UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 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 28365
Mount Olive, North Carolina (Zip Code)
(Address of Principal Executive offices)
Registrant's Telephone Number,
including Area Code: (919) 658-7000
Securities registered pursuant to Section 12(b) of the Act:
8.25% Junior Subordinated Debentures
Securities registered pursuant to Section 12(g) of the Act:
Series B non-cumulative preferred stock, no par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 17, 2000: The Registrant's voting stock has no readily
ascertainable market value as of any date within the last sixty days or
otherwise for the reason that such stock is not regularly traded and has no
quoted prices. Therefore, the aggregate market value of the voting stock held by
non-affiliates is not determinable.
The number of shares outstanding of the Registrant's common stock as of March
17, 2000: Common Stock, $5.00 par value - 118,626 shares
<PAGE>
Documents Incorporated by Reference
1. Portions of the Registrant's 1999 Annual Report to Shareholders are
incorporated by reference into Parts I and II.
2. Portions of the Registrant's definitive Proxy Statement dated March 17,
2000 for the 2000 Annual Meeting of Shareholders are incorporated by
reference into Part III.
<PAGE>
PART I
ITEM 1 - BUSINESS:
General
Southern BancShares (N.C.), Inc., a Delaware corporation (hereinafter, with
all of its subsidiaries, referred to as the "Registrant" or "BancShares"), is a
bank holding company pursuant to the provisions of the Bank Holding Company Act
of 1956, as amended. BancShares is the successor to Southern BancShares (N.C.),
Inc., a North Carolina corporation ("SBS") which was formed in 1982 to become
the parent company of Southern Bank and Trust Company ("Southern"), its
principal operating subsidiary, which it acquired in late 1982. BancShares was
formed in 1986 in order to effect the reincorporation in Delaware of the holding
company of Southern by the merger of SBS into BancShares, which was effective on
December 28, 1986. BancShares' second wholly-owned subsidiary, Southern Capital
Trust I, is a statutory business trust that issued $23.0 million of 8.25%
Capital Securities (the "Capital Securities") in June 1998 maturing in 2028. All
significant activities of the Registrant and its subsidiaries are banking
related so that the Registrant operates within one industry segment. Neither
BancShares nor its subsidiaries has any foreign operations.
Southern is BancShares principal operating subsidiary and is engaged in
commercial banking primarily in eastern North Carolina. In terms of total
assets, at December 31, 1999, Southern was the thirteenth largest bank in North
Carolina.
Business
Southern conducts a general banking business designed to meet the needs of
the people of its market area. These services, all of which are offered at its
46 offices, include, among other items: taking deposits; cashing checks and
providing for individual and commercial cash needs; and providing numerous
checking and savings plans, including automatic transfer services, direct
deposit, and banking by mail.
Southern also makes commercial, consumer and mortgage loans at its 33 full
service offices and provides individual retirement account service, safe deposit
box rental, travelers' check service, and Master Card and Visa credit card
programs. Southern does not operate in the international financing market.
Southern has a wholly-owned subsidiary, Goshen, Inc., which acts as agent
for credit life and credit accident and health insurance written in connection
with loans made by Southern.
Supervision and Regulation
The business and operations of BancShares and Southern are subject to
extensive federal and state governmental regulation and supervision.
BancShares is a bank holding company registered with the Board of Governors
of the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956 as amended (the "BHCA"), and is subject to supervision and
examination by and the regulations and reporting requirements of the Federal
Reserve. Under the BHCA, the activities of BancShares are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries or engaging in any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
<PAGE>
There are a number of obligations and restrictions imposed by law on a bank
holding company and its insured depository institution subsidiaries that are
designed to minimize potential loss to depositors and the FDIC insurance funds.
For example, if a bank holding company's insured depository institution
subsidiary becomes "undercapitalized," the bank holding company is required to
guarantee (subject to certain limits) the subsidiary's compliance with the terms
of any capital restoration plan filed with its appropriate federal banking
agency. Also, a bank holding company is required to serve as a source of
financial strength to its depository institution subsidiaries and to commit
resources to support such institutions in circumstances where it might not do
so, absent such policy. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary upon the Federal Reserve's determination that
such activity or control constitutes a serious risk to the financial soundness
and stability of a depository institution subsidiary of the bank holding
company.
As a result of its ownership of a North Carolina-chartered commercial bank,
BancShares also is registered with and subject to examination and regulation by
the North Carolina Commissioner of Banks under the state's bank holding company
laws.
Southern is a North Carolina commercial bank and its deposits are insured
by the FDIC. It is subject to supervision and examination by and the regulations
and reporting requirements of the North Carolina Commissioner of Banks (the
"Commissioner") and the FDIC.
Southern is subject to legal limitations on the amounts of dividends it is
permitted to pay. Prior approval of the Commissioner is required if the total of
all dividends declared by Southern in any calendar year exceeds its net profits
(as defined by statute) for that year combined with its retained net profits (as
defined by statute) for the preceding two calendar years, less any required
transfers to surplus. As an insured depository institution, Southern also is
prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, it would become
"undercapitalized" (as such term is defined in the Federal Deposit Insurance
Act).
Under current federal law, certain transactions between a depository
institution and its affiliates are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a depository institution is any company or
entity that controls, is controlled by or is under common control with the
institution, and, in a holding company context, the parent holding company of a
depository institution and any companies which are controlled by such parent
holding company are affiliates of the depository institution. Generally,
Sections 23A and 23B (i) limit the extent to which a depository institution or
its subsidiaries may engage in covered transactions with any one affiliate, and
(ii) require that such transactions be on terms and under circumstances
substantially the same, or at least as favorable, to the institution or the
subsidiary as those provided to a nonaffiliate.
Southern is subject to various other state and federal laws and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit and equal credit, fair credit reporting laws and laws relating to branch
banking. As an insured institution, Southern is prohibited from engaging as a
principal in activities that are not permitted for national banks unless (i) the
<PAGE>
FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund and (ii) the institution is, and continues to
be, in compliance with all applicable capital standards. Insured institutions
also are prohibited from directly acquiring or retaining any equity investment
of a type or in an amount not permitted for national banks.
The Federal Reserve, the FDIC and the Commissioner all have broad powers to
enforce laws and regulations applicable to BancShares and Southern and to
require corrective action of conditions affecting the safety and soundness of
Southern. Among others, these powers include cease and desist orders, the
imposition of civil penalties and the removal of officers and directors.
Capital Requirements
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines which require a minimum ratio of total capital to
risk-weighted assets of 8%. At least half of the total capital is required to be
Tier I capital. In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum leverage capital ratio under which a bank holding
company must maintain a level of Tier I capital to average total consolidated
assets of at least 3 % in the case of a bank holding company which has the
highest regulatory examination rating and is not contemplating significant
growth or expansion. All other bank holding companies are expected to maintain a
leverage capital ratio of at least 1% to 2% above the stated minimum.
Southern is also subject to capital requirements imposed by the FDIC. Under
the FDIC's regulations, insured institutions that receive the highest rating
during the examination process and are not anticipating or experiencing any
significant growth are required to maintain a minimum leverage ratio of 3% of
Tier I capital to average total consolidated assets. All other insured
institutions are required to maintain a minimum ratio of 1% or 2% above the
stated minimum, with a minimum leverage ratio of not less than 4%.
Insurance Assessments
Southern is subject to insurance assessments imposed by the FDIC. One
assessment to be paid by each insured institution is based on the institution's
assessment risk classification, which is determined based on whether the
institution is considered "well capitalized", "adequately capitalized" or "under
capitalized", as such terms have been defined in applicable federal regulations,
and whether the institution is considered by its supervisory agency to be
financially sound or to have supervisory concerns.
A separate assessment is made for the Financing Corporation ("FICO") funding
requirements. The FICO rate is not tied to the FDIC risk classification and is
subject to change by the FDIC within certain limitations. The FICO rate for the
first quarter of 2000 is set at an annual rate of 2.12 basis points of deposits
as defined by the FDIC. At December 31, 1999 the FICO assessable deposit base
for Southern was $565.0 million.
If Southern's deposits remained at these levels and the FDIC maintained the same
rates, the expense for the FICO obligation for Southern would
be approximately $118 thousand for 2000.
The FDIC also is authorized to impose one or more special assessments in any
amount deemed necessary to enable repayment of amounts borrowed by the FDIC from
the United States Treasury Department.
<PAGE>
Change in Control
State and federal law restricts the amount of voting stock of a bank
holding company, or a bank, that a person may acquire without the prior approval
of banking regulators.
Pursuant to North Carolina law, no person may, directly or indirectly,
purchase or acquire voting stock of any bank holding company or bank which would
result in the change of control of that entity unless the Commissioner first
shall have approved that proposed transaction. A person will be deemed to have
acquired "control" of a bank holding company or bank if that person, directly or
indirectly, (i) owns, controls or has the power to vote 10% or more of the
voting stock of the bank holding company or bank, or (ii) possesses the power to
direct or cause the direction of its management and policy. Federal law imposes
additional restrictions on acquisitions of stock in bank holding companies and
insured banks. Under the federal Change in Bank Control Act and regulations
thereunder, a person or group acting in concert must give advance notice to the
Federal Reserve or the FDIC before directly or indirectly acquiring the power to
direct the management or policies of, or to vote 25% or more of any class of
voting securities of, any bank holding company or insured bank. Upon receipt of
such notice, the federal regulator either may approve or disapprove the
acquisition.
Under the Act, a change in control is presumed to occur if, among other
things, a person or group acquires more than 10% of any class of voting stock of
a holding company or insured bank and, after such acquisition, the acquirer will
be the largest shareholder.
Interstate Banking and Branching
Federal law permits adequately capitalized and managed bank holding
companies to acquire control of the assets of banks in any state (the
"Interstate Banking Law"). Acquisitions are subject to anti-trust provisions
that cap at 10% the portion of the total deposits of insured depository
institutions in the United States that a single bank holding company may
control, and generally cap at 30% the portion of the total deposits of insured
depository institutions in a state that a single bank holding company may
control. Under certain circumstances, states have the authority to increase or
decrease the 30% cap, and states may set minimum age requirements of up to five
years on target banks within their borders.
Beginning June 1, 1997, and subject to certain conditions, the Interstate
Banking Law permitted interstate branching by allowing a bank to merge with a
bank located in a different state. The Interstate Banking Law also permits banks
to establish branches in other states, by opening new branches or acquiring
existing branches of other banks, if the laws of those other states specifically
permit that form of interstate branching. North Carolina has adopted statutes
which, subject to conditions contained therein, specifically authorize
out-of-state bank holding companies and banks to acquire or merge with North
Carolina banks and to establish or acquire branches in North Carolina.
Economic Considerations
As a bank holding company whose primary asset is the capital stock of a
commercial bank, BancShares is directly affected by regulatory measures
affecting the banking industry in general. Additionally, since BancShares'
banking business is centered in eastern North Carolina, the general state of the
economy of eastern North Carolina, especially the agricultural sector, has a
direct effect on its business and profitability.
<PAGE>
Among governmental regulators of primary importance is the Federal Reserve
which acts as the nation's central bank and can directly affect money supply and
thereby affect Southern's lending ability by increasing or decreasing its
interest costs and availability of funds. An important function of the Federal
Reserve is to regulate the national supply of bank credit in order to combat
recession and curb inflationary pressures. Among the instruments of monetary
policy used by the Federal Reserve to implement these objectives are open market
operations in U. S. Government securities, changes in the discount rate and
surcharge, if any, on member bank borrowings, and changes in reserve
requirements against bank deposits. These means are used in varying combinations
to influence overall growth of bank loans, investments and deposits and may also
affect interest rates charged on loans or paid for deposits.
Southern is not a member of the Federal Reserve System, but is subject to
reserve requirements imposed on non-member banks by the Federal Reserve. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future.
Competition
The banking laws of North Carolina allow statewide branching; therefore,
commercial banking in the state is highly competitive. Southern competes
directly in many of its markets with one or more of the largest banking
organizations in North Carolina. Such competitors range in size to over $571
billion in consolidated resources (including resources represented by banking
organizations in other states owned by or which control certain of such
competitors), have broader geographic markets and higher lending limits and
offer more services than Southern, and can, therefore, make more effective use
of media advertising, support services and electronic technology than can
BancShares or Southern.
Employees
At December 31, 1999, Southern employed 307 full-time employees and 35
part-time employees. It is not a party to any collective bargaining agreements
and considers relations with its employees to be good. BancShares and Goshen do
not have any separate employees.
Statistical Information
Certain additional statistical information with respect to BancShares'
business is included in the information incorporated herein under "Part II, Item
7" below.
<PAGE>
Statistical Information
<TABLE>
<CAPTION>
I. AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL AVERAGE BALANCES AND
AVERAGE RATES EARNED AND PAID
(Dollars in thousands)
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------- ----------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------ ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) (2) $ 380,877 $ 31,292 8.22% $ 362,298 $ 31,000 8.56%
Taxable investment securities 158,071 8,345 5.28% 141,193 8,085 5.73%
Nontaxable investment securities (3) 24,748 2,006 8.11% 22,842 1,982 8.68%
Federal funds sold 19,081 968 5.07% 18,321 972 5.31%
Other interest earning assets 4,003 204 5.10% 5,367 293 5.46%
--------- -------- ---- --------- -------- ----
Total interest earning assets 586,780 42,815 7.30% 550,021 42,332 7.70%
-------- ---------
Non-interest earning assets:
Cash and due from banks 22,012 19,250
Premises and equipment, net 19,781 18,304
Other 22,441 28,253
Total assets $ 651,014 $ 615,828
========= =========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits $ 83,823 $ 799 0.95% $ 78,283 $ 1,073 1.37%
Savings deposits 98,137 2,170 2.21% 92,657 2,325 2.51%
Time deposits 298,744 14,685 4.92% 285,869 15,318 5.36%
Short-term borrowed funds 6,231 229 3.68% 6,531 292 4.47%
Long-term obligations 23,000 2,084 9.06% 15,056 1,320 8.77%
--------- -------- ---- --------- -------- ----
Total interest bearing liabilities 509,935 19,967 3.92% 478,396 20,328 4.25%
--------- ---------
Non-interest bearing liabilities:
Demand deposits 77,682 69,746
Other 7,923 11,263
Shareholders' equity 55,474 56,423
--------- ---------
Total liabilities and equity $ 651,014 $ 615,828
========= =========
Interest rate spread (4) 3.38% 3.45%
Net interest income and
Net interest margin (5) $ 22,848 3.89% $ 22,004 4.00%
========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
------- -------- ----
<S> <C> <C> <C>
Interest earning assets:
Loans (1) (2) $ 340,195 $ 29,225 8.59%
Taxable investment securities 126,829 7,532 5.94%
Nontaxable investment securities (3) 24,581 2,130 8.66%
Federal funds sold 11,526 623 5.41%
Other interest earning assets 4,840 269 5.56%
--------- -------- ----
Total interest earning assets 507,971 39,779 7.83%
--------
Non-interest earning assets:
Cash and due from banks 17,730
Premises and equipment, net 17,457
Other 24,078
Total assets $ 567,236
=========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits $ 76,080 $ 1,234 1.62%
Savings deposits 87,577 2,259 2.58%
Time deposits 270,863 14,736 5.44%
Short-term borrowed funds 6,295 303 4.81%
Long-term obligations 4,539 295 6.50%
--------- -------- ----
Total interest bearing liabilities 445,354 18,827 4.23%
--------
Non-interest bearing liabilities:
Demand deposits 63,783
Other 12,396
Shareholders' equity 45,703
---------
Total liabilities and equity $ 567,236
=========
Interest rate spread (4) 3.60%
Net interest income and
Net interest margin (5) $ 20,952 4.12%
========
</TABLE>
(1) Includes non-accrual loans
(2) Interest income includes amortization of loan fees.
(3) The average rate on nontaxable investment securities has been adjusted to a
tax equivalent yield using a 34% tax rate. The taxable equivalent
adjustment was $682 in 1999, $543 in 1998 and $2,024 in 1997.
(4) Interest rate spread is the difference between earning asset yield and
interest bearing liability rate.
(5) Net interest margin is net interest income divided by average earning
assets.
<PAGE>
<TABLE>
<CAPTION>
II. AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL ANALYSIS OF CHANGES iN
INTEREST DIFFERENTIAL
(Dollars in thousands) December 31, 1999 Increase (Decrease)
-----------------------------------------------------------
AMOUNT AMOUNT AMOUNT
TOTAL ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
CHANGE TO CHANGE TO CHANGE TO CHANGE IN
1998-1999 IN VOLUME IN RATE RATE/VOLUME
ASSETS
<S> <C> <C> <C> <C>
Interest earning assets:
Loans $ 292 $ 1,590 (1,232) $ (66)
Taxable investment securities 171 967 (635) (161)
Non-taxable investment securities 24 165 (130) (11)
Federal funds sold (4) 40 (44) --
----- ------- ------- -----
Total interest income 483 2,762 (2,041) (238)
----- ------- ------- -----
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits (274) 76 (329) $ (21)
Savings deposits (155) 138 (278) (15)
Time deposits (633) 690 (1,258) (65)
Short-term borrowed funds (63) (13) (52) 2
Long-term obligations 764 697 44 23
----- ------- ------- -----
Total interest expense (361) 1,588 (1,873) (76)
----- ------- ------- -----
Net interest income $ 844 $ 1,174 $ (168) $(162)
===== ======= ======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998 Increase (Decrease)
-------------------------------------------------------------------
AMOUNT AMOUNT AMOUNT
TOTAL ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
CHANGE TO CHANGE TO CHANGE TO CHANGE IN
1997-1998 IN VOLUME IN RATE RATE/VOLUME
--------- --------- ------- -----------
ASSETS
<S> <C> <C> <C> <C>
Interest earning assets:
Loans $ 1,775 $ 1,836 $ (68) $ 7
Taxable investment securities 577 971 (355) (39)
Non-taxable investment securities (148) (151) 5 (2)
Federal funds sold 349 368 (12) (7)
------- ------- ----- -----
Total interest income 2,553 3,024 (430) (41)
------- ------- ----- -----
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits (161) 36 (190) (7)
Savings deposits 66 131 (61) (4)
Time deposits 582 728 (135) (11)
Short-term borrowed funds 22 45 (22) (1)
Long-term obligations 992 771 67 154
------- ------- ----- -----
Total interest expense 1,501 1,711 (341) 131
------- ------- ----- -----
Net interest income $ 1,052 $ 1,313 $ (89) $(172)
======= ======= ===== =====
</TABLE>
Average loan balances include nonaccrual loans. BancShares earns tax-exempt
interest on certain loans and investment securities due to the borrower or
issuer being either a governmental agency or a quasi-governmental agency. Yields
related to loans and securities exempt from federal income taxes are stated on a
taxable-equivalent basis assuming a statutory federal income tax rate of 34% for
all periods. The taxable equivalent adjustment was $682 in 1999, $543 in 1998
and $2,024 in 1997.
III. INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities
(dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------
(Dollars in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies (1) $139,659 $143,350 $118,589
States and political subdivisions 33,203 29,281 31,150
Other (2) 21,359 28,936 30,394
-------- -------- --------
Total $194,221 $201,567 $180,133
======== ======== ========
</TABLE>
<PAGE>
The following table sets forth the maturities of investment securities at
December 31, 1999 (dollars in thousands) and the weighted average yields of such
securities. (Note that nontaxable investment securities have not been adjusted
to a tax equivalent basis and unrealized gain (loss) on available for sale
securities is not included.)
<TABLE>
<CAPTION>
Maturing
----------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies (1) $ 62,825 4.94% $ 75,451 5.46% $ - -
States and political subdivisions 11,925 5.16% 7,945 6.56% 7,547 5.90%
Other (2) 10,262 3.23% - - 100 6.75%
-------- ---- -------- ---- -----
$ 85,012 4.77% $ 83,396 5.56% $ 7,647 5.91%
======== ======= =======
<CAPTION>
After Ten Years
Amount Yield
------ -----
<S> <C> <C>
U.S. Treasury and other
U.S. Government agencies (1) $ 1,382 6.45%
States and political subdivisions 5,787 5.41%
Other (2) - 6.75%
------- ----
$ 7,169 5.62%
=======
</TABLE>
<PAGE>
1) Mortgage-backed securities are included in the obligations of U.S. Government
agencies and spread within the columns according to their anticipated repayment
schedules.
(2) The "Within One Year" column of the "Other" category includes marketable
equity securities held by BancShares. Accordingly, the yield on these securities
represents anticipated dividend income rather than interest income.
IV. LOAN PORTFOLIO
Analysis of loans by type and maturity
The table below classifies loans by major category (dollars in thousands):
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $101,128 $ 86,980 $ 84,281 $ 70,881 $ 57,398
Real estate:
Construction 8,647 5,276 5,209 2,470 1,533
Mortgage:
One to four family residential 111,793 113,984 106,444 113,915 111,372
Commercial 74,873 62,446 58,056 52,686 43,580
Equityline 30,152 28,698 27,759 18,654 13,828
Other 32,851 26,846 27,868 21,615 20,535
Consumer 34,309 36,775 35,643 35,512 37,548
Lease financing 4,307 3,484 3,956 2,022 2,166
-------- -------- -------- -------- --------
Total loans $398,060 $364,489 $349,216 $317,755 $287,960
======== ======== ======== ======== ========
</TABLE>
<PAGE>
The following table identifies the maturities of all loans as of December 31,
1999 and addresses the sensitivity of these loans to changes in interest rates.
<TABLE>
<CAPTION>
(Dollars in thousands)
Within After One Year But After
One Year Within Five Years Five Years Total
-------- ----------------- ---------- -----
<S> <C> <C> <C> <C>
Commercial and Financial $ 88,792 $ 12,336 $ -- $101,128
Real Estate:
Construction 8,647 -- -- 8,647
One to four family residential 6,567 55,965 49,261 111,793
Commercial 4,378 37,310 33,185 74,873
Equityline 1,751 14,924 13,477 30,152
Other 1,897 16,168 14,786 32,851
Consumer 28,047 6,262 -- 34,309
Lease Financing -- 4,307 -- 4,307
-------- -------- -------- --------
Total $140,079 $147,272 $110,709 $398,060
======== ======== ======== ========
Fixed Rate $ 54,279 $116,251 $ 70,307 $240,837
Variable Rate 85,800 31,021 40,402 157,223
-------- -------- -------- --------
Total $140,079 $147,272 $110,709 $398,060
======== ======== ======== ========
</TABLE>
<PAGE>
Non-accrual, past-due, and restructured loans
The following analysis identifies other real estate owned and loans that were
either non-accruing, past-due or restructured. Accrual of interest is
discontinued on a loan when management believes the borrowers' financial
condition is such that collection of principal or interest is doubtful. Loans
are returned to the accrual status when the factors indicating doubtful
collectibility cease to exist.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 243 $ 166 $230 $147 $ 50
Restructured loans 42 42 -- 8 --
Accruing loans past-due 90 days or more 460 805 466 343 508
------ ------ ---- ---- ----
Total non-performing loans 745 1,013 696 498 558
Other real estate owned 414 84 48 -- 86
------ ------ ---- ---- ----
Total non-performing loans and assets $1,159 $1,097 $744 $498 $644
====== ====== ==== ==== ====
</TABLE>
<PAGE>
The amount of interest which would have been recorded in 1999 on non-accrual
loans, had they been in accordance with the original terms throughout the
period, was immaterial.
V. SUMMARY OF LOAN LOSS EXPERIENCE
Analysis of the allowance for loan losses
The table presented below summarizes activity in the allowance for loan losses
for the five years ended (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses - beginning of year $ 5,962 $ 5,971 $ 6,163 $ 6,321 $ 6,653
Charge - offs:
Commercial, financial and agricultural 183 158 47 5 --
Real estate:
Mortgage:
One to four family residential 77 41 86 106 34
Commercial 121 15 -- -- --
Equityline 10 32 -- -- --
Other -- -- 23 -- 209
Lease financing 16 -- -- -- --
Consumer 341 298 307 428 220
--------- --------- --------- --------- ---------
Total charge-offs 748 544 463 539 463
Recoveries:
Commercial, financial and agricultural 11 11 13 -- 54
Real estate:
Construction -- -- -- 19 --
Mortgage:
One to four family residential 25 20 59 131 19
Commercial 3 -- -- -- --
Equityline -- 8 -- -- --
Other -- 5 -- -- --
Consumer 105 67 139 91 58
--------- --------- --------- --------- ---------
Total recoveries 144 111 211 241 131
--------- --------- --------- --------- ---------
Net charge-offs 604 433 252 298 332
Provision for loan losses 830 155 60 140 --
Additions from bank acquisition -- 269 -- -- --
--------- --------- --------- --------- ---------
Allowance for loan losses - end of year $ 6,188 $ 5,962 $ 5,971 $ 6,163 $ 6,321
========= ========= ========= ========= ========
Average loans outstanding during the year $ 380,877 $ 362,298 $ 340,195 $ 310,389 $270,563
Ratio of net charge-offs to average loans outstanding 0.16% 0.12% 0.07% 0.10% 0.12%
</TABLE>
<PAGE>
The allowances for loan losses is increased by charges to the provision for loan
losses and reduced by loans charged off, net of recoveries. Southern's provision
is the amount necessary to maintain the allowance at a level considered adequate
to provide for possible loan losses based on management's internal evaluation of
the loan portfolio, as well as prevailing and anticipated economic conditions.
Allocation of the allowance for loan losses:
The composition of the allowance by loan category shown in the table below is
based upon management's evaluation of the loan portfolio, past history, and
prevailing economic conditions:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
----------------------------------------------------------------------
% of loans % of loans % of loans
in each in each in each
category to category to category to
1999 total loans 1998 total loans 1997 total loans
---- ----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $2,450 25% $2,200 24% $2,149 24%
Real estate:
Construction 100 2% 100 2% 60 1%
Mortgage:
One to four family residential 1,100 28% 1,100 31% 1,194 30%
Commercial 550 19% 550 17% 537 17%
Equityline 200 8% 200 8% 239 8%
Other 188 8% 212 7% 239 8%
Consumer 1,500 9% 1,500 10% 1,493 10%
Lease financing 100 1% 100 1% 60 2%
------ ------ ------ ------ ------ ------
$6,188 100% $5,962 100% $5,971 100%
====== ====== ====== ====== ====== ======
<CAPTION>
% of loans % of loans
in each in each
category to category to
1996 total loans 1995 total loans
---- ----------- ---- -----------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $2,214 22% $1,264 20%
Real estate:
Construction 76 1% 63 1%
Mortgage:
One to four family residential 1,245 36% 2,188 39%
Commercial 566 17% 853 15%
Equityline 204 6% 260 5%
Other 248 6% 408 7%
Consumer 1,537 11% 1,222 13%
Lease financing 73 1% 63 --
------ ------ ------ ---
$6,163 100% $6,321 100%
====== ====== ====== ===
</TABLE>
<PAGE>
VI. DEPOSITS
The average monthly volume of deposits, which is considered representative of
BancShares' operations, and the average rates paid on such deposits are
presented below (dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------------
1999 1998 1997
(Dollars in thousands)
Average Average Average Average Average Average
Balances Rates Balances Rates Balances Rates
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C>
Non-interest bearing demand $ 77,682 - $ 69,746 - $ 63,783 -
Interest bearing demand 83,823 0.95% 78,283 1.37% 76,080 1.62%
Savings 98,137 2.21% 92,657 2.51% 87,577 2.58%
Time deposits 298,744 4.94% 285,869 5.36% 270,863 5.44%
--------- --------- --------
Total deposits $ 558,386 $ 526,555 $498,303
========= ========= ========
</TABLE>
Maturities of $100,000 or more time certificates of deposit at December
31, 1999 are summarized as follows (dollars in thousands):
Maturity Category
Three months or less $ 24,458
Over three through six months 16,602
Over six months through twelve months 16,393
Over one year through five years 2,931
Over five years -
--------
$ 60,384
========
<PAGE>
VII. RETURN ON EQUITY AND ASSETS
The following table presents certain ratios of the Company:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on assets (net income divided by average total assets) 0.57% 0.91% 1.17%
Return on equity - including Series B and C preferred 6.63% 9.92% 14.47%
(net income divided by average total equity)
Dividend payout ratio (Dividends paid divided by net income) 15.57% 10.38% 8.85%
Equity to assets ratio - including Series B and C preferred 8.52% 9.16% 8.06%
(Average equity divided by average total assets)
</TABLE>
VIII. CAPITAL ADEQUACY
The following table presents certain calculations of BancShares' capital and
related ratios:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1999 1998 1997
-------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Total Shareholders' Equity $ 54,944 $56,033 $54,984
Tier 1 capital 55,398 51,240 34,380
Total capital (1) 62,967 65,666 38,449
Tier 1 capital ratio (2) 14.32% 16.01% 11.43%
Total capital ratio (2) 16.28% 20.52% 12.78%
</TABLE>
(1) The Capital Securities issued in 1998 are considered part of Tier I Capital.
(2) The minimum ratio of qualifying total capital to risk weighted assets is 8%,
of which 4% must be Tier 1 capital, which is common equity, retained earnings,
and a limited amount of perpetual preferred stock, less certain intangibles.
<PAGE>
IX. RATE OF INTERNAL CAPITAL GENERATION
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on average assets (based on net income) 0.57% 0.91% 1.17%
Average equity as a percentage of total average assets 8.52% 9.16% 8.06%
Return on average equity 6.63% 9.92% 14.47%
Dividend payout ratio (Dividends paid divided by net income) 15.57% 10.38% 8.85%
Earnings retention 84.43% 89.62% 91.15%
(Net income less dividends divided by net income)
Rate of internal capital generation 5.60% 8.89% 13.19%
(Return on average equity times earnings retention ratio)
</TABLE>
X. INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1999
-----------------------------------------------------------------------------
Non-Rate
1-30 31-90 91-180 181-365 Sensitive
Days Days Days Days & Over
Sensitive Sensitive Sensitive Sensitive 1 Year Total
--------- --------- --------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans $ 75,184 $ 21,535 $ 26,235 $ 55,911 $219,195 $398,060
Investment Securities 11,120 11,091 12,416 46,704 95,976 177,307
Temporary Investments 20,370 -- -- -- -- 20,370
--------- -------- -------- -------- -------- --------
Total earning assets $ 106,674 $ 32,626 $ 38,651 $102,615 $315,171 $595,737
========= ======== ======== ======== ======== ========
Interest-Bearing Liabilities:
Savings and core time deposits $ 218,793 $ 40,920 $ 76,652 $ 72,598 $ 19,722 $428,685
Time deposits of $100,000 and more 11,124 13,334 16,602 16,393 2,931 60,384
Short-term borrowings 6,658 -- -- -- -- 6,658
Long-term obligations -- -- -- -- 23,000 23,000
--------- -------- -------- -------- -------- --------
Total interest bearing liabilites $ 236,575 $ 54,254 $ 93,254 $ 88,991 $ 45,653 $518,727
========= ======== ======== ======== ======== ========
Interest sensitive Gap $(129,901) $(21,628) $(54,603) $ 13,624 $269,518 $ 77,010
========= ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Interest sensitivity is continually changing. The table above reflects
BancShares' gap position at December 31, 1999 and does not necessarily
represent its position on any other dates.
XI. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
(Dollars in thousands)
1999 1998 1997
------------------- -------------------- --------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements
At December 31 $5,223 3.72% $4,953 3.35% $4,761 5.62%
Average during year 5,240 3.58% 5,655 4.09% 4,819 4.18%
Maximum month-end balance during year 6,313 6,459 5,929
U. S. Treasury tax and loan accounts
At December 31 $1,435 4.78% $ 171 4.11% $2,065 5.25%
Average during year 991 4.15% 861 5.97% 997 5.85%
Maximum month-end balance during year 2,035 2,206 2,215
</TABLE>
<PAGE>
ITEM 2 - PROPERTIES
BancShares does not own or lease any real property. Except for three tracts
of land that are leased and upon which are constructed leasehold improvements
for the conduct of its banking business, Southern owns all of the real property
utilized in its operations.
Southern's home office is located at 121 East Main Street, Mount Olive,
North Carolina. At December 31, 1999 there were 46 Southern offices in North
Carolina. These offices are listed on page 41 of BancShares' 1999 Annual Report.
ITEM 3 - LEGAL PROCEEDINGS:
There are no material legal proceedings to which BancShares or its
subsidiaries are a party or to which any of their property is subject, other
than ordinary, routine litigation incidental to the business of commercial
banking.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS:
None.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS:
Information required by this item is incorporated herein by reference
to the section captioned "Market for the Registrant's Common Stock and Related
Shareholder Matters" on page 15, and the Table captioned "Per Share of Stock" on
page 16 of the Registrant's 1999 Annual Report.
ITEM 6 - SELECTED FINANCIAL DATA:
Information required by this item is incorporated herein by reference
to Table 1, Five-Year Financial Summary, Selected Balances and Ratios, on page 4
of Registrant's 1999 Annual Report.
ITEM 7 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
Information required by this item is incorporated herein by reference
to the section captioned "Management Discussion and Analysis of Financial
Condition and Results of Operations" on pages 4 through 16 of the Registrant's
1999 Annual Report.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Information required by this item is incorporated herein by reference
to the section captioned "Market Risk" on page 10 of Registrant's 1999 Annual
Report.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The information required by this item is incorporated herein by
reference to the following financial statements, supplementary data and
independent auditors' report on the indicated page numbers of the registrant's
1999 Annual Report:
Independent Auditors' Report 17
Consolidated Balance Sheets as of December 31, 1999 and 1998 18
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1999, 1998 and 1997 19
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 20
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 21
Notes To Consolidated Financial Statements 22-38
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES:
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT:
The information under the captions "PROPOSAL 1: ELECTION OF DIRECTORS",
"Section 16(a) Beneficial Ownership Reporting Compliance" and "Executive
Officers" on pages 4 through 6 and page 9 of Registrant's definitive Proxy
Statement dated March 17, 2000, is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION:
The information under the captions "Compensation of Directors",
"Compensation Committee Interlocks and Insider Participation", "Executive
Compensation" and "Pension Plan" on pages 6 through 10 of the Registrant's
definitive Proxy Statement dated March 17, 2000, is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT:
The information under the caption "Beneficial Owenership of Voting
Securities" on pages 2 through 4 of the Registrant's definitive Proxy Statement
dated March 17, 2000, is incorporated herein by reference.
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information contained in Footnote (5) to the table under the caption
"PROPOSAL 1: ELECTION OF DIRECTORS," on page 6 and under the captions
"Compensation Committee Interlocks and Insider Participation" on pages 7 through
8 and "Transactions with Management" on pages 11 through 12 of the Registrant's
definitive Proxy Statement dated March 17, 2000, is incorporated herein by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K:
(a) 1. Financial Statements
The following consolidated financial statements of Southern
BancShares (N.C.), Inc. and subsidiary, and Independent Auditors'
Report thereon, are incorporated herein by reference from
Registrant's 1999 Annual Report to Shareholders.
. Independent Auditors' Report
. Consolidated Balance Sheets at December 31, 1999 and 1998
. Consolidated Statements of Income and Comprehensive Income for
the years ended December 31, 1999, 1998 and 1997
. Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
. Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997
. Notes to Consolidated Financial Statements
2. Financial statement schedules are omitted because of the
absence of conditions under which they are required or
because the required information is contained in the
consolidated financial statements or related notes thereto
which are incorporated herein by reference from
Registrant's 1999 Annual Report to Shareholders.
3. Exhibits
The following exhibits are filed or incorporated herewith
as part of this report on Form 10-K:
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
3.1 Certificate of Incorporation and Certificate of Amendment to the
Certificate of Incorporation of the Registrant (filed as exhibit
3.1 to the Registrant's Registration Statement on Form S-1 (No.
33-52107) filed May 7, 1998 and incorporated herein by reference)
3.2 Registrant's Bylaws (filed as exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (No. 33-52107) filed May 7,
1998 and incorporated herein by reference)
4 Southern Bank and Trust Company Indenture dated February 27, 1971
(filed as exhibit 4 to the Registrant's Registration Statement on
Form S-14 (No. 2-78327) filed July 7, 1982 and incorporated
herein by reference)
10.1* Non-Competition and Consulting Agreement between R. S. Williams
and Southern Bank and Trust Company (filed as exhibit 10.1 to the
Registrant's 1989 Annual Report on Form 10-K and incorporated
herein by reference)
10.2* Tenth Amendment to Noncompetition and Consulting Agreement
between R. S. Williams and Southern Bank and Trust Company dated
December 31, 1999 (filed herewith)
10.3* Assignment and Assumption Agreement and First Amendment of
Noncompetition and Consultation Agreement between First-Citizens
Bank & Trust Company, Southern Bank and Trust Company and M. J.
McSorley (filed as exhibit 10.3 to the Registrant's 1989 Annual
Report on Form 10-K and incorporated herein by reference)
10.4* Employment Agreement between Watson N. Sherrod, Jr. and Southern
Bank and Trust Company (filed as exhibit 10.4 to the Registrant's
1998 Annual Report on Form 10-K and incorporated herein by
reference)
10.5 Amended and Restated Trust Agreement of Southern Capital Trust I
(filed as Exhibit 4.3 to Amendment No. 1 to Registrant's
Registration Statement on Form S-1 (No. 333-52107) filed June 3,
1998 and incorporated herein by reference.)
10.6 Form of Guarantee Agreement (filed as Exhibit 4.5 to Amendment
No. 1 to Registrant's Registration Statement on Form S-4 (No.
333-52107) filed June 3, 1998 and incorporated herein by
reference).
10.7 Junior Subordinated Indenture between Registrant and Bankers
Trust Company, as Debenture Trustee (filed as Exhibit 4.6 to
Amendment No. 1 to Registrant's Registration Statement on Form
S-4 (No. 333-52107) filed June 3, 1998 and incorporated herein by
reference).
<PAGE>
13 Registrant's 1999 Annual Report to Shareholders (filed herewith)
22 Subsidiaries of the Registrant (filed herewith)
27 Financial Data Schedule (filed herewith)
99.1** Registrant's definitive Proxy Statement dated March 17, 2000 for
the 2000 Annual Shareholders' Meeting
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the fourth quarter of the year
ended December 31, 1999.
* Denotes a Management Contract or compensatory plan or arrangement
in which an executive officer or director of the Company participates
** Not being refiled
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
<PAGE>
DATED: MARCH 14, 2000 SOUTHERN BANCSHARES (N.C.), INC.
/s/ R. S. Williams
By: ------------------
R. S. Williams,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/R. S. Williams Chairman of the Board of March 14, 2000
- ----------------- Directors
R. S. Williams
/s/David A. Bean Treasurer (principal March 10, 2000
- ---------------- financial and accounting
David A. Bean officer)
/s/Bynum R. Brown Director March 14, 2000
- -----------------
Bynum R. Brown
/s/William H. Bryan Director March 14, 2000
- -------------------
William H. Bryan
/s/D. Hugh Carlton Director March 14, 2000
- ------------------
D. Hugh Carlton
/s/Robert J. Carroll Director March 13, 2000
- --------------------
Robert J. Carroll
/s/Hope H. Connell Director March 14, 2000
- ------------------
Hope H. Connell
/s/J. Edwin Drew Director March 13, 2000
- ----------------
J. Edwin Drew
/s/Sam E. Ewell, Jr. Director March 14, 2000
- --------------------
Sam E. Ewell, Jr.
/s/Moses B. Gillam, Jr. Director March 13, 2000
- -----------------------
Moses B. Gillam, Jr.
/s/Leroy C. Hand, Jr. Director March 14, 2000
- --------------------
LeRoy C. Hand, Jr.
<PAGE>
/s/J. D. Hines Director March 14, 2000
- --------------
J. D. Hines
/s/Frank B. Holding Director March 15, 2000
- -------------------
Frank B. Holding
/s/George A. Hux Director March 15, 2000
- ----------------
George A. Hux
/s/M. J. McSorley Director March 14, 2000
- -----------------
M. J. McSorley
/s/W. B. Midyette, Jr. Director March 13, 2000
- ----------------------
W. B. Midyette, Jr.
/s/W. Hunter Morgan Director March 14, 2000
- -------------------
W. Hunter Morgan
/s/John C. Pegram, Jr. Director March 10, 2000
- ----------------------
John C. Pegram, Jr.
/s/Charles I. Pierce Director March 13, 2000
- --------------------
Charles I. Pierce, Sr.
/s/ W. A. Potts Director March 17, 2000
- ---------------
W. A. Potts
/s/Charles L. Revelle, Jr. Director March 14, 2000
- --------------------------
Charles L. Revelle, Jr.
/s/Watson N. Sherrod, Jr. Director March 15, 2000
- -------------------------
Watson N. Sherrod, Jr.
/s/ Charles O. Sykes Director March 17, 2000
- --------------------
Charles O. Sykes
/s/ Raymond M. Sykes Director March 16, 2000
- --------------------
Raymond M. Sykes
/s/John N. Walker Director March 14, 2000
- -----------------
John N. Walker
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit
------ -------
3.1 Certificate of Incorporation and Certificate of Amendment to the
Certificate of Incorporation of the Registrant (filed as exhibit
3.1 to the Registrant's Registration Statement on Form S-1 (No.
33-52107) filed May 7, 1998 and incorporated herein by reference)
3.2 Registrant's Bylaws (filed as exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (No. 33-52107) filed May 7,
1998 and incorporated herein by reference)
4 Southern Bank and Trust Company Indenture dated February 27, 1971
(filed as exhibit 4 to the Registrant's Registration Statement on
Form S-14 (No. 2-78327) filed July 7, 1982 and incorporated
herein by reference)
10.1* Non-Competition and Consulting Agreement between R. S. Williams
and Southern Bank and Trust Company (filed as exhibit 10.1 to the
Registrant's 1989 Annual Report on Form 10-K and incorporated
herein by reference)
10.2* Tenth Amendment to Noncompetition and Consulting Agreement
between R. S. Williams and Southern Bank and Trust Company dated
December 31, 1999 (filed herewith)
10.3* Assignment and Assumption Agreement and First Amendment of
Noncompetition and Consultation Agreement between First-Citizens
Bank & Trust Company, Southern Bank and Trust Company and M. J.
McSorley (filed as exhibit 10.3 to the Registrant's 1989 Annual
Report on Form 10-K and incorporated herein by reference)
10.4* Employment Agreement between Watson N. Sherrod, Jr. and Southern
Bank and Trust Company (filed as exhibit 10.4 to the Registrant's
1998 Annual Report on Form 10-K and incorporated herein by
reference)
10.5 Amended and Restated Trust Agreement of Southern Capital Trust I
(filed as Exhibit 4.3 to Amendment No. 1 to Registrant's
Registration Statement on Form S-1 (No. 333-52107) filed June 3,
1998 and incorporated herein by reference.)
10.6 Form of Guarantee Agreement (filed as Exhibit 4.5 to Amendment
No. 1 to Registrant's Registration Statement on Form S-4 (No.
333-52107) filed June 3, 1998 and incorporated herein by
reference).
10.7 Junior Subordinated Indenture between Registrant and Bankers
Trust Company, as Debenture Trustee (filed as Exhibit 4.6 to
Amendment No. 1 to Registrant's Registration Statement on Form
S-4 (No. 333-52107) filed June 3, 1998 and incorporated herein by
reference).
<PAGE>
13 Registrant's 1999 Annual Report to Shareholders (filed herewith)
22 Subsidiaries of the Registrant (filed herewith)
27 Financial Data Schedule (filed herewith)
99.1** Registrant's definitive Proxy Statement dated March 17, 2000 for
the 2000 Annual Shareholders' Meeting
STATE OF NORTH CAROLINA
COUNTY OF WAYNE
TENTH AMENDMENT TO NONCOMPETITION AND CONSULTING
AGREEMENT
THIS TENTH AMENDMENT TO NONCOMPETITION AND CONSULTING AGREEMENT "(Tenth
Amendment"), made and entered into as of the 31st day of December, 1999, by and
between SOUTHERN BANK AND TRUST COMPANY, A North Carolina banking corporation
with its principal place of business in Mount Olive, Wayne County, North
Carolina (hereinafter referred to as "Southern") and Robert S. Williams, a
resident of Wayne County, North Carolina (hereinafter referred to as
"Consultant");
W I T N E S E T H:
WHEREAS, by a Noncompetition and Consulting Agreement and Release, made and
entered into as of the 31st day of December, 1989, by and between the parties
hereto (the "Agreement"), Southern agreed to pay to Consultant $3,033.33 per
month for a noncompetition arrangement and $300.00 per month for his advisory
and consulting services, as well as various other benefits and compensation, and
to make available to Consultant office space, secretarial assistance and other
equipment and facilities, plus reimbursement for his out-of-pocket expenses
incurred in carrying out his consulting obligations pursuant to the Agreement,
which Agreement was to be effective from January 1, 1990 through December 31,
1990 and which was subsequently extended on the 28th day of December 1990 for a
term of one (1) year or until December 31, 1991; and which was subsequently
extended on the 31st day of December 1991 for a term of one (1) year and has
been extended on December 31 of each year thereafter for a term of one year
through December 31, 1999.:
WHEREAS, Southern and Consultant desire to extend the Agreement for an
additional calendar year, now enter into this Tenth Amendment to evidence their
understanding of said extension and amendment.
NOW, THEREFORE, for and in consideration of the mutual promises between the
parties made and other good and valuable considerations, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby do agree as
follows:
1. The Agreement made and entered into as of the 31st day of December,
1989, by and between Southern and Consultant, is hereby amended to continue in
effect for an additional term of one year, to be effective from January 1, 2000
through December 31, 2000.
2. Paragraph 5 of the Agreement, "Covenant Not To Compete," is hereby
amended to provide that the monthly consideration for such Covenant shall be
reduced to $1,116.67, with the first such payment to be made on or before
January 30, 1999, and each successive monthly payment thereafter to be made on
or before the 30th day of each month through and including December 31, 2000.
3. All of the other terms and conditions of said Agreement shall remain in
full force and effect.
<PAGE>
IN TESTIMONY WHEREOF, Southern has caused this tenth Amendment to be
executed in its corporate name by its President, attested by its Secretary and
its corporate seal to be hereto affixed, all within the authority duly given by
its Board of Directors, and Consultant has hereunto set his hand and adopted as
his seal the typewritten word "SEAL" appearing beside his name, all as of the
day and year first above written.
SOUTHERN BANK AND TRUST COMPANY
By /s/John C. Pegram
-----------------------------
John C. Pegram, President
Attest:
/s/ David A. Bean
- -----------------------
David A. Bean, Secretary
/s/ Robert S. Williams (SEAL)
----------------------------
Robert S. Williams
SOUTHERN BANCSHARES (N.C.), INC.
1999 ANNUAL REPORT
MISSION STATEMENT
The mission of our Company is to provide quality financial
services to individuals and small businesses in our defined
trade areas at a reasonable profit while at all times
maintaining high quality assets, high levels of liquidity,
adequate capital to maintain soundness and provide for future
growth and a well trained staff that is willing and eager to
fulfill this mission.
THIS REPORT HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION.
<PAGE>
CHAIRMAN'S LETTER
March 17, 2000
For Southern BancShares, 1999 will be remembered as a year of continued
growth and substantial accomplishments. Your Company made significant strides in
technology, customer service, deposit growth and lending growth. Total loans of
Southern Bancshares at December 31, 1999, were $398 million compared to $364
million at year-end 1998, a 9% increase. Total deposits of Southern BancShares
at December 31, 1999, were $578 million compared to $557 million at year-end
1998, a 4% increase. Total consolidated assets of Southern BancShares at
December 31, 1999, were $669 million compared to $649 million at year-end 1998,
a 3% increase.
Net interest income increased 1% during 1999, while noninterest expenses
increased 8%. Balance sheet growth within your Company's existing markets is
responsible, to a large extent, for the increase in net interest income. During
1999, personnel expenses increased, as a result of a full year of expenses for
three locations acquired in May, October and December 1998, a partial year of
expenses for a second Ahoskie branch acquired in September 1999 and the opening
of a new branch in Clinton in November 1999.
Net income for Southern BancShares decreased $1.9 million, or 34%, from $5.6
million in 1998 to $3.7 million in 1999. This decrease was principally the
result of a $1.8 million reduction in the gains on sales of securities in 1999
as compared to 1998 and a $465,000 incremental provision for loan losses in 1999
for the overall impact of the September 1999 hurricanes and related flooding in
eastern North Carolina.
In 1999 your Company opened its first branch in Clinton, at 925 Sunset
Avenue, acquired a second branch in Ahoskie, at 700 East Church Street,
consolidated its two Kill Devil Hills offices into a new office at 202 South
Croatan Highway, successfully prepared for the Year 2000 event, made important
progress in new customer product delivery systems and continued to improve its
in-house staff education programs.
As your Company expanded its geographic presence, it also continued to
improve the efficiency of its product delivery systems to meet the needs of all
of its customers. During 1999 Southern BancShares significantly expanded its
internet web-site containing bank history, product and service information,
banking locations and E-mail capabilities at www.southernbanknc.com. Significant
progress was made in the development of Southern Bank Online Banking, the Bank's
internet banking product solution, which is scheduled for full implementation in
the 2nd quarter of 2000.
During 1999, Southern Bank Automated Teller Machines (ATMs) provided 24 hour
banking services to 20 eastern North Carolina communities. At December 31, 1999,
Southern Bank provided financial services to 44 eastern North Carolina
communities through 46 branch locations. A second Robersonville location was
merged in February 2000, branch acquisitions in Battleboro, Nashville and
Sharpsburg are planned for April, 2000, a significantly enhanced internet
banking product is planned to be offered in 2000 that will include automated
bill paying and on-line loan applications and the first full service branch in
Greenville is planned to open in 2000.
<PAGE>
Your management team fully understands that, in order to be the best bank
for the customers in its market service areas, customer needs must be considered
first in each of the products, policies and procedures under which your Company
operates.
Your management team sincerely believes that its investments in quality
personnel, modern technology, extensive education, continued expansion of its
financial service market areas and improvements in customer product delivery
systems will enable it to realize its overall goal of being the first choice in
its eastern North Carolina markets for all individual and business financial
services. Additional opportunities are expected in 2000 that will allow your
Company to further enhance its financial services market share within eastern
North Carolina.
I am genuinely pleased with the overall results accomplished in 1999 and I
sincerely thank our shareholders, staff, customers and friends for their
confidence in, loyalty to and support of Southern Bank and Trust Company.
Sincerely,
/s/R. S. Williams
- -----------------
R. S. Williams
Chairman of the Board
2
<PAGE>
BUSINESS:
- ---------
Southern BancShares (N.C.), Inc., a Delaware corporation (hereinafter, with
all of its subsidiaries, referred to as "BancShares"), is a bank holding company
pursuant to the provisions of the Bank Holding Company Act of 1956, as amended.
BancShares is the successor to Southern BancShares (N.C.), Inc., a North
Carolina corporation ("SBS") which was formed in 1982 to become the parent
company of Southern Bank and Trust Company ("Southern"), its principal operating
subsidiary, which it acquired in late 1982. BancShares was formed in 1986 in
order to effect the reincorporation in Delaware of the holding company of
Southern by the merger of SBS into BancShares, which was effective on December
28, 1986. In 1998 BancShares formed a wholly-owned subsidiary, Southern Capital
Trust I, a statutory business trust that issued $23.0 million of 8.25% Capital
Securities (the "Capital Securities") in June 1998 maturing in 2028. All
significant activities of the Registrant and its subsidiaries are banking
related so that the Registrant operates within one industry segment. Neither
BancShares nor its subsidiaries have any foreign operations.
Southern conducts a general banking business designed to meet the needs of
the people of its market area. These services, all of which are offered at its
46 offices, include, among other items: taking deposits; cashing checks and
providing for individual and commercial cash needs; and providing numerous
checking and savings plans, including automatic transfer services, direct
deposit, and banking by mail.
Southern also makes commercial, consumer and mortgage loans at its 35 full
service offices and provides individual retirement account service, safe deposit
box rental, travelers' check service, and MasterCard and Visa credit card
programs.
Southern has twenty-two automatic teller machines: one each in Ahoskie,
Ayden, Belhaven, Bethel, Clinton, Edenton, Farmville, LaGrange, Mount Olive,
Murfreesboro, Nags Head, Nashville, Plymouth, Red Springs, Roanoke Rapids,
Warsaw, Whitakers and Windsor, North Carolina and two each in Kill Devil Hills,
North Carolina and Rocky Mount, North Carolina.
Southern has a wholly-owned subsidiary, Goshen, Inc., which acts as agent
for credit life and credit accident and health insurance written in connection
with loans made by Southern Bank.
FORM 10-K
- ---------
BancShares' Annual Report on Form 10-K is available on the internet at
http://www.sec.gov/cgi-bin/srch-edgar or a copy is available by providing a
written request to David A. Bean, Secretary, Southern BancShares (N.C.), Inc.,
Post Office Box 729, Mount Olive, North Carolina 28365-0729. A copy of
BancShares' Annual Report on Form 10-K for 1999, including Financial Statements
and Schedules thereto, will be provided without charge to the shareholder making
such request.
3
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS:
INTRODUCTION
This discussion provides information concerning changes in the consolidated
financial condition and results of operations of Southern BancShares (N.C.),
Inc. ("BancShares") and its subsidiary, Southern Bank and Trust Company
("Southern"), for 1999, 1998 and 1997. The comments are intended to supplement
and should be reviewed in conjunction with the consolidated financial
statements, related notes and selected financial data presented elsewhere
herein.
<PAGE>
<TABLE>
<CAPTION>
Table 1
- -------
Five-Year Financial Summary, Selected Balances and Ratios
- ---------------------------------------------------------
(Dollars in thousands, except share data and ratios)
December 31,
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of Operations
Interest income $ 42,134 $ 41,702 $ 39,055 $ 36,776 $ 32,894
Interest expense 19,967 20,328 18,827 17,450 16,055
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 22,167 21,374 20,228 19,326 16,839
Provision for loan losses 830 155 60 140 --
- --------------------------------------------------------------------------------------------------------------------------
Net interest income
after provision for loan losses 21,337 21,219 20,168 19,186 16,839
Noninterest income 5,119 6,544 9,849 4,508 4,028
Noninterest expense 21,627 20,107 23,064 18,203 15,661
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,829 7,656 6,953 5,491 5,206
Income taxes 1,150 2,060 340 1,127 1,293
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 3,679 $ 5,596 $ 6,613 $ 4,364 $ 3,913
==========================================================================================================================
Selected Year-End Balances
Total assets $669,232 $649,425 $590,752 $540,758 $496,980
Investment securities and federal funds sold 214,583 221,102 190,373 179,709 164,526
Loans 398,060 364,489 349,216 317,755 287,960
Interest-earning assets 613,340 590,699 544,789 499,164 452,486
Deposits 578,250 556,752 513,328 480,566 449,002
Interest-bearing liabilities 518,727 507,326 458,335 422,941 396,631
Shareholders' equity 54,944 56,033 54,984 44,778 37,163
Common shares outstanding 118,912 119,266 119,918 119,918 19,918
- ---------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Total assets $651,014 $615,828 $567,236 $519,541 $456,499
Investment securities and federal funds sold 215,935 182,356 162,936 157,779 145,417
Loans 380,877 362,298 340,195 310,389 270,563
Interest-earning assets 600,815 573,431 507,971 469,792 415,980
Deposits 558,386 526,555 498,303 459,552 407,252
Interest-bearing liabilities 509,935 463,340 445,354 411,960 366,597
Shareholders' equity 55,474 56,423 45,703 40,234 34,657
Common shares outstanding 119,137 119,685 119,918 119,918 121,226
- ---------------------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Return on average total assets .57% .91% 1.17% 0.84% 0.86%
Return on average shareholders' equity 6.63 9.92 14.47 10.85 11.29
Dividend payout ratio (1) 15.57 10.38 8.85 13.45 13.57
- --------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits 68.21% 68.81% 68.27% 67.54% 66.44%
Shareholders' equity to total assets 8.52 9.16 8.06 7.74 7.59
- --------------------------------------------------------------------------------------------------------------------------
Per share of common stock
Net income (2) $27.56 $43.40 $51.77 $33.00 $28.90
Cash dividends 1.50 1.50 1.50 1.50 1.00
Book value (3) 441.16 448.82 437.22 352.02 288.48
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(1) Total common and preferred dividends paid for the year ended December 31
divided by net income for the year ended December 31
(2) Net income less preferred dividends paid for the year ended December 31
divided by the average number of common shares out- standing for the year
ended December 31
(3) Shareholders' equity less Preferred B and C at December 31 divided by the
number of common shares outstanding at December 31
4
<PAGE>
ACQUISITIONS AND DISPOSITIONS
In September 1999 Southern acquired the Ahoskie, North Carolina office of
First-Citizens Bank & Trust Company. In May 1998 Southern acquired the Enfield,
North Carolina office of Enfield Savings Bank and sold the Littleton, North
Carolina office of Enfield Savings Bank to First-Citizens Bank & Trust Company.
In October 1998 Southern acquired the Gates, North Carolina office of
First-Citizens Bank & Trust Company. In December 1998 Southern acquired the Red
Springs, North Carolina office of First Union National Bank. These acquisitions
were accounted for as purchases, and, therefore, the results of operations prior
to purchase of the financial institutions are not included in the consolidated
financial statements. The acquisitions were as follows:
Table 2
- -------
<TABLE>
<CAPTION>
Branch Transactions
(dollars in thousands)
Loans Deposits
Transaction Acquired Acquired
Date (Sold) (Sold)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First-Citizens Bank & Trust Company - Ahoskie, NC September 1999 $ 9,211 $14,835
1999 acquisition totals $ 9,211 $14,835
===================================================================================================================
Enfield Savings Bank - Enfield, NC. May 1998 $16,662 $18,041
Enfield Savings Bank - Littleton, NC. May 1998 (3) (2,420)
First-Citizens Bank & Trust Company - Gates, NC. October 1998 226 5,302
First Union National Bank - Red Springs, NC. December 1998 76 16,440
- -------------------------------------------------------------------------------------------------------------------
Net 1998 acquisition totals $16,961 $37,363
===================================================================================================================
</TABLE>
RESULTS OF OPERATIONS
Earnings
- --------
For 1999 net income of $3.7 million represented a 34.26% decrease from 1998
net income of $5.6 million. Net income for 1997 was $6.6 million. Higher 1998
net income was principally the result of gains on sale of available-for-sale
securities. Excluding the impact of securities gains, income before income taxes
decreased by approximately $1.0 million between 1998 and 1999, principally due
to increased provision for loan losses associated with the estimated impact of
hurricanes in September 1999 on eastern North Carolina and the acquisitions
discussed above.
For 1998 net income of $5.6 million represented a 15.38% decrease from 1997
net income of $6.6 million. Net income for 1996 was $4.4 million. Higher 1997
<PAGE>
net income was principally the result of gains on sale of available-for-sale
securities and a reduction in income taxes resulting from the donation of
available-for-sale securities. Excluding the impact of securities gains and
charitable contributions, income before income taxes increased by approximately
$407,000 between 1997 and 1998, principally due to increased income associated
with expansion in existing and new markets.
Net Interest Income
- -------------------
The greatest portion of BancShares' earnings is from net interest income,
which is the difference between interest income on interest-earning assets and
interest paid on deposits and other interest-bearing liabilities. The primary
factors affecting net interest income are changes in the volume and yields/rates
on earning assets and interest-bearing liabilities, and the ability to respond
to changes in interest rates through asset/liability management.
In 1999 net interest income was $22.2 million as compared to $21.4 million
in 1998, an increase of $792,000 or 3.71%. In 1998 net interest income was $21.4
million as compared to $20.2 million in 1997, an increase of $1.1 million or
5.67%. The 1999 increase was primarily attributable to increased loan revenue
from a 5.13% increase in average loan balances outstanding, from $362.3 million
in 1998 to $380.9 million in 1999. The yields received on average loans
outstanding for 1999 decreased to 8.22% from 8.56% for 1998. The rates paid on
interest-bearing liabilities decreased 33 basis points during 1999 and average
interest-bearing liabilities increased 10.06% between 1998 and 1999, resulting
in a 1.78% increase in total interest expense.
In 1998 net interest income was $21.4 million as compared to $20.2 million
in 1997, an increase of $1.1 million or 5.67%. In 1997 net interest income was
$20.2 million as compared to $19.3 million in 1996, an increase of $902,000 or
4.67%. The 1998 increase was primarily attributable to increased loan revenue
from a 6.29% increase in average loan balances outstanding, from $340.2 million
in 1997 to $362.3 million in 1998. The yields received on average loans
outstanding for 1998 decreased to 8.56% from 8.59% for 1997. The rates paid on
interest-bearing liabilities increased 1 basis point during 1998 and average
interest-bearing liabilities increased 7.42% between 1997 and 1998, resulting in
a 7.97% increase in total interest expense.
Loans produced the largest component of interest income, amounting to $31.3
million in 1999, $31.0 million in 1998 and $29.2 million in 1997. This
represented an increase in 1999 of 0.94%. For the year ended December 31, 1998,
interest income on loans increased 6.07%. During 1999 average loans outstanding
increased $18.6 million or 5.13%. This increase was primarily due to loan growth
in the existing branch network and the impact of the 1999 branch acquisition as
set forth in Table 2, above. The 1998 increase in interest income was primarily
due to loan growth in the existing branch network and the impact of the 1998
branch acquisitions discussed above. In 1999, the average yield on loans
decreased to 8.22% from 8.56% in 1998. This decrease resulted from overall lower
market interest rates during most of 1999. The 1997 average yield was 8.59%.
5
<PAGE>
Earnings from investments and federal funds sold provided the balance of
interest income, contributing $10.8 million in 1999, $10.7 million in 1998, and
$9.8 million in 1997. In 1999, BancShares realized lower yields on investment
securities and federal funds sold and larger average balances. In 1998,
BancShares realized lower yields on investment securities and federal funds sold
and larger average balances. Average investment securities and federal funds
sold were $215.9 million in 1999, an increase from $182.4 million in 1998. The
1999 average increase was principally the result of growth in the existing
branch network and the impact of the 1999 branch acquisition as set forth in
table 2 above.
Total 1999 interest expense for BancShares decreased 1.78% after increasing
in 1998 by 7.97%. The principal component of BancShares' interest expense,
interest paid on deposits, totaled $17.7 million in 1999, $18.7 million in 1998
and $18.2 million in 1997. BancShares' deposit base increased 6.05% in 1999,
primarily as a result of growth in the existing branch network and the impact of
the 1999 branch acquisition as set forth in table 2. The interest expense for
interest-bearing deposits increased in 1998 primarily as a result of the 1998
acquisitions. The average effective rate paid on interest-bearing liabilities
was 3.92% in 1999, 4.25% in 1998 and 4.23% in 1997. During 1998, BancShares
utilized long-term borrowings to provide a $12.0 million investment of capital
into its subsidiary and to refinance the remaining balance of 1997 borrowings.
The 1998 long-term debt of $23.0 million of 8.25% Capital Securities issued in
June 1998 matures in 2028. Interest on long-term obligations was $1.9 million in
1999, $1.3 million in 1998 and $295,000 in 1997. The outstanding long-term debt
at December 31, 1999 was $23.0 million.
BancShares' interest rate spread on a tax equivalent basis was 3.38% in
1999, 3.45% in 1998 and 3.60% in 1997. BancShares' ability to maintain a
favorable spread between interest income and interest expense is a major factor
in generating earnings; therefore, it is necessary to effectively manage earning
assets and interest-bearing liabilities.
Noninterest Income
- ------------------
Noninterest income, which consists primarily of securities gains, service
charges, commissions, fees and gains on sales of loans, decreased $3.2 million
in 1998. Total noninterest income was $5.1 million in 1999, as compared to $6.5
million in 1998 and $9.8 million in 1997. Total noninterest income for 1998
includes securities gains of $1.8 million related to the sale of
available-for-sale securities. Total noninterest income for 1997 includes
securities gains of $5.6 million related to ( i ) the funding of a charitable
foundation by the contribution of appreciated available-for-sale equity
securities and ( ii ) the sale of appreciated available-for-sale securities.
Service charges on deposit accounts increased $298,000, or 9.32%, in 1999 to
$3.5 million, from $3.2 million in 1998. This increase was primarily
attributable to the full year impact of the accounts subject to service charges
acquired in 1998 and the partial year impact of the 1999 acquisition. Service
charges on deposit accounts increased $281,000, or 9.63%, in 1998 to $3.2
million, from $2.9 million in 1997. This increase was primarily attributable to
the full year impact of the accounts subject to service charges acquired in 1997
and the partial year impact of the 1998 acquisitions.
BancShares had an increase in 1999 in other service charges and fees of
$168,000 primarily attributable to the full year impact of the accounts subject
to service charges acquired in 1998 and the partial year impact of the 1999
acquisition. BancShares' increase in 1998 in other service charges and fees was
$261,000.
<PAGE>
During 1999, the remaining noninterest income decreased $104,000 from
$617,000 in 1998 to $513,000 in 1999. This decrease was primarily attributable
to $96,000 of increased losses on the sale of mortgage loans. During 1998, the
remaining noninterest income increased $38,000 from $496,000 in 1997 to $534,000
in 1998. This increase was primarily attributable to increased credit card
merchant discount income.
Noninterest Expense
- -------------------
The 1997, 1998 and 1999 acquisitions should enhance the future operating
results of BancShares. However, for the following seven to ten years, earnings
will be reduced as BancShares amortizes intangibles resulting from these
acquisitions. Noninterest expense also includes personnel, data processing,
occupancy, furniture and equipment, Federal Deposit Insurance Corporation
("FDIC") insurance assessments, printing, supplies, legal and professional fees,
postage and other miscellaneous operating expenses. Noninterest expense was
$21.7 million in 1999 compared to $20.2 million in 1998 and $23.1 million in
1997. In 1997 BancShares recorded $4.1 million of charitable contributions
expense related to the funding of a charitable foundation.
The most significant element of BancShares' noninterest expense is personnel
costs. In 1999, salaries and benefits represented $10.8 million, or 49.69%, of
total noninterest expense. The personnel costs of 1999 include the impact of a
full year of the costs related to the 1998 acquisitions and a partial year of
costs for the acquisition made in 1999 and the new branch opened in 1999. In
1998, salaries and benefits represented $9.5 million, or 47.00%, of total
noninterest expense. The personnel costs of 1998 include the impact of a full
year of the costs related to the 1997 acquisitions and a partial year of costs
for the acquisitions made in 1998. In 1997, salaries and benefits represented
$8.8 million, or 37.99%, of total noninterest expense. The personnel costs of
1997 include the impact of a full year of the costs related to the acquisitions
made in 1996 and a partial year of costs for the acquisitions made in 1997.
The 1999 noninterest expense, other than personnel and charitable
contributions, was $10.8 million, an increase of $207,000, or 1.95%, from $10.6
million in 1998. Occupancy expenses increased from $1.4 million in 1997 to $1.6
million in 1998 and 1999. These increases of 12.90% for 1998 and 4.21% for 1999
are principally the result of additional expenditures incurred as a result of
the 1997, 1998 and 1999 acquisitions, the replacements of aging branch
facilities, the 1997 opening of a second branch in Rocky Mount, North Carolina
and the 1999 opening of a branch in Clinton, North Carolina. Furniture and
equipment expenses decreased from $1.6 million in 1997 to $1.5 million in 1998
and 1999. This decrease of 8.02% for 1998 and increase of 2.13% for 1999 reflect
the related equipment expenses incurred as a result of the acquisitions in 1997,
1998 and 1999, the opening of the second Rocky Mount branch in 1997, the opening
of the Clinton branch in 1999, the write-off of assets damaged by the hurricanes
of September 1999 and the write-off of existing assets disposed of in the
replacement of aging facilities in 1997 and 1999. There were no such
replacements of aging facilities in 1998.
6
<PAGE>
Data processing costs represent charges by vendors that perform data
processing services for Southern. Data processing fees are primarily based upon
per item or per account charges. Data processing costs in 1999 were $1.9
million, a decrease of 5.50% from 1998 data processing expenses of $2.0 million.
This decrease was principally the result of decreased 1999 acquisitions. Data
processing costs in 1998 were $2.0 million, an increase of 25.22%, over 1997
data processing expenses of $1.6 million. This increase was principally the
result of the 1997 and 1998 acquisitions.
Intangibles amortization in 1999 was $1.9 million, a 26.60% increase over
the 1998 intangibles amortization. Intangibles amoritization is calculated on an
accelerated basis beginning in the first full month of purchase. The 1999
increase was primarily the result of the 1998 and 1999 acquisitions. Intangibles
amortization in 1998 was $1.5 million, a 12.59% decrease from the 1997
intangibles amortization. The 1998 decrease was primarily the result of the 1997
purchases being made earlier in the year, than the 1998 purchases and the
reduced 1998 amortization for prior period acquisitions due to the accelerated
basis of amortization. The 1999 amortization included a full year's amortization
for the 1998 acquisitions and partial year of amortization for the acquisition
made in 1999. The 1997 amortization included a full year's amortization for the
1996 acquisitions and partial year of amortization for the acquisitions made in
1997.
Southern has deposits insured under both of the FDIC's insurance funds, the
Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF").
BancShares expects that, under current FDIC assessment guidelines, it will not
incur any FDIC deposit insurance assessments for 2000. However, beginning in
1997 the FDIC began collecting from all banks an assessment for Financing
Corporation ("FICO") funding requirements. Accordingly, BancShares expects its
2000 FDIC FICO assessment expense to increase based on the FDIC FICO assessment
rates in effect for the last quarter of 1999 and the planned acquisitions in
2000 discussed below under Note 16, Subsequent Events.
Charitable contributions increased $7,000, to $9,000 in 1999 from $2,000 in
1998 after decreasing from $4.1 million in 1997. Charitable contributions
expense for 1997 includes $4.1 million related to the additional funding of a
charitable foundation through the contribution of appreciated available-for-sale
securities.
Other miscellaneous noninterest operating expenses were $3.9 million for
both 1999 and 1998 and $3.7 million for 1997.
BancShares had taxable income for book purposes that resulted in income tax
expense for 1999 of $1.2 million, $2.1 million for 1998 and $340,000 for 1997.
The 1999 decrease is principally due to the absence of the 1998 securities gains
discussed above. The lower 1997 income tax expense is principally a result of
tax deductions related to the 1997 contribution of appreciated
available-for-sale securities to the charitable foundation discussed above.
FINANCIAL CONDITION
Earning and Nonearning Assets
- -----------------------------
Earning assets consist of loans, investment securities, and short-term
investments that earn interest. Average earning assets during 1999 were $600.8
<PAGE>
million, an increase of 9.24% from the 1998 average of $550.0 million. This
increase was due primarily to the full year average impact of the 1998
acquisitions and the partial year impact of the 1999 acquisition discussed
above. The cash received in the acquisitions was invested primarily in loans and
short-term investments including federal funds.
Average earning assets during 1998 were $550.0 million, an increase of 8.28%
from the 1997 average of $508.0 million. This increase was due primarily to the
full year impact of the 1997 acquisitions and the partial year impact of the
1998 acquisitions. The cash received in the acquisitions was ultimately invested
primarily in loans and short-term investments including federal funds.
Average noninterest earning assets during 1999 were $50.2 million, an
increase of 18.40% from the 1998 average of $42.4 million. This increase was due
primarily to the 1999 full year impact of the 1998 acquisitions and the partial
year impact of the 1999 acquisition. Average non-interest earning assets during
1998 were $65.8 million, an increase of 11.04% from the 1997 average of $59.3
million. The principal nonearning asset for BancShares is cash and due from
banks. Cash and due from banks increased in 1999 and 1998 as a result of the
acquisitions discussed above. In 1999 cash and due from banks also increased due
to preparations for the year 2000 event. Cash and due from banks averaged $26.0
million in 1999, $19.3 million in 1998 and $17.7 million in 1997.
Return on total average assets was 0.57% in 1999, 0.91% in 1998 and 1.17% in
1997. The higher return levels of 1998 and 1997 as compared to 1999 were
principally the result of gains on the sales of available-for-sale securities.
Gains on sales of available-for-sale securities in 1998 were $1.8 million, a
decrease of $3.8 million from the $5.6 million of gains on sales of
available-for-sale securities in 1997 and a $1.8 million increase over the
$1,000 of gains on sales of available-for-sale securities in 1999.
Interest-Bearing and Noninterest Bearing Liabilities
- ----------------------------------------------------
Interest-bearing liabilities consist of deposits, short-term borrowed funds
and long-term notes payable. Average interest-bearing liabilities during 1999
were $509.9 million, an increase of 10.06% from the 1998 average of $463.3
million. This increase was due primarily to the 1999 full year impact of the
1998 acquisitions and the partial year impact of the 1999 acquisition. In
addition, $23.0 million of 8.25% Capital Securities maturing in 2028 were issued
in 1998 as discussed above. The principal interest-bearing liabilities of
BancShares are interest-bearing deposits. Average noninterest-bearing
liabilities during 1999 were $85.6 million, an increase of 5.68% from the 1998
average of $81.0 million. This increase was due primarily to the 1999 full year
impact of the 1998 acquisitions and the partial year impact of the 1999
acquisition. Noninterest-bearing demand deposits are the principal
noninterest-bearing liability. The cost of total interest-bearing liabilities
was 3.92% in 1999 as compared to 4.25% in 1998. The decrease in 1999 was
principally the result of the overall lower market rates of 1999.
7
<PAGE>
Average interest-bearing liabilities during 1998 were $463.3 million, an
increase of 4.04% from the 1997 average of $445.4 million. This increase was due
primarily to the 1998 full year impact of the 1997 acquisitions and the partial
year impact of the 1998 acquisitions. In addition, $23.0 million of 8.25%
Capital Securities maturing in 2028 were issued in 1998 as discussed above. The
principal interest-bearing liabilities of BancShares are interest-bearing
deposits. Average noninterest-bearing liabilities during 1998 were $80.3
million, an increase of 5.38% from the 1997 average of $76.2 million. This
increase was due primarily to the 1998 full year impact of the 1997 acquisitions
and the partial year impact of the 1998 acquisitions. Noninterest-bearing demand
deposits are the principal noninterest-bearing liability. The cost of total
interest-bearing liabilities was 4.25% in 1998 as compared to 4.23% in 1997. The
increase in 1998 was principally the result of the 1998 issuance of the 8.25%
Capital Securities discussed above.
Loans
- -----
As of December 31, 1999, loans, net of allowance for loan losses, totaled
$391.9 million compared to $358.5 million at year-end 1998. This growth was
related principally to the growth of the existing branch system and current year
acquisition discussed above.
Rate sensitivity and liquidity in the loan portfolio are achieved by making
loans with adjustable interest rates and shorter maturities. This allows
Southern to adjust its pricing structure with changes in interest rates. At the
end of 1999, 48.31% of the loan portfolio was due to mature or be available for
repricing of interest rates during 2000.
Investments
- -----------
Management's asset/liability strategies include maintaining an investment
securities portfolio with appropriate maturities to preclude the necessity of
selling investment securities for purposes of liquidity.
Traditionally, BancShares has maintained a larger investment portfolio than
its peers. BancShares traditionally has carried unrealized gains on investments
significantly greater than the average of its peers in North Carolina primarily
due to its investments in marketable equity securities.
At December 31, 1999 the fair value of available-for-sale securities
exceeded the carrying value by $11.0 million, deferred taxes related to these
available-for-sale securities were $3.7 million and shareholders' equity
included $7.3 million for the net unrealized gain related to these
available-for-sale securities. At December 31, 1998 the fair value of
available-for-sale securities exceeded the carrying value by $17.2 million,
deferred taxes related to these available-for-sale securities were $5.8 million
and shareholders' equity included $11.4 million for the net unrealized gains
related to these available-for-sale securities. The decline in value during 1999
is principally due to a concentration in financial institution stocks and the
overall decline in financial industry stock values. At December 31, 1999 none of
the equity securities with unrealized losses were deemed to have impairment that
was other than temporary. Management will continue to assess the securities for
any such impairment in value, which may result in write-downs in future periods.
BancShares does not maintain a trading account.
<PAGE>
On February 14, 1997, the board of directors of Southern Bank and Trust
Company approved the contribution of 48,250 shares of marketable equity
securities to the Southern Bank Foundation. These investments had an average
cost basis of $542,000 and, on February 5, 1997, a fair value of $4.1 million.
Southern recorded a 1997 securities gain of $3.5 million and charitable
contribution expense of $4.1 million related to this transaction.
ASSET QUALITY
Provision and Allowance for Loan Losses
- ---------------------------------------
Because the loan portfolio represents BancShares' largest earning asset,
BancShares continually monitors the quality of its loan portfolio. Southern
operates in an area dominated by agriculture and, accordingly, many loans are
made to commercial enterprises or to consumers who are directly or indirectly
supported by the region's agricultural economy. In 1999, BancShares had net loan
charge-offs of $604,000, an increase of $171,000 over 1998 net charge-offs of
$433,000. This increase is primarily the result of a $204,000 increase in gross
charge-offs for 1999 compared to 1998. Loan recoveries increased $33,000 in 1999
compared to 1998. The percentage of charge-offs (net of recoveries) to average
outstanding loans was 0.16% in 1999 and 0.12% in 1998.
The decrease in the ratio of total non-performing loans to total loans, from
0.28% at December 31, 1998 to 0.18% at December 31, 1999, was principally due to
decreases in non-performing loans (nonaccrual, restructured, and accruing loans
greater than 90 days past due) to $702,000 at December 31, 1999, compared to
$1.0 million at December 31, 1998. The ratio of non-performing loans and assets
to total assets was 0.17% at both December 31, 1998 and December 31, 1999. At
December 31, 1999 BancShares had $414,000 of assets classified as other real
estate. At December 31, 1998 BancShares had $84,000 of assets classified as
other real estate.
Accrual of interest is discontinued on a loan when management believes the
borrower's financial condition is such that collection of principal or interest
is doubtful. Loans are returned to a normal accrual status when the factors
indicating that collectibility is doubtful, cease to exist.
Management considers a loan to be impaired when based on current information
or events, it is probable that a borrower will be unable to pay all amounts due
according to the contractual terms of the loan agreement. Impaired loans are
valued using either the discounted expected cash flow method or the value of the
collateral. When the ultimate collectibility of the impaired loan's principal is
doubtful, all cash receipts are applied to principal. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied to
interest income, to the extent that any interest has been foregone. Future cash
receipts are recorded as recoveries of any amounts previously charged-off.
8
<PAGE>
There are certain loans classified for regulatory purposes as "substandard"
or "special mention" that have not been disclosed in the nonperforming asset
amounts above. Such loans do not represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources. Such classified loans also
do not represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
In assessing the allowance for loan losses, management considers current and
historical net charge-offs by loan category, current and historical
nonperforming loans by loan category, the relative concentration levels of total
loans by loan category and credit grade and current economic conditions. The
allowance for loan losses represented 881.48% of non-performing loans at
December 31, 1999. This was an increase of 293.48 basis points from the 588.00%
ratio at December 31, 1998. The allowance for loan losses represented 1.55% of
loans outstanding at year end 1999. The allowance for loan losses represented
1.64% of loans outstanding at year end 1998. Southern's provision for loan
losses charged against earnings was $830,000 in 1999, $155,000 in 1998 and
$60,000 in 1997. The increase in 1999 charges against earnings was principally
due to expected losses resulting from the eastern North Carolina hurricanes of
September 1999. Management does not expect to be able to determine the extent of
losses related to the hurricanes until late 2000 when the final benefits of
government assistance programs to the Bank's customers is determined.
Management considers the December 31, 1999 allowance for loan losses
adequate to cover the losses inherent in the loan portfolio. Management's
periodic evaluation of the adequacy of the allowance is based on Southern's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's experience, the estimated value of any
underlying collateral, current economic conditions and other risk factors.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Southern's allowance for loan losses
and losses on other real estate owned. Such agencies may require Southern to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
LIQUIDITY, MARKET RISK AND INTEREST SENSITIVITY
Liquidity
Liquidity refers to the ability of BancShares to generate sufficient funds
to meet its financial obligations and commitments at a reasonable cost. One of
BancShares' objectives is to maintain a high level of liquidity, and this goal
continues to be met. Maintaining liquidity ensures that funds will be available
for reserve requirements, customer demand for loans, withdrawal of deposit
balances and maturities of other deposits and liabilities. These events may take
place daily or at other intervals in the normal operation of the business. Past
experiences help management anticipate cyclical demands and amounts of cash
required. These obligations can be met by existing cash reserves or funds from
maturing loans and investments, but in the normal course of business are met by
deposit growth.
<PAGE>
In assessing liquidity, many relevant factors are considered, including:
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include available-for-sale investment
securities, federal funds sold, and cash and due from banks. These assets
represented 24.93% of total deposits at December 31, 1999, a decrease from
29.85% at December 31, 1998.
Southern's liquidity ratio, which is defined as net cash plus short-term and
available-for-sale securities divided by net deposits and short-term
liabilities, was 29.34% at December 31, 1999, compared to 30.78% at year-end
1998 and 33.98% at year-end 1997.
BancShares has traditionally maintained a high level of liquidity,
characteristic of the high ratio of investment securities to total assets and/or
total deposits that BancShares maintains. Maturing investments whose funds are
not immediately necessary to sustain BancShares' liquidity, will be invested in
similar instruments or used to fund any increased loan demand. Investments
scheduled to mature within the one-year time frame represented 46.40% of the
total investment securities portfolio at December 31, 1999, 43.23% at December
31, 1998 and 29.00% at December 31, 1997.
Included in investments maturing within one year are investments in
marketable equity securities held by BancShares with fair values of $21.9
million at December 31, 1999, $27.1 million at December 31, 1998, and $30.3
million at December 31, 1997. Although these investments do not "mature" in the
next twelve months, they are available-for-sale and could be sold at
management's discretion.
The consolidated statements of cash flows disclose the principal sources and
uses of cash from operating, investing and financing activities for 1999, 1998,
and 1997. In 1999, operating activities of BancShares provided cash flows of
$6.0 million. Net income of $3.7 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Decreases
in other liabilities of $2.1 million reduced the contribution of net income to
BancShares' cash flow. Investing activities, including lending, utilized $21.6
million of BancShares' cash flow. Loans originated, net of principal collected,
used $25.2 million. BancShares received $4.0 million in cash in connection with
the branch purchased from another financial institution in 1999.
Net additional cash inflows of $7.5 million resulted from financing
activities. Net deposit inflows of $6.7 million were increased by short-term
borrowed funds proceeds of $1.5 million and reduced by payments for cash
dividends and retirements of stock totaling $658,000.
9
<PAGE>
Southern has no brokered deposits. Jumbo certificates of deposit ("CD's")
are considered to include all CD's of $100 thousand or more. Southern does not
and has never aggressively bid on these deposits. Southern does not seek nor
does it accept deposits from outside of its general trade area. Almost all of
Southern's Jumbo CD customers have other relationships with Southern, including
savings, demand and other time deposits, and in some cases, loans. At December
31, 1999 Jumbo CD's represented 10.44% of total deposits. At December 31, 1998
Jumbo CD's represented 10.79%, of total deposits.
In the opinion of management, BancShares has the ability to generate
sufficient amounts of cash to cover normal requirements and any additional needs
which may arise, within realistic limitations, and management is not aware of
any known demands, commitments or uncertainties that will affect liquidity in a
material way.
Market Risk
- -----------
Market risk reflects the risk of economic loss resulting from adverse changes in
market price and interest rates. This risk of loss can be reflected in either
diminished current market values or reduced potential net interest income in
future periods.
BancShares' market risk arises primarily from interest rate risk inherent in its
lending and deposit taking activities. The structure of BancShares' loan and
deposit portfolios is such that a significant increase in the prime rate may
adversely impact net interest income. Management seeks to manage this risk
through the use of shorter term maturities. The composition and size of the
investment portfolio is managed so as to reduce the interest rate risk in the
deposit and loan portfolios while at the same time maximizing the yield
generated from the loan portfolio.
The table below presents in tabular form the contractual balances and the
estimated fair value of financial instruments at their expected maturity dates
as of December 31, 1999. The expected maturity categories take into
consideration historical prepayment experience as well as management's
expectations based on the interest rate environment as of December 31, 1999. For
core deposits without contractual maturity (i.e., interest bearing checking,
savings and money market accounts), the table presents principal cash flows as
maturing in 2000 since they are subject to immediate repricing. Weighted average
variable rates in future periods are based on the implied forward rates in the
yield curve as of December 31, 1999.
<PAGE>
<TABLE>
<CAPTION>
Maturing in Years ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans
Fixed rate $ 54,279 $ 23,973 $ 37,584 $ 35,344 $ 19,350 $ 70,307 $ 240,837 $243,429
Average rate (%) 8.26% 8.90% 8.26% 8.38% 8.47% 6.66% 7.89%
Variable rate $ 85,800 $ 14,154 $ 6,510 $ 5,883 $ 4,474 $ 40,402 $ 157,223 $157,223
Average rate (%) 9.28% 8.95% 8.90% 8.89% 8.96% 8.25% 8.95%
Investment Securities
Fixed rate $ 80,476 $ 70,020 $ 1,073 $ 1,702 $ 1,792 $ 27,043 $ 182,106 $192,995
Average rate (%) 5.06% 5.59% 8.40% 8.31% 8.32% 6.70% 5.60%
Variable rate -- -- -- -- -- $ 1,118 $ 1,118 $ 1,118
Average rate (%) -- -- -- -- -- 6.52% 6.52%
Liabilities
Savings and interest
bearing checking
Fixed rate $ 189,068 -- -- -- -- -- $ 189,068 $189,068
Average rate (%) 1.63% -- -- -- -- -- 1.63%
Certificates of deposit
Fixed rate $ 268,934 $ 11,917 $ 5,808 $ 4,928 -- -- $ 291,587 $306,835
Average rate (%) 5.09% 5.11% 4.95% 5.08% -- -- 5.09%
Variable rate $ 5,768 $ 2,646 -- -- -- -- $ 8,414 $ 8,414
Average rate (%) 4.62% 4.80% -- -- -- -- 4.68%
Long-term debt
Fixed rate -- -- -- -- -- $ 23,000 $ 23,000 $ 19,838
Average rate (%) -- -- -- -- -- 8.25% 8.25%
</TABLE>
10
<PAGE>
Interest Sensitivity
- --------------------
Deregulation of interest rates and short-term, interest bearing deposits
which are more volatile, have created a need for shorter maturities of earning
assets. As a result, an increasing percentage of commercial, installment and
mortgage loans are being made with variable rates or shorter maturities to
increase liquidity and interest rate sensitivity.
The difference between interest sensitive asset and interest sensitive
liability repricing within time periods is referred to as the interest rate
sensitivity gap. Gaps are identified as either positive (interest sensitive
assets in excess of interest sensitive liabilities) or negative (interest
sensitive liabilities in excess of interest sensitive assets). While there are
limitations of gap analysis, it is considered indicative of potential market
exposures over the relatively short term as a result of significant rate
changes.
As of December 31, 1999, BancShares had a negative one year cumulative gap
position of 29.44%. BancShares has interest earning assets of $280.6 million
maturing or repricing within one year and interest bearing liabilities of $474.1
million repricing or maturing within one year. This is primarily the result of
stable core deposits being used to fund longer term interest earning assets,
such as loans and investment securities. A negative gap position implies that,
in a falling rate environment, interest bearing liabilities (deposits) will
reprice at a faster rate than interest earning assets (loans and investments).
This position will generally have a positive effect on earnings, while in a
rising rate environment this position will generally have a negative effect on
earnings.
BancShares' core deposits of $428.7 million include interest bearing
checking accounts of $76.0 million. These deposits are considered as repricing
in the earliest period because the rate can be changed daily. However, history
has shown that the decreases in the interest rates paid on these deposits have
little, if any, effect on their movement out of Southern. Therefore, in reality,
they could be considered as Non-Rate Sensitive.
Inflation
- ---------
The effect of inflation on financial institutions differs from the impact on
other types of businesses. Since assets and liabilities of banks are primarily
monetary in nature, they are more affected by changes in interest rates than by
the rate of inflation.
Inflation generates increased credit demand and fluctuation in interest
rates. Although credit demand and interest rates are not directly tied to
inflation, each can significantly impact net interest income. As in any business
or industry, expenses such as salaries, equipment, occupancy and other operating
expenses are also subject to the upward pressures created by inflation.
Since the rate of inflation has been relatively stable during the last
several years, the impact of inflation on the earnings presented in this report
is insignificant.
<PAGE>
CAPITAL RESOURCES
Shareholders' Equity and Capital Adequacy
- -----------------------------------------
Sufficient levels of capital are necessary to sustain growth and absorb
losses. To this end, the Federal Reserve Board ("FRB"), which regulates
BancShares, and the FDIC, which regulates Southern, have established Risk Based
Capital ratio ("RBC") requirements. The FDIC also requires Southern to meet a
leverage capital requirement. These requirements relate to a company's Tier 1
RBC and Total RBC. In 1999, BancShares and Southern experienced increases in all
of their capital ratios.
Within the RBC calculations, BancShares' assets, including commitments to
lend and other off-balance sheet items, are weighted according to Federal
regulatory guidelines for the risk considered inherent in the assets. Tier 1 RBC
also is comprised of total equity and the balance of Capital Securities, less
intangible assets and unrealized gains on AFS securities. BancShares' Tier 1 RBC
as of December 31, 1999 was 14.32% which is, along with a ratio of 16.01% at
December 31, 1998 and 11.43% at December 31, 1997, representative of a
well-capitalized institution. The calculation of the Total RBC is similar to
that for Tier 1 RBC, except that it also allows the inclusion of BancShares'
allowance for loan losses in capital, but only to a maximum of 1.25% of risk
weighted assets. As of December 31, 1999 BancShares' Total RBC was 16.28%, which
is representative of a well-capitalized institution. The Total RBC for 1998 was
20.52% and the Total RBC for 1997 was 12.78% both of which were also
representative of a well capitalized financial institution. The increases in
1998 were primarily the result of the issuance of the Capital Securities
discussed above.
These ratios will only improve if BancShares' capital increases at a rate
proportionately faster than its liabilities. Management is aware that growth
must be controlled. Management believes that improvement in its overall market
share within an existing trade area is valuable in the long run and should be
pursued by BancShares, when it can be done prudently.
BancShares' primary source of new capital in 1999 was earnings, net of
dividends, of $3.0 million. In 1998, equity capital increased through the
issuance of the Capital Securities discussed above and also through retention of
earnings of $4.8 million. Retention of earnings increased equity capital by $6.0
million in 1997. BancShares' internal capital generation rate was 5.60% in 1999,
8.89% in 1998, and 13.19% in 1997. As of December 31, 1999, shareholders' equity
totaled $54.9 million compared to $56.0 million in 1998. The shareholders'
equity, as discussed above, included $7.3 million in 1999 and $11.4 million in
1998 of net unrealized securities gains. As previously discussed, such amounts
of unrealized gains are excluded from regulatory capital.
The ratio of average shareholders' equity to average total assets was 8.52%
in 1999 and 9.16% in 1998. The 1999 decrease was primarily the result of
decreased average retained earnings and decreased average net unrealized gains
on available-for-sale securities.
11
<PAGE>
Retention of sufficient earnings to maintain an adequate capital position
that provides BancShares with expansion capabilities is an important factor in
determining dividends. During 1999, BancShares paid $573,000 in dividends,
versus $581,000 in 1998 and $585,000 in 1997. As a percentage of net income,
dividends were 15.57% in 1999, 10.38% in 1998 and 8.85% in 1997. The 1999
percentage increase was principally the result of decreased earnings in 1999
compared to the 1998 earnings resulting principally from the sale of
available-for-sale securities in 1998.
Economy of Eastern North Carolina
- ---------------------------------
BancShares is headquartered and operates primarily in rural eastern North
Carolina. Economic information from state and national sources indicates that
the eighteen counties served by Southern lag the median figures of North
Carolina in the areas of per capita income, family income, and population growth
rates.
Management of BancShares recognizes that future growth in BancShares will
not come from people moving into the markets served by BancShares. Southern must
win customers from other institutions or purchase customers in existing markets
or expand into new markets as it did in 1997, 1998 and 1999. BancShares does
anticipate some offices of other institutions becoming available in the near
future.
Dependence on Local Agriculture and Tobacco Industry
- ----------------------------------------------------
The tobacco industry contributes significantly to the economy of eastern
North Carolina, especially in the 18 eastern North Carolina counties in which
Southern operates. For several decades, the tobacco industry, both in the United
States and abroad, has faced, and continues to face, a number of issues that may
adversely affect the volume, operating revenues, cash flows, operating income
and financial position of businesses operating in eastern North Carolina and, by
consequence, BancShares.
In the United States, these issues include proposed federal regulatory
controls (including, as discussed below, the issuance of final regulations by
the United States Food and Drug Administration (the "FDA") that regulate
cigarettes as "drugs" or "medical devices"); actual and proposed excise tax
increases; actual and proposed federal, state and local governmental and private
bans and restrictions on smoking (including in workplaces and in buildings
permitting public access); actual and proposed restrictions on tobacco
manufacturing, marketing, advertising (including decisions by certain companies
to limit or not accept tobacco advertising) and sales; proposed legislation and
regulations to require additional health warnings on cigarette packages and in
advertising, and to eliminate the tax deductibility of tobacco advertising and
promotional costs; actual and proposed requirements regarding disclosure of
cigarette ingredients and other proprietary information; actual and proposed
requirements regarding disclosure of the yields of "tar," nicotine and other
constituents found in cigarette smoke; increased assertions of adverse health
effects associated with both smoking and exposure to environmental tobacco smoke
("ETS"); legislation or other governmental action seeking to ascribe to the
industry responsibility and liability for the purported adverse health effects
<PAGE>
associated with both smoking and exposure to ETS; the diminishing social
acceptance of smoking; increased pressure from anti-smoking groups; unfavorable
press reports; governmental and grand jury investigations; and increased smoking
and health litigation, including private plaintiff class action litigation and
health care cost recovery actions brought by state and local governments, unions
and others seeking reimbursement for Medicaid and/or other health care
expenditures allegedly caused by cigarette smoking.
ACCOUNTING AND OTHER MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. This statement, as amended by Statement 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. 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.
Management is not aware of any other known trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on BancShares' liquidity, capital
resources or other operations.
12
<PAGE>
Year 2000 Issue
Introduction
- ------------
The year 2000 issue that confronted BancShares and its suppliers, customers,
customers' suppliers and competitors centered 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. At the new millennium, these
programs and computers would recognize "00" as the year 1900 rather than the
year 2000. These problems could have also arisen from other sources as well,
such as the use of special codes and conventions in software that made use of
the date field.
Awareness
- ---------
Financial institution regulators focused on year 2000 compliance issues and
issued guidance concerning the responsibilities of Senior Management and
Directors. The Federal Financial Institutions Examination Council ("FFIEC")
issued several interagency statements on the year 2000 issue.
These statements required 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 required 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 had
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 had asserted that year 2000 testing and
certification was a key safety and soundness issue in conjunction with
regulatory exams. An institution's failure to address appropriately the year
2000 issue could have resulted 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 addressed each of these areas as discussed below.
Risks
- -----
Like most financial service providers, BancShares and its operations could
have been significantly affected by the year 2000 issue due to its dependence on
information technology and date-sensitive data. Computer hardware, software,
other equipment, both within and outside BancShares' direct control, and third
parties with whom BancShares electronically or operationally interfaced
(including without limitation its customers and third party vendors) could have
been affected. If computer systems had not been modified to identify the year
2000, many computer applications could have failed or created erroneous results.
Many calculations that relied on the date field information, such as interest
payments, due dates and other operating functions, could have generated results
which were significantly misstated.
BancShares could have experienced an inability to process transactions,
prepare statements or engage in similar normal business activities. Likewise,
<PAGE>
under certain circumstances, a failure to adequately address the year 2000 issue
could have adversely affected the viability of BancShares' suppliers, creditors
and the creditworthiness of its borrowers. Thus, if not adequately addressed,
the year 2000 issue could have resulted 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 were, and
continue to be, performed by First-Citizens Bank & Trust Company ("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 divided information technology systems ("IT
Systems") into groups which included (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 addressed non-information technology systems ("Non-IT Systems"). As to
Group A Systems and Group B Systems, BancShares' year 2000 plan necessarily was
designed to be implemented jointly with FCB. FCB retained an outside consultant
to plan and direct its year 2000 compliance efforts. BancShares participated 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 met periodically to monitor the status of FCB's compliance efforts.
Periodic progress reports were made to BancShares' Board of Directors.
13
<PAGE>
The following paragraphs summarize the phases of BancShares' year 2000 plan:
Assessment Phase
- ----------------
During the assessment phase, a year 2000 corporate inventory and business
risk assessment was made (jointly with FCB in the case of Group A Systems and
Group B Systems, and separately in the case of Group C Systems and 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
quantified the importance of each asset to BancShares' daily operations. The
Status Code represented the claims of compliance by the asset's vendor. Used in
concert, these codes prioritized the remediation, testing and contingency
planning processes.
Remediation and Testing Phase
- -----------------------------
With respect to IT Systems, this phase contemplated 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 was responsible for coordinating
necessary modifications, upgrades or replacements. 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.
Validation Phase
- ----------------
The validation phase contemplated testing, in an isolated environment, of
the ability of new and modified systems, which had 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 completed validation testing on
Group C Systems.
Implementation Phase
- --------------------
Under BancShares' plan, once new and modified systems that required testing
had been tested for functionality, they were put into production.
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 involved identifying
potential year 2000 problems and insuring that outside vendors provided
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.
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
<PAGE>
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
were 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 were
made a part of the credit approval process.
Costs
- -----
BancShares expensed all costs associated with required system changes as
those costs were incurred, and such costs were 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 incurred a substantial portion of the expenses related to the
remediation and testing of systems that affected BancShares. Expenses actually
incurred by BancShares through December 31, 1999 were not material. BancShares
does not expect significant increases in future data processing costs relating
to year 2000 compliance.
14
<PAGE>
Contingency Plans
- -----------------
During the assessment phase, BancShares began to identify a back-up or
contingency plan for systems or non-IT assets which might be affected by year
2000. Virtually all of BancShares' systems are dependent upon third party
vendors or service providers; therefore, contingency plans included selecting a
new vendor or service provider and converting to their system. BancShares
believed its most reasonably likely worst case scenario would be a failure by
certain customers and vendors to achieve year 2000 readiness. For BancShares'
most reasonably likely worst case sceniaro, contingency plans were active prior
to December 31, 1999. Contingency plans for system failures on or after January
1, 2000 had been accepted by the Bank's regulators. Validation of these
contingency plans was completed prior to December 31, 1999.
Significant Year 2000 Events
- ----------------------------
BancShares did not have any significant events as a result of the year 2000
issue. BancShares will continue to monitor this issue during 2000 as other
significant year 2000 dates pass.
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS:
There is no active trading market for BancShares' common or preferred stock
although isolated transactions occur from time to time. Prices for BancShares'
common and preferred stock listed in the following table are based on
management's knowledge of the most recent sales prices for specific transactions
of each security.
The approximate number of record holders of BancShares' outstanding common
stock at December 31, 1999 was 343. Dividends paid to shareholders of BancShares
are dependent upon dividends received by BancShares from Southern. Southern is
restricted as to dividend payout by state laws applicable to banks and may pay
dividends only out of undivided profits. Should at any time its surplus be less
than 50% of its paid-in capital stock, Southern may not declare a dividend until
it has transferred from undivided profits to surplus 25% of its undivided
profits or any lesser percentage that may be required to restore its surplus to
an amount equal to 50% of its paid-in capital stock.
Additionally, dividends paid by Southern may be limited by the need to
retain sufficient earnings to satisfy minimum capital requirements imposed by
the Federal Deposit Insurance Corporation. Dividends on BancShares' common stock
may be paid only after dividends on preferred Series "B"' and "C" shares have
been paid. Common share dividends are based upon BancShares' profitability and
are paid at the discretion of the Board of Directors. Management does not expect
any of the foregoing restrictions to materially limit its ability to pay
dividends comparable to those paid in the past.
Common shareholders are entitled to one vote per share and both classes of
preferred stockholders are entitled to one vote for each 38 shares owned of a
class.
FORWARD-LOOKING STATEMENTS
The foregoing discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
<PAGE>
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifiers such as "expect," "believe," "estimate," "plan," "project" or other
statements concerning opinions or judgments of BancShares and its management
about future events. Factors that could influence the accuracy of such
forward-looking statements include, but are not limited to, the financial
success or changing strategies of BancShares' customers, actions of government
regulators, the level of market interest rates, and general economic conditions.
15
<PAGE>
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $11,096 $10,533 $10,277 $10,227 $10,593 $10,515 $10,501 $10,093
Interest expense 5,188 4,946 4,890 4,943 5,271 5,086 5,169 4,802
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 5,908 5,587 5,387 5,284 5,322 5,429 5,332 5,291
Provision for loan losses 245 465 60 60 15 20 60 60
- ------------------------------------------------------------------------------------------------------------------------------
Net income after provision for
loan losses 5,663 5,122 5,327 5,224 5,307 5,409 5,272 5,231
Noninterest income 1,261 1,480 1,239 1,138 1,000 1,392 1,219 2,933
Noninterest expense 5,455 5,401 5,339 5,430 5,088 5,118 5,113 4,788
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,469 1,201 1,227 932 1,219 1,683 1,378 3,376
Income taxes 350 290 270 240 330 470 451 809
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,119 $ 911 $ 957 $ 692 $ 889 $ 1,213 $ 927 $ 2,567
==============================================================================================================================
Net income applicable to
common shares $ 1,017 $ 811 $ 861 $ 595 $ 788 $ 1,110 $ 828 $ 2,468
==============================================================================================================================
PER SHARE OF STOCK
Net income per share of common
stock 8.54 6.81 7.22 4.99 6.64 9.27 6.91 20.58
Cash dividends - common 0.38 0.37 0.37 0.38 0.38 0.38 0.37 0.37
Cash dividends - preferred B 0.23 0.23 0.22 0.22 0.23 0.23 0.22 0.22
Cash dividends - preferred C 0.23 0.23 0.22 0.22 0.23 0.23 0.22 0.22
Common sales price
High 185.00 185.00 185.00 175.00 175.00 175.00 175.00 175.00
Low 185.00 185.00 185.00 175.00 175.00 175.00 175.00 175.00
Preferred B sales price
High 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Low 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Preferred C sales price
High 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Low 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
</TABLE>
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Southern BancShares (N.C.), Inc.:
We have audited the accompanying consolidated balance sheets of Southern
BancShares (N.C.), Inc. and subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of income and comprehensive
income, cash flows and shareholders' equity for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southern BancShares
(N.C.), Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/KPMG LLP
-------------
KPMG LLP
Raleigh, North Carolina
February 11, 2000
17
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except for per share data)
<TABLE>
<CAPTION>
December 31
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 28,524 $ 37,419
Federal funds sold 20,370 19,535
Investment securities:
Held-to-maturity, at amortized cost (fair value of $99,979 and $93,511, respectively) 100,129 92,340
Available-for-sale, at fair value (amortized cost of $83,095 and $92,012, respectively) 94,084 109,227
Loans 398,060 364,489
Less allowance for loan losses (6,188) (5,962)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 391,872 358,527
Premises and equipment 21,257 18,902
Accrued interest receivable 4,730 4,571
Intangible assets 6,411 6,972
Other assets 1,855 1,932
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 669,232 $ 649,425
===========================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 89,181 $ 77,550
Interest-bearing 489,069 479,202
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 578,250 556,752
Short-term borrowings 6,658 5,124
Long-term obligations 23,000 23,000
Accrued interest payable 4,471 4,505
Other liabilities 1,909 4,011
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 614,288 593,392
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares
authorized; 397,370 and 398,653 shares issued and outstanding at December
31, 1999 and December 31, 1998, respectively 1,936 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 December 31, 1999 and
December 31, 1998, respectively 555 562
Common stock, $5 par value; 158,485 shares authorized; 118,912 and 119,266 shares
issued and outstanding at December 31, 1999 and December 31, 1998, respectively 595 596
Surplus 10,000 10,000
Retained earnings 34,606 31,571
Accumulated other comprehensive income 7,252 11,362
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 54,944 56,033
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 669,232 $ 649,425
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands except for per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 31,292 $ 31,000 $ 29,225
Investment securities:
U. S. Government. 7,454 7,149 6,353
State, county and municipal 1,728 1,792 2,057
Other 692 789 797
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities interest income 9,874 9,730 9,207
Federal funds sold 968 972 623
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 42,134 41,702 39,055
Interest expense:
Deposits 17,655 18,716 18,229
Short-term borrowings 228 292 303
Long-term obligations 2,084 1,320 295
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 19,967 20,328 18,827
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 22,167 21,374 20,228
Provision for loan losses 830 155 60
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 21,337 21,219 20,168
Noninterest income:
Service charges on deposit accounts 3,497 3,199 2,918
Other service charges and fees 1,107 1,129 868
Investment securities gains, net 1 1,789 5,567
Insurance commissions 67 72 90
(Loss) gain on sale of loans (125) (112) 52
Other. 572 574 354
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,119 6,651 9,849
Noninterest expense:
Personnel 10,805 9,501 8,763
Intangibles amortization 1,942 1,534 1,755
Data processing 1,891 2,001 1,598
Furniture and equipment 1,534 1,502 1,633
Occupancy 1,633 1,567 1,388
FDIC insurance assessment 114 115 112
Charitable contributions 9 2 4,076
Other 3,699 3,992 3,739
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 21,627 20,214 23,064
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,829 7,656 6,953
Income taxes 1,150 2,060 340
- ---------------------------------------------------------------------------------------------------------------------------
Net income 3,679 5,596 6,613
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) arising during period (4,109) (2,554) 7,875
Less: reclassification adjustment for gains included
in net income 1 1,181 3,674
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (4,110) (3,735) 4,201
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (431) $ 1,861 $ 10,814
===========================================================================================================================
Per share information:
Net income per common share $ 27.56 $ 43.40 $ 51.77
Cash dividends declared on common shares 1.50 1.50 1.50
Weighted average common shares outstanding 119,137 119,685 119,918
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,679 $ 5,596 $ 6,613
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 830 155 60
Contribution expense for donation of marketable equity securities -- -- 4,071
Gain on contribution of marketable equity securities -- -- (3,529)
Gains on sales and issuer calls of securities (1) (1,789) (2,038)
Loss on sale and abandonment of premises and equipment 119 116 317
Loss (gain) on sale of loans 125 112 (52)
Net amortization of premiums (accretion of discounts) on investments 50 (54) (88)
Amortization of intangibles 1,942 1,534 1,755
Depreciation 1,482 1,394 1,139
Net increase in accrued interest receivable (159) (366) (206)
Net increase (decrease) in accrued interest payable (34) 111 1,190
Net (increase) decrease in other assets 113 (1,006) 1,754
Net decrease in other liabilities (2,102) ( 674) (1,339)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,044 5,129 9,647
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of
investment securities available-for-sale 44,734 46,625 25,798
Proceeds from maturities and issuer calls of
investment securities held-to-maturity 43,889 5,569 43,856
Proceeds from sales of investment securities available-for-sale 30 1,976 2,246
Purchases of investment securities held-to-maturity (57,458) (42,786) (37,261)
Purchases of investment securities available-for-sale (28,000) (32,046) (38,134)
Net decrease (increase) in loans (25,174) 1,392 (30,269)
Purchases of fixed assets (3,655) (1,653) (4,084)
Sales of fixed assets -- 48 185
Net cash received for bank and branches acquired 3,991 13,144 17,966
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (21,643) (7,731) (19,697)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and interest-bearing demand deposits 9,426 14,592 (4,658)
Net (decrease) increase in time deposits (2,763) (8,531) 16,360
Proceeds from issuance of long-term obligations -- 23,000 5,000
Debt issuance costs -- (862) --
Payments of long-term obligations -- (4,750) (1,650)
Net (repayments) proceeds of short-term borrowed funds 1,534 (1,702) 1,762
Cash dividends paid (573) (581) (585)
Purchase and retirement of stock (85) (231) (23)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,539 20,935 16,206
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (8,060) 18,333 6,156
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF YEAR 56,954 38,621 32,465
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR $ 48,894 $ 56,954 $ 38,621
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING
THE YEAR FOR:
Interest $ 20,001 $ 20,217 $ 17,637
Income taxes $ 894 $ 2,977 $ 1,776
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------- Accumulated
Common Other
Series B Series C Stock Compre- Total
---------------- --------------- ---------------------- Retained hensive Shareholders'
Shares Amount Shares Amount Shares Amount Surplus Earnings Income Equity
------ ------ ------ ------ ------ ----------------------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 407,752 $1,986 43,631 $578 119,918 $600 $10,000 $20,718 $10,896 $44,778
Net income -- -- -- -- -- -- -- 6,613 -- 6,613
Retirement of stock (2,107) (10) -- -- -- -- -- (13) -- (23)
Cash dividends:
Common stock ($1.50 per share) -- -- -- -- -- -- -- (180) -- (180)
Preferred B ($.90 per share) -- -- -- -- -- -- -- (366) -- (366)
Preferred C ($.90 per share) -- -- -- -- -- -- -- (39) -- (39)
Unrealized gain on securities available-
for-sale, net of tax -- -- -- -- -- -- -- -- 4,201 4,201
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 405,645 $1,976 43,631 $578 119,918 $600 $10,000 $26,733 $15,097 $54,984
Net income -- -- -- -- -- -- -- 5,596 -- 5,596
Retirement of stock (6,992) (34) (3,258) (16) (652) (4) -- (177) -- (231)
Cash dividends:
Common stock ($1.50 per share) -- -- -- -- -- -- -- (179) -- (179)
Preferred B ($.90 per share) -- -- -- -- -- -- -- (363) -- (363)
Preferred C ($.90 per share) -- -- -- -- -- -- (39) -- (39)
Unrealized loss on securities available-
for-sale, net of tax -- -- -- -- -- -- -- -- (3,735) (3,735)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 398,653 $1,942 40,373 $562 119,266 $596 $10,000 $31,571 $11,362 $56,033
Net income -- -- -- -- -- -- -- 3,679 -- 3,679
Retirement of stock (1,283) (6) (548) (7) (354) (1) -- (71) -- (85)
Cash dividends:
Common stock ($1.50 per share) -- -- -- -- -- -- -- (178) -- (178)
Preferred B ($.90 per share) -- -- -- -- -- -- -- (359) -- (359)
Preferred C ($.90 per share) -- -- -- -- -- -- -- (36) -- (36)
Unrealized loss on securities available-
for-sale, net of tax -- -- -- -- -- -- -- -- (4,110) (4,110)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 397,370 $1,936 39,825 $555 118,912 $595 $10,000 $34,606 $ 7,252 $54,944
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1. Summary of Significant Accounting Policies
BancShares
Southern BancShares (N.C.), Inc. ("BancShares") is the holding
company for Southern Bank and Trust Company ("Southern"),
which operates 46 banking offices in eastern North Carolina,
and Southern Capital Trust I, a statutory business trust that
issued $23.0 million of 8.25% Capital Securities (the "Capital
Securities") in June 1998 maturing in 2028. Southern, which
began operations in January, 1901, has a non-bank subsidiary,
Goshen, Inc., whose insurance agency operations complement the
operations of its parent. Southern and BancShares are
headquartered in Mount Olive, North Carolina. BancShares has
no foreign operations and BancShares' customers are
principally located in eastern North Carolina.
Principles of Consolidation
The consolidated financial statements include the accounts of
BancShares and its wholly-owned subsidiaries, Southern and
Southern Capital Trust I. The statements also include the
accounts of Goshen, Inc. a wholly-owned subsidiary of
Southern. BancShares' financial resources are primarily
provided by dividends from Southern. All significant
intercompany balances have been eliminated in consolidation.
Basis of Financial Statement Presentation
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The
most significant estimates made by BancShares in the
preparation of its consolidated financial statements are the
determination of the allowance for loan losses and fair value
estimates for financial instruments.
Reclassifications
Certain prior year balances have been reclassified to conform
to the current year presentation. Such reclassifications had
no effect on net income or shareholders' equity as previously
reported.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks and federal funds
sold. Federal funds are purchased and sold for one day
periods.
<PAGE>
Investment Securities
BancShares accounts for investment securities under the
provisions of Statement of Financial Accounting Standards
("Statement") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Statement 115 requires that
investments in certain debt and equity securities be
classified as either: held-to-maturity (reported at amortized
cost), trading (reported at fair value with unrealized gains
and losses included in earnings), or available-for-sale
(reported at fair value with unrealized gains and losses
excluded from earnings and reported, net of related income
taxes, as a separate component of shareholders' equity).
Unrealized losses on securities available for sale reflecting
a decline in value judged to be other than temporary are
charged to income in the consolidated statement of income.
There were no such changes in any of the periods presented.
BancShares' investment securities are classified in two
categories as follows:
- Securities held-to-maturity: Securities held-to-maturity
consist of debt instruments for which Banc- Shares has the
positive intent and ability to hold to maturity.
- Securities available-for-sale: Securities available-for-
sale consist of certain debt and marketable equity
securities not classified as trading securities nor as
securities held-to-maturity, and consist of securities
which may be sold in response to changes in interest
rates, prepayment risk, regulatory capital require- ments
and liquidity needs.
22
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Gains and losses on the sale and contribution of securities
available-for-sale are determined using the specific-
identification method. Premiums and discounts are amortized
into income on a level yield basis.
Loans
Loans are stated at principal amounts outstanding, reduced by
unearned income and an allowance for loan losses.
Southern originates certain residential mortgages with the
intent to sell. Such loans held-for-sale are included in loans
in the accompanying consolidated balance sheets at the lower
of cost or fair value as determined by outstanding commitments
from investors or current quoted market prices.
Interest income on substantially all loans is recognized in a
manner that approximates the level yield method when related
to the principal amount outstanding. Accrual of interest is
discontinued on a loan when management believes the borrower's
financial condition is such that collection of principal or
interest is doubtful. Loans are returned to the accrual status
when the factors indicating doubtful collectibility cease to
exist.
Management considers a loan to be impaired when based on
current information or events, it is probable that a borrower
will be unable to pay all amounts due according to the
contractual terms of the loan agreement. Impaired loans are
valued using either the discounted expected cash flow method
or the collateral value. When the ultimate collectibility of
the impaired loan's principal is doubtful, all cash receipts
are applied to principal. Once the recorded principal balance
has been reduced to zero, future cash receipts are applied to
interest income, to the extent that any interest has been
foregone. Future cash receipts are recorded as recoveries of
any amounts previously charged-off.
Southern provides an allowance for loan losses on a reserve
basis and includes in operating expenses a provision for loan
losses determined by management. The allowance is reduced by
charge-offs and increased by subsequent recoveries.
Management's periodic evaluation of the adequacy of the
allowance is based on Southern's past loan loss experience,
known and inherent risks in the portfolio, adverse situations
that may affect the borrower's experience, the estimated value
of any underlying collateral, current economic conditions and
other risk factors. Management believes it has established the
allowance in accordance with generally accepted accounting
principles and in consideration of the current economic
environment. While management uses the best information
available to make evaluations, future adjustments may be
necessary.
<PAGE>
In addition, various regulatory agencies, as an integral part
of their examination process, periodically review Southern's
allowance for loan losses and losses on other real estate
owned. Such agencies may require Southern to recognize
additions to the allowances based on the examiners' judgments
about information available to them at the time of their
examinations.
Mortgage Servicing Rights
The estimated value of the right to service mortgage loans for
others ("MSRs") is included in other assets on BancShares
consolidated balance sheet. Capitalization of MSRs occurs when
the underlying loans are sold. Capitalized MSRs are amortized
into income over the projected servicing life of the
underlying loans. Capitalized MSRs are periodically reviewed
for impairment.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the estimated
lives of the assets, ranging from 15 to 31.5 years for
buildings and improvements and 3 to 10 years for furniture and
equipment.
Intangible Assets
Intangible assets, primarily core deposit intangibles and
goodwill, are generally amortized on an accelerated basis over
a period of 5 to 10 years. Intangible assets are subject to
periodic review and are adjusted for any impairment of value.
Income Taxes
BancShares uses the asset and liability method to account for
deferred income taxes. The objective of the asset and
liability method is to establish deferred tax assets and
liabilities for the temporary differences between the
financial reporting basis and the income tax basis of
BancShares' assets and liabilities at enacted rates expected
to be in effect when such amounts are realized or settled.
23
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1. Summary of Significant Accounting Policies - continued
Recognition of deferred tax assets is based on management's
belief that it is "more likely than not" that the tax benefit
associated with certain temporary differences will be
realized. A valuation allowance is recorded for deferred tax
assets when the "more likely than not" standard is not met.
Shareholders' Equity
Common shareholders are entitled to one vote per share and
both classes of preferred shareholders are entitled to one
vote for each 38 shares owned of a class. Dividends on
BancShares' common stock may be paid only after annual
dividends of $.90 per share on both preferred series "B" and
"C" shares have been paid.
Earnings per common share is computed by dividing income
applicable to common shares by the weighted average number of
common shares outstanding during the period. Income applicable
to common shares represents net income reduced by dividends
paid to preferred shareholders. BancShares has no potentially
dilutive securities.
Earnings per common share are calculated based on the
following amounts for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $3,679 $5,596 $6,613
Less: Preferred dividends (395) (402) (405)
- -------------------------------------------------------------------------------------------------------------------------
Net income applicable to common shares $3,284 $5,194 $6,208
=========================================================================================================================
Weighted average common shares
outstanding during the period 119,137 119,685 119,918
=========================================================================================================================
</TABLE>
Comprehensive Income
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income"
("Statement 130"). Statement 130 establishes standards for
reporting and displaying of comprehensive income and its
components in a full set of general-purpose financial
statements. It does not address issues of recognition or
measurement for comprehensive income and its components.
BancShares adopted this statement for its annual financial
statements in 1998, reclassifying prior period financial
statements for comparative purposes. Accumulated other
comprehensive income consists entirely of unrealized gains
(losses) on securities available for sale.
<PAGE>
The tax effects of other comprehensive income components as
displayed in the consolidated statements of income are as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized (losses) gains arising during period $(2,116) $(1,316) $4,057
Less: Reclassification adjustment for gains
included in net income -- 608 1,893
- ---------------------------------------------------------------------------------------------------------------------------
Total tax effect $(2,116) $(1,924) $2,164
===========================================================================================================================
</TABLE>
24
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("Statement
131"). Statement 131 requires that public business enterprises
report certain information about operating segments in
complete sets of financial statements issued to shareholders.
It also requires that public business enterprises report
certain information about their products and services, the
geographic areas in which they operate and their major
customers. The provisions of Statement 131 were effective for
fiscal years beginning after December 31, 1997. Adoption of
this pronouncement did not have a material effect on
BancShares' consolidated financial statements as banking is
considered to be BancShares only segment.
New Accounting Standards
In June 1998, the FASB issued Statement 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and
the resulting designation. This statement, as amended by
Statement 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. 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 consolidated financial statements.
Note 2. Investment Securities
The amortized cost and estimated fair values of investment
securities at December 31 were as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------------------------- ---------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES
HELD-TO-MATURITY:
U. S. Government $ 80,298 12 (499) 79,811 $ 72,070 360 (41) 72,389
Obligations of states and
political subdivisions 19,731 347 (6) 20,072 20,170 850 -- 21,020
Corporate debenture 100 -- (4) 96 100 2 -- 102
- --------------------------------------------------------------------------------------------------------------------------
100,129 359 (509) 99,979 92,340 1,212 (41) 93,511
- --------------------------------------------------------------------------------------------------------------------------
SECURITIES
AVAILABLE-FOR-SALE:
U. S. Government 57,968 -- (551) 57,417 71,046 369 (135) 71,280
Marketable equity securities 10,262 12,559 (1,112) 21,709 10,747 16,867 (487) 27,127
Obligations of states and
political subdivisions 13,472 178 (72) 13,578 8,539 573 (1) 9,111
Mortgage-backed securities 1,393 14 (27) 1,380 1,680 38 (9) 1,709
- --------------------------------------------------------------------------------------------------------------------------
83,095 12,751 (1,762) 94,084 92,012 17,847 (632) 109,227
- --------------------------------------------------------------------------------------------------------------------------
TOTALS $183,224 13,110 (2,271) 194,063 $184,352 19,059 (673) 202,738
==========================================================================================================================
</TABLE>
Securities with a par value of $59,912 were pledged at
December 31, 1999 to secure public deposits and for other
purposes as required by law and contractual arrangement.
25
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 2. Investment Securities - continued
The amortized cost and estimated fair value of debt securities
at December 31, 1999, by contractual maturity, are shown
below. Expected maturities will differ from contractual
maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities held-to-maturity:
Due in one year or less $ 50,315 $ 50,101
Due after one year through five years 45,239 45,090
Due after five years through ten years 3,690 3,811
Due after ten years 885 977
- ------------------------------------------------------------------------------------------------------------------------
$100,129 $ 99,979
========================================================================================================================
Available-for-sale securities:
Due in one year or less $ 30,161 $ 29,901
Due after one year through five years 29,348 29,085
Due after five years through ten years 2,595 2,662
Due after ten years 9,336 9,347
Mortgage-backed securities 1,393 1,380
Marketable equity securities 10,262 21,709
- ------------------------------------------------------------------------------------------------------------------------
$ 83,095 $ 94,084
========================================================================================================================
</TABLE>
On February 14, 1997, the Board of Directors of Southern
approved the contribution of 48,250 shares of marketable
equity securities to the Southern Bank Foundation. These
investments had a cost basis of $542 and a fair value of
$4,071 on that date, resulting in the recognition of a
realized securities gain of $3,529. BancShares recorded
charitable contribution expense of $4,071 related to this
transaction.
Sales of securities available-for-sale having a cost basis of
$55 in 1999 and $187 in 1998 resulted in gross realized gains
of $1 for 1999, $1,789 for 1998 and $2,030 in 1997. Excluding
the gains discussed above, other gains on investment
securities in 1998 and 1997 were attributable to issuer calls
of debt securities.
<PAGE>
Note 3. Loans
Loans by type were as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $101,128 $ 86,980
Real estate:
Construction 8,647 5,276
Mortgage:
One to four family residential 111,793 113,984
Commercial 74,873 62,446
Equityline 30,152 28,698
Other 32,851 26,846
Consumer 34,309 36,775
Lease financing 4,307 3,484
- ------------------------------------------------------------------------------------------------------------------------
Total loans $398,060 $ 364,489
========================================================================================================================
Loans held for sale $ 3,508 $ 6,858
Loans serviced for others $ 180,345 $ 163,455
</TABLE>
26
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
On December 31, 1999 total loans to directors, executive
officers and related individuals and organizations were
$1,108. On December 31, 1998 total loans to directors,
executive officers and related individuals and organizations
were $1,227. During 1999, $104 of new loans were made to this
group and repayments totaled $223. There were no restructured
or nonaccrual loans to directors, executive officers or
related individuals and organizations. All extensions of
credit to such persons have been made in the ordinary course
of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time
in comparable transactions with others and did not involve
more than normal risks of collectibility.
Note 4. Allowance for Loan Losses
Transactions in the allowance for loan losses for the three
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $5,962 $5,971 $6,163
Allowance from bank acquisition -- 269 --
Provision for loan losses 830 155 60
Loans charged off (748) (544) (463)
Loan recoveries 144 111 211
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of the year $6,188 $5,962 $5,971
=========================================================================================================================
</TABLE>
At December 31, 1999 and 1998, Southern had nonaccrual loans
of $243 and $166, respectively. At December 31, 1999 and 1998
Southern had restructured loans of $42. At December 31, 1999
and 1998 Southern had accruing loans past due 90 days or more
totaling $460 and $805, respectively. The amount of foregone
interest on nonaccrual and restructured loans at December 31,
1999, 1998 and 1997, was not material for the periods
presented. At December 31, 1999 and 1998, Southern's impaired
loans were less than the nonaccrual and restructured loan
amounts presented above and no additional allowances for loan
losses were required for these impaired loans.
Note 5. Premises and Equipment
The components of premises and equipment were as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 4,822 $ 3,763
Buildings and improvements 17,254 15,333
Furniture and equipment 7,407 6,816
Construction-in-progress 12 103
- ---------------------------------------------------------------------------------------------------------------------------
29,495 26,015
Less: accumulated depreciation (8,238) (7,113)
- ---------------------------------------------------------------------------------------------------------------------------
$21,257 $18,902
===========================================================================================================================
</TABLE>
Note 6. Income Taxes
The components of income tax expense (benefit) for the years
ended December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,568 $2,221 $1,737
State 5 6 8
- -------------------------------------------------------------------------------------------------------------------------
1,573 2,227 1,745
- -------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (423) (167) (1,405)
- -------------------------------------------------------------------------------------------------------------------------
$1,150 $2,060 $ 340
=========================================================================================================================
</TABLE>
27
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 6. Income Taxes - continued
A reconciliation of the expected tax expense, based on the
Federal statutory rate of 34%, to the actual tax expense for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected income tax expense at stated rate (34%) $1,642 $2,603 $2,364
Increase (decrease) in income tax expense
resulting from:
Tax exempt income (911) (908) (943)
Amortization of intangible assets 126 143 172
Nontaxable gain on securities donated -- -- (1,200)
State income tax (net of federal benefit) 4 2 5
Other, net 289 220 (58)
- -------------------------------------------------------------------------------------------------------------------------
$1,150 $2,060 $ 340
=========================================================================================================================
Effective tax rate 24% 27% 5%
=========================================================================================================================
</TABLE>
Significant components of BancShares' deferred tax liabilities
and (assets) are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 554 $ 639
Leased assets 178 178
Investment securities 3,737 5,853
Other 392 249
- -------------------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities 4,861 6,919
- -------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses (2,104) (1,778)
Intangible assets (1,082) (861)
Other (912) (978)
- -------------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets (4,098) (3,617)
- -------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 763 $ 3,302
=========================================================================================================================
</TABLE>
No valuation allowance for deferred tax assets was required at
December 31, 1999 or 1998. Management has determined that it
is more likely than not that the net deferred tax asset can be
<PAGE>
supported by carrybacks to federal taxable income in the
carryback period. A portion of the change in the net deferred
tax liability relates to unrealized gains and losses on
securities available-for-sale. The related deferred tax
benefit of approximately $2,116 for the year ended December
31, 1999 has been recorded directly to shareholders' equity.
The related deferred tax charge of approximately $1,924 for
the year ended December 31, 1998 was recorded directly to
shareholders' equity.
28
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 7. Deposits
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Demand $ 89,181 $ 77,550
Checking with interest 75,969 75,270
Savings 57,398 56,499
Money market accounts 55,701 53,449
Time 300,001 293,984
- -------------------------------------------------------------------------------------------------------------------------
Total deposits $578,250 $556,752
=========================================================================================================================
</TABLE>
Total time deposits with a denomination of $100 or more were
$60,384 and $60,063 at December 31, 1999 and 1998,
respectively.
At December 31, 1999, the scheduled maturities of time
deposits were:
2000 $ 248,959
2001 8,033
2002 2,046
2003 987
2004 and thereafter 39,976
- ------------------------------------------------------------------------------
Total time deposits $ 300,001
==============================================================================
Note 8. Short-Term Borrowings and Long-Term Obligations
Short-term Borrowings
Short-term borrowings at December 31 were:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury tax and loan accounts $ 1,435 $ 171
Repurchase agreements 5,223 4,953
- -------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings $ 6,658 $5,124
=========================================================================================================================
</TABLE>
<PAGE>
The U. S. Treasury tax and loan accounts averaged $991 in 1999
and $861 in 1998. The highest month-end balance of the U. S.
Treasury tax and loan accounts was $2,035 in 1999 and $2,206
in 1998. The average rate on U. S. Treasury tax and loan
accounts was 4.15% in 1999 and 5.97% in 1998.
The repurchase agreements averaged $5,240 in 1999 and $5,655
in 1998. The highest month-end balance of the repurchase
agreements was $6,313 in 1999 and $6,459 in 1998. The average
rate on repurchase agreements in 1999 and 1998 was 3.58% and
4.09%. At December 31, 1999, $13,000 of investment securities
were pledged for repurchase agreements. The securities
collateralizing the repurchase agreements have been delivered
to a third party custodian for safekeeping.
Long-term Obligations
The $23.0 million long-term obligations are Capital Trust
Securities of Southern Capital Trust I, ("the Trust") a
wholly-owned statutory business trust of BancShares. These
long-term obligations, which qualify as Tier 1 Capital for
BancShares, bear interest at 8.25% and mature in 2028.
BancShares may redeem the long-term obligations in whole or in
part on or after June 30, 2003. The sole asset of the Trust is
$23.0 million of 8.25% Junior Subordinated Debentures of
BancShares due 2028. Considered together, the undertakings
constitute a full and unconditional guarantee by BancShares of
the Trust's obligations under the Capital Trust Securities.
29
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 9. Acquisitions and dispositions
BancShares has consummated numerous acquisitions and
dispositions in recent years. All of the acquisitions have
been accounted for under the purchase method of accounting,
with the results of operations not |included in BancShares'
Consolidated Statements of Income until after the transaction
date. The pro forma impact of the acquisitions and
dispositions as though they had been made at the beginning of
the periods presented is not material to BancShares'
consolidated financial statements.
The following table provides information regarding the
acquisitions and dispositions that have been consummated
during the three-year period ending December 31, 1999:
<TABLE>
<CAPTION>
Deposit
Assets Liabilities
Acquired Assumed Resulting
Date Institution/Location (Sold) (Sold) Intangible
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 1999 First-Citizens Bank & Trust Company $14,837 $14,835 $1,335
Ahoskie, North Carolina
December 1998 First Union National Bank 16,440 16,440 1,685
Red Springs, North Carolina
October 1998 First-Citizens Bank & Trust Company 5,309 5,302 186
Gates, North Carolina
May 1998 Enfield Savings Bank 18,174 18,041 448
Enfield, North Carolina
May 1998 Enfield Savings Bank (1) (2,420) (2,420) (85)
Littleton, North Carolina
May 1997 Wachovia Bank of North Carolina, N.A. 5,083 5,117 179
Aulander, North Carolina
May 1997 Wachovia Bank of North Carolina, N.A. 11,803 11,838 947
Aurora, North Carolina
May 1997 Wachovia Bank of North Carolina, N.A. 4,073 4,106 144
Hamilton, North Carolina
</TABLE>
(1) Represents the sale of this branch to First-Citizens Bank
& Trust Company.
30
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 10. Retirement Plans
Southern has a noncontributory, defined benefit pension plan
which covers substantially all full-time employees. Employees
who qualify under length of service and other requirements
participate in the noncontributory defined benefit pension
plan. Under the plan, retirement benefits are based on years
of service and average earnings. The policy is to fund the
maximum amount allowable for federal income tax purposes. The
plan's assets consist primarily of investments in
First-Citizens Bank & Trust Company common trust funds, which
include listed common stocks and fixed income securities (see
Note 15). It is Southern's policy to determine the service
cost and projected benefit obligation using the Projected Unit
Credit Cost method.
The following sets forth pertinent information regarding the
pension plan for the periods indicated:
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation
Net benefit obligation at beginning of year $7,647 $6,598 $5,417
Service cost 413 356 298
Interest cost 533 489 418
Actuarial (gain) loss (898) 414 645
Gross benefits paid (281) (210) (180)
- ---------------------------------------------------------------------------------------------------------------------------
Net benefit obligation at end of year $7,414 $7,647 $6,598
===========================================================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $6,936 $5,943 $4,936
Actual return on plan assets 351 920 817
Employer contributions 476 283 370
Gross benefits paid (280) (210) (180)
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $7,483 $6,936 $5,943
===========================================================================================================================
Funded status at end of year $ 69 $ (711) $ (655)
Unrecognized net actuarial loss. (511) 352 530
Unrecognized prior service cost 64 73 81
Unrecognized net transition asset. (143) (184) (225)
- ---------------------------------------------------------------------------------------------------------------------------
Net amount recognized as a liability in the consolidated
balance sheets at end of year $ (521) $ (470) $ (269)
===========================================================================================================================
Assumptions as of December 31
Discount rate 7.50% 6.75% 7.25%
Expected return on plan assets 8.50% 8.00% 8.25%
Rate of compensation increase 4.75% 4.50% 4.50%
Components of net periodic benefit cost
Service cost $ 413 $ 356 $ 298
Interest cost 533 489 418
Expected return on assets (464) (395) (345)
Amortization of:
Transition asset (40) (41) (41)
Prior service cost 8 8 8
Actuarial loss 77 67 53
- ---------------------------------------------------------------------------------------------------------------------------
Total net periodic benefit cost $ 527 $ 484 $ 391
===========================================================================================================================
</TABLE>
<PAGE>
Employees are also eligible to participate in a matching
savings plan after one year of service. During 1999 Southern
made participating contributions to this plan of $263 compared
to $245 during 1998 and $220 during 1997.
31
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 11. Regulatory Requirements and Restrictions
BancShares and its banking subsidiary are subject to certain
requirements imposed by state and federal banking statutes and
regulations. These regulations establish guidelines for
minimum capital levels, restrict certain dividend payments and
require the maintenance of noninterest-bearing reserve
balances at the Federal Reserve Bank. Such reserves averaged
$12,232 during 1999 of which $8,720 was satisfied by vault
cash and the remainder by amounts held in the Federal Reserve
Bank.
Various regulatory agencies have implemented guidelines that
evaluate capital based on risk adjusted assets. An additional
capital computation evaluates tangible capital based on
tangible assets. Minimum capital requirements set forth by the
regulators require a Tier 1 capital ratio of no less than 4%
of risk-adjusted assets, a total capital ratio of no less than
8% of risk-adjusted assets, and a leverage capital ratio of no
less than 4% of average tangible assets. To meet the Federal
Deposit Insurance Corporation's ("FDIC") "well capitalized"
standards, the Tier 1 ratios must be at least 6%, total
capital ratios must be at least 10% and leverage capital
ratios must be at least 5%. Failure to meet minimum capital
requirements may result in certain actions by regulators that
could have a direct material effect on the consolidated
financial statements. As of December 31, 1999, Southern was
considered to be "well capitalized" by the FDIC.
Southern's capital ratios as of December 31 are set forth
below:
1999 1998
- ------------------------------------------------------------------------------
Tier 1 capital $ 55,398 $ 49,198
Total capital 62,967 53,234
Risk-adjusted assets 386,761 311,341
Average tangible assets 654,268 582,955
Tier 1 capital ratio 14.32% 15.80%
Total capital ratio 16.28% 17.10%
Leverage capital ratio 8.47% 8.44%
The primary source of funds for the dividends paid by
BancShares to its shareholders is dividends received from its
Banking subsidiary. Southern Bank is restricted as to dividend
payout by state laws applicable to banks and may pay dividends
only out of retained earnings. Should at anytime its surplus
be less than 50% of its paid-in capital stock, Southern Bank
may not declare a dividend until it has transferred from
retained earnings to surplus 25% of its undivided profits or
<PAGE>
any lesser percentage that may be required to restore its
surplus to an amount equal to 50% of its paid-in capital
stock. Additionally, dividends paid by Southern Bank may be
limited by the need to retain sufficient earnings to satisfy
minimum capital requirements imposed by the FDIC. Dividends on
BancShares' common shares may be paid only after dividends on
preferred Series "B" and "C" shares have been paid. Common
share dividends are based upon BancShares' profitability and
are paid at the discretion of the Board of Directors.
Management does not expect any of the foregoing restrictions
to materially limit its ability to pay dividends comparable to
those paid in the past. At December 31, 1999, Southern had
available for the payment of dividends undivided profits of
approximately $19.6 million, unless declaration of dividends
for such amount would reduce the regulatory capital of
Southern below the minimum levels discussed above. At December
31, 1999, approximately $35.8 million of BancShares'
investment in Southern was restricted as to transfer to
BancShares without obtaining prior regulatory approval.
32
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 12. Commitments, Contingencies and Concentration of Credit Risk
In the normal course of business there are various commitments
and contingent liabilities outstanding, such as guarantees,
commitments to extend credit, etc., which are not reflected in
the accompanying financial statements.
Southern is party to financial instruments with
off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers and to reduce its
own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit,
standby letters of credit and undisbursed advances on customer
lines of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheet.
Southern is exposed to credit loss, in the event of
nonperformance by the other party to the financial instrument,
for commitments to extend credit and standby letters of credit
which is represented by the contractual notional amount of
those instruments. Southern uses the same credit policies in
making these commitments and conditional obligations as it
does for on-balance-sheet instruments.
Commitments to extend credit and undisbursed advances on
customer lines of credit are agreements to lend to a customer
as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of
a fee. Since many commitments expire without being drawn, the
total commitment amounts do not necessarily represent future
cash requirements. Southern evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by Southern, upon extension of
credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include trade
accounts receivable, property, plant, and equipment and
income-producing commercial properties.
Standby letters of credit are commitments issued by Southern
to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to
customers.
Outstanding standby letters of credit as of December 31, 1999
and December 31, 1998 amounted to $3,060 and $1,625.
Outstanding commitments at December 31, 1999 and December 31,
1998 were $111,988 and $51,466. Undisbursed advances on
customer lines of credit at December 31, 1999 and December 31,
1998 were $51,782 and $47,639. Southern does not anticipate
any losses as a result of these transactions.
<PAGE>
Southern grants agribusiness, commercial and consumer loans to
customers primarily in eastern North Carolina. Although
Southern has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is
dependent upon the agricultural industry and in particular the
tobacco segment thereof. For several decades tobacco has come
under increasing criticism for potential health risks.
Management is unable to predict the impact of the
contingencies inherent in this market segment as it relates to
Southern.
BancShares is also involved in various legal actions arising
in the normal course of business. Management is of the opinion
that the outcome of such actions will not have a material
adverse effect on the consolidated financial condition of
BancShares.
33
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 13. Parent Company Financial Statements
Presented below are the condensed balance sheets (parent
company only) of Southern BancShares (N.C.), Inc. as of
December 31, 1999 and 1998 and condensed statements of income
for the three years ended December 31, 1999.
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,862 $ 3,802
Investment securities available-for-sale 12,002 14,659
Other assets 1,147 1,333
Investment in subsidiaries 65,474 62,553
- -------------------------------------------------------------------------------------------------------------------------
Total assets $80,485 $82,347
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities $ 1,830 $ 2,603
Notes payable 23,711 23,711
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 25,541 26,314
Shareholders' equity 54,944 56,033
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $80,485 $82,347
=========================================================================================================================
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from bank subsidiary $ -- $3,090 $5,458
Other dividends 192 152 80
- --------------------------------------------------------------------------------------------------------------------------
Total income 192 3,242 5,538
Interest expense (2,142) (1,320) (295)
Other expense (65) (293) (49)
- --------------------------------------------------------------------------------------------------------------------------
(Loss) income before equity in undistributed
income of subsidiary (2,015) 1,629 5,194
Equity in undistributed income of subsidiary 5,694 3,967 1,419
- --------------------------------------------------------------------------------------------------------------------------
Net income $3,679 $5,596 $6,613
==========================================================================================================================
</TABLE>
34
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 13. Parent Company Financial Statements (continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $3,679 $5,596 $6,613
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (5,694) (3,967) (1,419)
Decrease (increase) in other assets 186 (543) --
Decrease in accrued liabilities (773) (959) --
Dividend income in the form of investment securities -- -- (2,753)
Increase (decrease) in accrued interest payable -- (9) 9
- --------------------------------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (2,602) 118 2,450
- --------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale (purchase) of investments 4,241 (1,787) (205)
Investments in subsidiaries (2,921) (12,711) (5,000)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 1,320 (14,498) (5,205)
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Dividends paid (573) (581) (585)
Purchase and retirement or redemption of stock (85) (231) (23)
Change in notes payable, net -- 18,961 3,350
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (658) 18,149 2,742
- --------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,940) 3,769 (13)
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF YEAR 3,802 33 46
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT THE END OF YEAR $1,862 $3,802 $ 33
==========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
PAID DURING THE YEAR FOR:
Interest $2,142 $1,329 $ 286
Income taxes $ 4 $ 11 $ 7
==========================================================================================================================
</TABLE>
<PAGE>
Note 14. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate
the fair value of each class of financial instrument:
Cash and due from banks, federal funds sold, and accrued
interest receivable
The carrying amounts for cash and due from banks, federal
funds sold and accrued interest receivable are equal to their
fair values due to the short term nature of these financial
instruments.
Investment securities
Fair values of investment securities are based on quoted
market prices. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
35
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 14. Fair Value of Financial Instruments - continued
Loans receivable
For variable-rate loans that are performing, fair values are
based on carrying values. The fair values of fixed rate loans
that are performing are estimated by discounting the future
cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for
the same remaining maturities. The fair value of nonperforming
loans is based on the book value of each loan, less an
applicable reserve for credit losses. This reserve for credit
losses is determined on a loan-by-loan basis for nonperforming
assets based on one or a combination of the following:
external appraisals, internal assessments using available
market information and specific borrower information, or
discounted cash flow analysis.
Deposits
The fair value of demand deposits, savings accounts and money
market deposits is the amount payable on demand at year end.
The fair value of certificates of deposit is estimated by
discounting the future cash flows using the current rates paid
for similar deposits.
Short-term borrowed funds and accrued interest payable
The carrying amounts for short-term borrowed funds and accrued
interest payable are equal to the fair values due to the short
term nature of these financial instruments.
Long-term obligations
The fair value of the long-term obligation is the market value
at the last trade date in 1999 and 1998.
Commitments
Southern's commitments to extend credit have no carrying value
and are generally at variable rates and/or have relatively
short terms to expiration. Accordingly, these financial
instruments are deemed to have no material fair value.
Limitations on Fair Value Assumptions
Fair value estimates are made by management at specific points
in time based on relevant information about the financial
instrument and the market. These estimates do not reflect any
premium or discount that could result from offering for sale
at one time BancShares' entire holdings of a particular
financial instrument nor are potential taxes and other
expenses that would be incurred in an actual sale considered.
Because no market exists for a significant portion of
BancShares' financial instruments, fair value estimates are
based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
<PAGE>
financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions and/or the methodology used
could significantly affect the estimates disclosed. Similarly,
the fair values disclosed could vary significantly from
amounts realized in actual transactions.
Fair value estimates are based on existing on and off balance
sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets
and liabilities that are not considered financial instruments.
For example, BancShares has premises and equipment which are
not considered financial instruments. Accordingly, the value
of these assets has not been incorporated into the fair value
estimates. In addition, tax ramifications related to the
realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in any of the estimates.
36
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The estimated fair values of BancShares' financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 28,524 $ 28,524 $ 37,419 $ 37,419
Federal funds sold 20,370 20,370 19,535 19,535
Investment securities:
Held-to-maturity 100,129 99,979 92,340 93,511
Available-for-sale 94,084 94,084 109,227 109,227
Loans 391,872 390,034 358,527 362,264
Accrued interest receivable 4,730 4,730 4,571 4,571
Financial liabilities:
Deposits $578,250 $593,498 $556,752 $558,544
Short-term borrowings 6,658 6,658 5,124 5,124
Long-term obligations 23,000 19,838 23,000 23,288
Accrued interest payable 4,471 4,471 4,505 4,505
</TABLE>
Note 15. Related Parties
BancShares has entered into various service contracts with
another bank holding company and its subsidiary (the
"Corporation"). The Corporation has two significant
shareholders, which are also significant shareholders of
BancShares. The first significant shareholder is a director of
BancShares and at December 31, 1999 beneficially owned 32,294
shares, or 27.16%, of BancShares' outstanding common stock and
22,171 shares, or 5.58%, of BancShares' outstanding Series B
preferred stock. At the same date, the second significant
shareholder beneficially owned 27,577 shares, or 23.19%, of
BancShares' outstanding common stock, and 17,205 shares, or
4.33%, of BancShares' Series B preferred stock. The above
totals include 17,205 Series B preferred shares, or 4.33%,
that are considered to be beneficially owned by both of the
shareholders and, therefore, are included in each of their
totals.
These two significant shareholders are directors and executive
officers of the Corporation and at December 31, 1999,
beneficially owned 2,522,615 shares, or 28.33%, and 1,492,974
shares, or 16.77%, of the Corporation's outstanding Class A
common stock, and 643,818 shares, or 37.42%, and 193,685
shares, or 11.26%, of the Corporation's outstanding Class B
common stock. The above totals include 487,557 Class A common
shares, or 5.48%, and 104,644 Class B common shares, or 6.08%,
that are considered to be beneficially owned by both of the
shareholders and, therefore, are included in each of their
totals. A subsidiary of the Corporation is First-Citizens Bank
& Trust Company ("First Citizens"). As more fully discussed in
note 9, Southern acquired branches from First Citizens in 1999
and 1998 and sold a branch to First Citizens in 1998.
37
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 15. Related Parties - continued
The following table lists the various charges paid to the
Corporation during the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Data and item processing $2,156 $2,345 $1,840
Forms, supplies and equipment 281 231 220
Trustee for employee benefit plans 89 79 66
Consulting fees 86 78 79
Trust investment services 19 20 22
Internal auditing services 1 1 41
Other services 116 114 94
- ---------------------------------------------------------------------------------------------------------------------------
$2,748 $2,868 $2,362
===========================================================================================================================
</TABLE>
Data and item processing expenses include courier services,
proof and encoding, microfilming, check storage, statement
rendering and item processing forms. BancShares also has a
correspondent relationship with the Corporation. Correspondent
account balances with the Corporation included in cash and due
from banks totaled $8,583 at December 31, 1999 and $15,988 at
December 31, 1998. Southern's wholly-owned subsidiary, Goshen,
Inc. paid $94 and $98 to an Insurance Company owned by the
Corporation for the sale of insurance written in connection
with loans made by Southern in 1999 and 1998, respectively.
BancShares also owns 124,584 and 22,219 shares of Class A and
Class B common stock of the Corporation. The Class A and Class
B common stock had an amortized cost of $2.6 million and $465,
respectively, at December 31, 1999 and 1998. The Class A
common stock had a fair value of $8.7 million and $11.2
million at December 31, 1999 and 1998, respectively. The Class
B common stock had a fair value of $1.6 million and $2.0
million at December 31, 1999 and 1998, respectively.
Note 16. Subsequent Events
Southern has received approval from the regulatory authorities
to purchase the Robersonville, North Carolina office of
Cooperative Bank for Savings, Inc., SSB ("Cooperative"). The
acquisition is planned for February 18, 2000. Southern expects
to purchase approximately $7.1 million of deposits,
approximately $1.3 million of loans and to record
approximately $532,000 of intangible assets for the
Cooperative acquisition. Southern plans to consolidate this
acquisition into its existing Robersonville facility and to
sell the existing Cooperative facility.
Southern has also received approval from the regulatory
authorities to open de novo branches in three new eastern
North Carolina markets. These branches are planned to open in
2000.
<PAGE>
Subject to regulatory approval, Southern plans to purchase the
Battleboro, North Carolina, Nashville, North Carolina and
Sharpsburg, North Carolina offices of Triangle Bank
("Triangle") on April 14, 2000. Southern expects to purchase
approximately $30.5 million of deposits, approximately $8.2
million of loans and to record approximately $3.0 million of
intangible assets for the Triangle acquisitions. Southern
plans to consolidate the Nashville acquisition into its
existing Nashville facility and to sell the existing Triangle
Nashville facility.
38
<PAGE>
DIRECTORS
Bynum R. Brown
Murfreesboro, NC
President and Owner,
Bynum R. Brown Agency, Inc.
(Real Estate)
President and Owner, Brown Manor, Inc.
(Family Care Home)
Secretary-Treasurer, Roanoke
Valley Nursing Home, Inc.
William H. Bryan
Mt. Olive, NC
President, Director and Treasurer
Mount Olive Pickle Company, Inc.
(Manufacturer of Pickle and Pepper Products)
D. Hugh Carlton
Warsaw, NC
President and Owner, Carlton Insurance Agency, Inc.
(Insurance)
Robert J. Carroll
Gates, NC
President and Owner, Carroll's Garage, Inc.
(Truck and Farm Equipment Dealer)
Hope H. Connell
Raleigh, NC
Senior Vice President,
First-Citizens Bank & Trust Company
J. Edwin Drew
Macclesfield, NC
Retired Physician
Former President, J. Edwin Drew, M.D., P.A.
Sam E. Ewell, Jr.
Wendell, NC
President and Owner, Ewell Ford Sales, Inc.
Moses B. Gillam, Jr.
Windsor, NC
Senior Partner, Gillam and Gillam, Attorneys
<PAGE>
George A. Hux
Rocky Mount, NC
Retired Attorney
Former Partner, Hux, Livermon & Armstrong, LLP
M.J. McSorley
Rocky Mount, NC
Vice Chairman, Southern Bank and Trust Company;
Vice President, Southern BancShares (N.C.), Inc
Former President and CEO, Southern Bank and Trust Co.
.
W. B. Midyette, Jr.
Bath, N.C.
Retired Farmer
W. Hunter Morgan
Sunbury, NC
President, Kellog-Morgan Agency, Inc.
(Insurance)
John C. Pegram, Jr.
Mount Olive, NC
President and Chief Executive Officer,
Southern BancShares (N.C.), Inc.
President and Chief Executive Officer,
Southern Bank and Trust Company.
Charles I. Pierce, Sr.
Ahoskie, NC
President, Pierce Printing Co., Inc.
(Commercial Printers)
W.A. Potts
Mount Olive, NC
Retired Veterinarian and former President
W.A. Potts DVM, P.A.
Charles L. Revelle, Jr.
Murfreesboro, NC
Chairman of the Board, Revelle Agri-Products, Inc.;
President, Revelle Equipment Co., Inc.
Vice President, Revelle Builders of NC, Inc.;
(Agribusiness)
<PAGE>
LeRoy C. Hand
Camden, NC
Retired Physician, former President,
Albermarle Emergency Associates, P.A.
Savings Bank, Inc. SSB
J. D. Hines
Rocky Mount, NC
President and Owner, Hines Equipment Company
President and Owner, Enfield Tractor and Equipment Company
(Farm and industrial equipment sales)
Frank B. Holding
Smithfield, NC
Executive Vice Chairman of the Board,
First Citizens BancShares, Inc. and
First-Citizens Bank & Trust Company
Vice Chairman of the Board
First Citizens Bancorporation of S. C., Inc. and
First-Citizens Bank and Trust Company of South Carolina
<PAGE>
Watson N. Sherrod, Jr.
Enfield, NC
Senior Vice President, Southern Bank and Trust Company,
Former President and CEO, ESB Bancorp, Inc. and Enfield Savings Bank, Inc.SSB
Charles O. Sykes
Mount Olive, NC
Charles O. Sykes
President, Mount Olive Livestock Market, Inc.
(Livestock Auction Market and Dealer)
Raymond M. Sykes
Whitakers, NC
Retired Farmer
John N. Walker
Mount Olive, NC
President Emeritus, Mount Olive Pickle Company, Inc.
R.S. Williams
Mount Olive, NC
Chairman of the Board and Consultant,
Southern BancShares (N.C.), Inc.
and Southern Bank and Trust Company
39
<PAGE>
OFFICERS
Executive Officers of Southern Bank and Trust Company
R. S. Williams, Chairman of the Board
M. J. McSorley, Vice Chairman of the Board
John C. Pegram, Jr., President and Chief Executive Officer
Paul A. Brewer, Executive Vice President
R. D. Ray, Executive Vice President
David A. Bean, Senior Vice President, Chief Financial Officer
and Secretary
EXECUTIVE OFFICERS OF SOUTHERN BANCSHARES (N.C.), INC.
R. S. Williams, Chairman of the Board
W. A. Potts, Vice Chairman of the Board
John C. Pegram, Jr., President And Chief Executive Officer
M. J. McSorley, Vice President
David A. Bean, Secretary, Treasurer and Chief Financial Officer
Paul A. Brewer, Assistant Secretary
R. D. Ray, Assistant Treasurer
40
<PAGE>
SOUTHERN BANK OFFICES
Branch County
- ----------------------------------------------
Ahoskie Hertford
700 East Church St.
Ahoskie, NC 27910-0825
(252) 332-6191
Ahoskie Hertford
507 East Main St.
Ahoskie, NC 27910-0825
(252) 332-5149
Askewville Bertie
Halifax
104 W. Askewville St.
Windor, NC 27983-0529
(252) 794-3029
Aulander Bertie
119 S. Commerce St
Aulander, NC 27805-0129
(252) 345-4061
Aurora Beaufort
298 North Fifth St.
Aurora, NC 27806-0427
(252) 322-4161
Ayden Pitt
1107 W. 3rd St.
Ayden, NC 28513-0368
(252) 746-6138
Bath Beaufort
419 Carteret St.
Bath, NC 27808-0217
(252) 923-8381
Belhaven Beaufort
148 E. Main St.
Belhaven, NC 27810-0087
(252) 943-2184
Bethel Pitt
Main St.
Bethel, NC 27812-0819
(252) 825-0031
Calypso Duplin
102 West Trade St.
Calypso, NC 28325-0729
(919) 658-7070
Clinton Duplin
925 Sunset Avenue
Clinton, NC 28329-0929
(910) 592-9005
<PAGE>
Deep Run Lenoir
1916 Tulls Mill Rd.
Deep Run, NC 28525-0126
(252) 568-4141
Dudley Wayne
Highway 117 Alternate South
Dudley, NC 28333-0729
(919) 734-5375
Edenton Chowan
1300 N. Broad St
Edenton, NC 27932-0546
(252) 482-7466
Edenton Chowan
101 W. Queen St
Edenton, NC 27932-0868
(252) 482-8466
Enfield Halifax
201Batchelor Avenue
Enfield, NC 27823-0368
(252) 445-2016
<PAGE>
Branch County
- ----------------------------------------------
Faison Duplin
110 W. Center St South
Faison, NC 28341-0628
(910) 267-4351
Farmville Pitt
107 E. Church St.
Farmville, NC 27828-0146
(252) 753-2161
Garland Sampson
96 South Ingold Ave.
Garland, NC 28441-0397
(910) 529-3651
Gates Gates
Gates Bank Road
Gates NC 27937-0064
(252) 357-1250
Gatesville Gates
203 Main St.
Gatesville NC 27938-0203
(252) 357-0190
Grantham Wayne
3382 U.S. 13 South
Goldsboro, NC 27530-0729
(919) 689-2300
Hamilton Martin
109 N. Front Street
Hamilton, NC 27840-0425
(252) 798-6971
Kill Devil Hills Dare
202 S. Croatan Highway
Kill Devil Hills, NC 27948-2037
(252) 449-4499
LaGrange Lenoir
208 S. Caswell St.
LaGrange, NC 28551-0248
(252) 566-4020
Lewiston Bertie
127 Main St.
Lewiston-Woodville, NC 27849-0190
(252) 348-2561
Macclesfield Edgecombe
105 N. Railroad St.
Macclesfield, NC 27852-0339
(252) 827-2111
<PAGE>
Mount Olive Wayne
100 North Center St.
Mount Olive, NC 28365-0729
(919) 658-7000
Mount Olive Wayne
800 North Breazeale Ave.
Mount Olive, NC 28365-0729
(919) 658-7100
Murfreesboro Hertford
336 East Main St
Murfreesboro, NC 27855-0277
(252) 398-4174
Nashville Nash
209 Barnes St.
Nashville, NC 27856-0758
(252) 459-2117
Plymouth Washington
612 Washington St.
Plymouth, NC 27962-1023
(252) 793-1115
<PAGE>
Branch County
- ----------------------------------------------
Pollocksville Jones
214 Main St.
Pollocksville, NC 28573-0171
(252) 224-5191
Red Springs Robeson
300 South Main St.
Red Springs, NC 28377-1624
(910) 843-4135
Roanoke Rapids Halifax
1580 E. 10th St.
Roanoke Rapids, NC 27870-4109
(252) 535-3043
Robersonville Martin
111 N. Main St.
Robersonville, NC 27871-0369
(252) 795-3041
Rocky Mount Nash
230 Sunset Ave.
Rocky Mount, NC 27802-0428
(252) 977-2825
Rocky Mount Nash
3690 Sunset Ave.
Rocky Mount, NC 27802-0428
(252)-443-7800
Roxobel Bertie
113 South Main St.
Roxobel, NC 27872-0159
(252) 344-5641
Salemburg Sampson
102 South Main St.
Salemburg, NC 28385-0160
(910) 525-4149
Seven Springs Wayne
306 Main St.
Seven Springs, NC 28578-0060
(252) 569-3161
Turkey Sampson
45 Union Rd.
Turkey, NC 28393-0375
(910) 592-7321
Warsaw Duplin
114 N. Pine St.
Warsaw, NC 28398-0896
(910) 293-7176
<PAGE>
Whitakers Nash
101 N. White St.
Whitakers, NC 27891-0130
(252) 437-0611
Windsor Bertie
101 N. King St.
Windsor, NC 27983-0529
(252) 794-3011
Winton Hertford
301 N. Main St.
Winton, NC 27986-0278
(252) 358-3111
41
<PAGE>
GENERAL INFORMATION
Shareholders' Meeting
The Annual Meeting of Shareholders will be held on Wednesday, April 19, 2000 at
3:00 P. M. at the Goldsboro Country Club, 1500 South Slocumb Street, Goldsboro,
North Carolina.
Stock Transfer Agent and Registrar
First-Citizens Bank & Trust Company
100 E. Tryon Road
Raleigh, North Carolina 27603
General Counsel
Ward and Smith, P.A.
New Bern, North Carolina 28563-0867
Auditors
KPMG LLP
Raleigh, North Carolina 27601
Form 10-K
Copies of Southern BancShares' Annual Reports on Form 10-K are available on the
internet at www.sec.gov/cgi-bin/srch-edgar or upon written request to Secretary,
Southern BancShares (N.C.), Inc., Post Office Box 729, Mount Olive, North
Carolina 28365-0729. A copy of Southern BancShares' Annual Report on Form 10-K
for 1999, including Financial Statements and Schedules thereto, will be provided
without charge to the shareholder making such request.
Equal Opportunity Employer
Southern Bank and Trust Company is an equal opportunity employer
Member FDIC
This report has not been reviewed or confirmed for accuracy by the FDIC.
42
The following are subsidiaries of Southern BancShares (N.C.), Inc. :
Subsidiary State of Incorporation
Southern Bank and Trust Company North Carolina
Southern Capital Trust I Delaware
Goshen, Inc. North Carolina
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 27,837
<INT-BEARING-DEPOSITS> 687
<FED-FUNDS-SOLD> 20,370
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,084
<INVESTMENTS-CARRYING> 100,129
<INVESTMENTS-MARKET> 99,979
<LOANS> 398,060
<ALLOWANCE> 6,188
<TOTAL-ASSETS> 669,232
<DEPOSITS> 578,250
<SHORT-TERM> 6,658
<LIABILITIES-OTHER> 6,380
<LONG-TERM> 23,000
0
2,491
<COMMON> 595
<OTHER-SE> 51,858
<TOTAL-LIABILITIES-AND-EQUITY> 669,232
<INTEREST-LOAN> 31,292
<INTEREST-INVEST> 9,874
<INTEREST-OTHER> 968
<INTEREST-TOTAL> 42,134
<INTEREST-DEPOSIT> 17,655
<INTEREST-EXPENSE> 2,312
<INTEREST-INCOME-NET> 22,167
<LOAN-LOSSES> 830
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 21,627
<INCOME-PRETAX> 4,829
<INCOME-PRE-EXTRAORDINARY> 4,829
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,679
<EPS-BASIC> 27.56
<EPS-DILUTED> 27.56
<YIELD-ACTUAL> 7.10
<LOANS-NON> 243
<LOANS-PAST> 460
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 42
<ALLOWANCE-OPEN> 5,962
<CHARGE-OFFS> 748
<RECOVERIES> 144
<ALLOWANCE-CLOSE> 6,188
<ALLOWANCE-DOMESTIC> 6,188
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
