SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999 Commission File No. 0-10852
SOUTHERN BANCSHARES (N.C.), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1538087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
121 East Main Street Mount Olive, North Carolina 28365
( Address of Principal Executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (919) 658-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of the Registrant's common stock as of
the close of the period covered by this report.
119,186 shares
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES June 30, December 31,
CONSOLIDATED BALANCE SHEETS 1999 1998
--------- ---------
(Dollars in thousands except per share data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,724 $ 37,419
Federal funds sold 10,050 19,535
Investment securities:
Available-for-sale, at fair value (amortized cost $89,570 and $92,012, respectively) 103,470 109,227
Held-to-maturity, at amortized cost (fair value $93,508 and $93,511, respectively) 93,230 92,340
Loans 379,668 364,489
Less allowance for loan losses (5,745) (5,962)
--------- ---------
Net loans 373,923 358,527
Premises and equipment 19,570 18,902
Intangible assets 5,952 6,972
Accrued interest receivable 4,819 4,571
Other assets 2,023 1,932
--------- ---------
Total assets $ 638,761 $ 649,425
========= =========
LIABILITIES
Deposits:
Noninterest-bearing $ 76,497 $ 77,550
Interest-bearing 470,263 479,202
--------- ---------
Total deposits 546,760 556,752
Short-term borrowings 6,931 5,124
Long-term obligations 23,000 23,000
Accrued interest payable 3,833 4,505
Other liabilities 3,056 4,011
--------- ---------
Total liabilities 583,580 593,392
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES June 30, December 31,
CONSOLIDATED BALANCE SHEETS (continued) 1999 1998
--------- ---------
(Dollars in thousands except per share data)
<S> <C> <C>
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares
authorized; 397,701 shares issued and outstanding at June 30, 1999 and
398,653 shares issued and outstanding at December 31, 1998 1,937 1,942
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized; 39,825
shares issued and outstanding at June 30, 1999 and 40,373 shares issued and
outstanding at December 31, 1998 557 562
Common stock, $5 par value; 158,485 shares authorized; 119,186 and 119,266 shares
issued and outstanding at June 30, 1999 and December 31, 1998, respectively 596 596
Surplus 10,000 10,000
Retained earnings 32,917 31,571
Accumulated other comprehensive income 9,174 11,362
--------- ---------
Total shareholders' equity 55,181 56,033
--------- ---------
Total liabilities and shareholders' equity $ 638,761 $ 649,425
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES (Unaudited) (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in thousands except share and per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 7,625 $ 7,768 $ 15,064 $ 15,300
Investment securities:
U. S. Government 1,858 1,734 3,749 3,469
State, county and municipal 453 451 887 932
Other 188 385 374 546
--------- --------- --------- ---------
Total investment securities interest income 2,499 2,570 5,010 4,947
Federal funds sold 153 163 430 347
--------- --------- --------- ---------
Total interest income 10,277 10,501 20,504 20,594
Interest expense:
Deposits 4,323 4,703 8,701 9,359
Short-term borrowings 49 395 97 471
Long-term obligations 518 71 1,035 141
--------- --------- --------- ---------
Total interest expense 4,890 5,169 9,833 9,971
--------- --------- --------- ---------
Net interest income 5,387 5,332 10,671 10,623
Provision for loan losses 60 60 120 120
--------- --------- --------- ---------
Net interest income after provision for loan losses 5,327 5,272 10,551 10,503
Noninterest income:
Service charges on deposit accounts 916 823 1,723 1,585
Other service charges and fees 272 190 519 436
Gain (loss) on sale of loans (149) 10 (189) 11
Investment securities gains, net -- -- 1 1,788
Other 200 143 294 279
--------- --------- --------- ---------
Total noninterest income 1,239 1,166 2,348 4,099
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES (Unaudited) (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME (continued) Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in thousands except share and per share data)
<S> <C> <C> <C> <C>
Noninterest expense:
Personnel 2,674 2,434 5,407 4,719
Data processing 469 466 961 898
Intangibles amortization 405 403 868 787
Occupancy 397 372 779 750
Furniture and equipment 368 396 726 728
Other 1,026 989 1,999 1,966
--------- --------- --------- ---------
Total noninterest expense 5,339 5,060 10,740 9,848
--------- --------- --------- ---------
Income before income taxes 1,227 1,378 2,159 4,754
Income taxes 270 451 510 1,260
--------- --------- --------- ---------
Net income 957 927 1,649 3,494
--------- --------- --------- ---------
Other comprehensive income (loss) net of tax:
Unrealized losses arising during period (119) (1,722) (2,188) (2,115)
Less: reclassification adjustment for gains included in net income -- -- -- 1,180
--------- --------- --------- ---------
Comprehensive (loss) income $ 838 $ (795) $ (539) $ 199
========= ========= ========= =========
Per share information:
Earnings per common share $ 7.22 $ 6.91 $ 12.21 $ 27.49
Cash dividends declared on common shares 0.37 0.37 0.75 0.75
Weighted average common shares outstanding 119,186 119,855 119,218 119,886
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
(Thousands) 1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,649 $ 3,494
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120 120
Gains on sales and issuer calls of securities available-for-sale (1) (1,788)
Loss on sale and abandonment of premises and equipment 1 34
Net accretion of discounts on investments (42) (39)
Amortization of intangibles 1,020 708
Depreciation 731 673
Net increase in accrued interest receivable (248) (425)
Net (decrease) increase in accrued interest payable (672) 136
Net increase in other assets (91) (478)
Net increase (decrease) in other liabilities 503 104
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,970 2,539
-------- --------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities available-for-sale 17,111 23,360
Proceeds from maturities and issuer calls of investment securities held-to-maturity 22,798 3,906
Proceeds from sales of investment securities available-for-sale -- 1,976
Purchases of investment securities held-to-maturity (23,645) (16,064)
Purchases of investment securities available-for-sale (15,000) (10,433)
Net increase in loans (15,516) (8,929)
Proceeds from net cash paid for bank and branches acquired -- (6,070)
Purchases of premises and equipment (1,400) (303)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES 15,652 (12,557)
-------- --------
</TABLE>
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<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Six months ended June 30,
(Thousands) 1999 1998
-------- --------
<S> <C> <C>
FINANCING ACTIVITIES:
Net decrease in demand and interest-bearing demand deposits (8,706) (3,985)
Net decrease in time deposits (1,286) (98)
Proceeds from issuance of long-term obligations -- 23,000
Payments on long-term obligations -- (4,750)
Net proceeds of short-term borrowed funds 1,807 297
Cash dividends paid (282) (289)
Purchase and retirement of stock (31) (25)
-------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (8,498) 14,150
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $(21,180) $ 4,132
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 56,954 38,621
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 35,774 $ 42,753
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest $ 10,505 $ 9,835
Income taxes $ 247 $ 1,335
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on securities available-for-sale, net of taxes $ (2,188) $ (2,115)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands except per share data)
(Unaudited)
Preferred Stock Common Stock
------------------------------------------- --------------------
Series B Series C
---------------------- -------------------
Shares Amount Shares Amount Shares Amount
------- ------ ------ ---- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 405,645 $1,976 43,631 $578 119,918 $600
Net income
Retirement of stock (360) (2) (122) (1)
Cash dividends:
Common stock ($.75 per share)
Preferred B ($.44 per share)
Preferred C ($.44 per share)
Unrealized loss on securities
available-for-sale, net of tax
------- ------ ------ ---- ------- ----
Balance, June 30, 1998 405,285 $1,974 43,631 $578 119,796 $599
======= ===== ====== ==== ======= ====
Balance, December 31, 1998 398,653 $1,942 40,373 $562 119,266 $596
Net income
Retirement of stock (952) (5) (548) (5) (80)
Cash dividends:
Common stock ($.75 per share)
Preferred B ($.44 per share)
Preferred C ($.44 per share)
Unrealized loss on securities
available-for-sale, net of tax
------- ------ ------ ---- ------- ----
Balance, June 30, 1999 397,701 $1,937 39,825 $557 119,186 $596
======= ===== ====== ==== ======= ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (continued)
(Dollars in thousands except per share data)
(Unaudited)
Accumulated
Other
Compre- Total
Retained hensive Shareholders'
Surplus Earnings Income Equity
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $10,000 $26,733 $15,097 $54,984
Net income 3,494 3,494
Retirement of stock (22) (25)
Cash dividends:
Common stock ($.75 per share) (91) (91)
Preferred B ($.44 per share) (179) (179)
Preferred C ($.44 per share) (19) (19)
Unrealized loss on securities
available-for-sale, net of tax (2,115) (2,115)
---------- ---------- ------------ -----------------
Balance, June 30, 1998 $10,000 $29,916 $12,982 $56,049
========== ========== ============= ==================
Balance, December 31, 1998 $10,000 $31,571 $11,362 $56,033
Net income 1,649 1,649
Retirement of stock (21) (31)
Cash dividends:
Common stock ($.75 per share) (89) (89)
Preferred B ($.44 per share) (175) (175)
Preferred C ($.44 per share) (18) (18)
Unrealized loss on securities
available-for-sale, net of tax (2,188) (2,188)
---------- ---------- ------------ -----------------
Balance, June 30, 1999 $10,000 $32,917 $9,174 $55,181
========== ========== ============= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SOUTHERN BANCSHARES (N. C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary Of Significant Accounting Policies
Basis of Financial Statement Presentation
Southern BancShares (N. C.), Inc. ("BancShares") is the holding company for
Southern Bank and Trust Company ("Southern"), which operates 45 banking offices
in eastern North Carolina, and Southern Capital Trust I (the "Trust"), a
statutory business trust that issued $23.0 million of 8.25% Capital Securities
("the Capital Securities") in June 1998 maturing in 2028. Southern, which began
operations January 29, 1901, has a wholly-owned subsidiary, Goshen, Inc. which
acts as agent for credit life and credit accident and health insurance written
in connection with loans made by Southern. BancShares and Southern are
headquartered in Mount Olive, North Carolina.
The consolidated financial statements in this report are unaudited. In the
opinion of management, all adjustments (none of which were other than normal
accruals) necessary for a fair presentation of the financial position and
results of operations for the quarters presented have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses for the
reporting periods. Actual results could differ from those estimates. The
statements should be read in conjunction with the consolidated financial
statements and accompanying notes for the year ended December 31, 1998,
incorporated by reference in the 1998 Annual Report on Form 10-K.
Principles Of Consolidation
The consolidated financial statements include the accounts of BancShares and its
wholly-owned subsidiaries, Southern and the Trust. The statements also include
the accounts of Goshen, Inc., a wholly-owned subsidiary of Southern. BancShares'
financial resources are primarily provided by dividends from Southern. All
significant intercompany balances have been eliminated in consolidation.
Cash And Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks and federal funds sold. Federal funds are purchased and sold for
one day periods.
Reclassifications
Certain prior period balances have been reclassified to conform to the current
period presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Dollars in thousands
<TABLE>
<CAPTION>
Note 2. Investment securities June 30, 1999
-------------------------------------------------
(In thousands, unaudited) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- --------- --------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY:
U. S. Government $74,050 80 (330) $ 73,800
Obligations of states
and political subdivisions 19,080 546 (19) 19,607
Corporate debenture 100 1 -- 101
------- ------- --------- --------
$93,230 627 (349) $ 93,508
======= ======= ========= ========
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government $68,980 72 (443) $ 68,609
Marketable equity securities 10,747 14,018 -- 24,765
Obligations of states
and political subdivisions 8,343 258 (1) 8,600
Mortgage-backed securities 1,500 27 (31) 1,496
------- ------- --------- --------
$89,570 14,375 (475) $103,470
======= ======= ========= ========
<CAPTION>
December 31, 1998
-------------------------------------------------
(In thousands, unaudited) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- --------- --------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY:
U. S. Government $72,070 360 (41) $ 72,389
Obligations of states
and political subdivisions 20,170 850 -- 21,020
Corporate debenture 100 2 -- 102
------- ------- --------- --------
$92,340 1,212 (41) $ 93,511
======= ======= ========= ========
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government $71,046 369 (135) $ 71,280
Marketable equity securities 10,747 16,867 (487) 27,127
Obligations of states
and political subdivisions 8,539 573 (1) 9,111
Mortgage-backed securities 1,680 38 (9) 1,709
------- ------- --------- --------
$92,012 17,847 (632) $109,227
======= ======= ========= ========
</TABLE>
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Dollars in thousands
<TABLE>
<CAPTION>
Note 3. LOANS (unaudited)
(Dollars in thousands, June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Commercial, financial and agricultural $ 96,198 $ 86,980
Real estate:
Construction 10,573 5,276
Mortgage:
One to four family residential 107,416 113,984
Commercial 65,563 62,446
Equityline 29,023 28,698
Other 31,396 26,846
Consumer 35,792 36,775
Lease financing 3,707 3,484
-------- --------
Total loans $379,668 $364,489
======== ========
Loans held for sale, included above $ 2,610 $ 6,858
Loans serviced for others, not included above $180,258 $163,455
<CAPTION>
Note 4. ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) (Unaudited)
Six Months Ended June 30,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Balance at beginning of year $ 5,962 $ 5,971
Allowance from bank acquisition -- 269
Provision for loan losses 120 120
Loans charged off (423) (119)
Loan recoveries 86 52
------- -------
Balance at end of the period $ 5,745 $ 6,293
======= =======
</TABLE>
Note 5. Earnings Per Common Share
Earnings per common share are computed by dividing income applicable to common
shares by the weighted average number of common shares outstanding during the
period. Income applicable to common shares represents net income reduced by
dividends paid to preferred shareholders. Since BancShares had no potentially
dilutive securities during 1999 or 1998, the computation of basic and diluted
earnings per share is the same. The following table presents the components of
the earnings per share computations:
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Dollars in thousands
<TABLE>
<CAPTION>
Note 5. EARNINGS PER COMMON SHARE (Unaudited) (Unaudited)
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 957 $ 927 $ 1,649 $ 3,494
Less: Preferred dividends (96) (99) (193) (198)
--------- --------- --------- ---------
Net income applicable to common shares $ 861 $ 828 $ 1,456 $ 3,296
========= ========= ========= =========
Weighted average common shares
outstanding during the period 119,186 119,855 119,218 119,886
========= ========= ========= =========
</TABLE>
Note 6. Acquisitions
During the third quarter of 1999 Southern plans to acquire the Ahoskie branch
office of First-Citizens Bank & Trust Company ("FCB"), a related party. In
connection with that transaction, Southern expects to assume total deposit
liabilities of approximately $16.0 million, to purchase approximately $8.0
million of loans and to record approximately $1.4 million in intangible assets.
Southern has historically amortized acquired intangibles, such as those
indicated above for the Ahoskie acquisition, utilizing an accelerated basis over
a ten year period.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - SIX
MONTHS ENDED 1999 VS. SIX MONTHS ENDED 1998
INTRODUCTION
In the first six months of 1999, the net income of BancShares decreased
approximately $1.8 million from $3.5 million in the first six months of 1998 to
$1.6 million in the first six months of 1999, a decrease of 111.89%. This
decrease resulted primarily from the 1998 sale of available-for-sale securities,
which resulted in a realized gain before tax of $1.8 million. One branch
acquisition each in May 1998, October 1998 and December 1998 resulted in
increased personnel expense and other related operating expenses for the six
months ended June 30, 1999.
Earnings per common share for the first six months of 1999 was $12.21, a
decrease of $15.28, or 55.58%, from $27.49 for the first six months of 1998. The
annualized return on average equity decreased to 5.95%, for the period ended
June 30, 1999, from 16.58% for the period ended June 30, 1998 and the return on
average assets decreased to 0.51%, for the period ended June 30, 1999, from
1.36% for the period ended June 30, 1998.
At June 30, 1999, BancShares' assets totaled $638.8 million, a decrease of $10.7
million, or 1.64%, from the $649.4 million reported at December 31, 1998. During
this six month period, cash and due from banks decreased $11.7 million, or
45.52% from $37.4 million to $25.7 million. During this six month period,
federal funds sold decreased $9.5 million, or 94.38% from $19.5 million to $10.1
million. During this six month period, loans increased $15.2 million, or 4.16%,
from $364.5 million to $379.7 million. During the six months ended June 30, 1999
investment securities decreased $4.9 million, or 2.41% from $201.6 million at
December 31, 1998 to $196.7 million at June 30, 1999. Total deposits decreased
$10.0 million, or 1.79% from $556.8 million at December 31, 1998 to $546.8
million at June 30, 1999. The above changes resulted principally from the
seasonal impact of the agricultural markets served by Southern .
ACQUISITIONS
In May 1998, Southern acquired $16.7 million of the loans and $18.0 million of
the deposits of Enfield Savings Bank ("ESB"). Southern simultaneously sold
$3,000 of the ESB loans and $2.4 million of the ESB deposits to FCB. Southern
recorded intangible assets of $363,000 for the ESB acquisition.
In October 1998, Southern acquired $226,000 of the loans and $5.3 million of the
deposits of the Gates office of FCB. Southern recorded intangible assets of
$186,000 for the Gates acquisition.
In December 1998, Southern acquired $76,000 of the loans and $16.4 million of
the deposits of the Red Springs office of First Union National Bank. Southern
recorded intangible assets of $1.7 million for the Red Springs acquisition.
These acquisitions were accounted for as purchases, and, therefore, the results
of operations prior to the purchases are not included in the consolidated
financial statements.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - SIX
MONTHS ENDED 1999 VS. SIX MONTHS ENDED 1998
The comparisons of the six months ended June 30, 1999 to the six months ended
June 30, 1998 are accordingly impacted by the above transactions. Southern had
no acquisitions in the six months ended June 30, 1999.
INTEREST INCOME
Interest and fees on loans decreased $236,000, or 1.54%, from $15.3 million for
the six months ended June 30, 1998 to $15.1 million for the six months ended
June 30, 1999. This decrease was principally due to overall lower loan portfolio
yields. Average loans for the six months ended June 30, 1999 were $372.6
million, an increase of 3.10% from $361.4 million for the prior year period.
This increase in average loans was principally the result of the 1998
acquisitions discussed above. The yield on the loan portfolio was 8.46% in the
six months ended June 30, 1998 and 8.06% in the six months ended June 30, 1999.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased $63,000 or 1.27%, from $4.9 million in the six months ended
June 30, 1998 to $5.0 million in the six months ended June 30, 1999. This
increase was due to an increase in the volume of average investment securities
for the six months ended June 30, 1999 to $197.6 million as compared to $159.8
million for the same 1998 period that more than offset an overall decrease in
portfolio yields. This increase in volume principally resulted from the
acquisitions discussed above. The yield on investment securities was 5.94% for
the six-month period ended June 30, 1998 and 5.26% for the six-month period
ended June 30, 1999.
Interest income on federal funds sold increased $83,000, or 23.92%, from
$347,000 for the six months ended June 30, 1998 to $430,000 for the six months
ended June 30, 1999. This increase in income resulted primarily from an increase
in the average federal funds sold to $18.1 million for the six months ended June
30, 1999 from an average of $12.9 million for the six months ended June 30, 1998
that more than offset a decrease in the yield on federal funds. The increase in
federal funds resulted primarily from the acquisitions discussed above. Average
federal funds sold yields were 4.73% for the six months ended June 30, 1999,
down from 5.43% for the six months ended June 30, 1998.
Total interest income decreased $90,000 or 0.44%, from $20.6 million for the six
months ended June 30, 1998 to $20.5 million for the six months ended June 30,
1999. This decrease was primarily the result of a 59 basis point decrease in
average earning asset yields that more than offset an increase in average
earning assets.
Average earning asset yields for the six months ended June 30, 1999 decreased to
7.04% from the 7.63% yield on average earning assets for the six months ended
June 30, 1998. Average earning assets increased from $534.1 million in the six
months ended June 30, 1998 to $583.3 million in the six months ended June 30,
1999. This $49.2 million increase in the average earning assets resulted
primarily from the acquisitions discussed above.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - SIX
MONTHS ENDED 1999 VS. SIX MONTHS ENDED 1998
INTEREST EXPENSE
Total interest expense decreased $138,000, or 1.38%, from $10.0 million in the
six months ended June 30, 1998 to $9.8 million for the six months ended June 30,
1999. The principal reason for this decrease was the decrease in the cost of
deposits and the cost of short-term borrowings that more than offset the
increase in long-term obligations interest related to the $23.0 million of 8.25%
Capital Securities issued by the Trust in June, 1998. BancShares recorded $1.0
million of interest expense in the six months ended June 30, 1999 related to the
capital securities compared to $141,000 in the six months ended June 30, 1998.
BancShares' total cost of funds decreased from 4.18% for the six months ended
June 30, 1998 to 3.92% for the six months ended June 30, 1999. Average
interest-bearing deposits were $474.4 million in the six months ended June 30,
1999, an increase of $20.9 million from the $453.5 million average in the six
months ending June 30, 1998. The increase in interest-bearing deposits was
primarily the result of the aforementioned October 1998 and December 1998
acquisitions .
NET INTEREST INCOME
Net interest income was $10.6 million for the six months ended June 30, 1999 and
$10.5 million for the six months ended June 30, 1998.
The interest rate spread for the six months ended June 30, 1999 was 3.11%, a
decrease of 34 basis points from the 3.45% interest rate spread for the six
months ended June 30, 1998.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the six months ended June 30, 1999 management recorded $120,000 as provision
for loan losses. Management also made a $120,000 addition to the provision for
loan losses for the six months ended June 30, 1998.
Due to an increase in non-performing loans during the first six months of 1999
management charged-off loans totaling $423,000 and received recoveries of
$87,000, resulting in net charge-offs of $336,000. During the same period in
1998, $119,000 in loans were charged-off and recoveries of $52,000 were
received, resulting in net charge-offs of $67,000. For the six months ended June
30, 1999 $120,000 was added to the allowance for loan losses through charges to
the operations of BancShares. The allowance for loan losses accordingly
decreased $217,000 from December 31, 1998. The following table presents
comparative Asset Quality ratios of BancShares:
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - SIX
MONTHS ENDED 1999 VS. SIX MONTHS ENDED 1998
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
---- -----
<S> <C> <C>
Ratio of annualized net loans charged off
to average loans 0.18% 0.12%
Allowance for loan losses
to loans 1.51% 1.64%
Non-performing loans
to loans 0.43% 0.28%
Non-performing loans and assets
to total assets 0.30% 0.17%
Allowance for loan losses
to non-performing loans 350.95% 588.00%
</TABLE>
The ratio of annualized net charge-offs to average loans outstanding increased
to 0.18% for the six months ended June 30, 1999 from 0.12% for the year ended
December 31, 1998. The allowance for loan losses represented 1.51% of loans at
June 30, 1999. The allowance for loan losses represented 1.64% of loans at
December 31, 1998. Loans increased $15.2 million, or 4.16% from $364.5 million
at December 31, 1998 to $379.7 million at June 30, 1999.
The ratio of nonperforming loans to loans, increased from 0.28% at December 31,
1998 to 0.43% at June 30, 1999. Nonperforming loans and assets to total assets
increased to 0.30% at June 30, 1999 from 0.17% at December 31, 1998. The
allowance for loan losses to nonperforming loans represented 350.95% of
nonperforming loans at June 30, 1999, a decrease from the 588.00% at December
31, 1998. The above performance declines resulted primarily from an increase in
nonperforming loans to $1.7 million at June 30, 1999 from $971,000 at December
31, 1998. The nonperforming loans at June 30, 1999 included $298,000 of
nonaccrual loans, $1.3 million of accruing loans 90 days or more past due and
$43,000 of restructured loans. BancShares had $305,000 of assets classified as
other real estate at June 30, 1999. BancShares had $84,000 of assets classified
as other real estate at December 31, 1998.
Management considers the June 30, 1999 allowance for loan losses to be adequate
to cover the losses and risks inherent in the loan portfolio at June 30, 1999
and will continue to monitor its portfolio and to adjust the relative level of
the allowance as needed. The majority of the loans charged-off in the six months
ended June 30, 1999 were not representative of BancShare's overall loan
portfolio.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - SIX
MONTHS ENDED 1999 VS. SIX MONTHS ENDED 1998
Management actively maintains a current loan watch list and knows of no other
loans which are material and (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources, or (ii) represent material
credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Southern's allowance for loan losses
and losses on other real estate owned. Such agencies may require Southern to
recognize adjustments to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
NONINTEREST INCOME
During the six months ended June 30, 1998, BancShares realized securities gains
of $1.8 million arising from the sale of available-for-sale securities. The
decrease of such gains during the six months ended June 30, 1999 was the primary
reason for the decrease in noninterest income. Service charges on deposit
accounts for the six months ended June 30, 1999 increased $138,000 and other
service charges and fees for the six months ended June 30, 1999 increased
$83,000 over the six months ended June 30, 1998 primarily as a result of the
acquisitions discussed above. Loses on the sale of mortgage loans for the six
months ended June 30, 1999 increased $200,000 over the six months ended June 30,
1998 primarily as a result of increasing mortgage interest rates in the six
months ended June 30, 1999.
NONINTEREST EXPENSE
Noninterest expense increased $899,000 or 9.08%, from $9.9 million in the six
months ended June 30, 1998 to $10.8 million in the six months ended June 30,
1999.
This increase was primarily due to an increase in personnel expense of $688,000,
or 14.58%, from $4.7 million at June 30, 1998 to $5.4 million at June 30, 1999
and increased occupancy, furniture and equipment expense and other expenses
resulting principally from the branch acquisitions in May 1998, October 1998 and
December 1998 discussed above.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - SIX
MONTHS ENDED 1999 VS. SIX MONTHS ENDED 1998
INCOME TAXES
In the six months ended June 30, 1999, BancShares had income tax expense of
$510,000, a decrease of $750,000 from $1.3 million in the prior year period. The
majority of this decrease is due to the effect of the 1998 securities gain
discussed above. The resulting effective tax rate for the six months ended June
30, 1999 was 23.62%. The effective tax rate for the six months ended June 30,
1998 was 26.50%. The effective tax rate in 1999 of 23.62% differs from the
federal statutory rate of 35.00% primarily due to tax exempt income.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1999 VS. SECOND QUARTER OF 1998
INTRODUCTION
In the second quarter of 1999, the net income of BancShares increased $30,000
from $927,000 in the second quarter of 1998 to $957,000 in the second quarter of
1999, an increase of 3.24%. One branch acquisition each in May 1998, October
1998 and December 1998 resulted in increased personnel expense and other related
operating expenses for the quarter ended June 30, 1999.
Earnings per common share for the second quarter of 1999 was $7.22, an increase
of $0.31, or 4.49%, from $6.91 in 1998.
ACQUISITIONS
Southern had no acquisitions in the quarter ended June 30, 1999. The comparisons
of the three months ended June 30, 1999 to the three months ended June 30, 1998
are accordingly impacted by the 1998 acquisitions discussed above.
INTEREST INCOME
Interest and fees on loans decreased $143,000, or 1.84%, from $7.8 million for
the quarter ended June 30, 1998 to $7.6 million for the quarter ended June 30,
1999. This decrease was due primarily to lower overall 1999 interest rates that
more than offset an increase in average loans. Average loans for the quarter
ended June 30, 1999 were $375.0 million, an increase of 3.76% from $361.4
million for the prior year quarter. The yield on the loan portfolio was 8.54%
for the three months ended June 30, 1998 and 8.05% for the three months ended
June 30, 1999.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities decreased $71,000, or 2.76%, from $2.6 million in the three months
ended June 30, 1998 to $2.5 million in the three months ended June 30, 1999.
This decrease was due primarily to lower overall interest rates that more than
offset an increase in the average investment portfolio. The acquisitions
discussed above resulted in increased average investment securities for the
quarter ended June 30, 1999 to $193.9 million as compared to $158.4 million for
the same 1998 quarter. The yield on investment securities was 5.89% for the
quarter ended June 30, 1998 and 5.17% for the quarter ended June 30, 1999.
Interest income on federal funds sold decreased $10,000, or 6.13%, from $163,000
for the quarter ended June 30, 1998 to $153,000 for the quarter ended June 30,
1999. This decrease in income resulted primarily from a decrease in rates that
more than offset an increase in volume resulting primarily from the acquisitions
discussed above. The average federal funds sold was $12.9 million for the
quarter ended June 30, 1999 compared to an average of $12.1 million for the
quarter ended June 30, 1998. Average federal funds sold yields were 4.69% for
the quarter ended June 30, 1999 down from 5.40% for the quarter ended June 30,
1998.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1999 VS. SECOND QUARTER OF 1998
Total interest income decreased $244,000, or 2.13%, from $10.5 million for the
quarter ended June 30, 1998 to $10.3 million for the quarter ended June 30,
1999. This decrease was primarily the result of a 66 basis point decrease in
average earning asset yields that more than offset an increase in the average
earnings assets.
Average earning asset yields for the quarter ended June 30, 1999 decreased to
7.02% from the 7.68% yield on average earning assets for the quarter ended June
30, 1998. Average earning assets increased from $545.6 million in the quarter
ended June 30, 1998 to $581.8 million in the quarter ended June 30, 1999. This
$36.2 million increase in the average earning assets resulted primarily from the
acquisitions discussed above.
INTEREST EXPENSE
Total interest expense decreased $279,000 or 5.40%, from $5.2 million in the
three months ended June 30, 1998 to $4.9 million for the second quarter ended
June 30, 1999. The principal reason for this decrease was lower costs of
deposits and short-term borrowings that more than offset the increase in
long-term obligations interest related to the $23.0 million of 8.25% Capital
Securities issued by the Trust in June, 1998. BancShares recorded $518,000 of
interest expense in the three months ended June 30, 1999 related to the capital
securities.
NET INTEREST INCOME
Net interest income was $5.4 million for the three months ended June 30, 1999
and $5.3 million for the three months ended June 30, 1998.
The interest rate spread for the quarter ended June 30, 1999 was 3.14%, a
decrease of 37 basis points from the 3.51% interest rate spread for the quarter
ended June 30, 1998.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the quarter ended June 30, 1999 management recorded $60,000 as provision for
loan losses. Management also made a $60,000 addition to the provision for loan
losses for the quarter ended June 30, 1998.
During the second quarter of 1999 management charged-off loans totaling $237,000
and received recoveries of $25,000, resulting in net charge-offs for the quarter
ended June 30, 1999 of $212,000. During the same quarter in 1998, $78,000 in
loans were charged-off and recoveries of $26,000 were received, resulting in net
charge-offs of $52,000. The majority of the loans charged-off in the quarter
ended June 30, 1999 were related to one former lending officer's failure to
follow established lending policies and one customer relationship that is not
representative of BancShare's overall loan portfolio.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1999 VS. SECOND QUARTER OF 1998
NONINTEREST INCOME
During the three months ended June 30, 1999, BancShares' noninterest income
increased $73,000 principally as a result of the acquisitions in May 1998,
October 1998 and December 1998 discussed above. Service charges on deposit
accounts for the three months ended June 30, 1999 increased $93,000 and other
service charges and fees for the three months ended June 30, 1999 increased
$82,000 over the three months ended June 30, 1998 primarily as a result of the
acquisitions discussed above. Losses on the sale of mortgage loans for the three
months ended June 30, 1999 increased $159,000 over the six months ended June 30,
1998 primarily as a result of increasing mortgage interest rates in the three
months ended June 30, 1999.
NONINTEREST EXPENSE
Noninterest expense including personnel, occupancy, furniture and equipment,
data processing, FDIC insurance, state assessments, printing, supplies and other
expenses, increased $279,000 or 5.51%, from $5.3 million in the three months
ended June 30, 1998 to $5.3 million in the three months ended June 30, 1999.
This increase was primarily due to an increase in personnel expense of $240,000,
or 9.86%, from $2.4 million for the quarter ended June 30, 1998 to $2.7 million
for the quarter ended June 30, 1999 and increased occupancy, furniture and
equipment expense and other expenses resulting principally from the branch
acquisitions in May 1998, October 1998 and December 1998 discussed above.
INCOME TAXES
In the three months ended June 30, 1999, BancShares had income tax expense of
$270,000, a decrease of $181,000 from $451,000 in the prior year quarter. The
majority of this decrease is due to a reduction in the estimated effective tax
rate for the quarter ended June 30, 1999 to 22.00%. The estimated effective tax
rate for the quarter ended June 30, 1998 was 32.73%. The effective tax rate for
the quarter ended June 30, 1999 of 22.00% differs from the federal statutory
rate of 35.00% primarily due to tax exempt income.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Sufficient levels of capital are necessary to sustain growth and absorb losses.
To this end, the Federal Reserve Board, which regulates BancShares, and the
FDIC, which regulates Southern, have established minimum capital guidelines for
the institutions they supervise.
In June 1998, the Trust issued $23.0 million of 8.25% Capital Securities
maturing in 2028. The Trust invested the $23.0 million proceeds in Junior
Subordinated Debentures issued by BancShares (the "Junior Debentures"), which
upon consolidation of BancShares are eliminated. The Junior Debentures, with a
maturity of 2028, are the primary assets of the Trust. With respect to the
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1999 VS. SECOND QUARTER OF 1998
Capital Securities, BancShares irrevocably and unconditionally guarantees the
Trust's obligations. Using the proceeds from the offering of the Capital
Securities discussed above in June 1998, BancShares paid off the remaining
balance of a long-term obligation, $4.3 million, and contributed an additional
$12.0 million in capital to Southern which improved each of Southern's capital
ratios.
Regulatory guidelines define minimum requirements for Southern's leverage
capital ratio. Leverage capital equals total equity less goodwill and certain
other intangibles and is measured relative to total adjusted assets as defined
by regulatory guidelines. According to these guidelines, Southern's leverage
capital ratio at June 30, 1999 was 8.50%. At December 31, 1998, Southern's
leverage capital ratio was 8.44%. Both of these ratios are greater than the
level designated as "well capitalized" by the FDIC.
Southern is also required to meet minimum requirements for Risk Based Capital
("RBC"). Southern's assets, including loan commitments and other off-balance
sheet items, are weighted according to federal guidelines for the risk
considered inherent in each asset. At June 30, 1999, Southern's Total RBC ratio
was 17.76%. At December 31, 1998 the RBC ratio was 17.10%. Both of these ratios
are greater than the level designated as "well capitalized" by the FDIC.
The regulatory capital ratios above reflect increases in assets and liabilities
from the acquisitions Southern has made. Each of the acquisitions required the
payment of a premium for the deposits received. Each of these premiums resulted
in increased intangible assets on BancShares' financial statements, which is
deducted from total equity in the ratio calculations.
Accumulated other comprehensive income was $9.2 million at June 30, 1999, and
$11.4 million at December 31, 1998. Accumulated other comprehensive income
consists entirely of unrealized gains on securities available-for-sale, net of
taxes. Although a part of total shareholders' equity, only 45% of accumulated
other comprehensive income, consisting entirely of unrealized gains on
marketable equity securities, is included in the calculation of the RBC and
leverage capital ratios pursuant to regulatory definitions of these capital
requirements. The following table presents capital adequacy calculations and
ratios of Southern:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
---- -----
(Dollars in thousands)
<S> <C> <C>
Risk-based capital:
Tier 1 capital $ 52,864 $ 49,198
Total capital 60,590 53,234
Risk-adjusted assets 341,098 311,341
Average tangible assets 621,997 582,955
Tier 1 capital ratio (1) 15.50% 15.80%
Total capital ratio (1) 17.76% 17.10%
Leverage capital ratio (1) 8.50% 8.44%
</TABLE>
(1) These ratios exceed the minimum ratios required for a bank to be
classified as "well capitalized" as defined by the FDIC.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1999 VS. SECOND QUARTER OF 1998
At June 30, 1999 and December 31, 1998, BancShares was also in compliance with
its regulatory capital requirements and all of its regulatory capital ratios
exceeded the minimum ratios required by the regulators to be classified as "well
capitalized".
LIQUIDITY
Liquidity refers to the ability of Southern to generate sufficient funds to meet
its financial obligations and commitments at a reasonable cost. Maintaining
liquidity ensures that funds will be available for reserve requirements,
customer demand for loans, withdrawal of deposit balances and maturities of
other deposits and liabilities. Past experiences help management anticipate
cyclical demands and amounts of cash required. These obligations can be met by
existing cash reserves or funds from maturing loans and investments, but in the
normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include cash and due from banks, federal
funds sold and investment securities available-for-sale. The liquidity ratio,
which is defined as cash plus short term available-for-sale securities divided
by deposits plus short term liabilities, was 32.10% at June 30, 1999 and 30.78%
at December 31, 1998.
The Statement of Cash Flows discloses the principal sources and uses of cash
from operating, investing and financing activities for the six months ended June
30, 1999 and for the six months ended June 30, 1998. Southern has no brokered
deposits. Jumbo time deposits are considered to include all time deposits of
$100,000 or more. Southern has never aggressively bid on these deposits. Almost
all jumbo time deposit customers have other relationships with Southern,
including savings, demand and other time deposits, and in some cases, loans. At
June 30, 1999 jumbo time deposits represented 11.24% of total deposits. At
December 31, 1998 jumbo time deposits represented 10.79% of total deposits.
Management believes that BancShares has the ability to generate sufficient
amounts of cash to cover normal requirements and any additional needs which may
arise, within realistic limitations, and management is not aware of any known
demands, commitments or uncertainties that will affect liquidity in a material
way.
ACCOUNTING AND OTHER MATTERS
In June 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
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1999 VS. SECOND QUARTER OF 1998
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, as amended by Statement 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2001. Earlier
application of all provisions of this statement is encouraged. BancShares plans
to adopt this statement on January 1, 2001 and does not anticipate any material
effect on its consolidated financial statements.
In October 1998, the FASB issued Statement 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This statement allows mortgage banking firms to
account for certain securities and other interests retained after securitizing
mortgage loans that were held for sale based on the intent and ability to hold
or sell such investments. This statement was effective for the first fiscal
quarter beginning after December 15, 1998. BancShares adopted this statement
effective January 1, 1999, resulting in no material impact.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of BancShares and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
Year 2000 Issue
Introduction
The year 2000 issue confronting BancShares and its suppliers, customers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the year 2000. Many existing computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these programs and computers will recognize "00" as the year 1900 rather than
the year 2000. These problems may also arise from other sources as well, such as
the use of special codes and conventions in software that make use of the date
field.
Awareness
Financial institution regulators recently have focused on 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 the year 2000 issue.
These statements require financial institutions to, among other things, examine
the year 2000 implications of their reliance on vendors, data exchange and the
potential impact of the year 2000 issue on customers, suppliers and borrowers.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1999 VS. SECOND QUARTER OF 1998
These statements also require each federally regulated financial institution to
survey its exposure, to measure its risk and to 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 Southern, 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. 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. BancShares has addressed 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) may 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 that rely on the date field information,
such as interest, payments, due dates and other operating functions, could
generate results which are significantly misstated. 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, 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, 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 FCB on its mainframe systems and/or on systems supported by FCB.
FCB also provides similar services to several other financial institutions.
Accordingly, BancShares' plan for addressing the year 2000 issue divides
information technology systems ("IT Systems") into groups which include (i)
FCB's mainframe systems used for processing BancShares' data ("Group A
Systems"), (ii) BancShares' non-mainframe systems which are supported by FCB
("Group B Systems"), and (iii) BancShares' separate non-mainframe systems
("Group C Systems"). BancShares' year 2000 plan also addresses non-information
technology systems ("Non-IT Systems"). As to Group A Systems and Group B
Systems, BancShares' year 2000 plan necessarily is designed to be implemented
jointly with FCB. FCB has retained an outside consultant to plan and direct its
year 2000 compliance efforts. 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.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1999 VS. SECOND QUARTER OF 1998
The following paragraphs summarize the phases of BancShares' year 2000 plan:
Assessment Phase
During the assessment phase, a year 2000 corporate inventory and business risk
assessment was made (jointly with FCB in the case of Group A Systems and Group B
Systems, and separately in the case of Group C Systems and Non-IT Systems) to
quantify the extent of BancShares' year 2000 exposure and identify systems that
required remediation. Each Group B and C application or system was given two
separate codes; a Priority Code and a Status Code. The Priority Code quantifies
the importance of each asset to BancShares' daily operations. The Status Code
represents the current claim of compliance by the asset's vendor. Used in
concert, these codes prioritize the remediation, testing and contingency
planning processes. This phase is complete.
Remediation and Testing Phase
With respect to IT Systems, this phase contemplates the implementation of
modifications, upgrades or system replacements determined to be necessary to
achieve year 2000 compliance and the testing of modified or upgraded systems to
determine their functionality and operating capability. As to Group A Systems
and Group B Systems, FCB's outside consultant is responsible for coordinating
necessary modifications, upgrades or replacements. This phase has been completed
for all Group A and B Systems. As to Group C Systems, BancShares' staff
coordinated remediation (which, in most cases, entailed the installation of
upgrades provided by outside vendors) and testing, where necessary. This phase
is also complete.
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 September 30, 1999.
BancShares' staff has completed validation testing on Group C Systems.
Implementation Phase
Under BancShares' plan, once new and modified systems that require testing have
been tested for functionality, they are put into production. BancShares' plans
to complete the implementation phases for all systems by September 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 was assigned to an officer of BancShares
whose responsibility was to communicate with the vendor of that system and
coordinate remediation. This phase is complete.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1999 VS. SECOND QUARTER OF 1998
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 initially
estimated that approximately $200,000 would be expensed for its separate year
2000 project expenses but now expects final year 2000 expenses to be
significantly less. The initial plan anticipated substantial outside consultant
expenditures that were later determined to be unnecessary. Expenses actually
incurred through June 30, 1999 were not material. BancShares does not expect
significant increases in future data processing costs relating to year 2000
compliance.
Contingency Plans
During the assessment phase, BancShares began to identify a back-up or
contingency plan for systems or non-IT assets which may be affected by year
2000. Virtually all of BancShares' systems are dependent upon third party
vendors or service providers; therefore, contingency plans include selecting a
new vendor or service provider and converting to their system. BancShares
believes its most reasonably likely worst case scenario will be a failure by
certain customers and vendors to achieve year 2000 readiness. For BancShares'
most reasonably likely worst case sceniaro, contingency plans are already
active. Contingency plans for system failures on or after January 1, 2000 have
been accepted by the Bank's regulators. Validation testing of these contingency
plans is currently in process.
Other matters
BancShares has received regulatory approval to purchase the Ahoskie, North
Carolina office of FCB containing approximately $16.0 million in deposits (see
note 6 of notes to consolidated financial statements). This purchase is planned
for September 1999. BancShares has also received regulatory approval to open de
novo branches in three new eastern North Carolina markets. These offices are
planned to open in 2000. BancShares has filed an application with the FDIC to
open a de novo full service office in Clinton, North Carolina. Subject to
regulatory approval, the Clinton office is planned to open in the fourth quarter
of 1999.
Management is not aware of any other trends, events, uncertainties, or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on BancShares' liquidity, capital resources or
other operations.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN BANCSHARES (N.C.), INC.
Dated: August 9, 1999 /s/John C. Pegram, Jr.
----------------------
John C. Pegram, Jr.,
President and Chief Executive Officer
Dated: August 9, 1999 /s/David A. Bean
-----------------
David A. Bean,
Secretary, Treasurer and Chief Financial Officer
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