SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2001 Commission File No. 0-10852
SOUTHERN BANCSHARES (N.C.), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1538087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
121 East Main Street Mount Olive, North Carolina 28365
(Address of Principal Executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (919) 658-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of the Registrant's common stock as of
the close of the quarter covered by this report.
114,874 shares
Part i - FINANCIAL INFORMATION
Item 1 - Financial Statements
(Unaudited)
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES June 30, December 31,
CONSOLIDATED BALANCE SHEETS 2001 2000
---------------- ---------------
(Dollars in thousands except per share data)
ASSETS
Cash and due from banks $ 38,829 $ 42,944
Federal funds sold 9,500 12,840
Investment securities:
Available-for-sale, at fair value (amortized cost $106,694 and $96,633, respectively) 124,574 111,573
Held-to-maturity, at amortized cost (fair value $74,938 and $96,416, respectively) 73,730 95,545
Loans 537,445 496,966
Less allowance for loan losses (7,296) (7,284)
---------------- ---------------
Net loans 530,149 489,682
Premises and equipment 30,909 29,313
Intangible assets 11,726 13,789
Accrued interest receivable 6,104 6,482
Other assets 2,041 1,273
---------------- ---------------
Total assets $ 827,562 $ 803,441
================ ===============
LIABILITIES
Deposits:
Noninterest-bearing $ 114,683 $ 107,695
Interest-bearing 599,826 590,790
---------------- ---------------
Total deposits 714,509 698,485
Short-term borrowings 15,097 15,427
Long-term obligations 23,000 23,000
Accrued interest payable 3,738 4,117
Other liabilities 4,546 2,730
---------------- ---------------
Total liabilities 760,890 743,759
---------------- ---------------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares
authorized; 365,962 and 367,524 shares issued and outstanding at June 30,
2001 and December 31, 2000, respectively 1,782 1,790
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized; 39,825
shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 555 555
Common stock, $5 par value; 158,485 shares authorized; 114,874 and 115,209 shares
issued and outstanding at June 30, 2001 and December 31, 2000, respectively 575 576
Surplus 10,000 10,000
Retained earnings 41,959 36,901
Accumulated other comprehensive income 11,801 9,860
---------------- ---------------
Total shareholders' equity 66,672 59,682
---------------- ---------------
Total liabilities and shareholders' equity $ 827,562 $ 803,441
================ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
2
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE Three Months Ended June 30,
INCOME 2001 2000
---- ----
(Dollars in thousands except share and per share data)
Interest income:
Loans $ 10,969 $ 9,024
Investment securities:
U. S. Government 2,241 2,236
State, county and municipal 356 491
Other 169 141
---------------- ---------------
Total investment securities interest income 2,766 2,868
Federal funds sold 287 301
---------------- ---------------
Total interest income 14,022 12,193
Interest expense:
Deposits 6,182 5,327
Short-term borrowings 131 97
Long-term obligations 518 518
---------------- ---------------
Total interest expense 6,831 5,942
---------------- ---------------
Net interest income 7,191 6,251
Provision for loan losses 250 75
---------------- ---------------
Net interest income after provision for loan losses 6,941 6,176
Noninterest income:
Service charges on deposit accounts 1,291 993
Investment securities (losses) gains, net 297 --
Other service charges and fees 371 401
Loss on sale of loans (46) --
Other 348 96
---------------- ---------------
Total noninterest income 2,261 1,490
Noninterest expense:
Personnel 3,490 2,902
Data processing 617 579
Intangibles amortization 985 594
Occupancy 623 515
Furniture and equipment 399 430
Professional fees 157 180
Other 1,156 929
---------------- ---------------
Total noninterest expense 7,427 6,129
---------------- ---------------
Income before income taxes 1,775 1,537
Income taxes 590 330
---------------- ---------------
Net income 1,185 1,207
---------------- ---------------
Other comprehensive income (loss) net of tax:
Unrealized (losses) gains arising during period 1,244 (343)
Less: reclassification adjustment for gains included in net income 196 --
---------------- ---------------
Total comprehensive (loss) income $ 1,048 $ (343)
================ ===============
Per share information:
Net income per common share $ 9.53 $ 9.40
Cash dividends declared on common shares 0.37 0.37
Weighted average common shares outstanding 114,933 118,267
================ ===============
(Unaudited)
Six Months Ended June 30
2001 2000
---- ----
Interest income:
Loans $ 21,855 $ 17,458
Investment securities:
U. S. Government 4,426 4,194
State, county and municipal 815 969
Other 299 297
--------------- ----------------
Total investment securities interest income 5,540 5,460
Federal funds sold 695 611
--------------- ----------------
Total interest income 28,090 23,529
Interest expense:
Deposits 12,847 10,065
Short-term borrowings 308 160
Long-term obligations 1,035 1,035
--------------- ----------------
Total interest expense 14,190 11,260
--------------- ----------------
Net interest income 13,900 12,269
Provision for loan losses 400 150
--------------- ----------------
Net interest income after provision for loan losses 13,500 12,119
Noninterest income:
Service charges on deposit accounts 2,466 1,855
Investment securities (losses) gains, net 4,624 (843)
Other service charges and fees 725 686
Loss on sale of loans (46) --
Other 493 276
--------------- ----------------
Total noninterest income 8,262 1,974
Noninterest expense:
Personnel 6,920 5,725
Data processing 1,226 1,058
Intangibles amortization 2,017 1,051
Occupancy 1,241 1,010
Furniture and equipment 744 812
Professional fees 300 409
Other 2,286 1,856
--------------- ----------------
Total noninterest expense 14,734 11,921
--------------- ----------------
Income before income taxes 7,028 2,172
Income taxes 1,640 460
--------------- ----------------
Net income 5,388 1,712
--------------- ----------------
Other comprehensive income (loss) net of tax:
Unrealized (losses) gains arising during period 4,993 (2,223)
Less: reclassification adjustment for gains included in net income 3,052 (556)
--------------- ----------------
Total comprehensive (loss) income $ 1,941 $ (1,667)
=============== ================
Per share information:
Net income per common share $ 45.28 $ 12.83
Cash dividends declared on common shares 0.75 0.75
Weighted average common shares outstanding 115,022 118,520
=============== ================
The accompanying notes are an integral part of these consolidated financial
statements.
3
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Dollars in thousands except per share data)
(Unaudited)
Preferred Stock Common Stock
---------------------------------------------------- ------------------------
Series B Series C
-------------------------- -----------------------
Shares Amount Shares Amount Shares Amount
------------ ----------- ----------- --------- ------------ ---------
Balance, December 31, 1999 397,370 $1,936 39,825 $555 118,912 $595
Net income
Purchase and retirement of stock (26,829) (131) (687) (4)
Cash dividends:
Common stock ($.75 per share)
Preferred B ($.44 per share)
Preferred C ($.44 per share)
Unrealized loss on securities
available-for-sale, net of tax of $859
------------ ----------- ----------- --------- ------------ ---------
Balance, June 30, 2000 370,541 $1,805 39,825 $555 118,225 $591
============ =========== =========== ========= ============ =========
Balance, December 31, 2000 367,524 $1,790 39,825 $555 115,209 $576
Net income
Purchase and retirement of stock (1,562) (8) (335) (1)
Cash dividends:
Common stock ($.75 per share)
Preferred B ($.44 per share)
Preferred C ($.44 per share)
Unrealized gain on securities
available-for-sale, net of tax of $1,000
------------ ----------- ----------- --------- ------------ ---------
Balance, June 30, 2001 365,962 $1,782 39,825 $555 114,874 $575
============ =========== =========== ========= ============ =========
Accumulated
Other
Compre- Total
Retained hensive Shareholders'
Surplus Earnings Income Equity
------------ ------------- ---------------- ----------------------
Balance, December 31, 1999 $10,000 $34,606 $7,252 $54,944
Net income 1,712 1,712
Purchase and retirement of stock (294) (429)
Cash dividends:
Common stock ($.75 per share) (88) (88)
Preferred B ($.44 per share) (173) (173)
Preferred C ($.44 per share) (18) (18)
Unrealized loss on securities
available-for-sale, net of tax of $859 (1,667) (1,667)
------------ ------------- ---------------- ----------------------
Balance, June 30, 2000 $10,000 $35,745 $5,585 $54,281
============ ============= ================ ======================
Balance, December 31, 2000 $10,000 $36,901 $9,860 $59,682
Net income 5,388 5,388
Purchase and retirement of stock (65) (74)
Cash dividends:
Common stock ($.75 per share) (85) (85)
Preferred B ($.44 per share) (162) (162)
Preferred C ($.44 per share) (18) (18)
Unrealized gain on securities
available-for-sale, net of tax of $1,000 1,941 1,941
------------ ------------- ---------------- ----------------------
Balance, June 30, 2001 $10,000 $41,959 $11,801 $66,672
============ ============= ================ ======================
The accompanying notes are an integral part of these consolidated financial
statements.
4
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
(Thousands) 2001 2000
-------------- -------------
OPERATING ACTIVITIES:
Net income $ 5,388 $ 1,712
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 400 150
Investment securities (gain) loss, net (4,624) 843
Loss on sale of loans 46 -
Loss on sale and abandonment of premises and equipment 37 8
Net accretion on discounts on investments (35) (43)
Amortization of intangibles 2,017 1,051
Depreciation 757 843
Net increase in accrued interest receivable 378 (979)
Net decrease in accrued interest payable (379) (280)
Net decrease (increase) in other assets (764) 239
Net (decrease) increase in other liabilities 1,816 (1,230)
-------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,037 2,314
-------------- -------------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities available-for-sale 25,323 12,162
Proceeds from maturities and issuer calls of investment securities held-to-maturity 29,803 23,666
Proceeds from sale of loans 14,551 -
Purchases of investment securities held-to-maturity (7,713) (41,863)
Purchases of investment securities available-for-sale (32,000) (20,000)
Net cash received for branches acquired - 26,074
Net increase in loans (55,468) (19,705)
Purchases of fixed assets (2,344) (2,800)
-------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (27,848) (22,466)
-------------- -------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and interest-bearing demand deposits (567) 1,376
Net increase (decrease) in time deposits 16,591 7,309
Net change in short-term borrowed funds (329) 1,597
Cash dividends paid (265) (279)
Purchase and retirement of stock (74) (429)
-------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,356 9,574
-------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (7,455) $ (10,578)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 55,784 48,894
-------------- -------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 48,329 $ 38,316
============== =============
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest $ 14,569 $ 11,540
Income taxes $ 1,287 $ 484
============== =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities available-for-sale, net of tax (expense) and benefit
of $1,000 and $859, respectively $ 1,941 ($1,667)
Foreclosed loans transferred to other real estate $ 49 -
The accompanying notes are an integral part of these consolidated financial
statements.
5
SOUTHERN BANCSHARES (N. C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary Of Significant Accounting Policies
Basis of Financial Statement Presentation
Southern BancShares (N. C.), Inc. ("BancShares") is the holding company for
Southern Bank and Trust Company ("Southern"), which operates 48 banking offices
in eastern North Carolina, and Southern Capital Trust I (the "Trust"), a
statutory business trust that issued $23.0 million of 8.25% Capital Securities
("the Capital Securities") in June 1998 maturing in 2028. BancShares irrevocably
and unconditionally guarantees the Trust's obligations. Southern, which began
operations January 29, 1901, has a wholly-owned subsidiary, Goshen, Inc. which
acts as agent for credit life and credit accident and health insurance written
in connection with loans made by Southern. BancShares and Southern are
headquartered in Mount Olive, North Carolina.
The consolidated financial statements in this report are unaudited. In the
opinion of management, all adjustments (none of which were other than normal
accruals) necessary for a fair presentation of the financial position and
results of operations for the quarters presented have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses for the
reporting periods. Actual results could differ from those estimates. The
statements should be read in conjunction with the consolidated financial
statements and accompanying notes for the year ended December 31, 2000,
incorporated by reference in the 2000 Annual Report on Form 10-K.
Principles of Consolidation
The consolidated financial statements include the accounts of BancShares and its
wholly-owned subsidiaries, Southern and the Trust. The statements also include
the accounts of Goshen, Inc., a wholly-owned subsidiary of Southern. BancShares'
financial resources are primarily provided by dividends from Southern. All
significant intercompany balances have been eliminated in consolidation.
6
Cash And Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks and federal funds sold. Federal funds are purchased and sold for
one day periods.
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 was encouraged. BancShares
adopted this statement on January 1, 2001 with no impact to the Company's
consolidated financial statements.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies the
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FAS
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. At this time BancShares has not determined
what effect that the adoption of SFAS No. 141 and 142 will have on the
consolidated financial statements.
Reclassifications
Certain prior period balances have been reclassified to conform to the current
period presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Dollars in thousands
Note 2. Investment securities June 30, 2001
-----------------------------------------------------------------
(In thousands, unaudited) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ----------------
SECURITIES HELD-TO-MATURITY:
U.S. Government $61,048 810 - $61,858
Obligations of states
and political subdivisions 12,582 399 (1) 12,980
Corporate debenture 100 - - 100
--------------- -------------- -------------- ----------------
73,730 1,209 (1) 74,938
--------------- -------------- -------------- ----------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government $ 86,073 1,249 - $ 87,322
Marketable equity securities 11,768 16,337 (26) 28,079
Obligations of states
and political subdivisions 7,916 304 (1) 8,219
Mortgage-backed securities 937 18 (1) 954
--------------- -------------- -------------- ----------------
106,694 17,908 (28) 124,574
--------------- -------------- -------------- ----------------
Totals $ 180,424 $19,117 $ (29) $ 199,512
=============== ============== ============== ================
Note 2. Investment securities December 31, 2000
----------------------------------------------------------------
(In thousands, unaudited) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- -------------- ------------- ---------------
SECURITIES HELD-TO-MATURITY:
U.S. Government $73,215 433 (24) $73,624
Obligations of states
and political subdivisions 22,230 464 (1) 22,693
Corporate debenture 100 - (1) 99
---------------- -------------- ------------- ---------------
95,545 897 (26) 96,416
---------------- -------------- ------------- ---------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government $ 73,997 509 (31) $ 74,475
Marketable equity securities 13,324 14,232 (157) 27,399
Obligations of states
and political subdivisions 8,177 387 - 8,564
Mortgage-backed securities 1,135 11 (11) 1,135
---------------- -------------- ------------- ---------------
96,633 15,139 (199) 111,573
---------------- -------------- ------------- ---------------
Totals $192,178 $16,036 $ (225) $ 207,989
================ ============== ============= ===============
7
During the six months ended June 30, 2000, management of BancShares reviewed its
portfolio of securities available-for-sale and determined that certain
marketable equity securities had declines in their value that were deemed to be
other than temporary. Accordingly, BancShares recorded a charge of $855,000 to
investment securities gains (losses) in the accompanying consolidated statement
of income and comprehensive income for the three and six months ended June 30,
2000 for this amount and reduced the carrying amount of the related investments
accordingly. There is no assurance that future charges to earnings for other
than temporary declines in the fair values of these or other investment
securities will be required.
Note 4. ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) (Unaudited)
Six Months Ended June 30,
--------------------------------
2001 2000
--------------- --------------
Balance at beginning of year $ 7,284 $ 6,188
Provision for loan losses 400 150
Loans charged off (351) (155)
Loan recoveries 58 168
Sale of credit card portfolio (95) -
--------------- --------------
Balance at end of the period $ 7,296 $ 6,351
=============== ==============
Note 5. Earnings Per Common Share
Earnings per common share are computed by dividing income applicable to common
shares by the weighted average number of common shares outstanding during the
period. Income applicable to common shares represents net income reduced by
dividends paid to preferred shareholders. Since BancShares had no potentially
dilutive securities during 2001 or 2000, the computation of basic and diluted
earnings per share is the same. The following table presents the components of
the earnings per share computations:
Note 5. EARNINGS PER COMMON SHARE (Unaudited) (Unaudited)
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
--------------- -------------- -------------- -------------
Net income $ 1,185 $ 1,207 $ 5,388 $ 1,712
Less: Preferred dividends (90) (95) (180) (191)
--------------- -------------- -------------- -------------
Net income applicable to common shares $ 1,095 $ 1,112 $ 5,208 $ 1,521
=============== ============== ============== =============
Weighted average common shares
outstanding during the period 114,933 118,267 115,022 118,520
=============== ============== ============== =============
Note 6. Related Parties
BancShares has entered into various service contracts with another bank holding
company (the "Corporation") and its subsidiary. The Corporation has two
significant shareholders, who also are significant shareholders of BancShares.
The first significant shareholder is a director of BancShares and, at June 30,
2001, beneficially owned 32,607 shares, or 28.39%, of BancShares' outstanding
common stock and 4,966 shares, or 1.36%, of BancShares' outstanding Series B
preferred stock. At the same date, the second significant shareholder
beneficially owned 27,522 shares, or 23.96%, of BancShares' outstanding common
stock.
8
These two significant shareholders are directors and executive officers of the
Corporation and at June 30, 2001, beneficially owned 2,527,814 shares, or
28.68%, and 1,452,494 shares, or 16.48%, of the Corporation's outstanding Class
A common stock, and 649,188 shares, or 38.26%, and 199,052 shares, or 11.73%, of
the Corporation's outstanding Class B common stock. The above totals include
478,728 Class A common shares, or 5.43%, and 104,644 Class B Common shares, or
6.17%, 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"). In 2000 Southern acquired two Rocky Mount, North Carolina offices
and one Nashville, North Carolina office of First Citizens containing $66.1
million of deposits and $75.8 million of loans. Southern paid $6.7 million to
First Citizens for this acquisition. In May 2001 Southern sold its $3.2 million
credit card portfolio to First Citizens, recording a gain of approximately
$250,000 on the sale. Southern continues to offer its customers a credit card
with the Southern Bank brand through First Citizens but the loans are owned by
First Citizens.
The following table lists the various charges paid to the Corporation during the
six months ended June 30, 2001 and the six months ended June 30, 2000:
(Dollars in thousands) (Unaudited)
Six Months Ended June 30,
----------------------------------------
2001 2000
------------------ -----------------
Data and item processing $1,160 $1,221
Forms, supplies and equipment 314 145
Trustee for employee benefit plans 32 45
Consulting fees 51 40
Other services 63 51
------------------ -----------------
$1,620 $1,502
================== =================
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - SIX MONTHS ENDED
2001 VS. SIX MONTHS ENDED 2000
INTRODUCTION
In the first six months of 2001, the net income of BancShares increased
approximately $3.7 million from $1.7 million in the first six months of 2000 to
$5.4 million in the first six months of 2001, an increase of 214.72%. This
increase resulted primarily from $4.6 million of gains on available-for-sale
securities in 2001, and an $855,000 adjustment for unrealized investment
security losses, considered other than temporary, to reduce the carrying values
of certain marketable equity securities in the first six months of 2000, that
did not recur in 2001. One branch acquisition in February 2000, three branch
acquisitions in April 2000, the opening of one new branch in September 2000 and
three branch acquisitions in November 2000 resulted in increased net interest
income, increased other noninterest income, increased personnel expense and
other related operating expenses for the six months ended June 30, 2001.
Per share net income available to common shares for the first six months of 2001
was $45.28, an increase of $32.45, or 252.92%, from $12.83 for the first six
months of 2000. The annualized return on average equity increased to 11.49%, for
the period ended June 30, 2001, from 6.31% for the period ended June 30, 2000
and the return on average assets increased to 0.90%, for the period ended June
30, 2001, from 0.50% for the period ended June 30, 2000.
At June 30, 2001, BancShares' assets totaled $827.6 million, an increase of
$24.1 million, or 3.00%, from the $803.4 million reported at December 31, 2000.
During this six month period, cash and due from banks decreased $4.1 million, or
9.58% from $42.9 million to $38.8 million. During this six month period, federal
funds sold decreased $3.3 million, or 26.01% from $12.8 million to $9.5 million.
During this six month period, loans increased $40.5 million, or 8.15%, from
$497.0 million to $537.4 million. During the six months ended June 30, 2001
investment securities decreased $8.8 million, or 4.26% from $207.1 million at
December 31, 2000 to $198.3 million at June 30, 2001. Total deposits increased
$16.0 million, or 2.29% from $698.5 million at December 31, 2000 to $714.5
million at June 30, 2001. The above changes resulted principally from the
seasonal impact of the agricultural markets served by Southern.
10
ACQUISITIONS
In February 2000 Southern acquired $1.3 million of loans and $7.1 million of
deposits of the Robersonville, North Carolina office of Cooperative Bank for
Savings, Inc. In April 2000 Southern acquired $5.1 million of loans and $29.4
million of deposits of the Battleboro, Nashville and Sharpsburg, North Carolina
offices of Centura Bank. In November 2000 Southern acquired $75.8 million of
loans and $66.1 million of deposits of the Nashville and Rocky Mount, North
Carolina offices of First-Citizens Bank & Trust Company, a related party. 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 proforma impact of the acquisitions, as though they had been made at the
beginning of the period presented, is not material to BancShares' consolidated
financial statements, however the comparisons of the six months ended June 30,
2001 to the six months ended June 30, 2000 are impacted by the above
transactions.
INTEREST INCOME
Interest and fees on loans increased $4.4 million, or 25.19%, from $17.5 million
for the six months ended June 30, 2000 to $21.9 million for the six months ended
June 30, 2001. This increase resulted from increased average balances that more
than offset slightly lower loan portfolio yields. Average loans for the six
months ended June 30, 2001 were $511.0 million, an increase of 25.52% from
$407.1 million for the prior year period. This increase in average loans was
principally the result of acquisitions and a new branch opening. The yield on
the loan portfolio was 8.58% for the six months ended June 30, 2000 and 8.50% in
the six months ended June 30, 2001.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased $80,000 or 1.47%, and totaled $5.5 million in both the six
months ended June 30, 2000 and the six months ended June 30, 2001. This increase
was due to an increase in the yield on the investment portfolio that more than
offset a decrease in the volume of average investment securities for the six
months ended June 30, 2001 to $188.6 million as compared to $199.7 million for
the same 2000 period. The decrease in volume principally resulted from loan
growth. The yield on investment securities was 5.49% for the six-month period
ended June 30, 2000 and 5.91% for the six-month period ended June 30, 2001.
11
Interest income on federal funds sold increased $84,000, or 13.75%, from
$611,000 for the six months ended June 30, 2000 to $695,000 for the six months
ended June 30, 2001. This increase in income resulted from an increase in the
average federal funds sold to $27.4 million for the six months ended June 30,
2001 from an average of $20.9 million for the six months ended June 30, 2000
that more than offset a decrease in the yield on federal funds. The increase in
average federal funds resulted from a decrease in investments. Average federal
funds sold yields decreased to 5.04% for the six months ended June 30, 2001 from
5.81% for the six months ended June 30, 2000.
Total interest income increased $4.6 million or 19.38%, from $23.5 million for
the six months ended June 30, 2000 to $28.1 million for the six months ended
June 30, 2001. This increase was the result of a 19 basis point increase in
average earning asset yields and an increase of $99.3 million in average earning
assets.
Average earning asset yields for the six months ended June 30, 2001 increased to
7.70% from the 7.51% yield on average earning assets for the six months ended
June 30, 2000. Average earning assets increased from $627.7 million in the six
months ended June 30, 2000 to $727.0 million in the six months ended June 30,
2001. This $99.3 million increase in the average earning assets resulted
primarily from branch acquisitions and a de novo branch.
INTEREST EXPENSE
Total interest expense increased $2.9 million, or 26.02%, from $11.3 million in
the six months ended June 30, 2000 to $14.2 million for the six months ended
June 30, 2001. The principal reasons for this increase were increased deposit
costs, increased short-term borrowings costs and increased deposits primarily
from branch acquisitions and a de novo branch. BancShares' total cost of funds
increased from 4.21% for the six months ended June 30, 2000 to 4.44% for the six
months ended June 30, 2001. Average interest-bearing deposits were $599.9
million in the six months ended June 30, 2001, an increase of $91.4 million from
the $508.5 million average in the six months ending June 30, 2000. The increase
in interest-bearing deposits was primarily the result of branch acquisitions and
a de novo branch.
NET INTEREST INCOME
Net interest income was $13.9 million for the six months ended June 30, 2001 and
$12.3 million for the six months ended June 30, 2000.
The interest rate spread for the six months ended June 30, 2001 was 3.27%, a
decrease of 3 basis points from the 3.30% interest rate spread for the six
months ended June 30, 2000.
12
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the six months ended June 30, 2001 management recorded $400,000 as a
provision for loan losses. Management made a $250,000 addition to the provision
for loan losses for the six months ended June 30, 2000.
During the first six months of 2001 management charged-off loans totaling
$351,000 and received recoveries of $58,000, resulting in net charge-offs of
$293,000. During the same period in 2000, $155,000 in loans were charged-off and
recoveries of $168,000 were received, resulting in net recoveries of $13,000.
For the six months ended June 30, 2001 $400,000 was added to the allowance for
loan losses through charges to the operations of BancShares. The allowance for
loan losses accordingly increased $12,000 from December 31, 2000. The following
table presents comparative Asset Quality ratios of BancShares:
(Unaudited)
June 30, December 31,
2001 2000
---------------- ---------------
Ratio of annualized net loans charged off
to average loans 0.11% 0.04%
Allowance for loan losses
to loans 1.36% 1.47%
Non-performing loans
to loans 0.37% 0.31%
Non-performing loans and assets
to total assets 0.25% 0.19%
Allowance for loan losses
to non-performing loans 362.99% 467.22%
The ratio of annualized net charge-offs to average loans outstanding increased
to 0.11% for the six months ended June 30, 2001 from 0.04% for the year ended
December 31, 2000. The allowance for loan losses represented 1.36% of gross
loans at June 30, 2001. The allowance for loan losses represented 1.47% of gross
loans at December 31, 2000. The allowance for loan losses to loans ratio was
impacted primarily by the loan growth. Loans increased $40.5 million, or 8.15%
from $497.0 million at December 31, 2000 to $537.4 million at June 30, 2001.
During the second quarter BancShares sold its credit card portfolio. Credit card
loans were considered by management to be one of the highest risk loan types and
accordingly had been assigned a high reserve requirement. The allowance related
to this portfolio was $95,000 at the time of sale. See the table above for the
effect of the sale on the allowance.
The ratio of nonperforming loans to total loans, increased from 0.31% at
December 31, 2000 to 0.37% at June 30, 2001. Nonperforming loans and assets to
total assets increased to 0.25% at June 30, 2001 from 0.19% at December 31,
2000. The allowance for loan losses to nonperforming loans represented 362.99%
of nonperforming loans at June 30, 2001, a decrease from the 467.22% at December
31, 2000. The above performance declines resulted primarily from an increase in
nonperforming loans to $2.0 million at June 30, 2001 from $1.6 million at
December 31, 2000. The nonperforming loans at June 30, 2001 included $186,000 of
nonaccrual loans, $1.8 million of accruing loans 90 days or more past due and no
restructured loans. The nonperforming loans at December 31, 2000 included
$478,000 of nonaccrual loans, $1.1 million of accruing loans 90 days or more
past due and no restructured loans. BancShares had $49,000 of assets classified
as other real estate at June 30, 2001. BancShares had no assets classified as
other real estate at December 31, 2000. Other real estate is recorded at the
lower of cost or fair value less estimated costs to sell. Subsequent costs
directly related to development and improvement of property are capitalized,
whereas costs relating to holding the property are expensed.
13
Management considers the June 30, 2001 allowance for loan losses to be adequate
to cover the losses and risks inherent in the loan portfolio at June 30, 2001
and will continue to monitor its portfolio and to adjust the relative level of
the allowance as needed.
Management actively maintains a current loan watch list and knows of no other
loans which are material and (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources, or (ii) represent material
credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Southern's allowance for loan losses
and losses on other real estate owned. Such agencies may require Southern to
recognize adjustments to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
NONINTEREST INCOME
During the six months ended June 30, 2001, BancShares realized a $6.3 million
increase in noninterest income primarily as a result of $4.6 million in gains on
the sales of available-for-sale investment securities.
During the six months ended June 30, 2000, management of BancShares reviewed its
portfolio of securities available-for-sale and determined that certain
marketable equity securities had declines in their value that were deemed to be
other than temporary. Accordingly, BancShares recorded a charge of $855,000 to
investment securities gains (losses) in the accompanying consolidated statement
of income and comprehensive income for the six months ended June 30, 2000 for
this amount and reduced the carrying amount of the related investments
accordingly. There is no assurance that future charges to earnings for other
than temporary declines in the fair values of these or other investment
securities will be required.
Service charges on deposit accounts for the six months ended June 30, 2001
increased $611,000 and other service charges and fees for the six months ended
June 30, 2001 increased $39,000 over the six months ended June 30, 2000
primarily as a result of branch acquisitions and a de novo branch.
14
NONINTEREST EXPENSE
Noninterest expense increased $2.8 million or 23.60%, from $11.9 million in the
six months ended June 30, 2000 to $14.7 million in the six months ended June 30,
2001.
This increase was primarily due to an increase in personnel expense of $1.2
million, or 20.87%, from $5.7 million at June 30, 2000 to $6.9 million at June
30, 2001 and increased occupancy, furniture and equipment expense, intangibles
amortization and other expenses resulting principally from branch acquisitions
and a de novo branch.
INCOME TAXES
In the six months ended June 30, 2001, BancShares had income tax expense of $1.6
million, an increase of $1.2 million from $460,000 in the prior year period. The
majority of this increase is due to the gains realized on available-for-sale
securities sales. The resulting effective tax rate for the six months ended June
30, 2001 was 23.34%. The effective tax rate for the six months ended June 30,
2000 was 21.18%. The estimated effective tax rate was revised due to certain
securities transactions. The effective tax rate in 2001 of 23.34% differs from
the federal statutory rate of 35.00% primarily due to tax exempt income.
15
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - SECOND QUARTER OF
2001 VS. SECOND QUARTER OF 2000
INTRODUCTION
In the three months ended June 30, 2001, net income of BancShares decreased
$22,000, or 1.82%, and was $1.2 million in both the three months ended June 30,
2000 and the three months ended June 30, 2001. The decrease in net income for
the quarter ended June 30, 2001 resulted principally from an increase in the
estimated tax rate for the quarter ended June 30, 2001 offset by a gain of
$250,000 from the sale of Southern's credit card portfolio.
Per share net income available to common shares for the three months ended June
30, 2001 was $9.53, an increase of $0.13, or 1.38%, from $9.40 in the three
months ended June 30, 2000.
ACQUISITIONS
In April 2000 Southern acquired $5.1 million of loans and $29.4 million of
deposits of the Battleboro, Nashville and Sharpsburg, North Carolina offices of
Centura Bank. In November 2000 Southern acquired $75.8 million of loans and
$66.1 million of deposits of the Nashville and Rocky Mount, North Carolina
offices of First-Citizens Bank & Trust Company, a related party. 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.
Southern had no acquisitions in the quarter ended June 30, 2001. The comparisons
of the three months ended June 30, 2001 to the three months ended June 30, 2000
are accordingly impacted by the acquisitions discussed above.
INTEREST INCOME
Interest and fees on loans increased $1.9 million, or 21.55%, from $9.0 million
for the quarter ended June 30, 2000 to $11.0 million for the quarter ended June
30, 2001. This increase was due to increased balances that more than offset
lower 2001 interest rates. Average loans for the quarter ended June 30, 2001
were $521.8 million, an increase of 25.49% from $415.8 million for the prior
year quarter. The yield on the loan portfolio was 8.64% for the three months
ended June 30, 2000 and 8.38% for the three months ended June 30, 2001.
16
Interest income from investment securities, including U.S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities decreased $102,000, or 3.56%, from $2.9 million in the three months
ended June 30, 2000 to $2.8 million in the three months ended June 30, 2001.
This decrease was due to lower balances that more than offset yields. Loan
growth resulted in decreased average investment securities for the quarter ended
June 30, 2001 to $188.5 million as compared to $206.4 million for the same 2000
quarter. The yield on investment securities was 5.55% for the quarter ended June
30, 2000 and 5.92% for the quarter ended June 30, 2001.
Interest income on federal funds sold decreased $14,000, or 4.65%, from $301,000
for the quarter ended June 30, 2000 to $287,000 for the quarter ended June 30,
2001. This decrease in income resulted from a decrease in rates that more than
offset an increase in volume. The volume increase resulted primarily from
decreased investments. The average federal funds sold was $24.3 million for the
quarter ended June 30, 2001 compared to an average of $19.9 million for the
quarter ended June 30, 2000. Average federal funds sold yields were 4.66% for
the quarter ended June 30, 2001 down from 5.97% for the quarter ended June 30,
2000.
Total interest income increased $1.8 million, or 15.00%, from $12.2 million for
the quarter ended June 30, 2000 to $14.0 million for the quarter ended June 30,
2001. This increase was the result of both an increase in average earning asset
yields and an increase in the average earning assets.
Average earning asset yields for the quarter ended June 30, 2001 increased to
7.62% from the 7.57% yield on average earning assets for the quarter ended June
30, 2000. Average earning assets increased from $642.1 million in the quarter
ended June 30, 2000 to $734.6 million in the quarter ended June 30, 2001. This
$92.5 million increase in the average earning assets resulted primarily from
acquisitions and a new branch.
INTEREST EXPENSE
Total interest expense increased $889,000 or 14.96%, from $5.9 million in the
three months ended June 30, 2000 to $6.8 million for the second quarter ended
June 30, 2001. The principal reason for this increase was both increased
balances resulting from the acquisitions and the new branch and higher costs of
deposits and short-term borrowings.
NET INTEREST INCOME
Net interest income was $7.2 million for the three months ended June 30, 2001
and $6.3 million for the three months ended June 30, 2000.
The interest rate spread for the quarter ended June 30, 2001 was 3.37%, an
increase of 11 basis points from the 3.26% interest rate spread for the quarter
ended June 30, 2000.
17
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the three months ended June 30, 2001 management recorded $250,000 as a
provision for loan losses. Management recorded a $75,000 provision for loan
losses for the quarter ended June 30, 2000. Management increased the provision
in consideration of loan growth, the increase in net loan charge offs and the
continued overall slowing of the economy.
During the three months ended June 30, 2001 management charged-off loans
totaling $345,000 and received recoveries of $20,000, resulting in net
charge-offs for the three months ended June 30, 2000 of $325,000. During the
three months ended June 30, 2000, $54,000 in loans were charged-off and
recoveries of $146,000 were received, resulting in net recoveries of $92,000 for
the three months ended June 30, 2000.
NONINTEREST INCOME
During the three months ended June 30, 2001, BancShares' noninterest income
increased $771,000 principally as a result of the sale of available-for-sale
securities and the sale of the credit card loans. Service charges on deposit
accounts for the three months ended June 30, 2001 increased $298,000 and other
service charges and fees for the three months ended June 30, 2001 decreased
$30,000 from the three months ended June 30, 2000 primarily as a result of the
sale of the credit card loans.
NONINTEREST EXPENSE
Noninterest expense including personnel, occupancy, furniture and equipment,
data processing, FDIC insurance, state assessments, printing, supplies and other
expenses, increased $1.3 million or 21.18%, from $6.1 million in the three
months ended June 30, 2000 to $7.4 million in the three months ended June 30,
2001.
This increase was primarily due to an increase in personnel expense of $588,000,
or 20.26%, from $2.9 million for the quarter ended June 30, 2000 to $3.5 million
for the quarter ended June 30, 2001 and increased occupancy, furniture and
equipment expense, intangibles amortization and other expenses resulting
principally from the branch acquisitions and new branch discussed above.
18
INCOME TAXES
In the three months ended June 30, 2001, BancShares had income tax expense of
$590,000, an increase of $260,000 from $330,000 in the prior year quarter. This
increase is due to an increase in the estimated effective tax rate to 33.24% for
the quarter ended June 30, 2001. The estimated effective tax rate for the
quarter ended June 30, 2000 was 21.47%. The estimated effective tax rate was
revised due to certain securities transactions. The effective tax rate for the
quarter ended June 30, 2001 of 33.24% differs from the federal statutory rate of
35.00% primarily due to tax exempt income.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Sufficient levels of capital are necessary to sustain growth and absorb losses.
In June 1998, the Trust issued $23.0 million of 8.25% Capital Securities
maturing in 2028. The Trust invested the $23.0 million proceeds in Junior
Subordinated Debentures issued by BancShares (the "Junior Debentures"), which
upon consolidation of BancShares are eliminated. The Junior Debentures, with a
maturity of 2028, are the primary assets of the Trust. BancShares irrevocably
and unconditionally guarantees the Trust's obligations.
BancShares contributed Capital Securities proceeds of $12.0 million to Southern
which are included in Tier I capital for Southern's regulatory capital adequacy
requirements. BancShares has similar regulatory capital adequacy requirements as
Southern and is in compliance with those capital adequacy requirements at June
30, 2001.
The Federal Reserve Board, which regulates BancShares, and the Federal Deposit
Insurance Corporation, which regulates Southern, have established minimum
capital guidelines for the institutions they supervise.
Regulatory guidelines define minimum requirements for Southern's leverage
capital ratio. Leverage capital equals total equity less goodwill and certain
other intangibles and is measured relative to total adjusted assets as defined
by regulatory guidelines. According to these guidelines, Southern's leverage
capital ratio at June 30, 2001 was 7.10%. At December 31, 2000, Southern's
leverage capital ratio was 6.97%. Both of these ratios are greater than the
level designated as "well capitalized" by the FDIC.
Southern is also required to meet minimum requirements for Risk Based Capital
("RBC"). Southern's assets, including loan commitments and other off-balance
sheet items, are weighted according to federal guidelines for the risk
considered inherent in each asset. At June 30, 2001, Southern's Total RBC ratio
was 12.79%. At December 31, 2000 the RBC ratio was 12.59%. Both of these ratios
are greater than the level designated as "well capitalized" by the FDIC.
19
The regulatory capital ratios above reflect increases in assets and liabilities
from the acquisitions Southern has made. Each of the acquisitions required the
payment of a premium for the deposits received. Each of these premiums resulted
in increased intangible assets on BancShares' financial statements, which is
deducted from total equity in the ratio calculations.
The accumulated other comprehensive income was $11.8 million at June 30, 2001,
and $9.9 million at December 31, 2000. Accumulated other comprehensive income
consists entirely of unrealized gains on securities available-for-sale, net of
taxes. Although a part of total shareholders' equity, accumulated other
comprehensive income is not included in the calculation of either the RBC or
leverage capital ratios pursuant to regulatory definitions of these capital
requirements. The following table presents capital adequacy calculations and
ratios of Southern:
(Unaudited)
June 30,
2001
-------------
(Dollars in thousands)
Tier 1 capital $ 56,095
Total capital 66,711
Risk-adjusted assets 521,661
Average tangible assets 789,618
Tier 1 capital ratio (1) 10.75%
Total capital ratio (1) 12.79%
Leverage capital ratio (1) 7.10%
(1) These ratios exceed the minimum ratios required for a bank to be
classified as "well capitalized" as defined by the FDIC.
LIQUIDITY
Liquidity refers to the ability of Southern to generate sufficient funds to meet
its financial obligations and commitments at a reasonable cost. Maintaining
liquidity ensures that funds will be available for reserve requirements,
customer demand for loans, withdrawal of deposit balances and maturities of
other deposits and liabilities. Past experiences help management anticipate
cyclical demands and amounts of cash required. These obligations can be met by
existing cash reserves or funds from maturing loans and investments, but in the
normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include cash and due from banks, federal
funds sold and investment securities available-for-sale. The liquidity ratio,
which is defined as cash plus short term available-for-sale securities divided
by deposits plus short term liabilities, was 25.89% at June 30, 2001 and 33.48%
at December 31, 2000.
The Statement of Cash Flows discloses the principal sources and uses of cash
from operating, investing and financing activities for the six months ended June
30, 2001 and for the six months ended June 30, 2000. Southern has no brokered
deposits. Jumbo time deposits are considered to include all time deposits of
$100,000 or more. Southern has never aggressively bid on these deposits. Almost
all jumbo time deposit customers have other relationships with Southern,
including savings, demand and other time deposits, and in some cases, loans. At
June 30, 2001 jumbo time deposits represented 13.73% of total deposits. At
December 31, 2000 jumbo time deposits represented 11.69% of total deposits.
20
Management believes that BancShares has the ability to generate sufficient
amounts of cash to cover normal requirements and any additional needs which may
arise, within realistic limitations, and management is not aware of any known
demands, commitments or uncertainties that will affect liquidity in a material
way.
ACCOUNTING AND OTHER MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. This statement, as amended by Statement 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application of all provisions of this statement is encouraged. BancShares
adopted this statement on January 1, 2001 with no impact to the Company's
consolidated financial statements.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies the
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FAS
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. At this time BancShares has not determined
what effect that the adoption of SFAS No. 141 and 142 will have on the
consolidated financial statements.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of BancShares and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
OTHER MATTERS
Management is not aware of any other trends, events, uncertainties, or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on BancShares' liquidity, capital resources or
other operations.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk:
Market risk reflects the risk of economic loss resulting from adverse changes in
market price and interest rates. This risk of loss can be reflected in 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. Historical prepayment
experience is considered as well as management's expectations based on the
interest rate environment and the core deposits without contractual maturity
level as of June 30, 2001. 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 June 30, 2001. The expected maturity categories take into consideration
historical prepayment experience as well as management's expectations based on
the interest rate environment as of June 30, 2001. 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 2002 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
June 30, 2001. The overall estimated fair market value of financial instruments,
as compared to statement amounts have increased at June 30, 2001 as compared to
December 31, 2000. Overall loan and deposit balance maturities are shorter at
June 30, 2001 and overall rates have declined significantly.
(Dollars in thousands, unaudited) Maturing in the years ended June 30
2002 2003 2004 2005 2006
Assets
Loans
Fixed rate $ 73,767 $ 48,155 $ 51,302 $ 33,806 $ 34,671
Average rate (%) 8.55% 8.66% 8.44% 8.28% 8.37%
Variable rate $ 122,523 $ 14,923 $ 13,238 $ 12,787 $ 10,761
Average rate (%) 8.33% 7.34% 7.30% 7.28% 7.31%
Investment securities
Fixed rate $ 93,611 $ 61,897 $ 2,155 $ 1,592 $ 1,630
Average rate (%) 6.31% 5.22% 8.11% 8.37% 8.28%
Variable rate - - - - -
Average rate (%) - - - - -
Liabilities
Savings and interest
bearing checking
Fixed rate $ 206,218 - - - -
Average rate (%) 1.29% - - - -
Certificates of deposit
Fixed rate $ 348,230 $ 24,436 $ 6,647 $ 7,695 -
Average rate (%) 5.25% 6.11% 5.44% 5.71% -
Variable rate $ 4,568 $ 2,032 - - -
Average rate (%) 3.34% 3.44% - - -
Long-term debt
Fixed rate - - - - -
Average rate (%) - - - - -
(Dollars in thousands, unaudited)
Thereafter Total Fair Value
Assets
Loans
Fixed rate $ 87,582 $329,283 $ 338,138
Average rate (%) 7.12% 8.12%
Variable rate $ 33,930 $208,162 $ 208,162
Average rate (%) 7.70% 7.98%
Investment securities
Fixed rate $ 18,602 $179,487 $ 198,575
Average rate (%) 6.26% 5.99%
Variable rate $ 937 $ 937 $ 937
Average rate (%) 6.75% 6.75%
Liabilities
Savings and interest
bearing checking
Fixed rate - $206,218 $ 206,218
Average rate (%) - 1.29%
Certificates of deposit
Fixed rate - $387,008 $ 391,114
Average rate (%) - 5.32%
Variable rate - $ 6,600 $ 6,600
Average rate (%) - 3.37%
Long-term debt
Fixed rate 23,000 $ 23,000 $ 23,000
Average rate (%) 10.00% 10.00%
A principal objective of BancShares' asset/liability function is to manage
interest rate risk or the exposure to changes in interest rates. Management
maintains portfolios of interest-earning assets and interest-bearing liabilities
with maturities or repricing opportunities that will protect against wide
interest rate fluctuations, thereby limiting, to the extent possible, the
ultimate interest rate exposure. The table below provides BancShares'
interest-sensitivity position as of June 30, 2001, which reflected a one year
negative cumulative interest-sensitivity gap of $274.7 million. As a result of
this one year negative gap, increases in interest rates could have an
unfavorable impact on net interest income. It should be noted that this analysis
reflects BancShares' interest sensitivity as of a single point in time and may
not reflect the effects of repricings of assets and liabilities in various
interest rate environments. The overall one-year interest sensitivity of
financial instruments is significantly higher at June 30, 2001 as compared to
December 31, 2000. The total cumulative interest sensitivity gap has also
increased significantly at June 30, 2001 as compared to December 31, 2000.
INTEREST-SENSITIVITY ANALYSIS
(Dollars in thousands, unaudited)
June 30, 2001
Non-Rate
1-90 91-180 181-365 Sensitive
Days Days Days & Over
Sensitive Sensitive Sensitive 1 year Total
Earning Assets:
Loans $ 161,396 $ 23,823 $ 11,071 $ 341,155 $ 537,445
Investment securities 18,639 32,968 42,004 104,693 198,304
Temporary investments 9,500 -- -- -- 9,500
---------------- ---------------- -------------- --------------- --------------
Total earning assets $ 189,535 $ 56,791 $ 53,075 $ 445,848 $ 745,249
================ ================ ============== =============== ==============
Interest-Bearing Liabilities:
Savings and core time deposits 302,885 132,473 32,582 33,806 501,746
Time deposits of $100,000 and more 30,187 30,315 30,574 7,004 98,080
Short-term borrowings 15,097 -- -- -- 15,097
Long-term obligations -- -- -- 23,000 23,000
---------------- ---------------- -------------- --------------- --------------
Total interest bearing liabilities $ 348,169 $ 162,788 $ 63,156 $ 63,810 $ 637,923
================ ================ ============== =============== ==============
Interest sensitivity gap $ (158,634) $ (105,997) $ (10,081) $ 382,038 $ 107,326
================ ================ ============== =============== ==============
Cumulative interest sensitivity gap $ (158,634) $ (264,631) $ (274,712) $ 107,326 $ 107,326
================ ================ ============== =============== ==============
Part ii - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 18, 2001 the annual meeting of shareholders was held. Eighteen
Directors of BancShares were elected for terms of one year or until their
respective successors are duly elected and qualified and KPMG LLP was ratified
as BancShares' independent public accountants for 2001.
Matter For Against Withheld Abstentions Broker Non-Votes
ELECTION OF DIRECTORS:
Bynum R. Brown 88,597 0 0 0 0
William H. Bryan 88,597 0 0 0 0
D. Hugh Carlton 88,597 0 0 0 0
Robert J. Carroll 88,597 0 0 0 0
Hope H. Connell 88,597 0 0 0 0
J. Edwin Drew 88,597 0 0 0 0
Moses B. Gilliam, Jr. 88,597 0 0 0 0
LeRoy C. Hand, Jr. 88,597 0 0 0 0
Frank B. Holding 88,597 0 0 0 0
M. J. McSorley 88,597 0 0 0 0
W. Hunter Morgan 88,597 0 0 0 0
John C. Pegram, Jr. 88,597 0 0 0 0
Charles I. Pierce, Sr. 88,597 0 0 0 0
W. A. Potts 88,597 0 0 0 0
Charles L. Revelle, Jr. 88,586 0 11 0 0
Charles O. Sykes 88,597 0 0 0 0
John N. Walker 88,407 0 190 0 0
R. S. Williams 88,597 0 0 0 0
RATIFICATION OF INDEPENDENT ACCOUNTANTS:
Matter For Against Withheld Abstentions Broker Non-Votes
KPMG LLP 87,945 23 0 629 0
Item 5. Other Information.
Forward-looking statements
The foregoing discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN BANCSHARES (N.C.), INC.
August 3, 2001 /s/ John C. Pegram, Jr.
-------------- ------------------------------------------------
Date John C. Pegram, Jr.,
President and Chief Executive Officer
August 3, 2001 /s/ David A. Bean
--------------- ------------------------------------------------
Date David A. Bean,
Secretary, Treasurer and Chief Financial Officer