except as limited by the provisions of the General Corporation
Law of the State of Delaware; provided, however, that in the absence or
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Such committee or committees shall have such name or names
as may be determined from time to time by resolution adopted by the Board of
Directors or as set forth in these Bylaws. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
ARTICLE IV
Meetings of Directors
Section 1. Regular Meetings: A regular meeting of the Board of
Directors will be held immediately after, and at the same place as, the annual
meeting of shareholders. In addition, the Board of Directors may provide, by
resolution, the time and place, either within or without the State of Delaware,
for the holding of additional regular meetings, one of which will be held in
each calendar quarter.
Section 2. Special Meetings: Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, Vice Chairman
of the Board, President or any two directors. Such meetings may be held either
within or without the State of Delaware.
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Section 3. Notice of Meetings: Regular meetings of the Board of
Directors may be held without notice.
The person or persons calling a special meeting of the Board of
Directors shall, at least one day before the meeting, give notice thereof by any
usual means of communication. Such notice need not specify the purpose for which
the meeting is called.
Section 4. Quorum: A majority of the Board of Directors as established
by the Bylaws and fixed by the Board of Directors shall constitute a quorum for
the transaction of business at any meeting of the Board of Directors.
Section 5. Manner of Acting: Except as otherwise provided in these
Bylaws, or as specifically provided by statute or by the Certificate of
Incorporation, the act of the majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 6. Informal Action by Directors: Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
of a committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board or the
committee, whether done before or after the action so taken.
ARTICLE V
Executive Committee
Section 1. Members and General Powers: A majority of the qualified
members of the Board of Directors then in office may, by proper resolution,
appoint an Executive Committee which shall be composed of not less than three
nor more than eight directors who shall have and exercise the powers of the
Board of Directors in the management of the business affairs of the corporation,
except at such time as the Board of Directors is in session. However, the Board
of Directors shall have the power to direct, limit or control said Executive
Committee by resolution at any special or regular meeting or by general rules
adopted for its guidance. The Executive Committee shall not have any authority
to take any action prohibited by the General Corporation Law of the State of
Delaware; provided, however, that such Executive Committee
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shall have the power to declare dividends and to authorize the issuance of
stock.
A majority of the members of the Executive Committee shall constitute a
quorum. Further, the Executive Committee shall have authority to take informal
action by written consent as provided in Article IV, Section 6 for the Board of
Directors.
Section 2. Vacancies: Any vacancy occurring on the Executive Committee
shall be filled by the vote of a majority of the number of qualified directors
at a regular or special meeting of the Board of Directors.
Section 3. Removal: Any member of the Executive Committee may be
removed at any time with or without cause by a majority of the number of
qualified directors then in office.
Section 4. Minutes: The Executive Committee shall keep regular minutes
of its proceedings and report the same to the Board when required.
Section 5. Responsibility of Directors: The designation of an Executive
Committee and the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any responsibility or
liability imposed upon it or him by law.
If such action taken by the Executive Committee is not thereafter
formally considered by the full Board, a director may dissent from such action
by filing his written objection with the Secretary with reasonable promptness
after learning of such action.
ARTICLE VI
Officers
Section 1. Number: The officers of the corporation shall consist of a
Chairman of the Board, Vice Chairman of the Board, President and Secretary and
may also consist of one or more Executive Vice Presidents, one or more Senior
Vice Presidents, one or more Vice Presidents, a Treasurer, and other specially
designated Vice Presidents or Assistant Vice Presidents as may be determined by
the Board of Directors, and such Assistant Secretaries and other officers as may
be deemed necessary or advisable by the Board of Directors, each of which
officers or assistant officers thereto shall have such powers as may be
delegated to them by the Board of Directors and these Bylaws. Any two or more
offices may be held by the
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same person, except that no officer may act in more than one capacity where
action of two or more officers is required.
Section 2. Election and Term: The officers of the corporation shall be
elected by the Board of Directors. Such elections may be held at any regular or
special meeting of the Board. Each officer shall hold office until his death,
resignation, retirement, removal, disqualification, or until his successor is
duly elected and qualified.
Section 3. Removal: Any officer or agent elected or appointed by the
Board of Directors may be removed by the affirmative vote of a majority of the
Board with or without cause; but such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
Section 4. Compensation: The compensation of all officers of the
corporation shall be fixed by the Board of Directors or as delegated by the
Board of Directors.
Section 5. Chairman of the Board, Vice Chairman of the Board and
President: The Chairman of the Board shall preside at all meetings of the Board
of Directors, the Executive Committee and the meetings of shareholders. In his
absence or disability, the Vice Chairman shall perform the duties of the
Chairman of the Board at all such meetings. In the absence or disability of both
the Chairman of the Board and the Vice Chairman of the Board, the President
shall perform such duties.
Section 6. Additional Duties of President: The President shall be the
principal executive officer of the corporation and, subject to the control of
the Board of Directors shall supervise and control the management of the
corporation in accordance with these Bylaws. He shall sign, with any other
proper officer, certificates for shares of the corporation and any deeds,
leases, mortgages, bonds, contracts or other instruments which may be lawfully
executed on behalf of the corporation, except where required or permitted by law
to be otherwise signed and executed and except where the signing and execution
thereof shall be delegated by the Board of Directors to some other officer or
agent and, in general, he shall perform all duties incident to the office of
President and such other duties as may be prescribed by the Board of Directors
from time to time.
Section 7. Vice Presidents: In the absence of the President or in the
event of his death, inability or refusal to act, the Vice Presidents in the
order of succession herein specified and in the order of their length of service
within the category or class of Vice President, unless otherwise determined by
the Board of Directors, shall perform the duties of the President and when so
acting shall have all the powers
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of and be subject to all the restrictions upon the President. Any Vice
President, with the Secretary and/or Assistant Secretary, may sign certificates
for shares of the corporation; and shall perform such other duties as from time
to time may be assigned to him by the President or the Board of Directors.
Section 8. Secretary: The Secretary shall attend and keep accurate
records of the acts and proceedings of all meetings of shareholders and
directors. He shall give or cause to be given all notices required by law and by
these Bylaws. He shall have general charge of the corporate books and records
and of the corporate seal, and he shall affix the corporate seal to any lawfully
executed instrument requiring it. He shall have general charge of the stock
transfer books of the corporation and shall keep, at the registered or principal
office of the corporation, a record of shareholders showing the name and address
of each shareholder and the number and class of the shares held by each. He
shall sign such instruments as may require his signature, and, in general, shall
perform all duties incident to the office of Secretary and such other duties as
may be assigned him from time to time by the President or by the Board of
Directors.
Section 9. Assistant Secretaries: In the absence of the Secretary or in
the event of his death, inability or refusal to act, the Assistant Secretaries
in the order of their length of service as Assistant Secretaries, unless
otherwise determined by the Board of Directors, shall perform the duties of the
Secretary, and when so acting shall have all the powers of and be subject to all
the restrictions upon the Secretary. They shall perform such other duties as may
be assigned to them by the Secretary, by the President or by the Board of
Directors. Any Assistant Secretary may sign, with the President, or a Vice
President, or other authorized officer, certificates for shares of the
corporation.
Section 10. Treasurer: The Treasurer shall have custody of all funds
and securities belonging to the corporation and shall receive, deposit or
disburse the same under the direction of the Board of Directors. He shall keep
full and accurate accounts of the finances of the corporation and shall render
to the President and Board of Directors, at its regular meetings or when the
Board of Directors so requires, an account of all his transactions as Treasurer
and of the financial condition of the corporation. The Treasurer, in general,
shall perform all duties incident to his office and such other duties as may be
assigned to him from time to time by the President or by the Board of Directors.
Section 11. Assistant Treasurers: In the absence of the Treasurer or in
the event of his death, inability, or refusal to act, the Assistant Treasurers
in the order of their length
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of service as Assistant Treasurers, unless otherwise determined by the Board of
Directors, shall perform the duties of the Treasurer, and when so acting shall
have all the powers of and be subject to all the restrictions upon the
Treasurer. They shall perform such other duties as may be assigned to them by
the Treasurer, by the President or by the Board of Directors.
Section 12. Other Officers: The duties of all officers and employees
not defined and enumerated in the Bylaws shall be prescribed and fixed by the
President and in carrying out the authority to do all other acts necessary to be
done to carry out the prescribed duties unless otherwise ordered by the Board of
Directors, including but not limited to the power to sign, certify or endorse
notes, certificates of indebtedness, deeds, checks, drafts or other contracts
for and on behalf of the corporation and/or to affix the seal of the corporation
to such documents as may require it.
Section 13. Bonds: The Board of Directors may by resolution require any
or all officers, agents and employees of the corporation to give bond to the
corporation, with sufficient sureties, conditioned on the faithful performance
of the duties of their respective offices or positions, and to comply with such
other conditions as may from time to time be required by the Board of Directors.
ARTICLE VII
Contracts, Loans, Checks and Deposits
Section 1. Contracts: The Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract, lease, or to execute
and deliver any instrument on behalf of the corporation, and such authority may
be general or confined to specific instances. The Board of Directors may enter
into employment contracts for any length of time it deems wise.
Section 2. Loans: No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or specific in nature and scope.
Section 3. Checks and Drafts: All checks, drafts or other orders for
the payment of money issued in the name of the corporation shall be signed by
such officer or officers, agent or agents of the corporation and in such manner
as from time to time shall be determined by resolution of the Board of
Directors.
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Section 4. Deposits: All funds of the corporation not otherwise
employed from time to time shall be deposited to the credit of the corporation
in such depositories as the Board of Directors shall direct.
ARTICLE VIII
Certificates of Stock and Their Transfer
Section 1. Certificates of Stock: Certificates representing stock in
the corporation shall be issued in such form as the Board of Directors shall
determine to every shareholder for the fully paid shares owned by him; such
stock certificates shall indicate thereon a reference to any and all restrictive
conditions of said stock. These certificates shall be signed by the Chairman of
the Board of Directors, or the Vice Chairman of the Board of Directors, or the
President or any Vice President and the Secretary, an Assistant Secretary,
Treasurer or an Assistant Treasurer or may have facsimile signatures of such
officers placed thereon and such officers shall have the power to make or order
to be made by an authorized officer or transfer agent any and all transfers of
the securities of the corporation. They shall be consecutively numbered or
otherwise identified; and the name and address of the persons to whom they are
issued, with the number of shares and the date of issue, shall be entered on the
stock transfer books of the corporation. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such an officer, transfer agent or registrar at the
date of issue.
Section 2. Transfer of Stock: Transfer of stock shall be made on the
stock transfer books of the corporation only upon surrender of the certificates
for the shares sought to be transferred by the registered holder thereof or by
his duly authorized agent, transferee or legal representative. All certificates
surrendered for transfer shall be cancelled before new certificates for the
transferred shares shall be issued.
Upon surrender to the corporation or its transfer agent of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation or its transfer agent to issue a new certificate to the person
entitled thereto, to cancel the old certificate and to record the transaction
upon its books.
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Section 3. Fixing Record Date: In order that the corporation may
determine the shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of shareholders of record entitled to notice of or
to vote at a meeting of shareholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 4. Lost Certificates: The Board of Directors may authorize and
direct the issuance of a new share certificate or certificates in place of a
certificate or certificates claimed to have been lost, stolen or destroyed, upon
receipt of an affidavit to such fact from the person claiming the loss, theft or
destruction. When authorizing such issuance of a new certificate or
certificates, the Board may, in its discretion and as a condition precedent to
the issuance thereof, require the claimant, or his legal representative, to
advertise the same in such manner as it may require and/or to give the
corporation a bond in such sum as the Board may direct to indemnify the
corporation against loss from any claim with respect to the certificate claimed
to have been lost, stolen or destroyed; or the Board may, by resolution reciting
the circumstances justifying such action, authorize the issuance of the new
certificate or certificates without requiring such a bond.
Section 5. Registered Shareholders: The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice hereof, except as otherwise provided by
the laws of Delaware.
Section 6. Treasury Shares: Treasury shares of the corporation shall
consist of such shares as have been issued and thereafter acquired but not
cancelled by the corporation. Treasury shares shall not carry voting or dividend
rights.
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ARTICLE IX
General Provisions
Section 1. Dividends: Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors or the Executive Committee at any
regular or special meeting, pursuant to law. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation.
Before payment of any dividend, there may be set aside out of any funds
of the corporation available for dividends, such sum or sums as the directors
from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
directors shall think conducive to the interest of the corporation, and the
directors may modify or abolish any such reserve in the manner in which it was
created.
Section 2. Seal: The corporate seal of the corporation shall have
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 3. Annual Statement: The Board of Directors shall present at
each annual meeting, and at any special meeting of the shareholders when called
for by majority vote of the shareholders, a full and clear statement of the
business and condition of the corporation.
Section 4. Notice and Waiver of Notice: Whenever any notice is required
to be given to any shareholder or director under the provisions of the General
Corporation Law of the State of Delaware or under the provisions of the
Certificate of Incorporation or Bylaws of this corporation, it shall not be
construed to mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or shareholder, at his address as it appears on
the records of the corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given by telegram,
telephone, telecopier or other electronic communication media.
Whenever notice is required to be given under the provisions of the
General Corporation Law of the State of Delaware or of the Certificate of
Incorporation or of these Bylaws, a waiver thereof in writing, signed by the
person or
14
<PAGE>
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
The attendance by a director at a meeting of the Board or a committee
of the Board shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 5. Amendments: Except as otherwise provided herein, these
Bylaws may be altered, amended or repealed and new bylaws may be adopted at any
regular meeting of the Board of Directors or the shareholders, or at any special
meeting of the Board of Directors or shareholders if notice of such alteration,
amendment, repeal or adoption, be contained in the notice of said special
meeting.
Section 6. Fiscal Year: The fiscal year of the corporation shall be
fixed by the Board of Directors.
Section 7. Indemnification: The corporation shall indemnify its
officers, directors, employees and agents to the maximum extent permitted by the
General Corporation Law of the State of Delaware.
Section 8. Disallowance of Deductions: Any payments made to or on
behalf of an officer or director of the corporation, including salary,
commission, bonus, interest, rent or entertainment expense incurred by him,
which shall be disallowed in whole or in part as a deductible expense of the
corporation by the Internal Revenue Service (and such determination shall be
acceded to by the corporation, or such determination shall be rendered final by
the appropriate taxing authority, or a judgment of a court of competent
jurisdiction and no appeal shall be taken therefrom, or the applicable period
for filing notice of appeal shall have expired), then such sum shall be
reimbursed by such officer or director to the corporation to the full extent of
such disallowance. It shall be the duty of the Board of Directors to enforce the
payment of any such sum disallowed and such repayment may not be waived.
However, in lieu of such direct payment by the officer or director involved to
the corporation, and subject to the determination of the Board of Directors in
its sole discretion, proportionate amounts may be withheld from future
compensation payments of such officer or director until the amount owed to the
corporation as a result of such disallowance has been fully recovered.
15
STATE OF NORTH CAROLINA
COUNTY OF WAYNE
NINTH AMENDMENT TO NONCOMPETITION AND CONSULTING
AGREEMENT
THIS NINTH AMENDMENT TO NONCOMPETITION AND CONSULTING AGREEMENT "(Ninth
Amendment"), made and entered into as of the 31st day of December, 1998, 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 and has
been extended on December 31 of each year thereafter for a term of one through
December 31, 1998.:
WHEREAS, Southern and Consultant desire to extend the Agreement for an
additional calendar year, now enter into this Ninth 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, 1999
through December 31, 1999.
2. Paragraph 5 of the Agreement, "Covenant Not To Compete," is hereby
amended to provide that the monthly consideration for such Covenant shall be
reduced to $1,116.67, with the first such payment to be made on or before
January 30, 1999, and each successive monthly payment thereafter to be made on
or before the 30th day of each month through and including December 31, 1999.
3. All of the other terms and conditions of said Agreement shall remain in
full force and effect.
<PAGE>
IN TESTIMONY WHEREOF, Southern has caused this ninth 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
- - -----------------------
David A. Bean, Secretary
/s/ Robert S. Williams (SEAL)
----------------------------
Robert S. Williams
STATE OF NORTH CAROLINA
COUNTY OF HALIFAX
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the
15th day of May, 1998 (the "Effective Date"), by and between SOUTHERN BANK AND
TRUST COMPANY ("Southern") and WATSON N. SHERROD, JR. ("Employee").
W I T N E S S E T H:
WHEREAS, Employee heretofore has been employed as President of ENFIELD
SAVINGS BANK, INC., SSB ("Enfield"), and in such position has provided
leadership and guidance in the growth and development of Enfield's business;
and,
WHEREAS, as of the Effective Date, Enfield has been merged into
Southern; and,
WHEREAS, Employee's experience and knowledge of Enfield's operations,
customers and affairs, and his knowledge of and standing and reputation in
Enfield's market area, would be of benefit to Southern in its continuation of
Enfield's business; and, for that reason, Southern desires to retain Employee's
services as an employee of Southern for the Term of Employment specified below,
and Employee desires to become an employee of Southern, all subject to the terms
and conditions provided herein; and,
WHEREAS, for that purpose, Southern and Employee have agreed and desire
to enter into this Agreement to set forth the terms and conditions of Employee's
employment with Southern.
NOW, THEREFORE, in consideration of the premises and mutual promises,
covenants and conditions hereinafter set forth, and for other good and valuable
considerations, the receipt and sufficiency of which hereby are acknowledged,
Southern and Employee hereby agree as follows:
1. Employment. Southern agrees to employ Employee, and Employee accepts
employment with Southern, all upon the terms and conditions stated herein. As an
employee of Southern, Employee will (I) serve as Senior Vice President of
Southern, (ii) provide such assistance and advice to Southern as it may request
from time to time regarding matters involving the former customers and employees
of Enfield, loan quality control and review, product conversion and other tasks
relating to the former operations of Enfield and the transition of control over
such operations to Southern, (iii) promote Southern and its business and engage
in business development activities on Southern's behalf in Enfield's former
market areas, and (iv) have such other duties and responsibilities as shall be
assigned to him by Southern.
In connection with the performance of his duties hereunder,
Employee's office and principal employment location shall be at such place or
places as Southern shall designate; provided, however, that Employee's office
and principal employment location shall not be outside of Halifax County, North
Carolina, without Employee's consent. Notwithstanding anything contained herein
to the contrary, required business travel (including overnight travel) outside
Halifax County in connection with his duties under this Agreement shall not
constitute a violation of this Agreement.
<PAGE>
2. Term. Unless sooner terminated as provided in this Agreement, and
subject to the right of either Employee or Southern to terminate Employee's
employment at any time as provided herein, the term of Employee's employment
with Southern under this Agreement (the "Term of Employment") shall be for a
period of three (3) years commencing on the Effective Date and terminating at
the close of Southern's business on May 14, 2001 (the "Expiration Date").
3. Compensation. For all services rendered by Employee to Southern
under this Agreement, including any services as a member of the Board of
Directors of Southern and/or of Southern's parent company, Southern BancShares
(N.C.), Inc. ("BancShares"), Southern shall pay Employee base salary at an
annual rate of One Hundred Twenty-Two Thousand Two Hundred and No/100 Dollars
($122,200) during the Term of Employment. Employee's Base Salary shall be
increased annually during the Term of Employment by a percentage equal to the
average of the percentage increases during the preceding 12 months in the
salaries of Southern's officers having the title Senior Vice President or
higher. Base salary paid under this Agreement shall be payable not less
frequently than monthly in accordance with Southern's payroll policies and
procedures. All compensation hereunder shall be subject to customary withholding
taxes and such other employment taxes as are required by law.
4. Participation in Retirement and Employee Benefit Plans; Fringe
Benefits. Employee shall be eligible to participate in any and all employee
benefit programs maintained by or for Southern that are generally available to
and which cover all Southern's officers at Employee's job level or
classification, subject to the rules applicable to such plans or programs
prevailing from time to time. Except as otherwise specifically provided herein,
Employee's participation in such plans and programs shall be subject to and in
accordance with the terms and conditions (including eligibility requirements) of
such plans and programs, resolutions of Southern's (or BancShares') Board of
Directors establishing such programs and plans, and Southern's (and BancShares')
normal practices and established policies regarding such plans and programs.
Employee shall receive credit for past full years of service
with Enfield prior to the Effective Date for purposes of (i) participation and
vesting in Southern's defined benefit pension plan (the "Pension Plan") and
Section 401(k) savings plan (the "Savings Plan"), and (ii) except as described
below, for all purposes under all other Southern benefit plans (including
coverage under Southern's health insurance plan and entitlement to vacation and
sick leave); provided, however, that in no event shall Employee be entitled to
or be given credit for past service with Enfield for purposes of the calculation
or determination of benefits under the Pension Plan. For purposes of Southern's
health insurance plan, Employee's participation will be without regard to
pre-existing condition requirements under that plan, provided that any such
pre-existing condition at the Effective Time would have been covered under the
health insurance plan of Enfield. Notwithstanding anything contained herein to
the contrary, if Southern shall believe in good faith that the granting of any
such past service credit would not be permissible under the terms and
requirements of the Employee Retirement Income Security Act of 1974, as amended,
the Internal Revenue Code of 1986, as amended, any governmental rules,
regulations and policies thereunder, or any other law or regulations applicable
to the operation of any such plan or program, or otherwise would expose any such
plan or program or Southern or Bancshares to any penalty, then Southern shall
not be required to give Employee any such credit for past service with Enfield.
<PAGE>
For calendar year 1998, Southern will grant to Employee a
number of days of sick leave and vacation leave, respectively, equal, in each
case, to (i) the full number of such days to which Employee would be entitled
during 1998, based on his credited years of service and in accordance with
Southern's standard leave policies, less (ii) the number of days of sick leave
and vacation used by Employee as an employee of Enfield during 1998 prior to the
Effective Date. Employee will be permitted to carry over accrued and unused sick
leave and vacation leave to the extent such carryover would be consistent with
and would not exceed limitations imposed by Southern's leave policies.
Employee acknowledges that the terms and provisions of
Southern's employee benefit plans and programs may be determined only by reading
the actual plan documents under which Southern, BancShares or the plan
administrator, as applicable, may make certain administrative determinations
with discretion, and that Southern and BancShares reserve the right to modify or
terminate each plan or program and any benefits provided thereunder.
5. Standards of Performance and Conduct. During the Term of Employment,
Employee faithfully and diligently shall discharge his obligations under this
Agreement and shall perform the duties associated with his position with
Southern in a manner which is competent and reasonably satisfactory to Southern,
and Employee shall use his best efforts to implement Southern's policies and
procedures currently in effect or as are established from time to time by
Southern.
Employee, in the execution of his duties under this Agreement,
at all times and in all material respects shall comply with Southern's Code of
Conduct as the same is in effect as of the Effective Date and as it may be
amended or supplemented from time to time subsequent thereto
(the "Code of Conduct"), and with all applicable federal and state statutes and
all rules, regulations, administrative orders, statements of policy and other
pronouncements or standards promulgated thereunder.
6. Termination of Previous Employment Agreement. Employee and Southern
specifically agree that this Agreement supersedes that certain Employment
Agreement dated September 22, 1995, between Employee and Enfield (the "Enfield
Agreement"), and, as additional consideration for Southern's agreements and
obligations under this Agreement, Employee hereby waives any and all rights, and
releases Enfield and Southern from any and all obligations (including all rights
and obligations under Section 10 thereof pertaining to "changes in control"),
under the Enfield Agreement and agrees that the Enfield Agreement hereby is
terminated and shall be of no further force or effect.
7. Noncompetition; Confidentiality.
(a) General. Employee hereby acknowledges and agrees that (i)
Enfield has made a significant investment in the development of its business in
the geographic area identified below as the "Relevant Market" and that, by
virtue of Southern's acquisition of substantially all Enfield's assets, Southern
has acquired a valuable economic interest in Enfield's business in the Relevant
Market which it is entitled to protect; (ii) in the course of his past service
on behalf of Enfield and future service as an employee of Southern, he has
gained and will continue to gain substantial knowledge of and familiarity with
Enfield's and Southern's customers and their dealings with them, and other
information concerning Enfield's and Southern's businesses, all of which
constitute valuable assets and privileged information; and, (iii) in order to
protect Southern's interest in and to assure it the benefit of its succession to
Enfield's business, it is reasonable and necessary to place certain restrictions
on Employee's ability to compete against Southern and on his disclosure of
information about Southern's and Enfield's business and customers. For that
purpose, and in consideration of Southern's agreements contained herein,
Employee covenants and agrees as provided below.
<PAGE>
(b) Covenant Not to Compete. During a period (the "Restriction
Period") commencing on the date of this Agreement and ending on the date one
year following the Expiration Date of the Term of Employment under this
Agreement or, if earlier, the effective date of any termination of Employee's
employment hereunder pursuant to Paragraph 8 below, Employee will not "Compete"
(as defined below), directly or indirectly, with Southern in the geographic area
(the "Relevant Market") consisting of Halifax County, North Carolina, and any
county of North Carolina contiguous thereto (including without limitation the
counties of Warren, Nash, Edgecombe, Bertie and Northampton).
For purposes of this Paragraph 7, the following terms shall
have the meanings set forth below:
Compete. The term "Compete" means: (i) soliciting or securing
deposits from any Person residing in the Relevant Market for any Financial
Institution; (ii) soliciting any Person residing in the Relevant Market to
become a borrower from any Financial Institution, or assisting (other than
through the performance of ministerial or clerical duties) any Financial
Institution in making loans to any such Person; (iii) soliciting any Person
residing in the Relevant Market to obtain any other service or product from any
Financial Institution, (iv) inducing or attempting to induce any Person who was
a Customer of Enfield at the time of its acquisition by Southern, or who was a
Customer of Southern on the date of termination of Employee's employment with
Southern, to change any depository, loan and/or other banking relationship of
the Customer from Enfield or Southern to another Financial Institution; (v)
acting as a consultant, officer, director, advisory director, independent
contractor, or employee of any Financial Institution that has its main or
principal office in the Relevant Market, or, in acting in any such capacity with
any other Financial Institution, to maintain an office or be employed at or
assigned to or to have any direct involvement in the management, supervision,
business, marketing activities, solicitation of business for or operation of any
office of such Financial Institution located in the Relevant Market; or (vi)
communicating to any Financial Institution the names or addresses or any
financial information concerning any Person who was a Customer of Enfield at the
time of its acquisition by Southern, or who was a Customer of Southern at the
date of termination of this Agreement or Employee's employment with Southern for
any reason.
Customer. The term "Customer of Enfield" means any Person with
whom Enfield has or has had a depository or loan relationship and/or to whom
Enfield has provided any other service or product, and the term "Customer of
Southern" means any Person who or which is a resident of or located within the
Relevant Market (as defined above) with whom Southern has or has had a
depository or loan relationship and/or to whom Southern has provided any other
service or product.
Financial Institution. The term "Financial Institution" means
(i) any federal or state chartered bank, savings bank, savings and loan
association or credit union, (ii) any holding company for, or corporation that
owns or controls, any such entity, (iii) any subsidiary or service corporation
of any such entity or holding company, or any entity controlled in any way by
any such entity or holding company, or (iv) any other Person engaged in the
business of making loans of any type, soliciting or taking deposits, or
providing any other service or product that is provided by Southern or one of
its affiliated corporations.
<PAGE>
Person. The term "Person" means any natural person or any
corporation, partnership, proprietorship, joint venture, limited liability
company, trust, estate, governmental agency or instrumentality, fiduciary,
unincorporated association or other entity.
(c) Confidentiality Covenant. Employee covenants and agrees
that any and all data, figures, projections, estimates, lists, files, records,
documents, manuals or other such materials or information (whether financial or
otherwise, and including any files, data or information maintained
electronically, on microfiche or otherwise) relating to Enfield or Southern and
their respective lending and deposit operations and related businesses,
regulatory examinations, financing sources, financial results and condition,
Customers (including lists of Customers and former customers and information
regarding their accounts and business dealings with Enfield or Southern),
prospective customers, contemplated acquisitions (whether of business or
assets), ideas, methods, marketing investigations, surveys, research, policies
and procedures, computer systems and software, shareholders, employees, officers
and directors (herein referred to as "Confidential Information") are
confidential and proprietary to Southern and are valuable, special and unique
assets of Southern's business which are not directly reproducible from any other
source and to which Employee has had access as an officer and employee of
Enfield and will have access during his employment with Southern. Employee
agrees that (i) all such Confidential Information shall be considered and kept
as the confidential, private and privileged records and information of Southern,
and (ii) during the Term of Employment and at all times following the
termination of this Agreement or his employment for any reason, and except as
shall be required in the course of the performance by Employee of his duties on
behalf of Southern or otherwise pursuant to the direct, written authorization of
Southern, Employee will not: divulge any such Confidential Information to any
other Person; remove any such Confidential Information in written or other
recorded form from Southern's premises; or make any use of any Confidential
Information for his own purposes or for the benefit of any Person other than
Southern. However, following the termination of Employee's employment with
Southern, this Paragraph 7(c) shall not apply to any Confidential Information
which then is in the public domain (provided that Employee was not responsible,
directly or indirectly, for permitting such Confidential Information to enter
the public domain without Southern's consent), or which is obtained by Employee
from a third party which or who is not obligated under an agreement of
confidentiality with respect to such information and who did not acquire such
Confidential Information in a manner which constituted a violation of the
covenants contained in this Paragraph 7(c) or which otherwise breached any duty
of confidentiality. Further, the above obligations of confidentiality shall not
prohibit the disclosure of any such Confidential Information by Employee to the
extent such disclosure is required by subpoena or order of a court or regulatory
authority of competent jurisdiction or to the extent that, in the reasonable
opinion of legal counsel to Employee, disclosure otherwise is required by law.
(d) Reasonableness of Restrictions. If any of the restrictions
set forth in this Paragraph 7 shall be declared invalid for any reason
whatsoever by a court of competent jurisdiction, the validity and enforceability
of the remainder of such restrictions shall not thereby be adversely affected.
Employee acknowledges that Enfield has had a substantial business presence in
the Relevant Market, that Southern, through its purchase of Enfield's business,
has acquired a legitimate economic interest of Enfield in those geographic areas
which this Paragraph 7 specifically is intended to protect, and that the
<PAGE>
Relevant Market and Restriction Period are limited in scope to the geographic
territory and period of time reasonably necessary to protect Southern's economic
interest and otherwise are reasonable and proper. In the event the Restriction
Period or any other such time limitation is deemed to be unreasonable by a court
of competent jurisdiction, Employee hereby agrees to submit to such reduction of
the Restriction Period as the court shall deem reasonable. In the event the
Relevant Market is deemed by a court of competent jurisdiction to be
unreasonable, Employee hereby agrees that the Relevant Market shall be reduced
by excluding any separately identifiable and geographically severable area
necessary to make the remaining geographic restriction reasonable, but this
Paragraph 7 shall be enforced as to all other areas included in the Relevant
Market which are not so excluded.
(e) Remedies for Breach. Employee understands and acknowledges
that a breach or violation by him of any of the covenants contained in
Paragraphs 7(b) and 7(c) shall be deemed a material breach of this Agreement and
will cause substantial, immediate and irreparable injury to Southern, and that
Southern will have no adequate remedy at law for such breach or violation. In
the event of Employee's actual or threatened breach or violation of the
covenants contained in either such Paragraph, Southern shall be entitled to
bring a civil action seeking, and shall be entitled to, an injunction
restraining Employee from violating or continuing to violate such covenant or
from any threatened violation thereof, or for any other legal or equitable
relief relating to the breach or violation of such covenant. Employee agrees
that, if Southern institutes any action or proceeding against Employee seeking
to enforce any of such covenants or to recover other relief relating to an
actual or threatened breach or violation of any of such covenants, Employee
shall be deemed to have waived the claim or defense that Southern has an
adequate remedy at law and shall not urge in any such action or proceeding the
claim or defense that such a remedy at law exists. However, the exercise by
Southern of any such right, remedy, power or privilege shall not preclude
Southern or its successors or assigns from pursuing any other remedy or
exercising any other right, power or privilege available to it for any such
breach or violation, whether at law or in equity, including the recovery of
damages, all of which shall be cumulative and in addition to all other rights,
remedies, powers or privileges of Southern.
Notwithstanding anything contained herein to the contrary,
Employee agrees that the provisions of Paragraphs 7(b) and 7(c) above and the
remedies provided in this Paragraph 7(e) for a breach by Employee shall be in
addition to, and shall not be deemed to supersede or to otherwise restrict,
limit or impair the rights of Southern under any state or federal law or
regulation dealing with or providing a remedy for the wrongful disclosure,
misuse or misappropriation of trade secrets or other proprietary or confidential
information.
(f) Survival of Covenants. Employee's covenants and agreements
and Southern's rights and remedies provided for in this Paragraph 7 shall
survive and remain fully in effect following expiration of the Term of
Employment or any actual termination of Employee's employment with Southern
during the Term of Employment).
8. Termination and Termination Pay.
(a) By Employee. Employee's employment under this Agreement
may be terminated at any time by Employee upon sixty (60) days' written notice
to Southern. Upon such termination, Employee shall be entitled to receive
compensation through the effective date of such termination.
<PAGE>
(b) Death or Retirement. Employee's employment under this
Agreement automatically shall be terminated upon his death during the Term of
Employment or upon the effective date of Employee's retirement with Southern's
consent or under the terms of Southern's pension plan. Upon any such
termination, Employee (or, in the case of Employee's death, his estate) shall be
entitled to receive any compensation Employee shall have earned prior to the
date of termination but which remains unpaid.
(c) By Southern. Southern may terminate Employee's employment
at any time during the Term of Employment for "Cause" (as defined below). Upon
any such termination by Southern under this Paragraph 8(c), Employee shall have
no further rights under this Agreement (including any right to receive
compensation or other benefits for any period after such termination).
Notwithstanding anything contained herein to the contrary,
before Southern may terminate Employee's employment for a Cause described in
Paragraph 8(c)(i) below, Southern first shall give Employee ten (10) days
written notice of the facts or circumstances constituting such Cause for
termination, and, if during such period Employee shall cure such Cause to the
reasonable satisfaction of Southern, then Employee's employment shall continue;
provided however, that, in the event of any reoccurrence or further occurrence
of the same Cause, Southern shall have no obligation to give Employee any
further or additional notice or opportunity to cure prior to the termination of
Employee's employment. Except as specifically provided above, no such notice or
opportunity to cure shall be required in the case of termination of Employee's
employment for any Cause.
For purposes of this Paragraph 8(c), Southern shall have
"Cause" to terminate Employee's employment upon:
(i) A determination by Southern, in good faith, that Employee
(A) has breached in any material respect any of the terms or conditions of this
Agreement or of the Code of Conduct, (B) has failed in any material respect to
perform or discharge his duties or responsibilities of employment in the manner
provided herein, or (C) is engaging or has engaged in willful misconduct or
conduct which is detrimental in any material respect to the business prospects
of Southern or which has had or likely will have a material adverse effect on
Southern's business or reputation;
(ii) The violation by Employee of any applicable federal or
state law, or any applicable rule, regulation, order or statement of policy
promulgated by any governmental agency or authority having jurisdiction over
Southern or any of its affiliates or subsidiaries (a "Regulatory Authority"),
including but not limited to the Federal Deposit Insurance Corporation, the
North Carolina Banking Commissioner, the North Carolina State Banking
Commission, the Federal Reserve Board or any other banking regulator, which
results from Employee's gross negligence, willful misconduct or intentional
disregard of such law, rule, regulation, order or policy statement and results
in any substantial damage, monetary or otherwise, to Southern or any of its
affiliates or subsidiaries or to Southern's reputation;
(iii) The commission in the course of Employee's employment
with Southern of an act of fraud, embezzlement, theft or proven personal
dishonesty (whether or not such act or charge results in criminal indictment,
charges, prosecution or conviction);
<PAGE>
(iv) The conviction of Employee of any felony or any criminal
offense involving dishonesty or breach of trust, or the occurrence of any event
described in Section 19 of the Federal Deposit Insurance Act or any other event
or circumstance which disqualifies Employee from serving as an employee or
executive officer of, or a party affiliated with, Southern or BancShares; or, in
the event Employee becomes unacceptable to, or is removed, suspended or
prohibited from participating in the conduct of Southern's or BancShares'
affairs (or if proceedings for that purpose are commenced), by any Regulatory
Authority; or,
(v) The exclusion of Employee by the carrier or underwriter
from coverage under Southern's then current "blanket bond" or other fidelity
bond or insurance policy covering its directors, officers or employees, or the
occurrence of any event which Southern believes, in good faith, will result in
Employee being excluded from such coverage, or having coverage limited as to
Employee as compared to other covered officers or employees, pursuant to the
terms and conditions of such "blanket bond" or other fidelity bond or insurance
policy.
(d) Except as otherwise provided below, upon the earlier of
the Expiration Date of the Term of Employment or the effective date of any
actual termination of Employee's employment with Southern under this Agreement
for any reason, the provisions of this Agreement likewise shall terminate and be
of no further force or effect. However, Employee's covenants contained in
Paragraph 7 above, and Southern's obligations for continued payments of Cash
Compensation under Paragraph 8(b) above, shall survive and remain in effect in
accordance with their terms following the Expiration Date or any actual
termination of Employee's employment.
9. Additional Regulatory Requirements. Notwithstanding anything
contained in this Agreement to the contrary, it is understood and agreed that
Southern (or any of its successors in interest) shall not be required to make
any payment or take any action under this Agreement if:
(a) Southern is declared by any Regulatory Authority to be
insolvent, in default or operating in an unsafe or unsound manner; or,
(b) in the opinion of counsel to Southern such payment or
action (i) would be prohibited by or would violate any provision of state or
federal law applicable to Southern, including without limitation the Federal
Deposit Insurance Act as now in effect or hereafter amended, (ii) would be
prohibited by or would violate any applicable rules, regulations, orders or
statements of policy, whether now existing or hereafter promulgated, of any
Regulatory Authority, or (iii) otherwise would be prohibited by any Regulatory
Authority.
10. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of Southern which shall acquire,
directly or indirectly, by conversion, merger, consolidation, purchase or
otherwise, all or substantially all of the assets of Southern.
(b) Southern is contracting for the unique and personal skills
of Employee. Therefore, Employee shall be precluded from assigning or delegating
his rights or duties hereunder without first obtaining the written consent of
Southern.
<PAGE>
11. Modification; Waiver; Amendments. No provision of this Agreement
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing and signed by the parties hereto. No waiver by
either party hereto, at any time, of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties, except as herein otherwise provided.
12. Applicable Law. The parties hereto agree that without regard to
principles of conflicts of laws, the internal laws of the State of North
Carolina shall govern and control the validity, interpretation, performance and
enforcement of this Agreement and that any suit or action relating to this
Agreement shall be instituted and prosecuted in the Courts of Wayne County,
North Carolina, and each party hereto hereby does waive any right or defense
relating to such jurisdiction and venue, except to the extent that federal law
shall be deemed to apply.
13. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
14. Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
15. Notices. Except as otherwise may be provided herein, all notices,
claims, certificates, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given when hand delivered or
sent by facsimile transmission by one party to the other, or when deposited by
one party with the United States Postal Service, postage prepaid, and addressed
to the other party as follows:
If to Southern: If to Employee:
Southern Bank and Trust Company Watson N. Sherrod, Jr.
121 East Main St. Post Office 486
Mt. Olive, N.C. 28365 Enfield, N.C. 27823
Attention: David A. Bean
16. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed an original
instrument, but all such counterparts together shall constitute but one
agreement.
17. Entire Agreement. This Agreement and the Exhibits and other
documents attached hereto and incorporated herein by reference contain the
entire understanding and agreement of the parties, and there are no agreements,
promises, warranties, covenants or undertakings other than those expressly set
forth or referred to herein.
<PAGE>
IN WITNESS WHEREOF, Southern has caused this Agreement to be
executed by its duly authorized officer in pursuance of authority duly given by
its Board of Directors, and Employee has set hereunto 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, Jr.
-----------------------
John C. Pegram, Jr.
President
/s/ Watson N. Sherrod, Jr. (SEAL)
--------------------------
Watson N. Sherrod, Jr.
SOUTHERN BANCSHARES (N.C.), INC.
1998 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 17, 1999
For Southern BancShares, 1998 was a year of major accomplishments. Your
Company made significant strides in technology, customer service, deposit and
lending growth. Net income decreased $1.0 million, or 15%, from $6.6 million in
1997 to $5.6 million in 1998. This decrease was principally the result of a
donation of appreciated securities which significantly reduced 1997 income
taxes. No similiar contribution was made in 1998. Total deposits of your Company
at December 31, 1998, totaled $557 million compared to $513 million at year-end
1997, an 8% increase. Total loans of your Company at December 31, 1998, totaled
$364 million compared to $349 million at year-end 1997, a 4% increase. Total
consolidated assets of your Company at December 31, 1998, totaled $649 million
compared to $591 million at year-end 1997, a 10% increase.
Net interest income increased 6% during 1998, while noninterest expenses
decreased 12%. To a large extent, we credit balance sheet growth for the
increase in net interest income, while the 1997 additional funding of a
charitable foundation resulted in higher noninterest expenses in 1997. In
addition, the 1998 personnel expenses increased, resulting from a full year of
expenses for three locations acquired in May 1997 and a partial year of expenses
for branches acquired in May 1998, October 1998 and December 1998.
Charitable contribution expenses decreased $4.1 million in 1998. In 1996,
BancShares initially funded a foundation to support charitable organizations by
donating securities which resulted in a $458,000 contribution expense and a
$536,000 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. This donation, and the sale of additional securities,
resulted in $5.6 million of investment gains in 1997.
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 and
consumated branch acquisitions as discussed below.
Acquisitions
During 1998, your Company entered into strategic acquisitions that improved
its position by expanding services to customers in three new North Carolina
markets: Enfield, Gates and Red Springs. As of March 17, 1999 your Company had
45 branches serving 42 North Carolina communities. On March 12, 1999 your
Company announced plans to purchase, subject to regulatory approval, the Ahoskie
branch of First-Citizens Bank &Trust Company. This acquisition is planned for
the third quarter of 1999 and is projected to increase deposits by approximately
$16 million and loans by approximately $8 million.
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 expanded personal computer banking for its
customers in 1998 and expanded its internet web-site containing bank history,
product and service information, banking locations and E-mail capabilities at
www.southernbank.com. During 1998 the Automated Teller Machine (ATM) network
provided 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 1999 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 to realize its
goal of being the first choice in its markets for all financial services.
I am pleased with the overall results accomplished in 1998 and I thank our
shareholders, staff, customers and friends for their confidence in, loyalty to
and support of Southern Bank and Trust Company.
Sincerely,
/s/R. S. Williams
R. S. Williams
Chairman of the Board
2
<PAGE>
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. In 1998 BancShares formed a wholly-owned subsidiary, Southern Capital
Trust I, a statutory business trust that issued $23.0 million of 8.25% Capital
Securities (the "Capital Securities") in June 1998 maturing in 2028. All
significant activities of the Registrant and its subsidiaries are banking
related so that the Registrant operates within one industry segment. Neither
BancShares nor its subsidiaries have any foreign operations.
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
45 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 35 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 nineteen 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 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
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 1998, including Financial Statements and
Schedules thereto, will be provided without charge to the shareholder making
such request.
3
<PAGE>
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 1998, 1997 and 1996. 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,
- - -----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income ............................ $ 41,702 39,055 36,776 32,894 27,164
Interest expense ........................... 20,328 18,827 17,450 16,055 11,044
- - -----------------------------------------------------------------------------------------------------
Net interest income ........................ 21,374 20,228 19,326 16,839 16,120
Provision for loan losses .................. 155 60 140 -- --
- - -----------------------------------------------------------------------------------------------------
Net interest income
after provision for loan losses ........ 21,219 20,168 19,186 16,839 16,120
Noninterest income ......................... 6,651 9,849 4,508 4,028 2,888
Noninterest expense ........................ 20,214 23,064 18,203 15,661 13,918
- - -----------------------------------------------------------------------------------------------------
Income before income taxes ................. 7,656 6,953 5,491 5,206 5,090
Income taxes ............................... 2,060 340 1,127 1,293 1,402
- - -----------------------------------------------------------------------------------------------------
Net income ................................. $ 5,596 6,613 4,364 3,913 3,688
=====================================================================================================
Selected Year-End Balances
Total assets ............................... $649,425 590,752 540,758 496,980 408,035
Investment securities and federal funds sold 221,102 190,373 179,709 164,526 123,852
Loans ...................................... 364,489 349,216 317,755 287,960 252,611
Interest-earning assets .................... 590,699 544,789 499,164 452,486 376,463
Deposits ................................... 556,752 513,328 480,566 449,002 367,522
Interest-bearing liabilities ............... 507,326 458,335 422,941 396,631 326,442
Shareholders' equity ....................... 56,033 54,984 44,778 37,163 30,965
Common shares outstanding .................. 119,266 119,918 119,918 119,918 121,767
- - -----------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
Table 1
Five-Year Financial Summary, Selected Balances and Ratios
(Dollars in thousands, except share data and ratios)
December 31,
- - -----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Average Balances
Total assets ............................... $615,828 567,236 519,541 456,499 407,554
Investment securities and federal funds sold 182,356 162,936 157,779 145,417 131,923
Loans ...................................... 362,298 340,195 310,389 270,563 242,217
Interest-earning assets .................... 550,021 507,971 469,792 415,980 374,140
Deposits ................................... 526,555 498,303 459,552 407,252 367,618
Interest-bearing liabilities ............... 478,396 445,354 411,960 366,597 331,104
Shareholders' equity ....................... 56,423 45,703 40,234 34,657 28,445
Common shares outstanding .................. 119,685 119,918 119,918 121,226 123,521
- - -----------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Return on average total assets ............. .91% 1.17% 0.84% 0.86% 0.90%
Return on average shareholders' equity ..... 9.92 14.47 10.85 11.29 12.97
Dividend payout ratio (1) .................. 10.38 8.85 13.45 13.57 12.80
- - -----------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits .......................... 68.81% 68.27% 67.54% 66.44% 65.93%
Shareholders' equity to total assets ....... 9.16 8.06 7.74 7.59 6.98
- - -----------------------------------------------------------------------------------------------------
Per share of common stock
Net income (2) ............................. $ 43.40 $ 51.77 $ 33.00 $ 28.90 $ 27.04
Cash dividends ............................. 1.50 1.50 1.50 1.00 1.00
Book value (3) ............................. 448.82 437.22 352.02 288.48 232.98
- - -----------------------------------------------------------------------------------------------------
</TABLE>
(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
(3) Shareholders' equity less Preferred B and C at December 31 divided by the
number of common shares outstanding at December 31
4
<PAGE>
ACQUISITIONS AND DISPOSITIONS
In May 1998 Southern acquired the Enfield, North Carolina office of Enfield
Savings Bank and sold the Littleton, North Carolina office of Enfield Savings
Bank to First-Citizens Bank & Trust Company. In October 1998 Southern acquired
the Gates, North Carolina office of First-Citizens Bank & Trust Company. In
December 1998 Southern acquired the Red Springs, North Carolina office of First
Union National Bank. In May 1997 Southern 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 Loans Deposits
(dollars in thousands) Transaction Acquired Acquired
Date (Sold) (Sold)
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Enfield Savings Bank - Enfield, NC May 1998 $16,662 $18,041
Enfield Savings Bank - Littleton, NC (1) May 1998 (3) (2,420)
First-Citizens Bank & Trust Company - Gates, NC October 1998 226 5,302
First Union National Bank - Red Springs, NC December 1998 76 16,440
- - ---------------------------------------------------------------------------------------------------------
Net 1998 acquisition totals $16,961 $37,363
=========================================================================================================
Wachovia Bank of North Carolina, N.A. - Aulander, NC May 1997 $ 180 $ 5,117
Wachovia Bank of North Carolina, N. A. - Aurora, NC May 1997 852 11,838
Wachovia Bank of North Carolina, N. A. - Hamilton, NC May 1997 412 4,106
- - ---------------------------------------------------------------------------------------------------------
1997 acquisition totals $ 1,444 $21,061
=========================================================================================================
</TABLE>
(1) Represents the sale of this branch to First-Citizens Bank & Trust Company
RESULTS OF OPERATIONS
Earnings
For 1998 net income of $5.6 million represented a 15.38% decrease from 1997
net income of $6.6 million. Net income for 1996 was $4.4 million. Higher 1997
net income was principally the result of gains on 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 increased by approximately
$407,000 between 1997 and 1998, principally due to increased income associated
with expansion in existing and new markets.
The increase in 1997 net income was principally the result of gains on sale
of available-for-sale securities and a reduction in income taxes resulting from
the donation of available-for-sale securities. Net income per average share of
common stock decreased to $43.40 in 1998, from $51.77 in 1997, due primarily to
the 1997 reduction in income taxes as discussed above. Net income per average
share of common stock increased to $51.77 in 1997, from $33.00 in 1996 due to
increased earnings and reduced income taxes in 1997 as discussed above.
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 1998 net
interest income was $21.4 million as compared to $20.2 million in 1997, an
increase of $1.1 million or 5.67%. In 1997 net interest income was $20.2 million
as compared to $19.3 million in 1996, an increase of $902,000 or 4.67%. The 1998
increase was primarily attributable to increased loan revenue from a 6.29%
increase in average loan balances outstanding, from $340.2 million in 1997 to
$362.3 million in 1998. The yields received on average loans outstanding for
1998 decreased to 8.57% from 8.59% for 1997. The rates paid on interest-bearing
liabilities increased 1 basis point during 1998 and average interest-bearing
liabilities increased 7.42% between 1997 and 1998, resulting in a 7.97% increase
in total interest expense.
The 1997 increase was primarily attributable to increased loan revenue from
a 9.60% increase in average loan balances outstanding from $310.4 million in
1996 to $340.2 million in 1997. The yields received on average loans for 1997
decreased to 8.59% from 8.66% for 1996. The rates paid on interest bearing
liabilities decreased 1 basis point during 1997 and the average interest bearing
liabilities increased 8.11% between 1996 and 1997 resulting in a 7.89% increase
in total interest expense.
Loans produced the largest component of interest income, amounting to $31.0
million in 1998, $29.2 million in 1997 and $26.9 million in 1996. This
represented an increase in 1998 of 6.07%. For the year ended December 31, 1997,
interest income on loans increased 8.73%. During 1998 average loans outstanding
increased $22.1 million or 6.50%. This increase was primarily due to loan growth
in the existing branch network and the impact of the 1998 branch acquisitions as
set forth in Table 2. The 1997 increase in interest income was primarily due to
loan growth in the existing branch network and the impact of the 1997 branch
acquisitions discussed above. In 1998, the average yield on loans decreased to
8.57% from 8.59% in 1997. This decrease resulted from overall lower market
interest rates during most of 1998. The 1996 average yield was 8.66%.
5
<PAGE>
Earnings from investments and federal funds sold provided the balance of
interest income, contributing $10.7 million in 1998, $9.8 million in 1997, and
$9.9 million in 1996. In 1998, BancShares realized lower yields on investment
securities and federal funds sold and larger average balances. In 1997,
BancShares realized lower yields on investment securities and federal funds sold
and maintained slightly larger average balances. Average investment securities
and federal funds sold were $182.4 million in 1998, an increase from $162.9
million in 1997. The 1998 average increase was principally the result of
additional liquid assets being made available from the acquisitions.
Total 1998 interest expense for BancShares increased 7.97% after increasing
in 1997 by 7.89%. The principal component of BancShares' interest expense,
interest paid on deposits, totaled $18.7 million in 1998, $18.2 million in 1997
and $16.9 million in 1996. BancShares' deposit base increased 8.46% in 1998,
primarily as a result of the 1998 acquisitions. The interest expense for
interest-bearing deposits also increased in 1998 primarily as a result of the
1998 acquisitions. The interest expense for interest-bearing deposits increased
in 1997 principally as a result of the 1997 acquisitions. The average effective
rate paid on interest-bearing liabilities was 4.24% in 1998, 4.23% in 1997 and
4.24% in 1996. During 1997, BancShares utilized long-term borrowings to provide
a $5.0 million investment of capital into its subsidiary and to refinance
existing long-term borrowings. During 1998, BancShares utilized long-term
borrowings to provide a $12.0 million investment of capital into its subsidiary
and to refinance the remaining balance of the 1997 borrowings. The 1996
long-term debt was being repaid at $100,000 per month plus interest. The 1997
long-term debt was being repaid at $450,000 per quarter plus interest. The 1998
long-term debt of $23.0 million of 8.25% capital securities issued in June 1998
matures in 2028. Interest on these long-term obligations was $1.3 million in
1998, $295,000 in 1997 and $117,000 in 1996. The outstanding long-term debt at
December 31, 1998 was $23.0 million.
BancShares' interest rate spread on a tax equivalent basis was 3.44% in
1998, 3.60% in 1997 and 3.75% in 1996. 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, decreased $3.2 million
in 1998. Total noninterest income was $6.7 million in 1998, as compared to $9.8
million in 1997 and $4.5 million in 1996. Total noninterest income for 1998
includes securities gains of $1.8 million related to the sale of
available-for-sale securities. Total noninterest income for 1997 includes
securities gains of $5.6 million related to ( i ) the funding of a charitable
foundation by the contribution of appreciated available-for-sale equity
securities and ( ii ) the sale of appreciated available-for-sale securities.
Service charges on deposit accounts increased $281,000, or 9.63%, in 1998 to
$3.2 million, from $2.9 million in 1997. This increase was primarily
attributable to the full year impact of the accounts subject to service charges
acquired in 1997 and the partial year impact of the 1998 acquisitions. Service
charges on deposit accounts increased $254,000, or 9.53%, in 1997, from $2.7
million in 1996 to $2.9 million for 1997. This increase was primarily
attributable to the full year impact of the accounts subject to service charges
acquired in 1996 and the partial year impact of the 1997 acquisitions.
BancShares had an increase in 1998 in other service charges and fees of
$261,000 primarily attributable to the full year impact of the accounts subject
to service charges acquired in 1997 and the partial year impact of the 1998
acquisitions. BancShares had an increase in 1997 in other service charges and
fees of $88,000.
During 1998, the remaining noninterest income increased $38,000 from
$496,000 in 1997 to $534,000 in 1998. This increase was primarily attributable
to increased credit card merchant discount income. During 1997, the remaining
noninterest income decreased $108,000 from $604,000 in 1996 to $496,000 in 1997.
This decrease was primarily attributable to a gain of $213,000 on the sale of a
branch in 1996.
Noninterest Expense
The 1996, 1997 and 1998 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 these acquisitions.
Noninterest expense also includes personnel, data processing, occupancy,
furniture and equipment, Federal Deposit Insurance Corporation ("FDIC")
insurance assessments, printing, supplies, legal and professional fees, postage
and other miscellaneous operating expenses. Noninterest expense was $20.2
million in 1998 compared to $23.1 million in 1997 and $18.2 million in 1996. In
1997 BancShares recorded $4.1 million of charitable contributions expense
related to the funding of a charitable foundation.
The most significant element of BancShares' noninterest expense is personnel
costs. In 1998, salaries and benefits represented $9.5 million, or 47.00%, of
total noninterest expense. The personnel costs of 1998 include the impact of a
full year of the costs related to the 1997 acquisitions and a partial year of
costs for the acquisitions made in 1998. In 1997, salaries and benefits
represented $8.8 million, or 37.99%, of total noninterest expense. The personnel
costs of 1997 include the impact of a full year of the costs related to the
acquisitions made in 1996 and a partial year of costs for the acquisitions made
in 1997. In 1996, salaries and benefits represented $8.0 million, or 43.81%, of
total noninterest expense. The personnel costs of 1996 included the impact of a
full year of the costs related to the acquisitions made in 1995 and partial year
costs for the acquisitions made in 1996.
The 1998 noninterest expense, other than personnel and charitable
contributions, was $10.7 million, an increase of $486,000, or 4.75%, from $10.2
million in 1997. Occupancy expenses increased from $1.2 million in 1996 to $1.4
million in 1997 to $1.6 million in 1998. These increases of 15.38% for 1997 and
12.90% for 1998 are principally the result of additional expenditures incurred
as a result of the 1996, 1997 and 1998 acquisitions, the replacements of aging
branch facilities and the 1997 opening of a second location in Rocky Mount,
North Carolina. Furniture and equipment expenses increased from $1.3 million in
1996 to $1.6 million in 1997 and decreased to $1.5 million in 1998. This
increase of 24.28% for 1997 and decrease of 8.02% for 1998 reflect the related
equipment expenses incurred as a result of the acquisitions in 1996, 1997 and
6
<PAGE>
1998, the opening of the second Rocky Mount branch in 1997 and the write-off of
existing assets disposed of in the replacement of aging facilities in 1996 and
1997. There were no such replacements of aging facilities in 1998.
Data processing costs represent charges by vendors that perform data
processing services for Southern. Data processing fees are primarily based upon
per item or per account charges. Data processing costs in 1998 were $2.0
million, an increase of 25.22% over 1997 data processing expenses of $1.6
million. This increase was the result of the 1997 and 1998 acquisitions and
volume increases in the existing branch system. Data processing costs in 1997
were $1.6 million, an increase of 10.97%, over 1996 data processing expenses of
$1.4 million. This increase was the result of the 1996 and 1997 acquisitions and
volume increases in the existing branch system.
Intangibles amortization in 1998 was $1.5 million, a 12.59% decrease from
the 1997 intangibles amortization. Intangible amoritization is calculated on an
accelerated basis beginning in the first full month of purchase. The 1998
decrease was primarily the result of the 1997 purchases being made earlier in
the year than the 1998 purchases and the reduced 1998 amortization for prior
period acquisitions due to the accelerated basis of amortization. The
amortization for the Red Springs purchase in December 1998 will begin in January
1999. Intangibles amortization in 1997 was $1.8 million, a 7.14% increase over
the 1996 intangibles amortization of $1.6 million. The 1998 amortization
included a full year's amortization for the 1997 acquisitions and partial year
of amortization for the acquisitions made in 1998. The 1997 amortization
included a full year's amortization for the 1996 acquisitions and partial year
of amortization for the acquisitions made in 1997. The 1996 amortization
included a full year's amortization for the 1995 acquisitions and partial year
of amortization for the acquisitions made in 1996.
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 80.00% of
Southern's SAIF insured deposits as reported on Southern's March 31, 1995 call
report and 100.00% of SAIF insured deposits purchased by Southern after March
31, 1995 be assessed at 0.657%. On September 30, 1996 Southern had approximately
$87.0 million of SAIF-insured deposits based on the above formula and recorded a
$569,000 charge to earnings on September 30, 1996 as a one-time FDIC SAIF
insurance expense. The FDIC insurance expense decrease of $660,000 for 1997
resulted primarily from the 1996 one-time assessment discussed above.
BancShares expects that under current FDIC assessment guidelines that it
will not incur any FDIC deposit insurance assessments for 1999. However,
beginning in 1997 the FDIC began collecting from all banks an assessment for
Financing Corporation ("FICO") funding requirements. Accordingly, BancShares
expects a 1999 FDIC FICO assessment expense of approximately $120,000, based on
the FDIC FICO assessment rates in effect for the last quarter of 1998.
Charitable contributions decreased $4.1 million, to $2,000 in 1998 from $4.1
million in 1997 after increasing $3.5 million from $589,000 in 1996. Charitable
contributions expense for 1997 includes $4.1 million related to the additional
funding of a charitable foundation through the contribution of appreciated
available-for-sale securities. Charitable contributions expense for 1996
includes $459,000 related to the contribution of available-for-sale securities
to the same charitable foundation.
Other miscellaneous noninterest operating expenses were $4.0 million for
1998, $3.7 million for 1997 and $3.3 million for 1996.
BancShares had taxable income for book purposes that resulted in income tax
expense for 1998 of $2.1 million, $340,000 for 1997 and $1.1 million for 1996.
The 1997 decrease is principally a result of tax deductions related to the 1997
contribution of appreciated 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 1998 were $550.0
million, an increase of 8.28% from the 1997 average of $508.0 million. This
increase was due primarily to the acquisitions discussed above. The cash
received in the acquisitions was ultimately invested primarily in loans and
short-term investments.
Average earning assets during 1997 were $508.0 million, an increase of 8.13%
from the 1996 average of $469.8 million. This increase was due primarily to the
full-year average impact of the 1996 acquisitions and the partial year impact of
the 1997 acquisitions. The cash received in the acquisitions was ultimately
invested primarily in loans and short-term investments including federal funds.
Average noninterest earning assets during 1998 were $65.8 million, an
increase of 11.04% from the 1997 average of $59.3 million. This increase was due
primarily to the 1998 full year average impact of the 1997 acquisitions and the
partial year impact of the 1998 acquisitions. Average non-interest earning
assets during 1997 were $59.3 million, an increase of 19.32% from the 1996
average of $49.7 million. The principal nonearning asset for BancShares is cash
and due from banks. Cash and due from banks averaged $19.3 million in 1998,
$17.7 million in 1997 and $15.7 million in 1996.
Return on total average assets was 0.91% in 1998, 1.17% in 1997 and 0.84% in
1996. The higher return levels of 1998 and 1997 as compared to 1996 were
principally the result of gains on the sales of available-for-sale securities.
Gains on sales of available-for-sale securities in 1998 were $1.8 million, a
decrease of $3.8 million from the $5.6 million of gains on sales of
available-for-sale securities in 1997 and a $1.3 million increase from the
$460,000 of gains on sales of available-for-sale securities in 1996.
Interest-Bearing and Noninterest Bearing Liabilities
Interest-bearing liabilities consist of deposits, short-term borrowed funds
and long-term notes payable. Average interest-bearing liabilities during 1998
were $478.4 million, an increase of 7.42% from the 1997 average of $445.4
million. This
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increase was due primarily to the 1998 full year impact of the 1997 acquisitions
and the partial year impact of the 1998 acquisitions. In addition, $23.0 million
of 8.25% Capital Securities maturing in 2028 were issued in 1998 as discussed
above. The principal interest-bearing liabilities of BancShares are
interest-bearing deposits. Average noninterest-bearing liabilities during 1998
were $81.0 million, an increase of 6.34% from the 1997 average of $76.2 million.
This increase was due primarily to the 1998 full year impact of the 1997
acquisitions and the partial year impact of the 1998 acquisitions.
Noninterest-bearing demand deposits are the principal noninterest-bearing
liability. The cost of total interest-bearing liabilities was 4.25% in 1998 as
compared to 4.23% in 1997. The increase in 1998 was principally the result of
the 1998 issuance of the 8.25% Capital Securities discussed above.
Average interest-bearing liabilities during 1997 were $445.4 million, an
increase of 8.11% from the 1996 average of $412.0 million. This increase was due
primarily to the 1997 full year impact of the 1996 acquisitions and the partial
year impact of the 1997 acquisitions. Average noninterest-bearing liabilities
during 1997 were $76.2 million, an increase of 13.22% from the 1996 average of
$67.3 million. Noninterest-bearing demand deposits are the principal
noninterest-bearing liability. This increase was also due primarily to the 1997
full year impact of the 1996 acquisitions and the partial year impact of the
1997 acquisitions. The cost of total interest-bearing liabilities was 4.23% in
1997 as compared to 4.24% in 1996. The decrease in 1997 was principally the
result of a generally lower deposit interest rate market in 1997.
Loans
As of December 31, 1998, loans, net of allowance for loan losses, totaled
$358.5 million compared to $343.2 million at year-end 1997. This growth was
related entirely to the current year acquisitions, as discussed above. The loan
portfolio grew $17.0 million through these acquisitions.
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 1998, 60.34% of the loan portfolio was due to mature or be available for
repricing of interest rates during 1999.
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 1998 and
1997, 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.
At December 31, 1998 the fair value of available-for-sale securities
exceeded the carrying value by $17.2 million, deferred taxes related to these
available-for-sale securities were $5.8 million and shareholders' equity
included $11.4 million for the net unrealized gain related to these
available-for-sale securities. 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 gains
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 $78,000 and, on December 17, 1996, a fair value of $536,000.
Southern recorded a securities gain of $458,000 and a charitable contribution
expense of $536,000 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 $542,000 and, on February 5, 1997, a fair value of $4.1 million.
Southern recorded a 1997 securities gain of $3.5 million and charitable
contribution expense of $4.1 million related to this transaction.
ASSET QUALITY
Provision and allowance for loan losses
Because the loan portfolio represents BancShares' largest earning asset,
BancShares continually monitors the quality of its loan portfolio. 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 1998, BancShares had net loan
charge-offs of $433,000, an increase, due to increased net charge-offs, of
$181,000 over 1997 net charge-offs of $252,000. This increase is primarily the
result of a $100,000 decrease in recoveries for 1998 compared to 1997. Loans
charged off increased $81,000 in 1998 compared to 1997. The percentage of
charge-offs (net of recoveries) to average outstanding loans was 0.12% in 1998
and 0.07% in 1997.
The increase in the ratio of total non-performing loans to total loans,
from 0.20% at December 31, 1997 to 0.28% at December 31,1998, was principally
due to increases in non-performing loans (nonaccrual, restructured, and accruing
loans greater than 90 days past due) to $1.0 million at December 31, 1998,
compared to $696,000 at December 31, 1997. The ratio of non-performing loans and
assets to total assets increased to 0.17% at December 31, 1998 from 0.13% a year
before. This increase was primarily the result of increased non-performing
loans. At December 31, 1998 BancShares had $84,000 of assets classified as other
real estate. At December 31, 1997 BancShares had $48,000 of 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.
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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 the 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.
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.
In assessing the allowance for loan losses management considers current and
historical net charge-offs by loan category, current and historical
nonperforming loans by loan category, the relative concentration levels of total
loans by loan category and credit grade and current economic conditions. The
allowance for loan losses represented 588.00% of non-performing loans at
December 31, 1998. This was a decrease of 270 basis points from the 857.90%
ratio at December 31, 1997. The allowance for loan losses represented 1.64% of
loans outstanding at year end 1998. The allowance for loan losses represented
1.71% of loans outstanding at year end 1997. Southern's provision for loan
losses charged against earnings was $155,000 in 1998, $60,000 in 1997 and
$140,000 in 1996.
Management considers the December 31, 1998 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 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 available-for-sale investment
securities, federal funds sold, and cash and due from banks. These assets
represented 29.85% of total deposits at December 31, 1998, a decrease from
31.65% at December 31, 1997.
Southern's liquidity ratio, which is defined as net cash plus short-term and
available-for-sale securities divided by net deposits and short-term
liabilities, was 30.78% at December 31, 1998, compared to 33.98% at year-end
1997 and 27.40% at year-end 1996.
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. 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 43.23% of the
total investment securities portfolio at December 31, 1998, 29.00% at December
31, 1997 and 33.38% at December 31, 1996.
Included in investments maturing within one year are investments in
marketable equity securities held by BancShares with fair values of $27.1
million at December 31, 1998, $30.3 million at December 31, 1997, and $24.8
million at December 31, 1996. 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 1999 is comparable
to the volumes that matured during 1998 and 1997, the effect on net interest
margin and operating results for 1999 should also be similar to effects realized
in 1998 and 1997.
The consolidated statements of cash flows disclose the principal sources and
uses of cash from operating, investing and financing activities for 1998, 1997,
and 1996. In 1998, operating activities of BancShares provided cash flows of
$5.1 million. Net income of $5.6 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Increases
in other assets of $1.0 million and decreases in other liabilities of $674,000
reduced the contribution of net income to BancShares' cash flow. Investing
activities, including lending, utilized $7.7 million of BancShares' cash flow.
Loans originated, net of principal collected, provided $1.4 million. BancShares
received $13.1 million in cash in connection with the branches purchased from
other financial institutions in 1998.
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Net additional cash inflows of $20.9 million resulted from financing
activities. Net deposit inflows of $6.1 million were decreased by short-term
borrowed funds repayments of $1.7 million and by an increase of $18.3 million in
long-term obligations and reduced by payments for cash dividends and retirements
of stock totaling $812,000.
Southern has no brokered deposits. Jumbo certificates of deposit ("CD's")
are considered to include all CD's of $100,000 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, 1998
Jumbo CD's represented 10.79% of total deposits. At December 31, 1997 Jumbo CD's
represented 10.33%, 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 increase in the prime rate may
adversely impact 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 loan 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, 1998. 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, 1998. 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 1999 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, 1998.
<PAGE>
<TABLE>
<CAPTION>
Maturing in Years ended December 31
- - --------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans
Fixed Rate $42,766 $28,703 $27,164 $26,046 $25,718 $74,594 $224,991 $228,728
Average rate (%) 8.41% 8.37% 8.45% 9.08% 8.39% 6.71% 7.92%
Variable rate $79,573 $8,084 $7,400 $5,287 $4,051 $35,103 $139,498 $139,498
Average rate (%) 8.38% 8.34% 8.23% 8.24% 8.16% 7.92% 8.23%
Investment Securities
Fixed Rate $83,221 $70,311 $1,118 $1,073 $1,706 $42,949 $200,378 $201,549
Average rate (%) 5.72% 4.92% 6.19% 6.09% 6.00% 5.84% 5.42%
Variable rate -- -- -- -- -- $1,189 $1,189 $1,189
Average rate (%) -- -- -- -- -- 6.65% 6.65%
Liabilities
Savings and interest
bearing checking
Fixed Rate $185,218 -- -- -- -- -- $185,218 $185,218
Average rate (%) 1.99% -- -- -- -- -- 1.99%
Certificates of
deposit
Fixed Rate $237,108 $39,978 $5,315 $2,388 $679 -- $285,468 $287,260
Average rate (%) 5.02% 5.83% 5.11% 5.10% 5.10% -- 5.13%
Variable rate $5,900 $2,616 -- -- -- -- $8,516 $8,516
Average rate (%) 4.40% 4.40% -- -- -- -- 4.40%
Long-term debt
Fixed Rate -- -- -- -- -- $23,000 $23,000 $23,288
Average rate (%) -- -- -- -- -- 8.25% 8.25%
</TABLE>
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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, 1998, BancShares had a negative one year cumulative gap
position of 30.37%. BancShares has interest earning assets of $262.3 million
maturing or repricing within one year and interest bearing liabilities of $436.0
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,
in a falling rate environment, interest bearing liabilities (deposits) will
reprice at a faster rate than interest earning assets (loans and investments).
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' core deposits of $419.1 million include interest bearing
checking accounts of $75.3 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 as
non-rate sensitive.
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, have established capital
adequacy guidelines. These guidelines relate to a company's Tier 1 and Total
Risk Based Capital ("RBC") for BancShares and Leverage Capital, Tier 1 and Total
Risk Based Capital ("RBC") for Southern. In 1998, BancShares and Southern
experienced increases in all regulatory capital ratios.
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. Tier 1 RBC
also is comprised of total equity and the balance of Capital Securities, less
intangible assets and unrealized gains on AFS securities. BancShares' Tier 1 RBC
ratio as of December 31, 1998 was 16.01% which is, along with a ratio of 11.43%
at December 31, 1997 and 9.33% at December 31, 1996, representative of a
well-capitalized institution. The calculation of the Total RBC ratio is similar
to that for Tier 1 RBC, except that it also allows the inclusion of BancShares'
allowance for loan losses in capital, but only to a maximum of 1.25% of risk
weighted assets. As of December 31, 1998 BancShares' Total RBC ratio was 20.52%,
which is representative of a well-capitalized institution. The total RBC ratio
for 1997 was 12.78% and the total RBC ratio for 1996 was 10.66% both of which
were also representative of a well capitalized financial institution. The
increase in 1998 is primarily the result of the issuance of the Capital
Securities discussed above.
BancShares' primary source of new capital in 1998 was the issuance of the
Capital Securities discussed above. In 1998, equity capital also increased
through retention of earnings by $4.8 million. Retention of earnings increased
equity capital by $6.0 million in 1997 and by $3.8 million in 1996. BancShares'
internal capital generation rate was 11.65% in 1998, 13.19% in 1997, and 9.39%
in 1996. As of December 31, 1998, shareholders' equity totaled $56.0 million
compared to $55.0 million in 1997. The shareholders' equity for 1998 included,
as discussed above, $11.4 million of net unrealized securities gains. The
shareholders' equity for 1997 included, as discussed above, $15.1 million of net
unrealized securities gains.
The ratio of average shareholders' equity to average total assets was 9.16%
in 1998 and 8.06% in 1997. The 1998 increase was primarily the result of
increased average retained earnings and increased average net urealized gains on
available-for-sale securities.
Retention of sufficient earnings to maintain an adequate capital position
that provides BancShares with expansion capabilities is an important factor in
determining dividends. During 1998, BancShares paid $581,000 in dividends,
versus $585,000 in 1997 and $587,000 in 1996. As a percentage of net income,
dividends were 10.38% in 1998, 8.85% in 1997 and 13.45% in 1996. The 1998
percentage increase was principally the result of decreased 1998 earnings
compared to the 1997 earnings resulting from the sale of available-for-sale
securities in 1998 versus the 1997 sales of available-for-sale securities.
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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 eighteen counties served by Southern lag the median figures of North
Carolina in the areas of per capita income, family income, and population growth
rates. Between 1980 and 1990, Southern's market counties experienced a negative
net migration of the population. Only in the area of unemployment does
Southern's market area compare favorably to the rest of eastern North Carolina,
but this may be related to the negative growth during the same period and the
agricultural nature of the area.
Management of BancShares recognizes that future growth in BancShares will
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 1996, and 1997, or expand into new markets as it did in 1996, 1997
and 1998.
BancShares does anticipate some offices of other institutions becoming
available in the near future.
Dependence on Local Agriculture and Tobacco Industry
The tobacco industry contributes significantly to the economy of eastern
North Carolina, especially in the 18 eastern North Carolina counties in which
Southern operates. For several decades, the tobacco industry, both in the United
States and abroad, has faced, and continues to face, a number of issues that may
adversely affect the volume, operating revenues, cash flows, operating income
and financial position of businesses operating in eastern North Carolina and, by
consequence, BancShares.
In the United States, these issues, include proposed federal regulatory
controls (including, as discussed below, the issuance of final regulations by
the United States Food and Durg Administration (the "FDA") that regulate
cigarettes as "drugs" or "medical devices"); actual and proposed excise tax
increases; actual and proposed federal, state and local governmental and private
bans and restrictions on smoking (including in workplaces and in buildings
permitting public access); actual and proposed restrictions on tobacco
manufacturing, marketing, advertising (including decisions by certain companies
to limit or not accept tobacco advertising) and sales; proposed legislation and
regulations to require additional health warnings on cigarette packages and in
adverising, and to eliminate the tax deductability of tobacco advertising and
promotional costs; actual and proposed requirements regarding disclosure of
cigarette ingredients and other proprietary information; actual and proposed
requirements regarding disclosure of the yields of "tar," nicotine and other
constituents found in cigarette smoke; increased assertions of adverse health
effects associated with both smoking and exposure to environmental tobacco smoke
("ETS"); legislation or other governmental action seeking to ascribe to the
industry responsibility and liability for the purported adverse health effects
associated with both smoking and exposure to ETS; the diminishing social
acceptance of smoking; increased pressure from anti-smoking groups; unfavorable
press reports; governmental and grand jury investigations; and increased smoking
and health litigation, including private plaintiff class action litigation and
health care cost recovery actions brought by state and local governments, unions
and others seeking reinbursement for Medicaid and/or other health care
expenditures allegedly caused by cigarette smoking.
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 is effective for
the first fiscal quarter beginning after December 15, 1998. BancShares plans to
adopt this statement effective January 1, 1999 and does not anticipate any
material effect on its consolidated financial statements.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of BancShares and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
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<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.
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.
Risks
Like most financial service providers, BancShares and its operations may be
significantly affected by the year 2000 issue due to its dependence on
information technology and date sensitive data. Computer hardware and software
and other equipment, both within and outside BancShares' direct control, and
third parties with whom BancShares electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated, and
BancShares could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the year 2000 issue could
adversely affect the viability of BancShares' suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the year
2000 issue could result in a significant adverse impact on BancShares'
operations and, in turn, its financial condition and results of operations.
State of Readiness
During October 1997, BancShares developed its plan to address the year 2000
issue. A substantial portion of BancShares' data processing functions are
performed by First-Citizens Bank & Trust Company ("FCB") on its mainframe
systems and/or on systems supported by FCB, which also provides similar services
to several other financial institutions. See "Related Parties" in Note 15 of the
"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS". 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' nonmainframe
systems which are supported by FCB ("Group B Systems"), and (iii) BancShares'
separate nonmainframe systems ("Group C Systems"). BancShares' year 2000 plan
also addresses noninformation technology systems ("NonIT 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.
13
<PAGE>
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 NonIT
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.
Remediation and Testing Phase
With respect to IT Systems, this phase contemplates the implementation of
modifications, upgrades or system replacements determined to be necessary to
achieve year 2000 compliance and the testing of modified or upgraded systems to
determine their functionality and operating capability. As to Group A Systems
and Group B Systems, FCB's outside consultant is responsible for coordinating
necessary modifications, upgrades or replacements. This phase has been completed
for all Group A Systems and for higher priority Group B Systems, and during the
first and second quarters of 1999 the remaining Group B Systems are to be
completed. 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 all mission critical
systems.
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 March 31, 1999.
BancShares' staff is conducting validation testing on Group C Systems which is
expected to be substantially completed by May 30, 1999.
Implementation Phase
Under BancShares' plan, once new and modified systems that require testing
have been tested for functionality, they are being put into production.
BancShares' target is to have substantially completed the validation and
implementation phases with respect to substantially all systems by May 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 first and 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 December 31, 1998 were not material. BancShares does not expect
significant increases in future data processing costs relating to year 2000
compliance.
14
<PAGE>
Contingency Plans
During the assessment phase, BancShares began to identify a backup 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. Contingency plans are
already active for BancShares' most reasonably likely worst case scenario. 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.
Planned Acquisition
On March 12, 1999 BancShares announced plans to purchase, subject to
regulatory approval, the Ahoskie branch of First-Citizens Bank &Trust Company.
This acquisition, planned for the third quarter of 1999, will increase deposits
by approximately $16.0 million and loans by approximately $8.0 million.
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 following 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, 1998 was 349. 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% of its paid-in capital stock, Southern may not declare a dividend until
it has transferred from undivided profits 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 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
1998 1997
--------------------------------------- -----------------------------------------
Fourth Third Second First Fourth Third Second First
--------------------------------------- -----------------------------------------
(thousands except per share data and ratios)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income .............. $ 10,593 $10,515 $10,501 $10,093 $ 10,100 $ 9,989 $ 9,711 $9,255
Interest expense ............. 5,271 5,086 5,169 4,802 4,881 4,845 4,738 4,363
- - -----------------------------------------------------------------------------------------------------------------------
Net interest income .......... 5,322 5,429 5,332 5,291 5,219 5,144 4,973 4,892
Provision for loan losses .... .15 20 60 60 -- -- -- 60
- - -----------------------------------------------------------------------------------------------------------------------
Net income after provision for
loan losses ............. 5,307 5,409 5,272 5,231 5,219 5,144 4,973 4,832
Noninterest income ........... 1,107 1,392 1,219 2,933 3,234 1,166 979 4,470
Noninterest expense .......... 5,195 5,118 5,113 4,788 5,046 4,874 4,679 8,465
- - -----------------------------------------------------------------------------------------------------------------------
Income before income taxes ... 1,219 1,683 1,378 3,376 3,407 1,436 1,273 837
Income taxes ................. 330 470 451 809 100 30 130 80
- - -----------------------------------------------------------------------------------------------------------------------
Net income ................... $ 889 $ 1,213 $ 927 $ 2,567 $ 3,307 $ 1,406 $ 1,143 $ 757
Net income applicable to
common shares ............ $ 788 $ 1,110 $ 828 $ 2,468 $ 3,203 $ 1,303 $ 1,045 $ 657
PER SHARE OF STOCK
Net income per share of common
stock .................... 6.63 9.27 6.91 20.58 26.71 10.87 8.71 5.48
Cash dividends - common ...... 0.38 0.37 0.37 0.38 0.38 0.38 0.37 0.37
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 ..................... 175.00 175.00 175.00 175.00 175.00 175.00 175.00 175.00
Low ...................... 175.00 175.00 175.00 175.00 175.00 175.00 175.00 175.00
Preferred B sales price
High ..................... 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Low ...................... 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Preferreed C sales price
High ..................... 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Low ...................... 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
</TABLE>
16
<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 subsidiaries (the "Company") as of December 31, 1998
and 1997, 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, 1998. 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 subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/KPMG LLP
Raleigh, North Carolina
February 10, 1999
17
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.) INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
December 31
- - -------------------------------------------------------------------------------------------------------------
1998 1997
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ......................................................... $ 37,419 $ 28,381
Federal funds sold .............................................................. 19,535 10,240
Investment securities:
Held-to-maturity, at amortized cost
(fair value of $93,511 and $57,294, respectively) .......................... 92,340 56,281
Available-for-sale, at fair value
(amortized cost of $92,012 and $100,978, respectively) ..................... 109,227 123,852
Loans ........................................................................... 364,489 349,216
Less allowance for loan losses ............................................. (5,962) (5,971)
- - -------------------------------------------------------------------------------------------------------------
Net loans ....................................................................... 358,527 343,245
Premises and equipment .......................................................... 18,902 18,157
Accrued interest receivable ..................................................... 4,571 4,205
Intangible assets ............................................................... 6,972 5,643
Other assets .................................................................... 1,932 748
- - -------------------------------------------------------------------------------------------------------------
Total assets ........................................................... $ 649,425 $ 590,752
=============================================================================================================
<PAGE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.) INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
December 31
- - -------------------------------------------------------------------------------------------------------------
1998 1997
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Deposits:
Noninterest-bearing ........................................................ $ 77,550 $ 66,565
Interest-bearing ........................................................... 479,202 446,763
- - -------------------------------------------------------------------------------------------------------------
Total deposits .................................................................. 556,752 513,328
Short-term borrowings ........................................................... 5,124 6,826
Long-term obligations ........................................................... 23,000 4,750
Accrued interest payable ........................................................ 4,505 4,394
Other liabilities ............................................................... 4,011 6,470
- - -------------------------------------------------------------------------------------------------------------
Total liabilities ...................................................... 593,392 535,768
- - -------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares authorized;
398,653 and 405,645 shares issued and outstanding at December 31, 1998 and
December 31, 1997, respectively ............................................ 1,942 1,976
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized;
40,373 and 43,631 shares issued and outstanding at December 31, 1998 and
December 31, 1997, respectively ............................................ 562 578
Common stock, $5 par value; 158,485 shares authorized; 119,266 and
119,918 shares issued and outstanding at December 31, 1998 and
December 31, 1997, respectively ............................................ 596 600
Surplus ......................................................................... 10,000 10,000
Retained earnings ............................................................... 31,571 26,733
Accumulated other comprehensive income .......................................... 11,362 15,097
- - -------------------------------------------------------------------------------------------------------------
Total shareholders' equity ............................................. 56,033 54,984
- - -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ............................. $ 649,425 $ 590,752
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share and per share data)
Year ended December 31,
1998 1997 1996
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans ................................................ $ 31,000 $ 29,225 $ 26,878
Investment securities:
U. S. Government .................................... 7,149 6,353 6,756
State, county and municipal ......................... 1,792 2,057 2,163
Other ............................................... 789 797 577
- - ----------------------------------------------------------------------------------------------
Total investment securities interest income ..... 9,730 9,207 9,496
Federal funds sold .................................... 972 623 402
- - ----------------------------------------------------------------------------------------------
Total interest income .......................... 41,702 39,055 36,776
Interest expense:
Deposits ............................................. 18,716 18,229 16,933
Short-term borrowings ................................ 292 303 400
Long-term obligations ................................ 1,320 295 117
- - ----------------------------------------------------------------------------------------------
Total interest expense ............................ 20,328 18,827 17,450
- - ----------------------------------------------------------------------------------------------
Net interest income ............................... 21,374 20,228 19,326
Provision for loan losses ............................... 155 60 140
- - ----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 21,219 20,168 19,186
Noninterest income:
Service charges on deposit accounts .................. 3,199 2,918 2,664
Other service charges and fees ....................... 1,129 868 780
Investment securities gains, net ..................... 1,789 5,567 460
Insurance commissions ................................ 72 90 145
Gain (loss) on sale of loans ......................... (112) 52 (158)
Other ................................................ 574 354 617
- - ----------------------------------------------------------------------------------------------
Total noninterest income .......................... 6,651 9,849 4,508
<PAGE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share and per share data)
Year ended December 31,
1998 1997 1996
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense:
Personnel ............................................ 9,501 8,763 7,975
Intangibles amortization ............................. 1,534 1,755 1,638
Data processing ...................................... 2,001 1,598 1,440
Furniture and equipment .............................. 1,502 1,633 1,314
Occupancy ............................................ 1,567 1,388 1,203
FDIC insurance assessment ............................ 115 112 772
Charitable contributions ............................. 2 4,076 589
Other ................................................ 3,992 3,739 3,272
- - ----------------------------------------------------------------------------------------------
Total noninterest expense .......................... 20,214 23,064 18,203
- - ----------------------------------------------------------------------------------------------
Income before income taxes .............................. 7,656 6,953 5,491
Income taxes ............................................ 2,060 340 1,127
- - ----------------------------------------------------------------------------------------------
Net income ...................................... 5,596 6,613 4,364
- - ----------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized (losses) gains arising during period ...... (2,554) 7,875 4,154
Less: reclassification adjustment for gains included
in net income ................................... 1,181 3,674 304
- - ----------------------------------------------------------------------------------------------
Comprehensive income ............................ $ 1,861 $ 10,814 $ 8,214
==============================================================================================
Per share information:
Earnings per common share ............................ $ 43.40 $ 51.77 $ 33.00
Cash dividends declared on common shares ............. 1.50 1.50 1.50
Weighted average common shares outstanding ........... 119,685 119,918 119,918
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................................. $ 5,596 $ 6,613 $ 4,364
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ................................................ 155 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 ............................ (1,789) (2,038) (2)
Loss on sale and abandonment of premises and equipment ................... 116 317 55
Loss (gain) on sale of loans ............................................. 112 (52) 158
Net accretion on discounts on investments ................................ (54) (88) (66)
Amortization of intangibles .............................................. 1,534 1,755 1,638
Depreciation ............................................................. 1,394 1,139 963
Net increase in accrued interest receivable .............................. (366) (206) (28)
Net increase (decrease) in accrued interest payable ...................... 111 1,190 (287)
Net (increase) decrease in other assets .................................. (1,006) 1,754 (1,824)
Net (decrease) increase in other liabilities ............................. (674) (1,339) 2,275
- - ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 5,129 9,647 7,464
- - ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of
investment securities available-for-sale ................................. 46,625 25,798 111
Proceeds from maturities and issuer calls of
investment securities held-to-maturity ................................... 5,569 43,856 53,749
Proceeds from sales of investment securities available-for-sale ............. 1,976 2,246 105
Purchases of investment securities held-to-maturity ......................... (42,786) (37,261) (11,414)
Purchases of investment securities available-for-sale ....................... (32,046) (38,134) (58,592)
Net decrease (increase) in loans ............................................ 1,392 (30,269) (24,748)
Purchases of fixed assets ................................................... (1,653) (4,084) (4,557)
Sales of fixed assets ....................................................... 48 185 97
Proceeds from net cash received for bank and branches acquired .............. 13,144 17,966 3,380
- - ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES ......................................... (7,731) (19,697) (41,869)
- - ---------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in demand and
interest-bearing demand deposits ......................................... 14,592 (4,658) 15,455
Net (decrease) increase in time deposits ................................. (8,531) 16,360 6,713
Proceeds from issuance of long-term obligations ............................. 23,000 5,000 --
Debt issuance costs ......................................................... (862) -- --
Payments of long-term obligations ........................................... (4,750) (1,650) (1,200)
Net (repayments) proceeds of short-term borrowed funds ...................... (1,702) 1,762 3,595
Cash dividends paid ......................................................... (581) (585) (587)
Purchase and retirement of stock ............................................ (231) (23) (12)
- - ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ...................................... 20,935 16,206 23,964
- - ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................................................ $18,333 $ 6,156 $(10,441)
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF YEAR ....................................................... 38,621 32,465 42,906
- - ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR ................................... $56,954 $38,621 $32,465
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING
THE YEAR FOR:
Interest .................................................................... $20,217 $17,637 $17,737
Income taxes ................................................................ $ 2,977 $ 1,776 $ 1,085
===========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities available for sale ...................... ($5,659) $ 6,365 $ 5,833
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands except per share data)
Preferred Stock Accumulated
---------------------------------- Common Other
Series B Series C Stock Compre- Total
--------------- ---------------- -------------- Retained hensive Shareholders'
Shares Amount Shares Amount Shares Amount Surplus Earninmgs Income Equity
------ ------ ------ ------ ------ ------ ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
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)
Unrealized gain on securities
available-for-sale,
net of tax -- -- -- -- -- -- -- -- 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
Retirement of stock (2,107) (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)
Unrealized gain on securities
available-for-sale,
net of tax -- -- -- -- -- -- -- -- 4,201 4,201
- - -----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 405,645 $1,976 43,631 $578 119,918 $600 $10,000 $26,733 $15,097 $54,984
- - -----------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- -- -- -- 5,596 -- 5,596
Retirement of stock (6,992) (34) (3,258) (16) (652) (4) -- (177) -- (231)
Cash dividends:
Common stock ($1.50 per share) -- -- -- -- -- -- -- (179) -- (179)
Preferred B ($.90 per share) -- -- -- -- -- -- -- (363) -- (363)
Preferred C ($.90 per share) -- -- -- -- -- -- -- (39) -- (39)
Unrealized loss on securities
available-for-sale,
net of tax -- -- -- -- -- -- -- -- (3,735) (3,735)
- - -----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 398,653 $1,942 40,373 $562 119,266 $596 $10,000 $31,571 $11,362 $56,033
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
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 45 banking offices in eastern North Carolina,
and Southern Capital Trust I, a statutory business trust that
issued $23.0 million of 8.25% Capital Securities (the "Capital
Securities") in June 1998 maturing in 2028. Southern, which
began operations in January, 1901, has a 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. BancShares has
no foreign operations and BancShares' customers are
principally located in eastern North Carolina.
Principles of Consolidation
The consolidated financial statements include the accounts of
BancShares and its wholly-owned subsidiaries, Southern and
Southern Capital Trust I. 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 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 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.
- 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.
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 the
contractual terms of the loan agreement. Impaired loans are
valued using either the discounted expected cash flow method
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. 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, ranging from 15 to 31.5 years for
buildings and improvements and 3 to 10 years for furniture and
equipment.
Intangible Assets
Intangible assets, primarily core deposit intangibles and
goodwill, are generally amortized on an accelerated basis over
a period of 5 to 10 years. Intangible assets are subject to
periodic review and are adjusted for any impairment of value.
Income Taxes
BancShares uses the asset and liability method to account for
deferred income taxes. The objective of the asset and
liability method is to establish deferred tax assets and
liabilities for the temporary differences between the
financial reporting basis and the income tax basis of
BancShares' assets and liabilities at enacted rates expected
to be in effect when such amounts are realized or settled.
23
<PAGE>
BancShares files a consolidated federal income tax return with
Southern and its subsidiary 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 will be
realized. A valuation allowance is recorded for deferred tax
assets when the "more likely than not" standard is not met.
Shareholders' Equity
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. Dividends on
BancShares' common stock may be paid only after annual
dividends of $.90 per share on both preferred series "B" and
"C" shares have been paid.
Earnings Per Common Share
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.
Earnings per common share is computed by dividing income
applicable to common shares by the weighted average number of
common shares outstanding during the period. Income applicable
to common shares represents net income reduced by dividends
paid to preferred shareholders. BancShares has no potentially
dilutive securities.
Earnings per common share are calculated based on the
following amounts for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income .............................. $ 5,596 $ 6,613 $ 4,364
Less: Preferred dividends ............... (402) (405) (407)
- - --------------------------------------------------------------------------------
Net income applicable to common shares . $ 5,194 $ 6,208 $ 3,957
================================================================================
Weighted average common shares
outstanding during the period ........ 119,685 119,918 119,918
================================================================================
</TABLE>
<PAGE>
Comprehensive Income
In June 1997, the Financial Accounting Standards Board
("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.
BancShares adopted this statement for its annual financial
statements in 1998, reclassifying prior period financial
statements for comparative purposes. Accumulated other
comprehensive income consists entirely of unrealized gain
(loss) on securities available for sale.
The tax effects of other comprehensive income components as
displayed in the consolidated statements of income are as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized (losses) gains arising during period ... $(1,316) $4,057 $2,139
Less: Reclassification adjustment for gains
included in net income ...................... 608 1,893 156
- - --------------------------------------------------------------------------------
Total tax effect .................................. $(1,924) $2,164 $1,983
================================================================================
</TABLE>
24
<PAGE>
Segment Reporting
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 did not have a material effect on
BancShares' consolidated financial statements as BancShares
has no operating segments as defined by Statement 131.
Disclosures About Pensions
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. Adoption of
Statement 132 by BancShares did not result in changes to any
measurement or recognition provisions, but has resulted in
altered disclosures relating to pension obligations.
New Accounting Standards
In June 1998, the FASB issued Statement 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and
the resulting designation. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 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 is effective for the first fiscal
quarter beginning after December 15, 1998. BancShares plans to
adopt this statement effective January 1, 1999 and does not
anticipate any material effect on its consolidated financial
statements.
<PAGE>
Note 2. Investment Securities
The amortized cost and estimated fair values of investment
securities at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
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 .................. $ 72,070 360 (41) 72,389 $ 33,969 122 -- 34,091
Obligations of states and
political subdivisions .......... 20,170 850 -- 21,020 22,212 890 -- 23,102
Corporate debenture ............... 100 2 -- 102 100 1 -- 101
- - ------------------------------------------------------------------------------------------------------------------------------------
92,340 1,212 (41) 93,511 56,281 1,013 -- 57,294
- - ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES
AVAILABLE-FOR-SALE:
U. S. Government .................. 71,046 369 (135) 71,280 82,471 130 (9) 82,592
Marketable equity securities ...... 10,747 16,867 (487) 27,127 8,119 22,183 (8) 30,294
Obligations of states and
political subdivisions .......... 8,539 573 (1) 9,111 8,411 527 -- 8,938
Mortgage-backed securities ........ 1,680 38 (9) 1,709 1,977 51 -- 2,028
- - ------------------------------------------------------------------------------------------------------------------------------------
92,012 17,847 (632) 109,227 100,978 22,891 (17) 123,852
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTALS .............................. $184,352 19,059 (673) 202,738 $157,259 23,904 (17) 181,146
====================================================================================================================================
</TABLE>
Securities with a par value of $55,184 were pledged at
December 31, 1998 to secure public deposits and for other
purposes as required by law and contractual arrangement.
25
<PAGE>
The amortized cost and estimated fair value of debt securities
at December 31, 1998, 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
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities held-to-maturity:
Due in one year or less ................................................ $38,519 $ 38,643
Due after one year through five years .................................. 46,085 46,400
Due after five years through ten years ................................. 5,522 5,869
Due after ten years .................................................... 2,214 2,599
- - ---------------------------------------------------------------------------------------------------------
......................................................................... 92,340 93,511
=========================================================================================================
Available-for-sale securities:
Due in one year or less ................................................ 41,180 41,416
Due after one year through five years .................................. 30,961 31,009
Due after five years through ten years ................................. 2,167 2,344
Due after ten years .................................................... 5,277 5,622
Mortgage-backed securities ............................................. 1,680 1,709
Marketable equity securities ........................................... 10,747 27,127
- - ---------------------------------------------------------------------------------------------------------
$92,012 $109,227
=========================================================================================================
</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
$187 in 1998 and $216 in 1997 resulted in gross realized gains
of $1,789 for 1998 and $2,030 for 1997. There were no sales of
securities available-for-sale during the year ended December
31, 1996. Excluding the gains discussed above, other gains on
investment securities in 1997 and 1996 were attributable to
issuer calls of debt securities.
<PAGE>
Note 3. Loans
Loans by type were as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural ........... $ 86,980 $ 84,281
Real estate
Construction ................................... 5,276 5,209
Mortgage:
One to four family residential ................. 113,984 106,444
Commercial ..................................... 62,446 58,056
Equityline ..................................... 28,698 27,759
Other .......................................... 26,846 27,868
Consumer ......................................... 36,775 35,643
Lease financing .................................. 3,484 3,956
- - --------------------------------------------------------------------------------
Total loans .................................. $364,489 $349,216
================================================================================
Loans held for sale .............................. $ 6,858 $ 3,019
Loans serviced for others ........................ $163,455 $ 78,426
</TABLE>
26
<PAGE>
On December 31, 1998 total loans to directors, executive
officers and related individuals and organizations were
$1,227. On December 31, 1997 total loans to directors,
executive officers and related individuals and organizations
were $1,469. During 1998, $344 of new loans were made to this
group and repayments totaled $586. 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,
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year ......... $ 5,971 $ 6,163 $ 6,321
Allowance from bank acquisition ...... 269 -- --
Provision for loan losses ............ 155 60 140
Loans charged off .................... (544) (463) (539)
Loan recoveries ...................... 111 211 241
- - --------------------------------------------------------------------------------
Balance at end of the year ........... $ 5,962 $ 5,971 $ 6,163
================================================================================
</TABLE>
At December 31, 1998 and December 31, 1997, Southern had
nonaccrual loans of $166 and $230, respectively. At December
31, 1998 Southern had restructured loans of $43. At December
31, 1997 Southern had no restructured loans. At December 31,
1998 and December 31, 1997 Southern had accruing loans past
due 90 days or more totaling $805 and $466, respectively. The
amount of foregone interest on nonaccrual and restructured
loans at December 31, 1998 and 1997, was not material for the
periods presented. At December 31, 1998 and 1997, Southern's
impaired loans, as determined under Statement 114 as amended
by Statement 118, 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 as amended by Statement 118 to
these impaired loans.
<PAGE>
Note 5. Premises and Equipment
The components of premises and equipment were as follows:
<TABLE>
<CAPTION>
December 31,
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C>
Land ......................................... $ 3,763 $ 3,377
Buildings and improvements ................... 15,333 14,292
Furniture and equipment ...................... 6,816 6,387
Construction-in-progress ..................... 103 90
- - --------------------------------------------------------------------------------
26,015 24,146
Less: accumulated depreciation ............... (7,113) (5,989)
- - --------------------------------------------------------------------------------
$ 18,902 $ 18,157
================================================================================
</TABLE>
Note 6. Income Taxes
The components of income tax expense (benefit) for the years
ended December 31 were:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ................... $ 2,221 $ 1,737 $ 1,348
State ..................... 6 8 21
- - --------------------------------------------------------------------------------
2,227 1,745 1,369
Deferred:
Federal ................... (167) (1,405) (242)
- - --------------------------------------------------------------------------------
$ 2,060 $ 340 1,127
================================================================================
</TABLE>
27
<PAGE>
A reconciliation of the expected tax expense, based on the
Federal statutory rate of 34%, to the actual tax expense for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount of tax computed at Federal
statutory rate of 34 percent .................... $ 2,603 $ 2,364 $ 1,867
Increase (decrease) in taxes
resulting from:
Tax exempt income ............................... (908) (943) (792)
Amortization of intangible assets ... 143 172 167
Nontaxable gain on securities donated -- (1,200) (162)
State income tax (net of federal benefit) ...... 2 5 14
Other, net .......................... 220 (58) 33
- - --------------------------------------------------------------------------------------
$ 2,060 $ 340 $ 1,127
======================================================================================
Effective tax rate .................... 27% 5% 21%
======================================================================================
</TABLE>
<PAGE>
Significant components of BancShares' deferred tax liabilities
and (assets) are as follows:
<TABLE>
<CAPTION>
1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation ....................................... $ 637 $ 709
Leased assets ...................................... 178 164
Investment securities .............................. 5,853 7,777
Other .............................................. 183 265
- - --------------------------------------------------------------------------------
Gross deferred tax liabilities ....... 6,851 8,915
- - --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses .......................... (1,778) (1,685)
Intangible assets .................................. (870) (711)
Other .............................................. (971) (1,196)
- - --------------------------------------------------------------------------------
Gross deferred tax assets ............ (3,619) (3,592)
- - --------------------------------------------------------------------------------
Net deferred tax liability ........................... $ 3,232 $ 5,323
================================================================================
</TABLE>
No valuation allowance for deferred tax assets was required at
December 31, 1998 or 1997. 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 and losses on
securities available-for-sale. The related deferred tax
benefit of approximately $1,924 for the year ended December
31, 1998 has been recorded directly to shareholders' equity.
The related deferred tax charge of approximately $2,164 for
the year ended December 31, 1997 has been recorded directly to
shareholders' equity.
28
<PAGE>
Note 7. Deposits
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C>
Demand ..................................... $ 77,550 $ 66,565
Checking with interest ................... 75,270 66,695
Savings .................................... 56,499 51,087
Money market accounts ...................... 53,449 50,061
Time ....................................... 293,984 278,920
- - --------------------------------------------------------------------------------
Total deposits .......................... $556,752 $513,328
================================================================================
</TABLE>
Total time deposits with a denomination of $100 or more were
$60,063 at December 31, 1998. Total time deposits with a
denomination of $100 or more were $53,004 at December 31,
1997.
At December 31, 1998, the scheduled maturities of time
deposits were:
1999 $ 243,008
2000 42,594
2001 5,315
2002 2,388
2003 and thereafter 679
----------------------------------------------------
Total time deposits $ 293,984
====================================================
Note 8. Short-Term Borrowings and Long-Term Obligations
Short-Term Borrowings
<TABLE>
<CAPTION>
December 31,
1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury tax and loan accounts .............. $ 171 $2,065
Repurchase agreements ............................ 4,953 4,761
- - --------------------------------------------------------------------------------
Total short-term borrowings ................... $5,124 $6,826
================================================================================
</TABLE>
The U. S. Treasury tax and loan accounts averaged $861 in 1998
and $997 in 1997. The highest month-end balance of the U. S.
Treasury tax and loan accounts was $2,206 in 1998 and $2,215
in 1997. The average rate on U. S. Treasury tax and loan
accounts was 5.97% in 1998 and 5.85% in 1997.
The repurchase agreements averaged $5,655 in 1998 and $4,819
in 1997. The highest month-end balance of the repurchase
agreements was $6,459 in 1998 and $5,929 in 1997. The average
rate on repurchase agreements in 1998 and 1997 was 4.09% and
4.18%. At December 31, 1998, $13,000 of investment securities
were pledged for repurchase agreements. The securities
collateralizing the repurchase agreements have been delivered
to a third party custodian for safe keeping.
29
<PAGE>
Long-Term Obligations
The $23.0 million long-term obligations at December 31, 1998
are Capital Trust Securities of Southern Capital Trust I,
("the Trust") a wholly-owned statutory business trust of
BancShares. These long-term obligations, which qualify as Tier
1 Capital for BancShares, bear interest at 8.25% and mature in
2028. BancShares may redeem the long-term obligations in whole
or in part on or after June 30, 2003. The sole asset of the
Trust is $23.0 million of 8.25% Junior Subordinated Debentures
of BancShares due 2028. Considered together, the undertakings
constitute a full and unconditional guarantee by BancShares of
the Trust's obligations under the Capital Trust Securities.
The $4,750 long-term obligation at December 31, 1997, was
payable to a bank and was negotiated by BancShares to provide
additional capital to its subsidiary, and was secured by
investment securities.
Note 9. Acquisitions and dispositions
BancShares has consummated numerous acquisitions and
dispositions in recent years. All of the acquisitions have
been accounted for under the purchase method of accounting,
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 and
dispositions as though they had been made at the beginning of
the periods presented is not material to BancShares'
consolidated financial statements.
<PAGE>
The following table provides information regarding the
acquisitions and dispositions that have been consummated
during the three-year period ending December 31, 1998:
<TABLE>
<CAPTION>
Assets Liabilities
Acquired Assumed Resulting
Date Institution/Location (Sold) (Sold) Intangible
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 1998 First Union National Bank $16,440 $16,440 $1,685
Red Springs, North Carolina
October 1998 First-Citizens Bank & Trust Company 5,309 5,302 186
Gates, North Carolina
May 1998 Enfield Savings Bank 18,174 18,041 448
Enfield, North Carolina
May 1998 Enfield Savings Bank (1) (2,420) (2,420) (85)
Littleton, North Carolina
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 & Trust Company 7,352 7,348 539
Windsor, North Carolina
</TABLE>
(1) Represents the sale of this branch to First-Citizens Bank & Trust Company.
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>
1998 1997 1996
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation
Net benefit obligation at beginning of year ............ $ 6,598 $ 5,417 $ 4,909
Service cost ........................................... 356 298 256
Interest cost .......................................... 489 418 373
Actuarial loss ......................................... 414 645 53
Gross benefits paid .................................... (210) (180) (174)
- - -------------------------------------------------------------------------------------------
Net benefit obligation at end of year .................. $ 7,647 $ 6,598 $ 5,417
===========================================================================================
Change in plan assets
Fair value of plan assets at beginning of year ......... $ 5,943 $ 4,936 $ 4,583
Actual return on plan assets ........................... 920 817 309
Employer contributions ................................. 283 370 218
Gross benefits paid .................................... (210) (180) (174)
- - -------------------------------------------------------------------------------------------
Fair value of plan assets at end of year ............... $ 6,936 $ 5,943 $ 4,936
===========================================================================================
Funded status at end of year ........................... $ (711) $ (655) $ (481)
Unrecognized net actuarial loss ........................ 352 530 409
Unrecognized prior service cost ........................ 73 81 90
Unrecognized net transition asset ...................... (184) (225) (265)
- - -------------------------------------------------------------------------------------------
Net amount recognized as a liability in the consolidated
balance sheets at end of year ..................... $ (470) $ (269) $ (247)
===========================================================================================
Assumptions as of December 31
Discount rate .......................................... 6.75% 7.25% 7.25%
Expected return on plan assets ......................... 8.00% 8.25% 8.25%
Rate of compensation increase .......................... 4.50% 4.50% 4.25%
Components of net periodic benefit cost
Service cost ........................................... $ 356 $ 298 $ 256
Interest cost .......................................... 489 418 373
Expected return on assets .............................. (395) (345) (319)
Amortization of:
Transition asset .................................... (41) (41) (41)
Prior service cost .................................. 8 8 8
Actuarial loss ...................................... 67 53 45
- - -------------------------------------------------------------------------------------------
Total net periodic benefit cost ........................ $ 484 391 $ 322
===========================================================================================
</TABLE>
Employees are also eligible to participate in a matching
savings plan after one year of service. During 1998 Southern
made participating contributions to this plan of $245 compared
to $220 during 1997 and $198 during 1996.
31
<PAGE>
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
$10,753 during 1998 of which $8,447 was satisfied by vault
cash and the remainder by amounts held in the Federal Reserve
Bank.
Various regulatory agencies have implemented guidelines that
evaluate capital based on risk adjusted assets. An additional
capital computation evaluates tangible capital based on
tangible assets. Minimum capital requirements set forth by the
regulators require a Tier 1 capital ratio of no less than 4%
of risk-adjusted assets, a total capital ratio of no less than
8% of risk-adjusted assets, and a leverage capital ratio of no
less than 4% of average tangible assets. To meet the Federal
Deposit Insurance Corporation's ("FDIC") "well capitalized"
standards, the Tier 1 ratios must be at least 6%, total
capital ratios must be at least 10% and Leverage capital
ratios must be at least 5%. 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, 1998, Southern was
considered to be "well capitalized" by the FDIC.
Southern's capital ratios as of December 31 are set forth
below:
<TABLE>
<CAPTION>
1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital ....................... $ 49,198 $ 33,999
Total capital ........................ 53,234 37,876
Risk-adjusted assets ................. 311,341 295,654
Average tangible assets .............. 582,955 564,633
Tier 1 capital ratio ................. 15.80% 11.50%
Total capital ratio .................. 17.10% 12.81%
Leverage capital ratio ............... 8.44% 6.02%
</TABLE>
The primary source of funds for the dividends paid by
BancShares to its shareholders is dividends received from its
Banking subsidiary. Southern Bank is restricted as to dividend
payout by state laws applicable to banks and may pay dividends
only out of retained earnings. Should at anytime its surplus
be less than 50% of its paid-in capital stock, Southern Bank
may not declare a dividend until it has transferred from
retained earnings to surplus 25% of its undivided profits or
any lesser percentage that may be required to restore its
surplus to an amount equal to 50% of its paid-in capital
stock. Additionally, dividends paid by Southern Bank may be
limited by the need to retain sufficient earnings to satisfy
minimum capital requirements imposed by the FDIC. Dividends on
BancShares' common shares may be paid only after dividends on
preferred Series "B" and "C" shares have been paid. Common
share dividends are based upon BancShares' profitability and
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. At December 31, 1998, Southern had
available for the payment of dividends undivided profits of
approximately $12.6 million, unless declaration of dividends
for such amount would reduce the regulatory capital of
Southern below the minimum levels discussed above. At December
31, 1998, approximately $35.8 million of BancShares'
investment in Southern was restricted as to transfer to
BancShares without obtaining prior regulatory approval.
32
<PAGE>
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.
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, 1998
and December 31, 1997 amounted to $1,625 and $1,324.
Outstanding commitments at December 31, 1998 and December 31,
1997 were $51,466 and $53,763. Undisbursed advances on
customer lines of credit at December 31, 1998 and December 31,
1997 were $47,639 and $29,602. 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.
33
<PAGE>
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, 1998 and 1997 and condensed statements of income
and cash flows for the three years ended December 31, 1998.
<TABLE>
<CAPTION>
December 31,
- - ---------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS 1998 1997
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash ........................................................................... $ 3,802 $ 33
Investment securities available-for-sale ....................................... 14,659 14,782
Other assets ................................................................... 1,333 790
Investment in subsidiaries ..................................................... 62,553 47,700
- - ---------------------------------------------------------------------------------------------------------
Total assets ................................................................ $82,347 $63,305
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities ............................................................$ 2,603 $ 3,562
Accrued interest payable ....................................................... -- 9
Notes payable .................................................................. 23,711 4,750
- - ---------------------------------------------------------------------------------------------------------
Total liabilities ........................................................... 26,314 8,321
Shareholders' equity ........................................................... 56,033 54,984
- - ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity .................................. $82,347 $63,305
=========================================================================================================
<CAPTION>
CONDENSED STATEMENTS OF INCOME Year ended December 31,
- - ---------------------------------------------------------------------------------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from bank subsidiary .............................. $3,090 $5,458 $2,637
Other dividends ............................................. 152 80 78
- - ---------------------------------------------------------------------------------------------------------
Total income ............................................. 3,242 5,538 2,715
Interest expense ............................................ (1,320) (295) (117)
Other expense ............................................... (293) (49) (42)
- - ---------------------------------------------------------------------------------------------------------
Income before equity in undistributed income
of subsidiary ............................................ 1,629 5,194 2,556
Equity in undistributed income of subsidiary ................ 3,967 1,419 1,808
- - ---------------------------------------------------------------------------------------------------------
Net income ............................................... $5,596 $6,613 $4,364
=========================================================================================================
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS Year ended December 31,
- - --------------------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................. $ 5,596 $ 6,613 $ 4,364
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary ... (3,967) (1,419) (1,808)
Increase in other assets ........................... (543) -- --
(Decrease) increase in accrued liabilities ......... (959) -- 642
Dividend income in the form of investment securities -- (2,753) --
Increase (decrease) in accrued interest payable .... (9) 9 (39)
- - --------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 118 2,450 3,159
- - --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investments ............................... (1,787) (205) (1,318)
Investments in subsidiaries ............................ (12,711) (5,000) --
- - --------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES ................... (14,498) (5,205) (1,318)
- - --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Dividends paid ......................................... (581) (585) (587)
Purchase and retirement or redemption of stock ......... (231) (23) (12)
Change in notes payable, net ........................... 18,961 3,350 (1,200)
- - --------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES ................................ 18,149 2,742 (1,799)
- - --------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS ........................... 3,769 (13) 42
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF YEAR ...................................... 33 46 4
- - --------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE
END OF YEAR ............................................ $ 3,802 $ 33 $ 46
============================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH PAID
DURING THE YEAR FOR:
Interest ............................................... $ 1,329 $ 286 $ 156
Income taxes ........................................... $ 11 $ 7 $ 7
============================================================================================
</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.
35
<PAGE>
Loans receivable
For variable-rate loans that are performing, fair values are
based on carrying values. The fair values of fixed rate loans
that are performing are estimated by discounting the future
cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for
the same remaining maturities. The fair value of nonperforming
loans is based on the book value of each loan, less an
applicable reserve for credit losses. This reserve for credit
losses is determined on a loan by loan basis for nonperforming
assets based on one or a combination of the following:
external appraisals, internal assessments using available
market information and specific borrower information, or
discounted cash flow analysis.
Deposits
The fair value of demand deposits, savings accounts and money
market deposits is the amount payable on demand at year end.
The fair value of certificates of deposit is estimated by
discounting the future cash flows using the current rates paid
for similar deposits.
Short-term borrowed funds and accrued interest payable
The carrying amounts for short-term borrowed funds and accrued
interest payable are equal to the fair values due to the short
term nature of these financial instruments.
Long-term obligations
The fair value of the 1998 long-term obligation is the market
value at the last trade date in 1998. The carrying amount for
the 1997 long-term obligation was considered to be equal to
its fair value since the underlying note bore 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.
Limitations on Fair Value Assumptions
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>
The estimated fair values of BancShares' financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks .............................. $ 37,419 $ 37,419 $ 28,381 $ 28,381
Federal funds sold ................................... 19,535 19,535 10,240 10,240
Investment securities:
Held-to-maturity ................................. 92,340 93,511 56,281 57,294
Available-for-sale ............................... 109,227 109,227 123,852 123,852
Loans ................................................ 358,527 362,264 343,245 349,668
Accrued interest receivable .......................... 4,571 4,571 4,205 4,205
Financial liabilities:
Deposits ............................................. $556,752 $558,544 $513,328 $514,095
Short-term borrowings ................................ 5,124 5,124 6,826 6,826
Long-term obligations ................................ 23,000 23,288 4,750 4,750
Accrued interest payable ............................. 4,505 4,505 4,394 4,394
</TABLE>
Note 15. Related Parties
BancShares has entered into various service contracts with
another bank holding company and its subsidiary (the
"Corporation"). The Corporation has two significant
shareholders, which are also significant shareholders of
BancShares. The first significant shareholder is a director of
BancShares and at December 31, 1998 beneficially owned 32,294
shares, or 27.08%, of BancShares' outstanding common stock and
22,171 shares, or 5.56%, of BancShares' outstanding Series B
preferred stock. At the same date, the second significant
shareholder beneficially owned 27,577 shares, or 23.12%, of
BancShares' outstanding common stock, and 17,205 shares, or
4.32%, of BancShares' Series B preferred stock. The above
totals include 17,205 Series B preferred shares, or 4.32%,
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, 1998,
beneficially owned 2,553,656 shares, or 28.69%, and 1,543,942
shares, or 17.35%, of the Corporation's outstanding Class A
common stock, and 641,641 shares, or 37.30%, and 164,347
shares, or 9.55%, of the Corporation's outstanding Class B
common stock. The above totals include 530,522 Class A common
shares, or 5.96%, and 110,668 Class B Common shares, or 6.43%,
that are considered to be beneficially owned by both of the
shareholders and, therefore, are included in each of their
totals. A subsidiary of the Corporation is First-Citizens Bank
& Trust Company ("First Citizens"). As more fully discussed in
note 9 and 16, Southern acquired branches from First Citizens
in 1998 and 1996, sold a branch to First Citizens in 1998 and
plans to acquire a branch from First Citizens in 1999.
37
<PAGE>
The following table lists the various charges paid to the
Corporation during the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Data and item processing ......................... $2,345 $1,840 $1,828
Forms, supplies and equipment .................... 231 220 300
Trustee for employee benefit plans ............... 79 66 62
Consulting fees .................................. 78 79 79
Trust investment services ........................ 20 22 24
Internal auditing services ....................... 1 41 165
Other services ................................... 114 94 143
- - ---------------------------------------------------------------------------------------------
$2,868 $2,362 $2,601
=============================================================================================
</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 $15,988 at December 31, 1998 and $10,071 at
December 31, 1997. Southern's wholly-owned subsidiary, Goshen,
Inc., paid $98,000 and $121,000 to an Insurance Company owned
by the Corporation for the sale of insurance written in
connection with loans made by Southern in 1998 and 1997,
respectively. Beginning June 23, 1998 the trust department of
the Corporation assumed the duties of Stock Transfer Agent of
BancShares. BancShares also owns 124,584 and 22,219 shares of
Class A and Class B Common Stock of the Corporation. The Class
A and Class B Common Stock had an amortized cost of $2.6
million and $465,000, respectively, at December 31, 1998 and
1997. The Class A Common Stock had a market value of $11.2
million and $13.0 million at December 31, 1998 and 1997,
respectively. The Class B Common Stock had a market value of
$2.0 million and $2.3 million at December 31, 1998 and 1997,
respectively.
Note 16. Subsequent Events
Southern has received approval from the regulatory authorities
to open de novo branches in three new eastern North Carolina
markets. These branches are planned to open in 1999.
Southern has announced plans to acquire, subject to regulatory
approval, the Ahoskie branch of the Corporation. This
acquisition is planned for the third quarter of 1999 and is
projected to increase deposits by approximately $16.0 million
and loans by approximately $8.0 million.
38
<PAGE>
DIRECTORS _______________________________________________________________
Bynum R. Brown
Murfreesboro, NC
President and Owner,
Bynum R. Brown Agency, Inc.
(Real Estate and Insurance)
President and Owner, Brown Manor, Inc.
(Family Care Home)
Secretary-Treasurer, Roanoke
Valley Nursing Home, Inc.
William H. Bryan
Mount Olive, NC
President, Director and Treasurer
Mount Olive Pickle Company, Inc.
(Manufacturer of Pickle and Pepper Products)
D. Hugh Carlton
Warsaw, NC
President and Owner, Carlton Insurance Agency, Inc.
(Insurance)
Robert J. Carroll
Gates, NC
President and Owner, Carroll's Garage, Inc.
(Truck and Farm Equipment Sales and Service)
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.
Sam E. Ewell, Jr.
Wendell, NC
President and Owner, Ewell Ford Sales, Inc.
Moses B. Gillam, Jr.
Windsor, NC
Senior Partner, Gillam and Gillam, Attorneys
LeRoy C. Hand
Camden, NC
Retired Physician, former President,
Albemarle Emergency Associates, P.A.
J.D. Hines
Rocky Mount, NC
President and Owner, Hines Equipment Company
President and Owner, Enfield Tractor and Equipment Company
<PAGE>
Frank B. Holding
Smithfield, NC
Executive Vice Chairman of the Board,
First-Citizens Bank & Trust Company and
First Citizens BancShares, Inc.
George A. Hux
Rocky Mount, NC
Retired Attorney
Former Partner, Hux, Livermon &Armstrong, L.L.P.
M. J. McSorley
Rocky Mount, NC
Vice Chairman,
Southern Bank and Trust Company;
Vice President, Southern BancShares (N.C.), Inc.
Former President and CEO,
Southern Bank and Trust Company
W. B. Midyette, Jr.
Bath, NC
Retired Farmer
W. Hunter Morgan
Sunbury, NC
President, Kellogg-Morgan Agency, Inc.
(Insurance)
John C. Pegram, Jr.
Mount Olive, NC
President and Chief Executive Officer,
Southern BancShares (N.C.), Inc.
President and Chief Executive Officer,
Southern Bank and Trust Company
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)
Charles L. Revelle, Jr.
Murfreesboro, NC
Chairman of the Board,
Revelle Agri-Products, Inc.;
Vice President, Revelle Builders of N. C., Inc.;
President, Revelle Equipment Co., Inc.
(Agribusiness)
<PAGE>
Watson N. Sherrod, Jr.
Enfield, NC
Senior Vice President,
Southern Bank and Trust Company
Former President and CEO, ESB Bancorp, Inc.
and Enfield Savings Bank, Inc. SSB
Charles O. Sykes
Mount Olive, NC
President, Mount Olive Livestock
Market, Inc.
(Livestock Auction Market and Dealer)
Raymond M. Sykes
Whitakers, NC
Retired Farmer
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 and Chief Executive Officer
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 of the Board
John C. Pegram, Jr., President and Chief Executive Officer
Paul A. Brewer, Executive Vice President
R. D. Ray, Executive Vice President
David A. Bean, Senior Vice President,
Controller and Secretary
40
<PAGE>
SOUTHERN BANK OFFICES ___________________________________________________
Branch County
- - ------ ------
Ahoskie Hertford
507 E. Main St.
Ahoskie, NC 27910-0825
(252) 332-5149
Askewville Bertie
104 W. Askewville St.
Windor, NC 27983-0529
(252) 794-3029
Aulander Bertie
119 S. Commerce St.
Aulander, NC 27805-0129
(252) 345-4061
Aurora Beaufort
298 North Fifth St.
Aurora, NC 27806-0427
(252) 322-4161
Aydn Pitt
1107 W. 3rd St.
Ayden, NC 28513-0368
(252) 746-6138
Bath Beaufort
Highway 92
Bath, NC 27808-0217
(252) 923-8381
Belhaven Beaufort
106 E. Main St.
Belhaven, NC 27810-0087
(252) 943-2184
Bethel Pitt
124 N. Main St.
Bethel, NC 27812-0819
(252) 825-0031
Calypso Duplin
104 West Trade St.
Calypso, NC 28325-0729
(919) 658-7070
Deep Run Lenoir
Highway 11 & SR 1144
Deep Run, NC 28525-0126
(252) 568-4141
<PAGE>
Branch County
- - ------ ------
Dudley Wayne
Highway 117 Alternate South
Dudley, NC 28333-0729
(919) 734-5375
Edenton Chowan
1207 N. Broad St
Edenton, NC 27932-0546
(252) 482-7466
Edenton Chowan
101 W. Queen St
Edenton, NC 27932-0868
(252) 482-8466
Enfield Halifax
201Batchelor Avenue
Enfield, NC 27823-0368
(252) 445-2016
Faison Duplin
110 W. Center St South
Faison, NC 28341-0628
(910) 267-4351
Farmville Pitt
107 E. Church St.
Farmville, NC 27828-0146
(252) 753-2161
Garland Sampson
96 South Ingold Ave.
Garland, NC 28441-0397
(910) 529-3651
Gates Gates
Gates Bank Road
Gates, NC 27937-0064
(252) 357-1250
Gatesville Gates
203 Main St.
Gatesville NC 27938-0203
(252) 357-0190
Grantham Wayne
3382 U.S. 13 South
Goldsboro, NC 27530-0729
(919) 689-2300
Hamilton Martin
100 S. Front Street
Hamilton, NC 27840-0425
(252) 798-6971
<PAGE>
Branch County
- - ------ ------
Kill Devil Hills North Dare
3105 N. Croatan Highway
Kill Devil Hills, NC 27948-2036
(252) 441-2871
Kill Devil Hills South Dare
1906 S. Croatan Highway
Kill Devil Hills, NC 27948-0329
(252) 441-6355
LaGrange Lenoir
208 S. Caswell St.
LaGrange, NC 28551-0248
(252) 566-4020
Lewiston Bertie
127 Main St.
Lewiston-Woodville, NC 27849-0190
(252) 348-2561
Macclesfield Edgecombe
105 N. Railroad St.
Macclesfield, NC 27852-0339
(252) 827-2111
Mount Olive Wayne
100 North Center St.
Mount Olive, NC 28365-0729
(919) 658-7000
Mount Olive Wayne
800 North Breazeale Ave.
Mount Olive, NC 28365-0729
(919) 658-7100
Murfreesboro Hertford
336 East Main St
Murfreesboro, NC 27855-0277
(252) 398-4174
Nashville Nash
209 Barnes St.
Nashville, NC 27856-0758
(252) 459-2117
Plymouth Washington
612 Washigton St.
Plymouth, NC 27962-1023
(252) 793-1115
<PAGE>
Branch County
- - ------ ------
Pollocksville Jones
214 Main St.
Pollocksville, NC 28573-0171
(252) 224-5191
Red Springs Robeson
300 South Main St.
Red Springs, NC 28377-1624
(910) 843-4135
Roanoke Rapids Halifax
1580 E. 10th St.
Roanoke Rapids, NC 27870-4109
(252) 535-3043
*Robersonville Martin
111 N. Main St.
Robersonville, NC 27871-0369
(252) 795-3041
Rocky Mount Nash
230 Sunset Ave.
Rocky Mount, NC 27802-0428
(252) 977-2825
Rocky Mount Nash
3690 Sunset Ave.
Rocky Mount, NC 27802-0428
(252)-443-7800
Roxobel Bertie
113 South Main St.
Roxobel, NC 27872-0159
(252) 344-5641
Salemburg Sampson
102 South Main St.
Salemburg, NC 28385-0160
(910) 525-4149
Seven Springs Wayne
Main St.
Seven Springs, NC 28578-0060
(252) 569-3161
Turkey Sampson
45 Union Rd.
Turkey, NC 28393-0375
(910) 592-7321
Warsaw Duplin
114 N. Pine St.
Warsaw, NC 28398-0896
(910) 293-7176
<PAGE>
Branch County
- - ------ ------
Whitakers Nash
101 N. White St.
Whitakers, NC 27891-0130
(252) 437-0611
Windsor Bertie
101 N. King St.
Windsor, NC 27983-0529
(252) 794-3011
Winton Hertford
301 N. Main St.
Winton, NC 27986-0278
(252) 358-3111
41
<PAGE>
GENERAL INFORMATION_____________________________________________________
Shareholders' Meeting
The Annual Meeting of Shareholders will be held on Wednesday, April 21, 1999 at
3:00 P. M. at the Goldsboro Country Club, 1500 South Slocumb Street, Goldsboro,
North Carolina.
Stock Transfer Agent and Registrar
First-Citizens Bank &Trust Company
100 E. Tryon Road
Raleigh, North Carolina 27603
General Counsel
Ward and Smith, P.A.
New Bern, North Carolina 28563-0867
Auditors
KPMG LLP
Raleigh, North Carolina 27601
Form 10-K
Copies of Southern BancShares' Annual Reports on Form 10-K are available on the
internet at 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 1998, 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
This report has not been reviewed or conformed for accuracy by the FDIC.
42
The following are subsidiaries of Southern BancShares (N.C.), Inc. :
Subsidiary State of Incorporation
---------- ----------------------
Southern Bank and Trust Company North Carolina
Southern Capital Trust I Delaware
Goshen, Inc. North Carolina
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