SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 quarter 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 quarter covered by this report.
119,000 shares
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES September 30, December 31,
CONSOLIDATED BALANCE SHEETS 1999 1998
--------------- ------------------
(Dollars in thousands except per share data)
ASSETS
<S> <C> <C>
Cash and due from banks $ 24,725 $ 37,419
Federal funds sold 18,145 19,535
Investment securities:
Available-for-sale, at fair value (amortized cost $96,175 and $92,012, respectively) 108,763 109,227
Held-to-maturity, at amortized cost (fair value $86,221 and $93,511, respectively) 85,993 92,340
Loans 392,798 364,489
Less allowance for loan losses (6,133) (5,962)
--------------- ------------------
Net loans 386,665 358,527
Premises and equipment 20,099 18,902
Intangible assets 6,904 6,972
Accrued interest receivable 5,689 4,571
Other assets 1,632 1,932
--------------- ------------------
Total assets $ 658,615 $ 649,425
=============== ==================
LIABILITIES
Deposits:
Noninterest-bearing $ 81,602 $ 77,550
Interest-bearing 485,127 479,202
--------------- ------------------
Total deposits 566,729 556,752
Short-term borrowings 7,160 5,124
Long-term obligations 23,000 23,000
Accrued interest payable 3,999 4,505
Other liabilities 2,683 4,011
--------------- ------------------
Total liabilities 603,571 593,392
--------------- ------------------
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES September 30, December 31,
CONSOLIDATED BALANCE SHEETS 1999 1998
--------------- ------------------
(Dollars in thousands except per share data)
ASSETS
<S> <C> <C>
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares authorized;
397,638 and 398,653 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 1,937 1,942
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized; 39,825
and 40,373 shares issued and outstanding at September 30, 1999 and December 31,
1998, respectively 555 562
Common stock, $5 par value; 158,485 shares authorized; 119,000 and 119,266 shares
issued and outstanding at September 30, 1999 and December 31, 1998, respectively 595 596
Surplus 10,000 10,000
Retained earnings 33,649 31,571
Accumulated other comprehensive income 8,308 11,362
--------------- ----------------
Total shareholders' equity 55,044 56,033
--------------- ----------------
Total liabilities and shareholders' equity $ 658,615 $ 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
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands except share and per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 7,951 $ 7,956 $ 23,015 $ 23,256
Investment securities:
U. S. Government 1,858 1,774 5,607 5,243
State, county and municipal 400 433 1,287 1,365
Other 178 42 552 588
------- -------- --------- ---------
Total investment securities interest income 2,436 2,249 7,446 7,196
Federal funds sold 146 310 576 657
------- -------- --------- ---------
Total interest income 10,533 10,515 31,037 31,109
INTEREST EXPENSE:
Deposits 4,352 4,688 13,053 14,047
Short-term borrowings 63 82 160 223
Long-term obligations 531 316 1,566 787
------- -------- --------- ---------
Total interest expense 4,946 5,086 14,779 15,057
------- -------- --------- ---------
NET INTEREST INCOME 5,587 5,429 16,258 16,052
Provision for loan losses 465 20 585 140
------- -------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,122 5,409 15,673 15,912
NONINTEREST INCOME:
Service charges on deposit accounts 914 802 2,637 2,387
Other service charges and fees 296 302 815 693
Gain (loss) on sale of loans 52 38 (137) 68
Investment securities gains, net - - 1 1,788
Other 218 250 512 608
------- -------- --------- ---------
Total noninterest income 1,480 1,392 3,828 5,544
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands except share and per share data)
<S> <C> <C> <C> <C>
NONINTEREST EXPENSE:
Personnel 2,730 2,415 8,137 7,134
Data processing 458 513 1,419 1,411
Intangibles amortization 389 375 1,257 1,162
Occupancy 406 390 1,185 1,140
Furniture and equipment 494 375 1,220 1,103
Other 924 1,050 2,923 3,069
------- -------- ------------ --------
Total noninterest expense 5,401 5,118 16,141 15,019
------- -------- ------------ --------
INCOME BEFORE INCOME TAXES 1,201 1,683 3,360 6,437
Income taxes 290 470 800 1,730
------- -------- ------------ --------
NET INCOME 911 1,213 2,560 4,707
------- -------- ------------ --------
OTHER COMPREHENSIVE INCOME (LOSS) NET OF TAX:
Unrealized losses arising during period (866) (880) (3,054) (2,995)
Less: reclassification adjustment for gains included in net income - - - 1,180
------- -------- ------------ --------
COMPREHENSIVE INCOME (LOSS) $ 45 $ 333 $ (494) $ 532
======= ======== ============ ========
PER SHARE INFORMATION:
Earnings per common share $ 6.81 $ 9.27 $ 19.02 $ 36.76
Cash dividends declared on common shares 0.38 0.38 1.13 1.13
Weighted average common shares outstanding 119,172 119,794 119,203 119,855
======= ======== ============ ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended September 30,
1999 1998
(Thousands) ----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,560 $ 4,707
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 585 140
Gains on sales and issuer calls of securities available-for-sale (1) (1,788)
Loss on sale and abandonment of premises and equipment 95 28
Net accretion on discounts on investments (54) (53)
Amortization of intangibles 1,403 1,162
Depreciation 1,105 1,029
Net increase in accrued interest receivable (1,118) (1,485)
Net (decrease) increase in accrued interest payable (506) 399
Net decrease (increase) in other assets 300 (1,279)
Net decrease in other liabilities (1,331) (130)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,038 2,730
----------- -----------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities available-for-sale 26,188 25,625
Proceeds from maturities and issuer calls of investment securities held-to-maturity 32,131 4,678
Proceeds from sales of investment securities available-for-sale 30 1,976
Purchases of investment securities held-to-maturity (31,537) (21,804)
Purchases of investment securities available-for-sale (23,000) (14,420)
Net increase in loans (19,512) (1,477)
Proceeds from net cash received (paid) for bank and branches acquired 3,991 (6,050)
Purchases of premises and equipment (2,096) (1,194)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (13,805) (12,666)
----------- -----------
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended September 30,
1999 1998
(Thousands) ----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES:
Net (increase) decrease in demand and interest-bearing demand deposits (4,143) 1,500
Net decrease in time deposits (715) (2,778)
Proceeds from issuance of long-term obligations - 23,000
Payments on long-term obligations - (4,750)
Net proceeds of short-term borrowed funds 2,036 391
Cash dividends paid (428) (436)
Purchase and retirement of stock (67) (132)
----------- -----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (3,317) 16,795
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (14,084) $ 6,859
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 56,954 38,621
----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 42,870 $ 45,480
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest $ 15,285 $ 14,658
Income taxes $ 543 $ 2,386
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on securities available-for-sale, net of taxes $ (3,054) $ (2,995)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ACCUMULATED
------------------------------------- -------------------- OTHER TOTAL
SERIES B SERIES C COMPRE- SHARE
---------------- ---------------- RETAINED HENSIVE HOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS INCOME EQUITY
-------- ------- -------- ------- -------- ------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 405,645 $1,976 43,631 $578 119,918 $600 $10,000 $26,733 $15,097 $54,984
Net income 4,707 4,707
Retirement of stock (852) (4) (708) (3) (652) (4) (121) (132)
Cash dividends:
Common stock ($1.13 per share) (135) (135)
Preferred B ($.66 per share) (272) (272)
Preferred C ($.66 per share) (29) (29)
Unrealized loss on securities
available-for-sale, net of tax (2,995) (2,995)
-------- ------- -------- ------ -------- ------ ---------- ---------- -------- --------
BALANCE, SEPTEMBER 30, 1998 404,793 $1,972 42,923 $575 119,266 $596 $10,000 $30,883 $12,102 $56,128
======== ======= ======== ====== ======== ====== ========== ========== ======== ========
BALANCE, DECEMBER 31, 1998 398,653 $1,942 40,373 $562 119,266 $596 $10,000 $31,571 $11,362 $56,033
Net income 2,560 2,560
Retirement of stock (1,015) (5) (548) (7) (266) (1) (54) (67)
Cash dividends:
Common stock ($1.13 per share) (135) (135)
Preferred B ($.66 per share) (265) (265)
Preferred C ($.66 per share) (28) (28)
Unrealized loss on securities
available-for-sale, net of tax (3,054) (3,054)
-------- ------- -------- ------ -------- ------ ---------- ---------- -------- --------
BALANCE, SEPTEMBER 30, 1999 397,638 $1,937 39,825 $555 119,000 $595 $10,000 $33,649 $8,308 $55,044
======== ======= ======== ====== ======== ====== ========== ========== ======== ========
</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 46 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
NOTE 2. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
--------------------------------------------- ----------------------------------------------
(IN THOUSANDS, UNAUDITED) GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED
MORTIZED 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 $72,333 45 (268) $72,110 $72,070 360 (41) $72,389
Obligations of states
AND POLITICAL SUBDIVISIONS 13,560 455 (3) 14,012 20,170 850 21,020
CORPORATE DEBENTURE 100 - (1) 99 100 2 102
--------- -------- ---------- ------------ ----------- ----------- ----------- ---------
$85,993 500 (272) $ 86,221 $92,340 1,212 (41) $ 93,511
========= ======== ========== ============ =========== =========== =========== =========
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government $70,967 32 (364) $ 70,635 $71,046 369 (135) $ 71,280
Marketable equity securities 15,384 12,730 - 28,114 10,747 16,867 (487) 27,127
Obligations of states
and political subdivisions 8,343 235 (40) 8,538 8,539 573 (1) 9,111
Mortgage-backed securities 1,481 23 (28) 1,476 1,680 38 (9) 1,709
--------- -------- ---------- ------------ ----------- ----------- ----------- ---------
$96,175 13,020 (432) $ 108,763 $92,012 17,847 (632) $ 109,227
========= ======== ========== ============ =========== =========== =========== =========
</TABLE>
<PAGE>
Note 3. LOANS
<TABLE>
<CAPTION>
(Dollars in thousands, unaudited) September 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Commercial, financial and agricultural $101,651 $86,980
Real estate:
Construction 7,863 5,276
Mortgage:
One to four family residential 111,378 113,984
Commercial 70,167 62,446
Equityline 30,230 28,698
Other 32,955 26,846
Consumer 34,008 36,775
Lease financing 4,546 3,484
-------------- --------------
Total loans $ 392,798 $ 364,489
============== ==============
Loans held for sale, included above $ 4,408 $ 6,858
Loans serviced for others, not included above $ 179,406 $ 163,455
</TABLE>
<PAGE>
Note 4. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(Unaudited)
(Dollars in thousands Nine Months Ended September 30,
---------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Balance at beginning of year $5,962 $5,971
Allowance from bank acquisition - 269
Provision for loan losses 585 140
Loans charged off (537) (294)
Loan recoveries 123 70
-------------- --------------
Balance at end of the period $6,133 $6,156
============== ==============
</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:
Note 5. EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
(Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C>
Net income $911 $1,213 $2,560 $4,707
Less: Preferred dividends (100) (103) (293) (301)
--------------- --------------- ------------- -----------------
Net income applicable to common shares $811 $1,110 $2,267 $4,406
=============== =============== ============= =================
Weighted average common shares
outstanding during the period 119,172 119,794 119,203 119,855
=============== =============== ============= =================
</TABLE>
Note 6. Acquisitions
On September 20,1999 Southern acquired the Ahoskie branch office of
First-Citizens Bank & Trust Company ("FCB"), a related party. In connection with
that transaction, Southern assumed total deposit liabilities of $14.8 million,
purchased $9.2 million of loans and recorded $1.3 million in intangible assets.
Southern amortizes acquired intangibles, such as those indicated above for the
Ahoskie acquisition, utilizing an accelerated basis over a seven to ten year
period.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - NINE MONTHS ENDED 1999 VS. NINE MONTHS ENDED 1998
INTRODUCTION
In the first nine months of 1999, the net income of BancShares decreased
approximately $2.1 million from $4.7 million in the first nine months of 1998 to
$2.6 million in the first nine months of 1999, a decrease of 45.61%. 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, December 1998 and September 1999
resulted in increased personnel expense and other related operating expenses for
the nine months ended September 30, 1999.
Earnings per common share for the first nine months of 1999 was $19.02, a
decrease of $17.74, or 48.26%, from $36.76 for the first nine months of 1998.
The annualized return on average equity decreased to 6.15%, for the period ended
September 30, 1999, from 14.59% for the period ended September 30, 1998 and the
return on average assets decreased to 0.53%, for the period ended September 30,
1999, from 1.28% for the period ended September 30, 1998.
At September 30, 1999, BancShares' assets totaled $658.6 million, an increase of
$9.2 million, or 1.42%, from the $649.4 million reported at December 31, 1998.
During this nine month period, cash and due from banks decreased $12.7 million,
or 33.95% from $37.4 million to $24.7 million. During this nine month period,
federal funds sold decreased $1.4 million, or 7.12% from $19.5 million to $18.1
million. During this nine month period, loans increased $28.3 million, or 7.77%,
from $364.5 million to $392.8 million. The increase in loans was principally due
to growth in existing markets with only $9.2 million related to the September
1999 acquisition discussed below. During the nine months ended September 30,
1999 investment securities decreased $6.8 million, or 3.38% from $201.6 million
at December 31, 1998 to $194.8 million at September 30, 1999. Total deposits
increased $10.0 million, or 1.79% from $556.8 million at December 31, 1998 to
$566.7 million at September 30, 1999. The deposit increase resulted from the
September acquisition of $14.8 discussed below.
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 First-Citizens
Bank & Trust Company ("FCB"), a related party. Southern recorded intangible
assets of $363,000 for the ESB acquisition.
<PAGE>
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.
In September 1999, Southern acquired $9.2 million of the loans and $14.8 million
of the deposits of the Ahoskie office of FCB. Southern recorded intangible
assets of $1.3 million for the Ahoskie acquisition.
These acquisitions were accounted for as purchases, and, therefore, the results
of operations prior to the purchases are not included in the consolidated
financial statements.
The comparisons of the nine months ended September 30, 1999 to the nine months
ended September 30, 1998 are accordingly impacted by the above acquisitions.
INTEREST INCOME
Interest and fees on loans decreased $241,000, or 1.04%, from $23.3 million for
the nine months ended September 30, 1998 to $23.0 million for the nine months
ended September 30, 1999. This decrease was principally due to overall lower
loan portfolio yields. Average loans for the nine months ended September 30,
1999 were $376.4 million, an increase of 4.27% from $361.0 million for the prior
year period. This increase in average loans was principally the result of the
growth in existing markets. As discussed above the only significant loan
acquisition occurred in September 1999. The yield on the loan portfolio was
8.53% in the nine months ended September 30, 1998 and 8.08% in the nine months
ended September 30, 1999.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased $250,000 or 3.47%, from $7.2 million in the nine months
ended September 30, 1998 to $7.4 million in the nine months ended September 30,
1999. This increase was due to an increase in the volume of average investment
securities for the nine months ended September 30, 1999 to $197.0 million as
compared to $160.1 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 5.90% for the nine-month period ended September 30, 1998 and
5.23% for the nine-month period ended September 30, 1999.
<PAGE>
Interest income on federal funds sold decreased $81,000, or 12.33%, from
$657,000 for the nine months ended September 30, 1998 to $576,000 for the nine
months ended September 30, 1999. This decrease in income resulted primarily from
a decrease in the yields on federal funds from 5.48% for the nine months ended
September 30, 1998 to 4.83% for the nine months ended September 30, 1999. The
average federal funds sold also decreased to $15.7 million for the nine months
ended September 30, 1999 from an average of $15.8 million for the nine months
ended September 30, 1998.
Total interest income decreased $72,000 or 0.23%, from $31.1 million for the
nine months ended September 30, 1998 to $31.0 million for the nine months ended
September 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 nine months ended September 30, 1999
decreased to 7.07% from the 7.66% yield on average earning assets for the nine
months ended September 30, 1998. Average earning assets increased from $536.9
million in the nine months ended September 30, 1998 to $583.1 million in the
nine months ended September 30, 1999. This $46.2 million increase in the average
earning assets resulted primarily from the acquisitions discussed above.
INTEREST EXPENSE
Total interest expense decreased $278,000, or 1.85%, from $15.1 million in the
nine months ended September 30, 1998 to $14.8 million for the nine months ended
September 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
$1.6 million of interest expense in the nine months ended September 30, 1999
related to the capital securities compared to $632,000 in the nine months ended
September 30, 1998. BancShares' total cost of funds decreased from 4.11% for the
nine months ended September 30, 1998 to 3.91% for the nine months ended
September 30, 1999. Average interest-bearing deposits were $473.4 million in the
nine months ended September 30, 1999, an increase of $14.1 million from the
$459.3 million average in the nine months ending September 30, 1998. The
increase in interest-bearing deposits resulted from the aforementioned
acquisitions.
NET INTEREST INCOME
Net interest income was $16.3 million for the nine months ended September 30,
1999 and $16.1 million for the nine months ended September 30, 1998.
The interest rate spread for the nine months ended September 30, 1999 was 3.16%,
a decrease of 39 basis points from the 3.55% interest rate spread for the nine
months ended September 30, 1998.
<PAGE>
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the nine months ended September 30, 1999 management made a $585,000 addition
to the provision for loan losses. Management made a $140,000 addition to the
provision for loan losses for the nine months ended September 30, 1998. This
$445,000 increase in the provision for loan losses is principally related to the
impact on eastern North Carolina of hurricanes in September 1999. For the nine
months ended September 30, 1999 Southern has also experienced increased
charge-offs and increased non-performing assets.
Although the final impact of the September hurricanes on Southern's customers is
currently not completely determined, management believes that the incremental
provision for loan losses should be sufficient to cover known probable losses
arising from this event.
Due to an increase in non-performing loans during the first nine months of 1999
management charged-off loans totaling $537,000 and received recoveries of
$123,000, resulting in net charge-offs of $414,000. During the same period in
1998, $294,000 of loans were charged-off and recoveries of $70,000 were
received, resulting in net charge-offs of $224,000.
The allowance for loan losses accordingly increased $171,000 from December 31,
1998. The following table presents comparative Asset Quality ratios of
BancShares:
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Ratio of annualized net loans charged off
to average loans 0.15% 0.12%
Allowance for loan losses
to loans 1.56% 1.64%
Non-performing loans
to loans 0.40% 0.28%
Non-performing loans and assets
to total assets 0.29% 0.17%
Allowance for loan losses
to non-performing loans 392.14% 588.00%
</TABLE>
The ratio of annualized net charge-offs to average loans outstanding increased
to 0.15% for the nine months ended September 30, 1999 from 0.12% for the year
ended December 31, 1998. The allowance for loan losses represented 1.56% of
loans at September 30, 1999. The allowance for loan losses represented 1.64% of
loans at December 31, 1998. Loans increased $28.3 million, or 7.77% from $364.5
million at December 31, 1998 to $392.8 million at September 30, 1999.
<PAGE>
The ratio of nonperforming loans to loans, increased from 0.28% at December 31,
1998 to 0.40% at September 30, 1999. Nonperforming loans and assets to total
assets increased to 0.29% at September 30, 1999 from 0.17% at December 31, 1998.
The allowance for loan losses to nonperforming loans represented 392.14% of
nonperforming loans at September 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 $1.6 million at September 30, 1999 from
$971,000 at December 31, 1998. The nonperforming loans at September 30, 1999
included $274,000 of nonaccrual loans, $1.3 million of accruing loans 90 days or
more past due and no restructured loans. BancShares had $356,000 of assets
classified as other real estate at September 30, 1999. BancShares had $84,000 of
assets classified as other real estate at December 31, 1998.
Management considers the September 30, 1999 allowance for loan losses to be
adequate to cover the losses and risks inherent in the loan portfolio at
September 30, 1999 and will continue to monitor its portfolio and to adjust the
relative level of the allowance as needed.
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 nine months ended September 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 nine months ended September 30, 1999 was
the primary reason for the decrease in noninterest income. Service charges on
deposit accounts for the nine months ended September 30, 1999 increased $250,000
and other service charges and fees for the nine months ended September 30, 1999
increased $122,000 over the nine months ended September 30, 1998 primarily as a
result of the acquisitions discussed above. Losses on the sale of mortgage loans
for the nine months ended September 30, 1999 increased $205,000 over the nine
months ended September 30, 1998 primarily as a result of increasing mortgage
interest rates in the nine months ended September 30, 1999.
<PAGE>
NONINTEREST EXPENSE
Noninterest expense increased $1.1 million or 7.47%, from $15.0 million in the
nine months ended September 30, 1998 to $16.1 million in the nine months ended
September 30, 1999.
This increase was primarily due to an increase in personnel expense of $1.0
million or 14.06%, from $7.1 million at September 30, 1998 to $8.1 million at
September 30, 1999 and increased occupancy, furniture and equipment expense and
other expenses resulting principally from the branch acquisitions discussed
above.
BancShares recorded $111,000 in losses, net of estimated insurance proceeds, for
furniture and equipment damage related to the hurricanes of September 1999.
Management does not anticipate any additional material occupancy or furniture
and equipment expenses related to the September 1999 hurricanes.
INCOME TAXES
In the nine months ended September 30, 1999, BancShares had income tax expense
of $800,000, a decrease of $930,000 from $1.7 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 nine months ended
September 30, 1999 was 23.81%. The effective tax rate for the nine months ended
September 30, 1998 was 26.88%. The effective tax rate in 1999 of 23.81% differs
from the federal statutory rate of 35.00% primarily due to tax exempt income.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - THIRD QUARTER OF 1999 VS. THIRD QUARTER OF 1998
INTRODUCTION
In the third quarter of 1999, the net income of BancShares decreased $302,000
from $1.2 million in the third quarter of 1998 to $911,000 in the third quarter
of 1999, a decrease of 24.90%. One branch acquisition each in May 1998, October
1998, December 1998 and September 1999 resulted in increased personnel expense
and other related operating expenses for the quarter ended September 30, 1999.
As a result of the hurricanes of September 1999, Bancshares added $355,000 to
its loan loss reserve and recorded $111,000, net of estimated insurance
proceeds, in furniture and equipment related losses.
Earnings per common share for the third quarter of 1999 was $6.81, a decrease of
$2.46, or 26.54%, from $9.27 in 1998.
ACQUISITIONS
In September 1999, Southern acquired $9.2 million of the loans and $14.8 million
of the deposits of the Ahoskie office of FCB. Southern recorded intangible
assets of $1.3 million for the Ahoskie acquisition. Southern had no acquisitions
in the quarter ended September 30, 1998. The comparisons of the three months
ended September 30, 1999 to the three months ended September 30, 1998 are
accordingly impacted by the 1999 acquisition and the 1998 acquisitions discussed
above.
<PAGE>
INTEREST INCOME
Interest and fees on loans, at $8.0 million for both the quarter ended September
30, 1998 and the quarter ended September 30, 1999, decreased $5,000, or 0.06%.
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
September 30, 1999 were $380.1 million, an increase of 2.79% from $369.8 million
for the prior year quarter. The yield on the loan portfolio was 8.45% for the
three months ended September 30, 1998 and 8.14% for the three months ended
September 30, 1999.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased 187,000, or 8.31%, from $2.2 million in the three months
ended September 30, 1998 to $2.4 million in the three months ended September 30,
1999. This increase was due primarily to an increase in the average investment
portfolio resulting from the acquisitions discussed above that more than offset
lower overall interest rates.
The acquisitions discussed above resulted in increased average investment
securities for the quarter ended September 30, 1999 to $197.9 million as
compared to $160.8 million for the same 1998 quarter. The yield on investment
securities was 5.80% for the quarter ended September 30, 1998 and 5.17% for the
quarter ended September 30, 1999.
Interest income on federal funds sold decreased $164,000, or 52.90%, from
$310,000 for the quarter ended September 30, 1998 to $146,000 for the quarter
ended September 30, 1999. This decrease in income resulted from both a decrease
in rates and a decrease in volume. The average federal funds sold was $11.2
million for the quarter ended September 30, 1999 compared to an average of $21.7
million for the quarter ended September 30, 1998. Average federal funds sold
yields were 5.08% for the quarter ended September 30, 1999 down from 5.63% for
the quarter ended September 30, 1998.
Total interest income, at $10.5 million for both the quarter ended September 30,
1999 and the quarter ended September 30, 1998, increased $18,000, or 0.17%.
Average earning asset yields for the quarter ended September 30, 1999 decreased
to 7.13% from the 7.57% yield on average earning assets for the quarter ended
September 30, 1998. Average earning assets increased from $552.3 million in the
quarter ended September 30, 1998 to $582.9 million in the quarter ended
September 30, 1999. This $30.6 million increase in the average earning assets
resulted primarily from the acquisitions discussed above.
INTEREST EXPENSE
Total interest expense decreased $140,000 or 2.75%, from $5.1 million in the
three months ended September 30, 1998 to $4.9 million for the quarter ended
September 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 $531,000 of
interest expense in the three months ended September 30, 1999 related to the
capital securities.
<PAGE>
NET INTEREST INCOME
Net interest income was $5.6 million for the three months ended September 30,
1999 and $5.4 million for the three months ended September 30, 1998.
The interest rate spread for the quarter ended September 30, 1999 was 3.24%, a
decrease of 21 basis points from the 3.45% interest rate spread for the quarter
ended September 30, 1998.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the quarter ended September 30, 1999 management recorded $465,000 as
provision for loan losses primarily as a result of the impact of the hurricanes
that eastern North Carolina experienced in September 1999. Management made a
$20,000 provision for loan losses for the quarter ended September 30, 1998.
During the third quarter of 1999 management charged-off loans totaling $114,000
and received recoveries of $37,000, resulting in net charge-offs for the quarter
ended September 30, 1999 of $77,000. During the same quarter in 1998, $175,000
in loans were charged-off and recoveries of $18,000 were received, resulting in
net charge-offs of $157,000.
NONINTEREST INCOME
During the three months ended September 30, 1999, BancShares' noninterest income
increased $88,000 principally as a result of the acquisitions discussed above.
Service charges on deposit accounts for the three months ended September 30,
1999 increased $112,000 over the three months ended September 30, 1998 primarily
as a result of the acquisitions discussed above.
NONINTEREST EXPENSE
Noninterest expense including personnel, occupancy, furniture and equipment,
data processing, FDIC insurance, state assessments, printing, supplies and other
expenses, increased $283,000 or 5.53%, from $5.1 million in the three months
ended September 30, 1998 to $5.4 million in the three months ended September 30,
1999.
This increase was primarily due to an increase in personnel expense of $315,000,
or 13.04%, from $2.4 million for the quarter ended September 30, 1998 to $2.7
million for the quarter ended September 30, 1999 and increased occupancy,
furniture and equipment expense and other expenses resulting principally from
the branch acquisitions discussed above.
BancShares recorded $111,000 in losses of furniture and equipment related to the
hurricanes of September 1999. Management does not anticipate any additional
material occupancy or furniture and equipment expenses related to the September
1999 hurricanes.
INCOME TAXES
In the three months ended September 30, 1999, BancShares had income tax expense
of $290,000, a decrease of $180,000 from $470,000 in the prior year quarter.
This decrease resulted from both reduced earnings and a reduction in the
estimated effective tax rate for the quarter ended September 30, 1999 to 24.15%.
<PAGE>
The estimated effective tax rate for the quarter ended September 30, 1998 was
27.93%. The effective tax rate for the quarter ended September 30, 1999 of
24.15% 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
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 September 30, 1999 was 8.55%. 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 September 30, 1999, Southern's Total RBC
ratio was 16.57%. 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 $8.3 million at September 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.
<PAGE>
Accumulated other comprehensive income consists entirely of unrealized gains on
marketable equity securities. Although a part of total shareholders' equity,
only 45% of accumulated other comprehensive income 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)
September 30, December 31,
1999 1998
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Risk-based capital:
Tier 1 capital $ 53,419 $ 49,198
Total capital 61,077 53,234
Risk-adjusted assets 368,639 311,341
Average tangible assets 624,753 582,955
Tier 1 capital ratio (1) 14.49% 15.80%
Total capital ratio (1) 16.57% 17.10%
Leverage capital ratio (1) 8.55% 8.44%
</TABLE>
(1) These ratios exceed the minimum ratios required for a bank to be classified
as "well capitalized" as defined by the FDIC.
At September 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 31.65% at September 30, 1999 and
30.78% at December 31, 1998.
<PAGE>
The Statement of Cash Flows discloses the principal sources and uses of cash
from operating, investing and financing activities for the nine months ended
September 30, 1999 and for the nine months ended September 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 September 30, 1999 jumbo time deposits represented 10.98% 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
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 impact on its 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.
<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 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.
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.
<PAGE>
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.
The following paragraphs summarize the phases of BancShares' year 2000 plan:
Assessment Phase
During the assessment phase, a year 2000 corporate inventory and business risk
assessment was made (jointly with FCB in the case of Group A Systems and Group B
Systems, and separately in the case of Group C Systems and Non-IT Systems) to
quantify the extent of BancShares' year 2000 exposure and identify systems that
required remediation. Each Group B and C application or system was given two
separate codes; a Priority Code and a Status Code. The Priority Code quantifies
the importance of each asset to BancShares' daily operations. The Status Code
represents the current claim of compliance by the asset's vendor. Used in
concert, these codes prioritize the remediation, testing and contingency
planning processes. This phase is complete.
<PAGE>
Remediation and Testing Phase
With respect to IT Systems, this phase contemplates the implementation of
modifications, upgrades or system replacements determined to be necessary to
achieve year 2000 compliance and the testing of modified or upgraded systems to
determine their functionality and operating capability. As to Group A Systems
and Group B Systems, FCB's outside consultant is responsible for coordinating
necessary modifications, upgrades or replacements. This phase has been completed
for all Group A and B Systems. As to Group C Systems, BancShares' staff
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 was completed by FCB's
outside consultant and the 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' has
completed the implementation phases for all such systems.
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.
During early 1998, BancShares identified those borrowing customers whose
existing aggregate borrowings from BancShares met certain criteria based on
aggregate credit exposure, loan collateral and whose businesses were of a nature
that they could be adversely affected by the year 2000 issue. A meeting was held
individually with each such borrowing customer to assess the customer's plan
for, and progress toward, addressing the year 2000 issue. Follow-up meetings are
being held with each customer whose assessment indicated a higher than typical
level of risk. With respect to new and renewed loans, an assessment of year 2000
risk and steps being taken by the customer to address the year 2000 issue have
been made a part of the credit approval process.
<PAGE>
Costs
BancShares is expensing all costs associated with required system changes as
those costs are incurred, and such costs are being funded through operating cash
flows. Because a substantial portion of BancShares' data processing functions
are performed by FCB on its mainframe systems and/or on systems supported by
FCB, FCB is bearing a substantial portion of the expenses related to the
remediation and testing of systems that affect BancShares. BancShares 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 September 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 of these contingency plans is
complete.
Other Matters
BancShares has announced plans to purchase, subject to regulatory approval, the
Robersonville office of Cooperative Bank for Savings, Inc., SSB ("Cooperative").
The acquisition is planned for the first quarter of 2000. BancShares expects to
purchase approximately $7.0 million of deposits, $1.8 million of loans and to
record approximately $525,000 of intangible assets for the Cooperative
acquisition. BancShares plans to consolidate this acquisition into its existing
Robersonville facility and to sell the existing Cooperative facility.
At September 30, 1999 BancShares had regulatory approval to open de novo
branches in four eastern North Carolina markets. These include a full service
branch in Clinton, North Carolina, that opened on November 1, 1999 and three
branches opening in 2000.
Management is not aware of any other trends, events, uncertainties, or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on BancShares' liquidity, capital resources or
other operations.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About 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
diminished current market values and/or reduced potential net interest income in
future periods.
As of September 30, 1999, Management believes that there have been no
significant changes in market risk as disclosed in BancShares' Annual Report on
Form 10-K for the year ended December 31, 1998.
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: November 3, 1999 /s/John C. Pegram, Jr.
----------------------------------------
John C. Pegram, Jr.,
President and Chief Executive Officer
Dated: November 3, 1999 /s/David A. Bean
----------------------------------------
David A. Bean,
Secretary, Treasurer and Chief Financial Officer
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