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, 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)
116 East Main Street
Mount Olive, North Carolina 28365
(Address of Principal Executive offices, Zip Code)
(919) 658-7000
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to:
Section 12(b) of the Act: 8.25% Junior Subordinated Debentures
Section 12(g) of the Act: Series B non-cumulative preferred stock, no
par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 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 February
28, 2002: Common Stock, $5.00 par value - 114,114 shares
Portions of the Registrant's definitive Proxy Statement dated March 22, 2002 for
the 2001 Annual Meeting of Shareholders are incorporated by reference into Part
III.
CROSS REFERENCE INDEX
Page Number
PART I Item 1 Business ..................................................................................... 3
Item 2 Properties ................................................................................... 4
Item 3 Legal Proceedings ............................................................................ 26
Item 4 Submission of Matters to a Vote of Security Holders .......................................... None
PART II Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters ..................... 25
Item 6 Selected Financial Data ...................................................................... 6
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 4
Item 7A Quantitative and Qualitative Disclosures about Market Risk ................................... 15-17
Item 8 Financial Statements and Supplementary Data
Quarterly Financial Summary for 2001 and 2000 ................................................ 24-25
Independent Auditors' Report ................................................................. 29
Consolidated Balance Sheets as of December 31, 2001 and 2000 ................................. 30
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2001, 2000 and 1999 ............................................................. 31
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001,
2000 and 1999 ................................................................................ 32
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and
1999 ......................................................................................... 33
Notes To Consolidated Financial Statements ................................................... 34-53
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ........ None
PART III Item 10 Directors and Executive Officers of Registrant ............................................... *
Item 11 Executive Compensation ....................................................................... *
Item 12 Security Ownership of Certain Beneficial Owners and Management ............................... *
Item 13 Certain Relationships and Related Transactions ............................................... *
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements (see Item 8 for Reference)
(2) Financial Statement Schedules normally required on Form 10-K are omitted since they are
not applicable, except as referred to in Item 8.
(3) Exhibits have been filed separately with the Commission and are available upon written
request ...................................................................................... 55
(b) During the quarter ended December 31, 2001, no reports on Form 8-K were filed
* Information required by Item 10 is incorporated herein by reference to the
information that appears under the captions "PROPOSAL 1: ELECTION OF DIRECTORS",
"Section 16(a) Beneficial Ownership Reporting Compliance" and "Executive
Officers" on pages 4 through 5 and page 8 of Registrant's definitive Proxy
Statement dated March 22, 2002.
2
Information required by Item 11 is incorporated herein by reference to the
information that appears under the captions "Compensation Committee Interlocks
and Insider Participation", "Director Compensation", "Executive Compensation"
and "Pension Plan" on pages 6 through 10 of the Registrant's definitive Proxy
Statement dated March 22, 2002.
Information required by Item 12 is incorporated herein by reference to the
information that appears under the caption "Beneficial Ownership of Voting
Securities" on pages 2 through 4 of the Registrant's definitive Proxy Statement
dated March 22, 2002.
Information required by Item 13 is incorporated herein by reference to the
information that appears under the caption "Transactions with Related Parties"
on page 11 of the Registrant's definitive Proxy Statement dated March 22, 2002.
BUSINESS
General. Southern BancShares (N.C.), Inc. (hereinafter, with all of its
subsidiaries, referred to as "BancShares" or "Registrant"), is a bank holding
company which was organized during 1986 as the successor to Southern BancShares
(N.C.), Inc., a North Carolina corporation ("SBS"). SBS was formed in 1982 as
the parent company of Southern Bank and Trust Company ("Southern"). During 1986,
SBS was merged into BancShares to effect the reincorporation of Southern's
parent company in Delaware.
Southern is BancShares' principal operating subsidiary and is currently
engaged in commercial banking through 49 offices located primarily in eastern
North Carolina.
BancShares also is the parent company of Southern Capital Trust I ("SCT"),
a Delaware business trust that was organized during 1998 for the sole purpose of
issuing and selling $23.0 million aggregate liquidation amount of 8.25% capital
securities (the "Capital Securities"). The net proceeds from that sale, together
with the proceeds from SCT's issuance of its common securities to BancShares,
were invested in a like aggregate face amount of BancShares' 8.25% junior
deferrable interest subordinated debentures which mature during 2028. The
capital securities and the junior subordinated debentures are subject to
optional redemption at any time on or after June 30, 2003. BancShares has
entered into a guaranty agreement which, when taken together with its
obligations under the trust agreement under which SCT exists, the junior
subordinated debentures, and the indenture under which the debentures were
issued, provides a full and unconditional guarantee on a subordinated basis by
BancShares of SCT's payment of distributions and other payments on the Capital
Securities.
BancShares's executive offices are located at 116 East Main Street, Mount
Olive, North Carolina 28365, and its telephone number is (919) 658-7000.
BancShares's principal assets are its investments in and receivables from
its bank subsidiary and its investment securities portfolio. Its primary sources
of income are dividends from its bank subsidiary and interest income on its
investment securities portfolio. Certain laws and regulations restrict the
ability of Southern to transfer funds to BancShares in the form of cash
dividends or loans. All significant activities of BancShares and its
subsidiaries are banking related so that BancShares operates within one industry
segment. Neither BancShares nor its subsidiaries has any foreign operations.
Services. Southern provides a full range of banking and financial services
to individuals, small and medium-sized businesses and governmental units located
in its banking markets, including regular and interest checking accounts, money
market, savings and time deposit accounts, personal and business loans and a
variety of other services incidental to commercial banking. 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.
Employees. At December 31, 2001, BancShares and its subsidiaries employed a
full-time staff of 361 and a part-time staff of 26 for a total of 387employees.
Supervision and Regulation. BancShares is subject to the jurisdiction of
the Board of Governors of the Federal Reserve System (the "FRB") under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). Under the BHC Act,
3
BancShares is subject to supervision and examination by, and the regulations and
reporting requirements of, the FRB, and its activities are limited to those
permitted to financial holding companies. BancShares is required to obtain the
prior approval of the FRB before it may acquire direct or indirect control of
more than 5% of the outstanding voting stock, or substantially all of the assets
of, any other bank or bank holding company. Additionally, the BHC Act prohibits
BancShares from acquiring ownership or control of more than 5% of the
outstanding voting stock of any company engaged in an activity that is not
permitted for bank holding companies.
Bank holding companies are required to serve as a source of financial
strength for their depository institution subsidiaries, and, if their depository
institution subsidiaries become undercapitalized, bank holding companies may be
required, subject to certain limits, to guarantee compliance by those
subsidiaries with capital restoration plans filed with their regulators.
The federal Gramm-Leach-Bliley Act enacted in 1999 (the "GLB Act")
dramatically changed various federal laws governing the banking, securities and
insurance industries. The economic effects of the GLB Act on the banking
industry, and competitive conditions in the financial services industry
generally, may be profound. The GLB Act may expand opportunities for BancShares
and Southern to provide other services and obtain other revenues in the future,
and also may present new competitive challenges.
The internal affairs of BancShares, including the rights of its
shareholders, are governed by Delaware law and by its Articles of Incorporation
and Bylaws. BancShares files periodic reports under the Securities Exchange Act
of 1934 and is subject to the jurisdiction of the Securities and Exchange
Commission.
As an insured, state-chartered bank that is not a member of the Federal
Reserve System, Southern is subject to supervision and examination by, and the
regulations and reporting requirements of, the North Carolina Commissioner of
Banks (the "Commissioner") and the Federal Deposit Insurance Corporation (the
"FDIC"). Absent approval of the FDIC, Southern is prohibited from engaging as
principal in activities that are not permitted for national banks and it is
prohibited from acquiring or retaining any equity investment of a type not
permitted for national banks.
As a subsidiary of BancShares, Southern is subject to restrictions under
federal law on the amount of, and its ability to enter into, transactions with,
or investments in the securities of, BancShares and certain other affiliated
entities. Though it is not a member of the Federal Reserve System, Southern is
subject to the FRB's reserve requirements applicable to all banks and its
business is significantly influenced by the fiscal policies of the FRB. The
actions and policy directives of the FRB determine to a significant degree
Southern's cost and the availability of funds and the rates of interest charged
on its loans and paid on its deposits.
The FDIC, Commissioner and FRB 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.
Statistical Data. Certain statistical disclosures for bank holding
companies required by Guide 3 are included in Item 7 of this report under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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 116 East Main Street, Mount Olive,
North Carolina. At December 31, 2001 there were 48 Southern offices in North
Carolina. Southern opened its 49/th/ office on January 14, 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
4
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 2001, 2000 and 1999. 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.
SUMMARY
BancShares experienced a 120.70 percent increase in net income during 2001,
compared to 2000. Securities gains and gains on the sale of fixed assets are the
principal reasons for the 2001 increase. Consolidated net income was $8.2
million for 2001 compared to $3.7 million for 2000 and $3.7 million for 1999.
Net income per share for the year ended December 31, 2001 totaled $68.66
compared to $28.51 in 2000 and $27.56 in 1999. Return on average assets totaled
0.99 percent during 2001, 0.52 percent during 2000 and 0.57 percent during 1999.
Table 1 provides a five year summary of financial information for BancShares.
An analysis of BancShares' financial condition and growth can be made by
examining the changes and trends in interest-earning assets and interest-bearing
liabilities. Such an analysis also requires an evaluation of noninterest income
and noninterest expenses. In recent years, increasing total noninterest income
has been a significant focus for BancShares. The introduction of new revenue
sources and modifications to existing products and services has allowed bank
service related noninterest income to grow. In recent years the recognition of
gains and losses on available-for-sale securities has also had a significant
impact on total noninterest income, although management does not consider these
sources of noninterest income to be a recurring source of revenues for
BancShares. Franchise expansion has contributed to the growth in noninterest
income, but has also resulted in large increases in noninterest expense,
especially personnel-related costs, occupancy expenses, equipment expenses and
intangible asset amortization expenses.
Members of the Holding family, including Frank B. Holding who serves as a
director and Chairman of BancShares' Executive Committee, have been actively
involved in the management of BancShares. Currently, various members of the
Holding family control an aggregate of 69.78% of BancShares' common stock.
Southern is party to contracts with an affiliated financial institution,
First-Citizens Bank & Trust Company, Raleigh, North Carolina, pursuant to which
Southern is provided with various management consulting, support and data
processing services. See "Beneficial Ownership of Voting Securities" and
"Transactrions with Related Parties" in the preceding PROXY STATEMENT and Note
15, Related Parties in the following NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
As a result, Bancshares has been managed from a long-term perspective with
primary emphasis being placed on balance sheet liquidity, loan quality, and
earnings stability.
CRITICAL ACCOUNTING POLICIES
BancShares' significant accounting policies are set forth in note 1 of the
consolidated financial statements. Of these significant accounting policies,
BancShares considers its policy regarding the allowance for loan losses to be
its single critical accounting policy, because it requires management's most
subjective and complex judgments. In addition, changes in economic conditions
can have a significant impact on the allowance for loan losses and therefore the
provision for loan losses and results of operations. Bancshares has developed
appropriate policies and procedures for assessing the adequacy of the allowance
for loan losses, recognizing that this process requires a number of assumptions
and estimates with respect to its loan portfolio. BancShares' assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers which is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning
BancShares' allowance for loan losses and related matters, see Allowance for
Loan Losses.
5
Table 1
-------
SELECTED FINANCIAL DATA
-----------------------
(Dollars in thousands, except share data and ratios)
December 31,
--------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest income ..................................... $ 55,366 $ 49,909 $ 42,134 $ 41,702 $ 39,055
Interest expense .................................... 25,980 24,932 19,967 20,328 18,827
--------------------------------------------------------------------------------------------------------------------
Net interest income ................................. 29,386 24,977 22,167 21,374 20,228
Provision for loan losses ........................... 1,000 475 830 155 60
--------------------------------------------------------------------------------------------------------------------
Net interest income
after provision for loan losses ................. 28,386 24,502 21,337 21,219 20,168
Noninterest income .................................. 12,656 5,260 4,946 6,553 9,849
Noninterest expense ................................. 29,746 25,028 21,454 20,116 23,064
--------------------------------------------------------------------------------------------------------------------
Income before income taxes .......................... 11,296 4,734 4,829 7,656 6,953
Income taxes ........................................ 3,055 1,000 1,150 2,060 340
--------------------------------------------------------------------------------------------------------------------
Net income .......................................... $ 8,241 $ 3,734 $ 3,679 $ 5,596 $ 6,613
--------------------------------------------------------------------------------------------------------------------
Selected Year-End Balances
Total assets ........................................ $855,228 $803,441 $669,232 $649,425 $590,752
Investment securities and overnight funds sold 226,648 219,958 214,583 221,102 190,373
Loans ............................................... 545,300 496,966 398,060 364,489 349,216
Interest-earning assets ............................. 772,263 704,672 613,340 590,699 544,789
Deposits ............................................ 738,659 698,485 578,250 556,752 513,328
Interest-bearing liabilities ........................ 651,437 629,217 518,727 507,326 458,335
Shareholders' equity ................................ 67,429 59,682 54,944 56,033 54,984
Common shares outstanding ........................... 114,208 115,209 118,912 119,266 119,918
--------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Total assets ........................................ $833,716 $716,773 $651,014 $615,828 $567,236
Investment securities and overnight funds sold ...... 232,317 230,927 215,935 182,356 162,936
Loans ............................................... 527,204 427,939 380,877 362,298 340,195
Interest-earning assets ............................. 759,994 648,553 600,815 573,431 507,971
Deposits ............................................ 720,958 624,173 558,386 526,555 498,303
Interest-bearing liabilities ........................ 646,072 557,625 509,935 463,340 445,354
Shareholders' equity ................................ 65,544 55,370 55,474 56,423 45,703
Common shares outstanding ........................... 114,717 117,743 119,137 119,685 119,918
--------------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Return on average total assets ...................... 0.99% 0.52% 0.57% 0.91% 1.17%
Return on average shareholders' equity .............. 12.57 6.74 6.63 9.92 14.47
Dividend payout ratio (1) ........................... 6.52 14.84 15.57 10.38 8.85
--------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits ................................... 73.13% 68.56% 68.21% 68.81% 68.27%
Shareholders' equity to total assets ................ 7.86 7.72 8.52 9.16 8.06
--------------------------------------------------------------------------------------------------------------------
Per share of common stock
Net income (2) ...................................... $ 68.66 $ 28.51 $ 27.56 $ 43.40 $51.77
Cash dividends ...................................... 1.50 1.50 1.50 1.50 1.50
Book value (3) ...................................... 570.07 497.68 441.16 448.82 437.22
--------------------------------------------------------------------------------------------------------------------
(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 stock at December 31 divided by
the number of common shares outstanding at December 31
ACQUISITIONS AND DIVESTITURES
In February 2000 Southern acquired the Robersonville, North Carolina office
of Cooperative Bank for Savings, Inc. In April 2000 Southern acquired the
Battleboro, Nashville and Sharpsburg, North Carolina offices of Centura Bank. In
November 2000 Southern acquired the Nashville and Rocky Mount, North Carolina
offices of First-Citizens Bank & Trust Company, a related party. In September
1999 Southern acquired the Ahoskie, North Carolina office 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 acquisitions were as follows:
Table 2
-------
BRANCH ACQUISITIONS AND DIVESTITURES
(dollars in thousands)
Loans Deposits
Acquisitions Date Acquired Acquired
----------------------------------------------------------------------------------------------------------
Cooperative Savings Bank - Robersonville, NC ................ February 2000 $ 1,335 $ 7,117
6
Centura Bank - Battleboro, NC .......................... April 2000 2,131 11,065
Centura Bank - Nashville, NC ........................... April 2000 2,345 10,322
Centura Bank - Sharpsburg, NC .......................... April 2000 660 8,003
First-Citizens Bank & Trust Company - Nashville, NC ..... November 2000 8,493 15,349
First-Citizens Bank & Trust Company - Rocky Mount, NC.... November 2000 67,308 50,764
-------- --------
2000 Acquisition Totals ............................. $ 82,272 $102,620
====================================================================================================
====================================================================================================
First-Citizens Bank & Trust Company - Ahoskie, NC ..... September 1999 $ 9,211 $ 14,835
-------- --------
1999 Acquisition Totals.............................. $ 9,211 $ 14,835
====================================================================================================
INTEREST-EARNING ASSETS
Interest-earning assets averaged $760.0 million during 2001, an increase of
$111.4 million or 17.18 percent over 2000 levels, compared to a $47.7 million or
7.95 percent increase in 2000 over 1999 levels. Growth among average
interest-earning assets during 2001 was primarily due to internal loan growth
and the acquisitions discussed above.
Loans. As of December 31, 2001, gross loans outstanding were $545.3
milliom, a 9.73 percent increase over the December 31, 1999 balance of $497.0
million, which was a 24.85 percent increase over the December 31, 1999 balance
of $398.1 million. Loan growth during 2001 resulted principally from internal
loan growth. Loan growth during 2000 resulted principally from the acquisitions
discussed in Table 2 above. Loan balances for the last five years are provided
in Table 3.
Table 3
-------
LOANS
(Dollars in thousands)
December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Commercial, financial and agricultural....................... $ 92,293 $ 91,936 $ 77,169 $ 56,195 $ 45,947
Real estate:
Construction ................... ...................... 52,414 14,621 647 5,276 5,209
Mortgage:
One to four family residential ....................... 132,513 115,473 111,793 113,984 106,444
Commercial ........................................... 134,562 126,472 74,873 62,446 58,056
Equityline ........................................... 42,504 40,468 30,152 28,698 27,759
Other ................................................ 24,823 39,069 32,851 26,846 27,868
Consumer .................................................... 39,581 38,795 34,309 36,775 35,643
Lease financing ............................................. 26,610 30,132 36,266 34,269 42,290
-------- -------- -------- -------- --------
Total loans ............................... $545,300 $496,966 $398,060 $364,489 $349,216
======== ======== ======== ======== ========
7
All information presented in this table relates to domestic loans as BancShares
makes no foreign loans.
Loans secured by real estate averaged $405.5 million during 2001, compared
to $289.6 million during 2000, an increase of 40.02 percent. Much of the $115.9
million increase in real estate secured loans during 2001 was among
construction, commercial real estate and retail home equity loans. Commercial
and industrial loans averaged $115.7 million during 2001 compared to $107.5
million during 2000, an increase of 7.63 percent. Commercial and industrial loan
growth during 2001 resulted from BancShares' continued focus on small and
mid-size commercial customers.
Consumer loans averaged $36.9 million during 2001 compared to $36.3 during
2000. The $0.6 million increase during 2001 was primarily due to the
acquisitions discussed above. Demand for direct installment lending was sluggish
during 2001, as customers who have traditionally favored closed-end installment
lending continue to migrate to revolving lines of credit secured by home equity.
During 2002, management anticipates continued loan growth among loans to
commercial borrowers. Loan demand among small and mid-size businesses remains
relatively strong due to continuing economic growth in BancShares' market areas.
Recent downward trends in interest rates will likely contribute to loan growth
at rates similar to 2001 and 2000. Demand among retail customers continues to
shift to open-end credit products such as EquityLine. Growth in this area is
also expected during 2002.
To minimize the potential adverse impact of interest rate fluctuations,
management monitors the maturity and repricing distribution of the loan
portfolio. BancShares offers variable rate loan products and fixed rate callable
loans to reduce interest rate risk. Table 4 details the maturity and repricing
distribution as of December 31, 2001. Of the gross loans outstanding on December
31, 2001, 21.95 percent have scheduled maturities or repricing dates that extend
beyond five years.
Table 4
-------
LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
(Dollars in thousands) Within After One Year But After
One Year Within Five Years Five Years Total
-------- ----------------- ---------- --------
Commercial and Financial ....................... $ 6,482 $83,337 $ 2,474 $ 92,293
Real Estate:
Construction ................................. 52,414 -- -- 52,414
One to four family residential ............... 25,989 54,494 52,030 132,513
Commercial ................................... 43,429 59,782 31,351 134,562
Equityline ................................... 42,504 -- -- 42,504
8
Other ............................................ -- -- 24,823 24,823
Consumer ........................................... 19,970 19,611 -- 39,581
Lease Financing .................................... 9,593 12,455 4,562 26,610
-------- -------- -------- --------
Total ......................................... $200,381 $229,679 $115,240 $545,300
======== ======== ======== ========
Fixed Rate ......................................... $ 83,769 $168,704 $ 83,550 $336,023
Variable Rate ...................................... 116,612 60,975 31,690 209,277
-------- -------- -------- --------
Total ......................................... $200,381 $229,679 $115,240 $545,300
======== ======== ======== ========
Investment Securities. At December 31, 2001 the investment portfolio
totaled $204.3 million and at December 31, 2000 the investment portfolio totaled
$207.1 million resulting in a decrease of $2.8 million or 1.37 percent.
Investment securities averaged $199.2 million during 2001, $207.1 million during
2000 and $194.2 million during 1999. In each period U. S. Treasury and
government agency securities represented substantially all of the portfolio. The
decrease in the average securities portfolio during 2001 resulted primarily from
growth in loans. The increase in the average securities portfolio during 2000
and 1999 resulted primarily from growth in deposits.
The weighted-average maturity of the investment securities portfolio was 32
months at December 31, 2001 and 19 months at December 31, 2000. Management
continues to maintain a portfolio of securities with short maturities and call
dates, consistent with BancShares' focus on liquidity. Investment securities
available for sale include marketable equity securities that are recorded at
their fair value, with the unrealized gain included as a component of
shareholders' equity, net of deferred taxes. Table 5 presents detailed
information relating to the investment securities portfolio.
Table 5
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INVESTMENT SECURITIES
(Dollars in thousands) December 31,
2001 2000 1999
---- ---- ----
U.S. Treasury ............................................. $ 74,032 $126,969 $139,359
U.S. Government agencies .................................. 62,865 20,244 300
States and political subdivisions ......................... 24,210 34,975 33,203
Other ..................................................... 43,176 24,930 21,359
-------- -------- --------
Total investment securities ..................... $204,283 $207,118 $194,221
======== ======== ========
Investment Securities At December 31, 2001 Maturing
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------------ ------------ ------------ ------------
U.S. Treasury .............................. $74,032 6.05% - $ - - $ - -
U.S. Government agencies ................... - - 62,865 3.96% - - - -
States and political subdivisions .......... 6,411 2.79% 6,618 6.22% 7,554 7.41% 3,627 7.46%
Other ...................................... 117 6.00% 3,040 5.07% - - 40,019 5.62%
------- ----- ------- ----- ------ ---- ------- ----
Total investment securities ........... $80,560 5.89% $72,523 4.21% $7,554 7.41% $43,646 5.97%
======= ======= ====== =======
Income on Interest-Earning Assets. Table 6 analyzes the interest-earning
assets and interest-bearing liabilities for the three years ended December 31,
2001. Table 9 identifies the causes for changes in interest income and interest
expense for 2001 and 2000. Interest income amounted to $56.0 million during
2001, a $5.2 million increase from 2000 levels, compared to a $7.9 increase from
1999 to 2000. During 2001, loan growth was the primary factor for the increase
in interest income over
9
2000 as interest rates decreased. Interest income growth during 2000 resulted
from both increased rates and an increased volume of earning assets.
Total interest-earning assets yielded 7.34 percent during 2001, a 48 basis
point decrease from the 7.85 percent reported in 2000. The average
taxable-equivalent yield on the loan portfolio decreased from 8.73 percent in
2000 to 8.26 percent in 2001. The lower loan yield during 2001 reflects general
market conditions throughout the year, consisting primarily of a declining
interest rate environment. Loan interest income increased $6.2 million or 16.48
percent from 2000. This followed an increase of 19.45 percent in loan interest
income in 2000 over 1999. During 2000, the increase in loan interest income was
the result of both loan growth and higher loan yields. During 2001, the increase
in loan interest income was solely due to growth in loan volume as the average
yield on loans declined from 8.73 percent in 2000 to 8.26 percent in 2001.
Interest income earned on the investment portfolio amounted to $11.3
million for the year ended December 31, 2001, $12.2 million for the year ended
December 31, 2000 and $10.5 million for the year ended December 31, 1999. The
average taxable-equivalent yield on the portfolio for 2001 was 5.67 percent. The
average taxable-equivalent yield on the portfolio for 2000 was 6.11 percent The
average taxable-equivalent yield on the portfolio for 1999 was 5.33 percent. The
$1.7 million increase in investment interest income during 2000 results from the
combined effect of an increase in average yields and an increase in average
volume. The $944,000 decrease in 2001 investment interest income compared to
2000 investment interest income was due to decreased average volume and a
decrease in the tax-equivalent yield on investments from 6.11 percent in 2000 to
5.67 percent for 2001.
INTEREST-BEARING LIABILITIES
At December 31, 2001 interest-bearing liabilities totaled $651.4 million,
an increase of $22.2 million or 3.53 percent over December 31, 2000.
Interest-bearing liabilities averaged $646.1 million during 2001, an increase of
$88.4 million or 15.86 percent over 2000 levels. Interest-bearing deposits
contributed $80.6 million to the 2001 increase in interest-bearing liabilities.
During 2000, interest-bearing liabilities averaged $557.6 million, an increase
of $47.7 million or 9.35 percent over 1999. The growth during 2000 resulted
primarily from a $45.7 million increase in average interest-bearing deposits.
Deposits. Total deposits averaged $721.0 million in 2001, an increase of
$96.8 million or 15.51 percent over the 2000 average balance. Average
interest-bearing deposits were $607.0 million during 2001, an increase of $80.6
million or 15.32 percent compared to 2000. Money market accounts averaged $73.8
million during 2001, an increase of $12.9 million or 21.18 percent over the 2000
average balance. Checking with interest balances averaged $83.5 million during
2001, an increase of $6.2 million or 8.02 percent over the 2000 average balance.
Time deposit balances averaged $391.4 million during 2001, an increase of $61.5
million or 18.64 percent over the 2000 average balance. The overall growth in
average deposits during 2001 resulted primarily from internal growth and the
full-year impact of the acquisitions listed in Table 2.
Total deposits averaged $624.2 million in 2000, an increase of $65.8
million or 11.78 percent increase over the 1999 average balance. Average
interest-bearing deposits were $526.4 million during 2000, an increase of $45.7
million or 9.50 percent compared to 1999. Money market accounts averaged $60.9
million during 2000, an increase of $7.7 million or 14.45 percent over the 1999
average balance. Checking with interest balances averaged $77.3 million during
2000, an increase of $5.9 million or 8.25 percent over the 1999 average balance.
Time deposit balances averaged $329.9 million during 2000, an increase of $31.1
million or 10.43 percent over the 1999 average balance. The overall growth in
average deposits during 2000 resulted primarily from the acquisitions listed in
Table 2.
BancShares has historically avoided excessive reliance on high-dollar time
deposits, which are generally defined as time deposit accounts with balances in
excess of $100,000. At December 31, 2001, these funds were 14.23 percent of
total deposits, compared to 11.69 percent of December 31, 2000 total deposits.
Table 7 provides a maturity distribution for these deposits, which totaled
$105.1 million at December 31, 2001.
10
Table 6
-------
AVERAGE BALANCE SHEET ITEMS, NET INTEREST DIFFERENTIAL AVERAGE BALANCES AND
AVERAGE RATES EARNED AND PAID
Year ended December 31,
(Dollars in thousands) 2001 2000 1999
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------- --------------------------- ---------------------------
Interest earning assets:
Loans (1) (2)........................... $527,204 43,535 8.26% $ 427,939 $ 37,377 8.73% $ 380,877 $ 31,292 8.22%
Taxable investment securities........... 178,750 9,518 5.32% 170,223 9,695 5.70% 172,106 8,345 4.85%
Nontaxable investment
securities (3)..................... 20,437 1,769 8.66% 29,882 2,536 8.49% 24,748 2,155 8.71%
Federal funds sold...................... 33,130 1,190 3.54% 19,882 1,237 6.22% 19,081 968 5.07%
Other interest earning assets........... 474 36 7.51% 627 42 6.70% 4,003 204 5.10%
-------- ------- ----- --------- -------- ----- --------- -------- -----
Total interest earning assets 759,995 56,048 7.37% 648,553 50,887 7.85% 600,815 42,964 7.15%
-------- -------- --------
Non-interest earning assets:
Cash and due from banks................. 14,948 23,384 22,012
Premises and equipment, net............. 31,112 23,732 19,781
Other................................... 27,661 21,104 8,406
-------- --------- ---------
Total assets....................... $833,716 $ 716,773 $ 651,014
======== ========= =========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits...................... $100,334 716 0.71% $ 91,941 $ 1,019 1.11% $ 83,823 $ 799 0.95%
Savings deposits..................... 115,259 2,141 1.86% 104,503 2,586 2.47% 98,137 2,170 2.21%
Time deposits........................ 391,398 20,634 5.27% 329,910 18,783 5.69% 298,744 14,686 4.92%
Short-term borrowed funds............ 16,081 419 2.61% 8,271 474 5.73% 6,231 228 3.68%
Long-term obligations................ 23,000 2,070 9.00% 23,000 2,070 9.00% 23,000 2,084 9.06%
-------- ------- ----- --------- -------- ----- --------- -------- -----
Total interest bearing liabilities 646,072 25,980 4.02% 557,625 24,932 4.47% 509,935 19,967 3.92%
------- -------- --------
Non-interest bearing liabilities:
Demand deposits...................... 113,967 97,820 77,682
Other................................ 8,133 5,958 7,923
Shareholders' equity................. 65,544 55,370 55,474
-------- --------- ---------
Total liabilities and equity ... $833,716 $ 716,773 $ 651,014
======== ========= =========
Interest rate spread (4) 3.35% 3.38% 3.23%
Net interest income and
net interest margin (5)......... $30,068 3.96% $ 25,955 4.00% $ 22,997 3.83%
======= ======== ========
(1) Average balances include 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 combined federal and state tax rate of 38.55%.
The taxable equivalent adjustment was $682 in 2001, $978 in 2000 and $830
in 1999.
(4) Interest rate spread is the difference between interest earning asset yield
and interest bearing liability rate.
(5) Net interest margin is net interest income divided by average earning
assets.
(Dollars in thousands)
Three months or less ................................... $ 52,054
Over three through six months........................... 28,989
Over six months through twelve months................... 12,480
Over one year through five years ....................... 11,588
Over five years......................................... -
--------
$105,111
========
Short-Term Borrowings. BancShares has access to various short-term
borrowings, including the purchase of federal funds, overnight repurchase
obligations and credit lines with various correspondent banks. At December 31,
2001, short-term borrowings totaled $18.1 million, compared to $15.4 million at
December 31, 2000. For the year ended December 31, 2001, short-term borrowings
averaged $16.1 million, compared to $8.3 million during 2000 and $6.2 million
during 1999. Table 8 provides additional information regarding short-term
borrowed funds.
Table 8
-------
SHORT-TERM BORROWINGS 2001 2000 1999
---- ---- ----
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
------------------ ------------------- ----------------------
Repurchase agreements:
At December 31......................................... $17,683 0.62% $14,068 5.23% $ 5,223 3.72%
Average during year.................................... 14,681 2.55% 7,124 5.03% 5,240 3.58%
Maximum month-end balance during year.................. 17,969 14,068 6,313
U. S. Treasury tax and loan accounts:
At December 31......................................... $ 463 0.52% $ 1,359 6.29% $ 1,435 4.78%
Average during year.................................... 1,400 3.17% 1,147 5.95% 991 4.15
Maximum month-end balance during year.................. 2,366 2,150 2,035
Long-Term Obligations. At December 31, 2001 and December 31, 2000,
long-term obligations totaled $23.0 million. For the year ended December 31,
2001, December 31, 2000 and December 31, 1999 long-term borrowings averaged
$23.0 million. In June 1998 $23.0 million in long-term obligations were issued
by 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. BancShares issued these
long-term obligations to provide capital to support continued growth. Management
views these securities as an effective way to provide capital resources without
diluting current ownership.
Expense of Interest-Bearing Liabilities. Interest expense amounted to $26.0
million in 2001, a $1.0 million or 4.20 percent increase from 2000. Interest
expense amounted to $24.9 million in 2000, a $5.0 million or 24.87 percent
increase from 1999. The increased interest expense during 2001and 2000 was
primarily the result of the growth in volume due to the acquisitions listed in
Table 2.
As a result of overall market interest rate declines the average cost of
interest-bearing deposits decreased to 3.87 percent during 2001, compared to
4.25 percent in 2000 and 3.67 percent in 1999. Interest expense on total
interest-bearing deposits amounted to $22.4 million during 2000, an increase
from $17.7 million recorded during 1999. Interest expense on total
interest-bearing deposits amounted to $23.5 million during 2001, an increase
from $22.4 million recorded during 2000. The
12
increased interest expense on deposits during 2000 was primarily the result of
higher interest rates and growth in volume due to acquisitions listed in Table
2. The increased interest expense on deposits during 2001 was primarily the
result of acquisitions listed in Table 2. The average rate on time deposits
increased from 4.92 percent in 1999 to 5.69 in 2000 and decreased to 5.27
percent in 2001.
Interest expense on short-term borrowings amounted to $474,000 during 2000,
an increase from $228,000 or 107.89 percent from 1999. Interest expense on
short-term borrowings amounted to $419,000 during 2001, a decrease from $474,000
recorded during 2000. The decreased interest expense during 2001 was primarily
the result of overall lower 2001 market interest rates. The average rate on
short-term borrowings increased from 3.68 percent in 1999 to 5.73 in 2000 and
decreased to 2.61 percent in 2001.
Interest expense on long-term obligations amounted to $2.1 million for
2001, 2000 and 1999. The average rate on long-term borrowings decreased from
9.06 percent in 1999 to 9.00 percent in 2000 and 2001.
Table 9
-------
AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL ANALYSIS OF CHANGES IN
INTEREST DIFFERENTIAL
(Dollars in thousands) December 31, 2001 Increase (Decrease)
AMOUNT AMOUNT AMOUNT
TOTAL ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
CHANGE TO CHANGE TO CHANGE TO CHANGE IN
2000-2001 IN VOLUME IN RATE RATE/VOLUME
ASSETS
Interest earning assets:
Loans .......................................... $ 6,158 $ 8,606 $(2,011) $ (437)
Taxable investment securities .................. (177) 486 (647) (16)
Non-taxable investment securities .............. (767) (802) 51 (16)
Federal funds sold ............................. (53) 814 (528) (339)
------- --------- --------- ---------
Total interest income ..................... 5,161 9,104 (3,135) (808)
------- --------- --------- ---------
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits ................................ (303) 93 (368) (28)
Savings deposits ............................... (445) 266 (637) (74)
Time deposits .................................. 1,851 3,499 (1,386)
Short-term borrowings .......................... (55) 448 (258) (245)
------- --------- --------- ---------
Total interest expense .................... 1,048 4,306 (2,649) (609)
------- --------- --------- ---------
Net interest income .............................. $ 4,113 $ 4,798 $ (486) $ (199)
======= ========= ========= =========
(Dollars in thousands) December 31, 2001 Increase (Decrease)
AMOUNT AMOUNT AMOUNT
TOTAL ATTRIBUTABLE ATTRIBUTABLE ATTRIBUTABLE
CHANGE TO CHANGE TO CHANGE TO CHANGE IN
1999-2000 IN VOLUME IN RATE RATE/VOLUME
ASSETS
Interest earning assets:
Loans........................................... $ 6,085 $ 3,868 $ 1,714 $ 503
13
Taxable investment securities .................... 1,188 642 664 (118)
Non-taxable investment securities ................ 381 447 (54) (12)
Federal funds sold ............................... 269 41 219 9
------- ------- ------- -------
Total interest income ....................... 7,923 4,998 2,543 382
------- ------- ------- -------
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits .................................. 220 77 134 9
Savings deposits ................................. 416 141 255 20
Time deposits .................................... 4,097 1,533 2,301 263
Short-term borrowings ............................ 246 75 128 43
Long-term obligations ............................ (14) -- (14) -
------- ------- ------- -------
Total interest expense ...................... 4,965 1,826 2,804 335
------- ------- ------- -------
Net interest income ................................ $ 2,958 $ 3,172 $ (261) $ 47
======= ======= ======= =======
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 38.55%
for all periods. The taxable equivalent adjustment was $682 in 2001, $978 in
2000 and $830 in 1999.
NET INTEREST INCOME
Net interest income totaled $29.4 million during 2001, an increase of $4.4
million or 17.70 percent from 2000. Net interest income amounted to $25.0
million during 2000, an increase from $22.2 million recorded during 1999. Table
9 presents the annual changes in net interest income by components due to
changes in volume, yields and rates. Table 9 is presented on a
taxable-equivalent basis to adjust for the tax-exempt status of income earned on
certain loans, leases and municipal securities.
The average yield on interest-earning assets was 7.37 percent in 2001, 7.85
percent in 2000 and 7.15 percent in 1999. The lower average yield in 2001 was
the result of decreased market rates. The combined increase in loans and
decrease in investment securities and overall market rates created a
lower-yielding earning asset mix for 2001 compared to 2000, resulting in a
decrease in the net interest margin from 4.00 percent in 2000 to 3.96 percent in
2001. The higher net yields realized in 2000 compared to 1999 resulted from
overall higher market rates for earning assets.
Rate Sensitivity. 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. Table 10 provides
BancShares' interest-sensitivity position as of December 31, 2001, which
reflected a one year negative interest-sensitivity gap of $256.0 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.
Table 10
--------
INTEREST-SENSITIVITY ANALYSIS
(Dollars in thousands) December 31, 2001
Non-Rate
1-30 31-90 91-180 181-365 Sensitive
Days Days Days Days & Over
Sensitive Sensitive Sensitive Sensitive 1 Year Total
Interest Earning Assets:
Loans....................................... $ 13,291 $ 122,897 $ 18,377 $ 45,816 $344,919 $545,300
14
Investment securities............. 10,698 10,848 20,784 59,014 102,939 204,283
Temporary investments............. 22,365 - - - - 22,365
---------- --------- ---------- --------- --------- ---------
Total earning assets........ $ 46,354 $ 133,745 $ 39,161 $ 104,830 $ 431,345 $ 755,435
========== ========= ========== ========= ========= =========
Interest-Bearing Liabilities:
Savings and core time deposits.... $ 263,126 $ 89,958 $ 111,470 $ 3,910 $ 36,716 $ 505,180
Time deposits of $100,000
and more...................... 25,806 26,248 28,989 12,480 11,588 105,111
Short-term borrowings............. 18,146 - - - - 18,146
Long-term obligations............. - - - - 23,000 23,000
---------- --------- ---------- --------- --------- ---------
Total interest bearing
liabilities............... $ 307,078 $ 116,206 $ 140,459 $ 16,390 $ 71,304 $ 651,437
========== ========= ========== ========= ========= =========
Interest sensitivity gap.......... $ (260,724) $ 17,539 $ (101,298) $ 88,440 $ 360,041 $ 103,998
========== ========= ========== ========= ========= =========
Cumulative interest
sensitivity gap................... $ (260,724) $(243,185) $ (344,483) $(256,043) $ 103,998 $ 103,998
========== ========= ========== ========= ========= =========
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, since its interest bearing liabilities
generally mature or reprice faster than its interest earning assets. Management
seeks to manage this risk through the use of shorter term maturities where
possible. 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, 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 December 31, 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 2001 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, 2001.
15
Table 11
--------
MARKET RISK
(Dollars in thousands) Maturing in Years ended December 31
2002 2003 2004 2005 2006 Thereafter Total Fair Value
------------------------------------------------------------------------------------------------------------------------------
Assets
Loans:
Fixed rate................ $ 83,769 $ 39,875 $ 53,196 $ 29,583 $ 41,279 $ 88,321 $ 336,023 $ 362,514
Average rate (%).......... 8.25% 8.45% 8.07% 8.04% 7.80% 6.95% 7.83%
Variable rate............. $ 116,612 $ 17,793 $ 15,071 $ 14,582 $ 13,529 $ 31,690 $ 209,277 $ 209,277
Average rate (%).......... 7.96% 6.26% 6.58% 6.41% 6.31% 6.96% 7.35%
Investment Securities
Fixed rate................ $ 80,560 $ 56,252 $ 10,254 $ 1,592 $ 1,629 $ 53,284 $ 203,571 $ 205,074
Average rate (%).......... 5.89% 4.15% 4.35% 8.44% 8.28% 6.13% 5.38%
Variable rate............. -- -- -- -- -- $ 712 $ 712 $ 712
Average rate (%).......... -- -- -- -- -- 6.90% 6.90%
16
Liabilities
Savings and interest
bearing checking
Fixed rate............................. $229,619 -- -- -- -- -- $229,619 $229,619
Average rate (%)....................... 1.33% -- -- -- -- -- 1.33%
Certificates of deposit
Fixed rate............................. $330,357 $ 25,699 $ 9,503 $ 8,581 -- -- $374,140 $401,670
Average rate (%)....................... 3.72% 5.71% 4.38% 5.37% -- -- 3.91%
Variable rate.......................... $ 4,603 $ 1,929 -- -- -- -- $ 6,532 $ 6,532
Average rate (%)....................... 1.69% 1.73% -- -- -- -- 1.70%
Short-term borrowings
Variable rate.......................... $ 18,146 -- -- -- -- -- $ 18,146 $ 18,146
Average rate (%)....................... 2.61% -- -- -- -- -- 2.61%
Long-term debt
Fixed rate............................. -- -- -- -- -- $ 23,000 $ 23,000 $ 23,230
Average rate (%)....................... -- -- -- -- -- 8.25% 8.25%
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET 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, 2001 and December
31, 2000 amounted to $2,125 and $3,008. Outstanding commitments to lend at
December 31, 2001 and December 31, 2000 were $154,636 and $136,950. Undisbursed
advances on customer lines of credit at December 31, 2001 and December 31, 2000
were $45,940 and $48,506. Outstanding standby letters of credit and commitments
to lend at December 31, 2001 generally expire within one year, whereas
commitments associated with undisbursed advances on customer lines of credit at
December 31, 2001 generally expire within
17
one to five years.
At December 31, 2001, commitments to sell loans amounted to $3,718. At December
31, 2000 there were no commitments to sell loans.
BancShares does not have any special purpose entities or other similar forms of
off-balance sheet financing arrangements.
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 been under criticism
for potential health risks.
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.
ASSET QUALITY
Nonperforming Assets. Nonperforming asset balances for the past five years
are presented in Table 12. BancShares' nonperforming assets of $2.1 million at
December 31, 2001 included nonaccrual loans totaling $407,000, accruing loans
past due 90 days or more totaling $1.6 million and $64,000 of foreclosed
property. Nonperforming assets as of December 31, 2001 represented 0.38 percent
of loans outstanding. Nonperforming assets totaled $2.1 million at December 31,
2001, $1.6 million at December 31, 2000 and $1.2 million at December 31, 1999.
Of the $407,000 in nonaccrual loans at December 31, 2001, $197,203 were
considered to be impaired. Of the $478,000 in nonaccrual loans at December 31,
2000, none were considered to be impaired.
Table 12
--------
RISK ELEMENTS
Year ended December 31,
(Dollars in thousands) 2001 2000 1999 1998 1997
Nonaccrual loans ...................................... $ 407 $ 478 $ 243 $ 166 $230
Restructured loans .................................... 28 - 42 42 -
Accruing loans past due 90 days or more ............... 1,565 1,081 460 805 466
------ ------ ------ ------- ----
Total nonperforming loans ...................... 2,000 1,559 745 1,013 696
------ ------ ------ ------- ----
Other real estate owned ............................... 64 - 414 84 48
------ ------ ------ ------- ----
Total nonperforming loans and assets ..... $2,064 $1,559 $1,159 $ 1,097 $744
====== ====== ====== ======= ====
18
Management continually monitors the loan portfolio to ensure that problem
loans have been identified as nonperforming. Should economic conditions
deteriorate, the inability of distressed customers to service their existing
debt could cause higher levels of nonperforming assets.
Allowance for Loan Losses. Management evaluates the risk characteristics of
the loan portfolio under current economic conditions, reviews the financial
condition of the borrower, estimates the fair market value of the loan
collateral and considers any other pertinent factors to estimate current credit
losses. 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 borrowers 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 accounting principles generally accepted in the United States of
America and in consideration of the current economic environment. While
management uses the best information available to make evaluations, future
adjustments may be necessary.
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.
At December 31, 2000, BancShares' allowance for loan losses was $7.3
million or 1.47 percent of loans outstanding. At December 31, 2001, BancShares'
allowance for loan losses was $7.6 million or 1.40 percent of loans outstanding.
The reduction in the allowance-to-loan ratios since 2000 is primarily
attributable to continued growth in real estate secured lending. Commercial
loans generally have a higher level of credit risk than commercial real estate
loans; as a result, the commercial real estate loans generally have a lower
level of allowance for loan losses when compared to traditional commercial
loans. As a percentage of total loans, traditional commercial loans declined
from 22.98 percent of total loans at December 31, 2000 to 21.48 percent of total
loans at December 31, 2001.
19
Table 13
--------
SUMMARY OF LOAN LOSS EXPERIENCE
Year ended December 31,
(Dollars in thousands) 2001 2000 1999 1998 1997
Allowance for loan losses - beginning of year .................. $ 7,284 $ 6,188 $ 5,962 $ 5,971 $ 6,163
Charge - offs:
Commercial, financial and agricultural ...................... 269 84 183 158 47
Real estate:
Mortgage:
One to four family residential .................. - 67 77 41 86
Commercial ...................................... 46 11 121 15 -
Equityline ...................................... - 11 10 32 -
Other ........................................... 133 - - - 23
Lease financing ............................................. - - 16 - -
Consumer .................................................... 354 361 341 298 307
-------- -------- -------- -------- --------
Total charge-offs .................... 802 534 748 544 463
Recoveries:
Commercial, financial and agricultural ...................... 46 56 11 11 13
Real estate:
Construction ............................................ - - - - -
Mortgage:
One to four family residential ...................... - 13 25 20 59
Commercial .......................................... - 99 3 - -
Equityline .......................................... - 19 - 8 -
Other ............................................... 120 16 - 5 -
Consumer .................................................... 83 152 105 67 139
-------- -------- -------- -------- --------
Total recoveries ..................... 249 355 144 111 211
-------- -------- -------- -------- --------
Net charge-offs ................................................ 553 179 604 433 252
Provision for loan losses ...................................... 1,000 475 830 155 60
Reduction for sale of credit card portfolio .................... 95 - - - -
Additions from bank acquisitions .............................. - 800 - 269 -
-------- -------- -------- -------- --------
Allowance for loan losses - end of year ........................ $ 7,636 $ 7,284 $ 6,188 $ 5,962 $ 5,971
======== ======== ======== ======== ========
Average loans outstanding during the year ...................... $527,204 $427,939 $380,877 $362,298 $340,195
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans
outstanding ............................................... 0.10% 0.04% 0.16% 0.12% 0.07%
======== ======== ======== ======== ========
The provision for loan losses charged to operations was $1.0 million during
2001 compared to $475,000 during 2000 and $830,000 in 1999. The provision for
loan losses in 2001 was primarily a result of the $48.3 million in loan growth
and the impact of the slowing economy. Loans charged off were also impacted by
the slowing economy in eastern North Carolina. The provision for loan losses was
significantly impacted in 1999 by the effects of the September 1999 hurricanes
on BancShares' borrowers. Provision for loan losses for 2000 continued to be
impacted by unresolved concerns of Southern's hurricane-impacted borrowers in
addition to significant growth in the loan portfolio during 2000.
Net charge-offs during 2001 increased by $374,000 from 2000 net charge-offs
of $179,000. Net charge-offs during 2000 decreased by $425,000 from 1999 net
charge-offs of $604,000. The percentage of charge-offs, net of recoveries, to
average outstanding loans was 0.10 percent in 2001, 0.04 percent in 2000 and
0.16 percent in 1999. These loss percentages reflect the quality of BancShares'
loan portfolio, as these ratios remain low by industry standards. Table 13
provides details concerning the allowance and provision for loan losses for the
past five years.
Management considers the established allowance adequate to absorb probable
losses in the December 31, 2001 loan portfolio, although future additions to the
allowance may be necessary based on changes in economic conditions and other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. Such
agencies may require the recognition of additions to the allowance based on
their judgments of information available to them at the time of their
examinations.
Table 14 details management's allocation of the allowance among the various
loan types. The process to allocate the allowance for loan losses considers,
among other factors, whether the borrower is a retail or commercial customer,
whether the loan is secured or unsecured, and whether the loan is an open or
closed-end agreement. Generally, loans to commercial
20
customers are evaluated individually and assigned a credit grade using such
factors as the borrower's cash flow, the value of any underlying collateral and
the value of any guarantees, while loans to retail customers are evaluated among
groups of loans with similar characteristics. These ratings, prior loss
experience and current economic conditions become the basis for the allowance
allocation shown in Table 14.
Table 14
--------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
December 31,
---------------------------------------------------------------------------------------------------
% of loans % of loans % of loans % of loans % of loans
in each in each in each in each in each
category to category to category to category to category to
2001 total loans 2000 total loans 1999 total loans 1998 total loans 1997 total loans
---- ---- ---- ---- ----
Commercial,
financial and
agricultural ............ 2,800 17% $3,000 19% $2,450 19% $2,200 16% $2,149 13%
Real estate:
Construction ......... 300 10% 100 3% 100 1% 100 2% 60 2%
Mortgage:
One to four family
residential ..... 1,200 24% 1,100 23% 1,100 28% 1,100 31% 1,194 30%
Commercial ....... 550 25% 550 25% 550 19% 550 17% 537 17%
Equityline ....... 200 8% 200 8% 200 8% 200 8% 239 8%
Other ............ 186 5% 184 8% 188 8% 212 7% 239 8%
Consumer ............... 2,000 6% 2,050 8% 1,500 8% 1,500 10% 1,493 10%
Lease financing ........ 400 5% 100 6% 100 9% 100 9% 60 12%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ................... $7,636 100% $7,284 100% $6,188 100% $5,962 100% $5,971 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
NONINTEREST INCOME
Total noninterest income was $12.7 million for the year ended December 31,
2001, an increase of $7.4 million or 140.61 percent. This compares to $5.3
million for the year ended December 31, 2000 and $4.9 million for the year ended
December 31, 1999. Net securities gains of $4.6 million were realized in the
year ended December 31, 2001. Net securities losses of $746,000 were realized in
the year ended December 31, 2000. In 1999, $1,000 of investment securities gains
were realized.
Table 15 presents the components of noninterest income for the last five
years. In recent years management has searched for various opportunities to
enhance noninterest income through new products, new services, new fees and
marketing changes to existing products. Excluding securities gains and losses,
noninterest income, as a percentage of net interest income, has increased from
21.17 percent for 1997 to 27.33 percent for 2001.
Table 15
--------
NONINTEREST INCOME
(Dollars in thousands) Year Ended December 31,
2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts ..................... $ 5,080 $ 3,942 $ 3,497 $ 3,199 $ 2,918
Other service charges and fees .......................... 1,482 1,275 1,192 1,025 868
Investment securities (losses) gains, net ............... 4,625 (746) 1 1,789 5,567
Gain (loss) on sale of loans ............................ 402 38 (272) (112) 52
Other ................................................... 1,067 751 528 652 444
---------------------------------------------------------------------------------------------------------------------------------
21
7
Total noninterest income ............................ $12,656 $5,260 $4,946 $6,553 $9,849
===================================================================================================================================
Income from service charges on deposit accounts was $5.1 million for the
year ended December 31, 2001, an increase of 28.87 percent. Service charge
income was $3.9 million for the year ended December 31, 2000 compared to $3.5
million for the year ended December 31, 1999.
Income from other service charges and fees was $1.5 million for the year
ended December 31, 2001, an increase of 16.24 percent. Other service charges and
fee income was $1.3 million for the year ended December 31, 2000 and $1.2
million for the year ended December 31, 1999.
Gains and losses resulting from sales of available-for-sale securities was
a net gain of $4.6 million for the year ended December 31, 2001, compared to
losses of $746,000 for 2000 and a gain of $1,000 for the year ended December 31,
1999.
Gain on sale of loans increased $364,000 from $38,000 in 2000 to $402,000
in 2001 as a result of the lower overall interest rate market in 2001 which
resulted in both increased mortgage loan production and increased sales of
mortgage loans into the secondary market.
Other noninterest income increased $316,000 from $751,000 in 2000 to $1.1
million in 2001 as a result of the gain realized on the sale of a vacant banking
facility.
NONINTEREST EXPENSE
Total noninterest expense for the year ended December 31, 2001 of $29.7
million was an 18.85 percent increase over the year ended December 31, 2000
compared to a 16.66 percent increase for the year ended December 31, 2000 over
the year ended December 31, 1999. Table 16 presents the components of
noninterest expense for the last five years.
Personnel expense was $14.0 million for the year ended December 31, 2001,
an increase of $2.2 million or 18.95 percent over the year ended December 31,
2000 compared to a $946,000 or 8.76 percent increase for the year ended December
31, 2000 over the year ended December 31, 1999. Increases in each period
resulted primarily from merit increases, growth in incentive-based compensation
and additional personnel due to the acquisitions discussed in Table 2.
BancShares had 378 full time equivalent employees at December 31, 2001, compared
to 365 at December 31, 2000 and 327 at December 31, 1999. The increases during
2001, 2000 and 1999 were primarily due to the acquisitions discussed in Table 2
and the opening of a new office in Greenville, North Carolina in September 2000
and Clinton, North Carolina in November 1999.
Table 16
--------
NONINTEREST EXPENSE
Year Ended December 31,
(Dollars in thousands)
2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
Personnel ..................................................... $ 13,978 $ 11,751 $ 10,805 $ 9,501 $ 8,763
Intangibles amortization ...................................... 3,852 2,603 1,942 1,534 1,755
Data processing ............................................... 2,461 2,224 1,852 1,829 1,598
Furniture and equipment ....................................... 1,874 1,650 1,534 1,502 1,633
Occupancy ..................................................... 2,624 2,106 1,633 1,567 1,388
Professional fees ............................................. 600 705 286 715 649
FDIC insurance assessment ..................................... 127 122 114 115 112
Charitable contributions ...................................... - - 9 2 4,076
Other ......................................................... 4,230 3,867 3,279 3,351 3,090
------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense .............................. $ 29,746 $ 25,028 $ 21,454 $ 20,116 $ 23,064
====================================================================================================================================
Intangibles amortization was $3.9 million for the year ended December 31,
2001, an increase of $1.2 million or 47.98 percent over the year ended December
31, 2000 compared to a $661,000 or 34.04 percent increase for the year ended
December 31, 2000 over the year ended December 31, 1999. Increases in each
period resulted from the acquisitions listed in Table 2.
22
Data processing expense was $2.5 million for the year ended December 31,
2001, an increase of $237,000 or 10.66 percent over the year ended December 31,
2000 compared to a $372,000 or 20.09 percent increase for the year ended
December 31, 2000 from the year ended December 31, 1999. In the year
acquisitions are made, substantial one time data processing costs are incurred
to convert customer account information files from the selling institution's
data processing files to BancShares' data processing files. Increases and
decreases in each period resulted primarily from the acquisitions listed in
Table 2 and the opening of new offices in Greenville, North Carolina in
September 2000 and Clinton, North Carolina in November 1999.
Furniture and equipment expense was $1.9 million for the year ended
December 31, 2001, an increase of $224,000 or 13.58 percent over the year ended
December 31, 2000 compared to a $116,000 or 7.56 percent increase for the year
ended December 31, 2000 over the year ended December 31, 1999. Increases in each
period resulted primarily from the acquisitions listed in Table 2, the opening
of new administrative offices in Mount Olive, North Carolina in 2001 and the
opening of new branches in Greenville, North Carolina in 2000 and Clinton, North
Carolina in 1999.
Occupancy expense was $2.6 million for the year ended December 31, 2001, an
increase of $518,000 or 24.60 percent over the year ended December 31, 2000
compared to a $473,000 or 28.97 percent increase for the year ended December 31,
2000 over the year ended December 31, 1999. Increases in each period resulted
primarily from the acquisitions listed in Table 2, the opening of new
administrative offices in Mount Olive, North Carolina in 2001 and the opening of
new branches in Greenville, North Carolina in 2000 and Clinton, North Carolina
in 1999.
INCOME TAXES
For the year ended December 31, 2001, BancShares recorded total income tax
expense of $3.1 million, compared to $1.0 million of income tax expense for the
year ended December 31, 2000 and $1.2 million for the year ended December 31,
1999. BancShares' effective tax rate declined from 23.81 percent for the year
ended December 31, 1999 to 21.12 percent for the year ended December 31, 2000
and increased to 27.04 percent for the year ended December 31, 2001. The
decrease in the effective tax rate from 1999 to 2000 primarily resulted from an
increase in the proportion of non-taxable investments. The increase in the
effective tax rate from 2000 to 2001 primarily resulted from the securities
gains realized in 2001 and a resulting lower proportion of non-taxable
investments.
RELATED PARTY TRANSACTIONS
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, 2001 beneficially owned 32,856 shares, or 28.77%, of BancShares' outstanding
common stock and 4,966 shares, or 1.37%, of BancShares' outstanding Series B
preferred stock. At the same date, the second significant shareholder
beneficially owned 27,522 shares, or 24.10%, of BancShares' outstanding common
stock.
These two significant shareholders are directors and executive officers of
the Corporation and at December 31, 2001, beneficially owned 2,524,210 shares,
or 28.67%, and 1,446,621 shares, or 16.43%, of the Corporation's outstanding
Class A common stock, and 649,188 shares, or 38.35%, and 199,052 shares, or
11.76%, of the Corporation's outstanding Class B common stock. The above totals
include 472,855 Class A common shares, or 5.37%, and 104,644 Class B common
shares, or 6.18%, 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 2000 and 1999. Southern incurred expenses for
various contractual services provided by First Citizens. Data and item
processing expenses were incurred for courier services, proof and encoding,
microfilming, check storage, statement rendering and item processing forms.
Management has researched
23
alternative, non-related, providers for such services and believes that it pays
fair value for these services. BancShares also has a correspondent relationship
with the Corporation. Correspondent account balances with the Corporation
included in cash and due from banks totaled $23,974 at December 31, 2001 and
$26,205 at December 31, 2000. Southern's wholly-owned subsidiary, Goshen, Inc.
paid $87 and $99 to an Insurance Company owned by the Corporation for the sale
of insurance written in connection with loans made by Southern in 2001 and 2000,
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 $465,000, respectively, at both
December 31, 2001 and 2000. The Class A common stock had a fair value of $12.2
million and $10.0 million at December 31, 2001 and 2000, respectively. The Class
B common stock had a fair value of $2.2 million and $1.6 million at December 31,
2001 and 2000, respectively.
LIQUIDITY
Management places great importance on maintaining a highly liquid
investment portfolio with maturities structured to meet liquidity requirements.
The ability to generate deposits is the primary source of liquidity. The average
deposit growth rate was 15.51 percent for the year ended December 31, 2001,
11.78 percent for the year ended December 31, 2000 and 6.05 percent for the year
ended December 31, 1999.
At December 31, 2001 the investment portfolio totaled $204.3 million or
23.89 percent of total assets. At December 31, 2000 the investment portfolio
totaled $207.1 million or 25.78 percent of total assets. Management expects
maturing securities combined with other traditional sources of liquidity to
provide BancShares liquidity requirements.
The above liquidity sources have traditionally enabled BancShares to place
minimal dependence on borrowed funds to meet liquidity needs, however BancShares
has readily available sources for borrowed funds through various correspondent
banks.
BancShares has obligations under existing contractual obligations that will
require payments in future periods. The following table presents aggregated
information about such payments to be made in future periods. Transaction
deposit accounts with indeterminate maturities have been classified as having
payments due in less than one year.
Table 17
--------
CONTRACTURAL OBLIGATIONS
As of December 31, 2001
(In thousands)
Payments due by period
----------------------
Less than 1 year 1-3 years 4-5 years Over 5 years Total
Deposits ................................ $692,947 $37,131 $8,581 - $738,659
Short-term borrowings ................... 18,146 - - - 18,146
Long-term obligations ................... - - - 23,000 23,000
Lease obligations ....................... 58 92 - - 150
---------------------------------------------------------------------------------------------------------------------
Total contractural cash obligations .... $711,151 $37,223 $8,581 $23,000 $779,955
=====================================================================================================================
24
SHAREHOLDER'S EQUITY AND CAPITAL ADEQUACY
BancShares maintains adequate capital balances and exceeds all minimum
regulatory capital requirements. Table 18 provides additional information on the
regulatory capital of BancShares. Failure to meet certain capital requirements
as defined by BancShares regulatory agencies could result in specific regulatory
actions that could have a material effect on BancShares financial statements.
Table 18
--------
ANALYSIS OF SOUTHERN'S CAPITAL ADEQUACY
Southern's capital ratios as of December 31 are set forth below:
2001 2000 1999
Tier 1 capital(1) .................... $ 60,458 $ 51,865 $ 55,398
Total capital ........................ 70,916 61,630 62,967
Risk-adjusted assets ................. 548,884 489,540 386,761
Average tangible assets .............. 820,605 744,328 654,268
Tier 1 capital ratio (1) ............. 11.01% 10.59% 14.32%
Total capital ........................ 12.92% 12.59% 16.28%
Leverage capital ratio ............... 7.37% 6.97% 8.47%
(1) The Capital Securities issued in 1998 are considered part of Tier I
Capital. 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.
The increase in capital ratios during 2001 reflects the impact of the 2001
gains on sale of available-for-sale securities. The rate of return on average
shareholders' equity for the year ended December 31, 2001 was 12.57 percent
compared to 6.74 percent for the year ended December 31, 2000 and 6.63 percent
for the year ended December 31, 1999. The increased return recorded during 2001
resulted principally from gains on sale of available-for-sale securities. The
increased return recorded during 2000 resulted principally from the growth in
earnings.
The Board of Directors of BancShares has authorized the purchase of up to
15,849 shares of Common and 40,873 of Preferred B and 4,363 shares of Preferred
C stock. Management will continue to consider the purchase of outstanding shares
when market conditions are favorable and excess capital is available for such
purchases.
FOURTH QUARTER ANALYSIS
BancShares' net income for the fourth quarter of 2001 totaled $1.6 million,
an increase of $899,000 or 127.34 percent from the fourth quarter of 2000.
Average interest-earning assets for the fourth quarter of 2001 increased $67.0
million or 9.64
25
percent over the fourth quarter of 2000. Average loans for the fourth quarter of
2001 increased $70.5 million or 15.07 percent over the fourth quarter of 2000.
Average investment securities for the fourth quarter of 2001 decreased $22.7
million or 11.28 percent over the fourth quarter of 2000. Average earning assets
and average loans increased both as a result of the acquisitions listed in Table
2 and internal growth of existing branches. Average investment securities
decreased as a result of internal loan growth and growth in overnight funds
sold.
Interest income for the fourth quarter of 2001 decreased $288,000 or 2.09
percent from the fourth quarter of 2000 primarily as a result of lower overall
interest rates.
Average interest-bearing liabilities increased $57.5 million from the
fourth quarter of 2000 to the fourth quarter of 2001 primarily as a result of
the acquisitions discussed in Table 2. The rate on total interest-bearing
liabilities decreased from 4.75 percent for the fourth quarter of 2000 to 3.22
percent for the fourth quarter of 2001.
Net interest income increased $1.6 million from the fourth quarter of 2000
to the fourth quarter of 2001 primarily as a result of the acquisitions listed
in Table 2.
Non-interest income for the fourth quarter of 2001 increased $948,000 or
64.18 percent over the fourth quarter of 2000 primarily as a result of a gain on
sale of fixed assets of $461,000. Non-interest expense for the fourth quarter of
2001 increased $943,000 or 13.64 percent over the fourth quarter of 2000
primarily as a result of the acquisitions listed in Table 2.
Table 19
--------
SELECTED QUARTERLY DATA
2001 2000
Fourth Third Second First Fourth Third Second First
-----------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income ...................... $13,482 $13,794 $14,022 $14,068 $13,770 $12,610 $12,193 $11,336
Interest expense ..................... 5,368 6,422 6,831 7,359 7,250 6,422 5,942 5,318
-----------------------------------------------------------------------------------------------------------------------
Net interest income .................. 8,114 7,372 7,191 6,709 6,520 6,188 6,251 6,018
Provision for loan losses ............ 350 250 250 150 175 150 75 75
-----------------------------------------------------------------------------------------------------------------------
Net income after provision for loan
losses ........................... 7,764 7,122 6,941 6,559 6,345 6,038 6,176 5,943
Noninterest income ................... 2,425 1,969 2,261 6,001 1,477 1,809 1,490 484
Noninterest expense .................. 7,859 7,153 7,427 7,307 6,916 6,191 6,129 5,792
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes ........... 2,330 1,938 1,775 5,253 906 1,656 1,537 635
Income taxes ......................... 725 690 590 1,050 200 340 330 130
-----------------------------------------------------------------------------------------------------------------------
Net income ........................... $ 1,605 $ 1,248 $ 1,185 $ 4,203 $ 706 $ 1,316 $ 1,207 $ 505
=======================================================================================================================
Net income applicable to common
shares ........................... $ 1,513 $ 1,156 $ 1,095 $ 4,113 $ 613 $ 1,223 $ 1,112 $ 409
=======================================================================================================================
26
PER SHARE OF STOCK
Net income per share of common
stock........................................ 13.33 10.07 9.53 35.73 5.26 10.41 9.40 3.44
Cash dividends - common.......................... 0.38 0.37 0.37 0.38 0.38 0.37 0.37 0.38
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......................................... 195.00 195.00 195.00 195.00 195.00 195.00 185.00 185.00
Low.......................................... 195.00 195.00 195.00 195.00 195.00 185.00 185.00 185.00
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
MARKET FOR THE REGISTRANT'S COMMON EQUITY 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, 2001 was 323. 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.
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.
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 material impact to the
Company's consolidated financial statements.
The FASB has also issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125." It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral, and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. This statement is effective for transfers
and servicing of financial assets
27
and extinguishments of liabilities occurring after March 31, 2001. This
statement is effective for recognition and reclassification of collateral and
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The adoption of this statement did not
materially impact the Company.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 (Statement 141), "Business Combinations", and Statement of Financial
Accounting Standards No. 142 (Statement 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. Statement 141 also
specifies criteria which must be met for intangible assets acquired in a
purchase method business combination to be recognized and reported apart from
goodwill. 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 identifiable intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of".
BancShares was required to adopt the provisions of Statement 141 as of June
30, 2001 and will adopt Statement 142 effective January 1, 2002. Furthermore,
any goodwill and any intangible asset determined to have an indefinite useful
life that are acquired in a purchase business combination completed after June
30, 2001 will not be amortized, but will continue to be evaluated for impairment
in accordance with the appropriate accounting literature issued prior to
Statement 142. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 continued to be amortized in 2001 prior to the
adoption of Statement 142 on January 1, 2002.
Statement 141 requires, upon adoption of Statement 142, that BancShares
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, BancShares will be required to
reassess the useful lives and residual values of all identifiable intangible
assets acquired in purchase business combinations, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. In addition, any intangible asset classified as goodwill under
Statement 142 will be subjected to a transitional impairment test during the
first six months of 2002 based on the level of goodwill as of January 1, 2002.
Any impairment losses identified as a result of this transitional impairment
test will be recognized in the 2002 statement of income as the effect of a
change in accounting principle.
As of December 31, 2001, BancShares had intangible assets totaling $9.9
million. Management has evaluated BancShares's existing intangible assets and
goodwill as of January 1, 2002 and will make appropriate reclassifications in
future periods in order to conform to the new criteria in Statement 141 for
recognition apart from goodwill, as further described below.
BancShares has determined that upon adoption of Statement 142 on January 1,
2002, BancShares had $229,000 of goodwill that will no longer be amortized
beginning in 2002. The amortization expense associated with this goodwill during
the years ended December 31, 2001, 2000 and 1999 was $415,000, $674,000 and $1.0
million, respectively. In accordance with Statement 142, BancShares will perform
a transitional impairment test of this goodwill in the first six months of 2002,
and will perform an annual impairment test of the goodwill in 2002 and
thereafter.
The remaining intangible assets, totaling $9.7 million at December 31,
2001, relate to acquisitions of branches that are being accounted for in
accordance with Statement of Financial Accounting Standards No. 72 (Statement
72), "Accounting for Certain Acquisitions of Banking and Thrift Institutions."
Statement 72, which was not amended by Statement 142, requires that identified
intangible assets and unidentified intangible assets associated with certain
acquisitions of branches be amortized into expense. Accordingly, these
intangible assets will continue to be amortized over their useful lives
(generally 7 years). Management periodically reviews the useful lives of these
assets and adjusts them downward where appropriate. The amortization expense
associated with these branches was $3.4 million, $1.9 million, and $687,000 for
the years ended December 31, 2001, 2000 and 1999, respectively, and is expected
to be $3.1 million for the year ending December 31, 2002.
28
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 (Statement 143), "Accounting for Asset Retirement Obligations", which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
cost. This standard requires BancShares to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and or normal use of the
assets. BancShares also is to record a corresponding increase to the carrying
amount of the related long-lived asset and to depreciate that cost over the life
of the asset. The liability is changed at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying the
initial fair value measurement. This statement is effective for fiscal years
beginning after June 15, 2002. At this time, BancShares is assessing the impact
of Statement 143 on its financial condition and results of operations.
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (Statement 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard provides guidance on differentiating between long-lived assets to
be held and used, long-lived assets to be disposed of other than by sale and
long-lived assets to be disposed of by sale. Statement 144 supersedes FASB
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Statement 144 also supersedes Accounting Principals Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for fiscal years beginning
after December 15, 2001. BancShares does not expect adoption of this statement
to have a material effect on its consolidated financial statements.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of BancShares and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
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.
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.
29
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, 2001
and 2000, and the related consolidated statements of income and comprehensive
income, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
30
/s/ KPMG LLP
Raleigh, North Carolina
February 8, 2002
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except for per share data)
December 31,
2001 2000
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks ......................................................................... $ 40,811 $ 42,944
Overnight funds sold ............................................................................ 22,365 12,840
Investment securities ($87,105 and $78,155 pledged for repurchase agreements, respectively):
Held-to-maturity, at amortized cost (fair value of $50,142 and $96,416, respectively) ....... 49,351 95,545
Available-for-sale, at fair value (amortized cost of $138,419 and $96,633, respectively) .... 154,932 111,573
Loans ........................................................................................... 545,300 496,966
Less allowance for loan losses .............................................................. (7,636) (7,284)
-----------------------------------------------------------------------------------------------------------------------------------
Net loans ....................................................................................... 537,664 489,682
Premises and equipment .......................................................................... 32,683 29,313
Accrued interest receivable ..................................................................... 6,097 6,482
Intangible assets ............................................................................... 9,916 13,789
Other assets .................................................................................... 1,409 1,273
------------------------------------------------------------------------------------------------------------------------------------
Total assets .............................................................................. $ 855,228 $803,441
====================================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing ......................................................................... $ 128,368 $107,695
Interest-bearing ............................................................................ 610,291 590,790
------------------------------------------------------------------------------------------------------------------------------------
Total deposits .................................................................................. 738,659 698,485
Short-term borrowings ........................................................................... 18,146 15,427
Long-term obligations ........................................................................... 23,000 23,000
Accrued interest payable ........................................................................ 3,228 4,117
Other liabilities ............................................................................... 4,766 2,730
------------------------------------------------------------------------------------------------------------------------------------
31
Total liabilities .................................................... 787,799 743,759
--------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares
authorized; 363,373 and 367,524 shares issued and outstanding at
December 31, 2001 and December 31, 2000, respectively .................. 1,770 1,790
Series C non-cumulative preferred stock, no par value; 43,631 shares
authorized; 39,716 and 39,825 shares issued and outstanding at
December 31, 2001 and December 31, 2000, respectively .................. 553 555
Common stock, $5 par value; 158,485 shares authorized; 114,208 and
115,209 shares issued and outstanding at December 31, 2001 and
December 31, 2000, respectively ........................................ 571 576
Surplus .................................................................... 10,000 10,000
Retained earnings .......................................................... 44,388 36,901
Accumulated other comprehensive income ..................................... 10,147 9,860
--------------------------------------------------------------------------------------------------------
Total shareholders' equity ............................................ 67,429 59,682
--------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ............................ $855,228 $803,441
========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands except for per share data)
Year ended December 31,
2001 2000 1999
-----------------------------------------------------------------------------------------------------
Interest income:
Loans ................................................... $ 43,535 $ 37,377 $ 31,292
Investment securities:
U. S. Government ....................................... 8,488 8,753 7,454
State, county and municipal ............................ 1,431 1,966 1,728
Other .................................................. 722 576 692
-----------------------------------------------------------------------------------------------------
Total investment securities interest income .......... 10,641 11,295 9,874
Overnight funds sold .................................... 1,190 1,237 968
-----------------------------------------------------------------------------------------------------
Total interest income ................................ 55,366 49,909 42,134
Interest expense:
Deposits ................................................ 23,491 22,388 17,655
Short-term borrowings ................................... 419 474 228
Long-term obligations ................................... 2,070 2,070 2,084
-----------------------------------------------------------------------------------------------------
Total interest expense ................................. 25,980 24,932 19,967
-----------------------------------------------------------------------------------------------------
Net interest income .................................... 29,386 24,977 22,167
Provision for loan losses ............................... 1,000 475 830
-----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses .... 28,386 24,502 21,337
Noninterest income:
Service charges on deposit accounts ..................... 5,080 3,942 3,497
Other service charges and fees .......................... 1,482 1,275 1,192
Investment securities gain (loss), net .................. 4,625 (746) 1
Gain (loss) on sale of loans ............................ 402 38 (272)
Other ................................................... 1,067 751 528
-----------------------------------------------------------------------------------------------------
Total noninterest income ................................ 12,656 5,260 4,946
32
Noninterest expense:
Personnel ................................................................. 13,978 11,751 10,805
Intangibles amortization .................................................. 3,852 2,603 1,722
Data processing ........................................................... 2,461 2,224 1,852
Furniture and equipment ................................................... 1,874 1,650 1,534
Occupancy ................................................................. 2,624 2,106 1,633
Professional fees ......................................................... 600 705 286
Other ..................................................................... 4,357 3,989 3,622
-------------------------------------------------------------------------------------------------------------------------
Total noninterest expense ................................................ 29,746 25,028 21,454
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes ................................................. 11,296 4,734 4,829
Income taxes ............................................................... 3,055 1,000 1,150
-------------------------------------------------------------------------------------------------------------------------
Net income ............................................................... 8,241 3,734 3,679
-------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) arising during period ........................... 3,129 2,116 (4,109)
Reclassification adjustment for (gains) losses included in net income ..... (2,842) 492 (1)
-------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) ......................................... 287 2,608 (4,110)
-------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) .............................................. $ 8,528 $ 6,342 $ (431)
=========================================================================================================================
Per share information:
Net income per common share ............................................... $ 68.66 $ 28.51 $ 27.56
Cash dividends declared on common shares .................................. 1.50 1.50 1.50
Weighted average common shares outstanding ................................ 114,717 117,743 119,137
=========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands except for per share data)
Accumulated
Other
Preferred Stock Common Compre- Total
---------------------------------
Series B Series C Stock Retained hensive Shareholders'
---------------- -------------- ---------------
Shares Amount Shares Amount Shares Amount Surplus Earnings Income Equity
---------------- -------------- --------------- ------- -------- ------- ------
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
Purchase and 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
------------------------------------------------------------------------------------------------------------------------------------
Net income .......................... -- -- -- -- -- -- -- 3,734 -- 3,734
Purchase and retirement of stock .... (29,846) (146) -- -- (3,703) (19) -- (885) -- (1,050)
Cash dividends:
Common stock ($1.50 per share) ... -- -- -- -- -- -- -- (177) -- (177)
Preferred B ($.90 per share) ..... -- -- -- -- -- -- -- (341) -- (341)
Preferred C ($.90 per share) ..... -- -- -- -- -- -- -- (36) -- (36)
Unrealized gain on securities
available-for-sale, net of tax ... -- -- -- -- -- -- -- -- 2,608 2,608
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 .......... 367,524 $1,790 39,825 $555 115,209 $576 $10,000 $36,901 $ 9,860 $59,682
------------------------------------------------------------------------------------------------------------------------------------
33
Net income ............................... -- -- -- -- -- -- -- 8,241 -- 8,241
Purchase and retirement of stock ......... (4,151) (20) (109) (2) (1,001) (5) -- (217) -- (244)
Cash dividends:
Common stock ($1.50 per share) ....... -- -- -- -- -- -- -- (173) -- (173)
Preferred B ($.90 per share) ......... -- -- -- -- -- -- -- (328) -- (328)
Preferred C ($.90 per share) ......... -- -- -- -- -- -- -- (36) -- (36)
Unrealized gain on securities available-
for-sale, net of tax ................. -- -- -- -- -- -- -- -- 287 287
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 ............... 363,373 $ 1,770 39,716 $553 114,208 $ 571 $10,000 $44,388 $ 10,147 $67,429
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES Year ended December 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income ............................................................................... $ 8,241 $ 3,734 $ 3,679
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .............................................................. 1,000 475 830
Deferred income taxes .................................................................. (682) (230) (423)
Loss on impairment of available-for-sale securities .................................... - 855 -
Gains on sales and issuer calls of securities .......................................... (4,625) (109) (1)
(Gain) loss on sale and abandonment of premises and equipment .......................... (682) 8 119
(Gain) loss on sale of loans ........................................................... (652) (38) 272
Net amortization (accretion of discounts) of premiums on investments ................... 8 (114) 50
Amortization of intangibles and mortgage servicing rights .............................. 3,873 2,708 1,942
Depreciation ........................................................................... 2,134 1,713 1,482
Proceeds from loans held for sale ...................................................... 43,793 10,244 31,600
Origination of loans held for sale ..................................................... (73,806) (14,092) (30,052)
Proceeds from sale of credit card portfolio ............................................ 3,200 - -
Net decrease (increase) in accrued interest receivable ................................. 385 (1,752) (159)
Net decrease in accrued interest payable ............................................... (889) (354) (34)
Net decrease in other assets ........................................................... 79 627 113
Net increase (decrease) in other liabilities ........................................... 1,514 (303) (1,679)
------------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES ........................................... (17,109) 3,372 7,739
------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities available-for-sale .... 33,260 30,165 44,734
Proceeds from maturities and issuer calls of investment securities held-to-maturity ...... 68,642 58,324 43,889
Proceeds from sales of investment securities available-for-sale .......................... 2,796 1,604 30
Purchases of investment securities held-to-maturity ...................................... (18,085) (58,679) (57,458)
Purchases of investment securities available-for-sale .................................... (83,786) (41,000) (28,000)
34
Net increase in loans ............................................................... (15,408) (12,927) (26,869)
Proceeds from sale of fixed assets .................................................. 1,034 0 0
Purchases of fixed assets ........................................................... (6,064) (6,304) (3,655)
Net cash received for bank and branches acquired .................................... - 7,555 3,991
--------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES .................................................. (17,611) (21,262) (23,338)
--------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and interest-bearing demand deposits .............. 36,519 (11,721) 9,426
Net increase (decrease) in time deposits ............................................ 3,655 29,336 (2,763)
Net proceeds of short-term borrowed funds ........................................... 2,719 8,769 1,534
Cash dividends paid ................................................................. (537) (554) (573)
Purchase and retirement of stock .................................................... (244) (1,050) (85)
--------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............................................. 42,112 24,780 7,539
--------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... 7,392 6,890 (8,060)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR ..................................... 55,784 48,894 56,954
--------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR ........................................... $ 63,176 $ 55,784 $ 48,894
================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE YEAR FOR:
Interest ............................................................................ $ 26,869 $ 25,286 $ 20,001
Income taxes ........................................................................ $ 3,259 $ 1,224 $ 894
================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Unrealized gains (losses) on available-for-sale securities, net of tax .............. $ 287 $ 2,608 ($4,110)
Foreclosed loans transferred to other real estate ................................... $ 207 $ 503 $ 818
The accompanying notes are an integral part of these consolidated financial
statements.
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 currently
operates 49 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 accounting
principles generally accepted in the United States of America 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
35
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 overnight funds sold. Overnight
and federal funds are purchased and sold for one day periods.
Investment Securities
BancShares accounts for investment securities under the provisions of
Statement of Financial Accounting Standards ("Statement") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Statement 115 requires that investments in certain debt and equity
securities be classified as either: held-to-maturity (reported at
amortized cost), trading (reported at fair value with unrealized gains
and losses included in earnings), or available-for-sale (reported at
fair value with unrealized gains and losses excluded from earnings and
reported, net of related income taxes, as a separate component of
shareholders' equity). 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.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 1. Summary of Significant Accounting Policies - continued
Investment Securities - continued
BancShares' investment securities are classified in two categories as
follows:
- Securities held-to-maturity: Securities held-to-maturity consist of
debt instruments for which BancShares has the positive intent and
ability to hold to maturity.
- Securities available-for-sale: Securities available-for-sale
consist of certain debt and marketable equity securities not
classified as trading securities nor as securities
held-to-maturity, and consist of securities which may be sold in
response to changes in interest rates, prepayment risk, regulatory
capital requirements and liquidity needs.
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. BancShares does not hold trading securities.
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.
36
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 and the loan has performed in accordance with its terms
for a demonstrated period of time.
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 borrowers 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 accounting principles generally accepted in the United
States of America and in consideration of the current economic
environment. While management uses the best information available to
make evaluations, future adjustments may be necessary.
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.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 1. Summary of Significant Accounting Policies - continued
Other Real Estate
Other real estate, which is included in other assets on the
consolidated balance sheet, represents properties acquired through
foreclosure or deed in lieu thereof and is carried at the lower of
cost or estimated fair value, less estimated costs to sell. Declines
in fair value of properties included in other real estate below
carrying value are recognized by a charge to income.
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. The balance of MSRs were $608
and $629 at December 31, 2001 and 2000 respectively. No valuation
allowance for impairment was required at either date.
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.
37
Intangible Assets
Intangible assets, primarily core deposit intangibles arising
from branch acquisitions 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. In addition the useful
lives and core deposit intangible asset are periodically
reviewed for reasonableness.
In July 2001, the FASB issued Statement of Financial
Accounting Standards No. 141 (Statement 141), "Business
Combinations", and Statement of Financial Accounting Standards
No. 142 (Statement 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. Statement 141 also specifies criteria
which must be met for intangible assets acquired in a purchase
method business combination to be recognized and reported
apart from goodwill. 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 identifiable intangible
assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with
Statement 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of".
BancShares was required to adopt the provisions of Statement
141 as of June 30, 2001 and will adopt Statement 142 effective
January 1, 2002. Furthermore, any goodwill and any intangible
asset determined to have an indefinite useful life that are
acquired in a purchase business combination completed after
June 30, 2001 will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate
accounting literature issued prior to Statement 142. Goodwill
and intangible assets acquired in business combinations
completed before July 1, 2001 continued to be amortized in
2001 prior to the adoption of Statement 142 on January 1,
2002.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 1. Summary of Significant Accounting Policies - continued
Statement 141 requires, upon adoption of Statement 142, that
BancShares evaluate its existing intangible assets and
goodwill that were acquired in a prior purchase business
combination, and to make any necessary reclassifications in
order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement
142, BancShares will be required to reassess the useful lives
and residual values of all identifiable intangible assets
acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the
first interim period after adoption. In addition, any
intangible asset classified as goodwill under Statement 142
will be subjected to a transitional impairment test during the
first six months of 2002 based on the level of goodwill as of
January 1, 2002. Any impairment losses identified as a result
of this transitional impairment test will be recognized in the
2002 statement of income as the effect of a change in
accounting principle.
As of December 31, 2001, BancShares had intangible assets
totaling $9.9 million. Management has evaluated BancShares's
existing intangible assets and goodwill as of January 1, 2002
and will make appropriate reclassifications in future periods
in order to conform to the new criteria in Statement 141 for
recognition apart from goodwill, as further described below.
BancShares has determined that upon adoption of Statement 142
on January 1, 2002, BancShares had $229,000 of goodwill that
will no longer be amortized beginning in 2002. The
amortization expense associated with this goodwill during the
years ended December 31, 2001, 2000 and 1999 was $415,000,
$674,000 and $1.0 million, respectively. In accordance with
Statement 142, BancShares will perform a transitional
impairment test of this goodwill in the first six months of
2002, and will perform an annual impairment test of the
goodwill in 2002 and thereafter.
38
The remaining intangible assets, totaling $9.7 million at
December 31, 2001, relate to acquisitions of branches that are
being accounted for in accordance with Statement of Financial
Accounting Standards No. 72 (Statement 72), "Accounting for
Certain Acquisitions of Banking and Thrift Institutions."
Statement 72, which was not amended by Statement 142, requires
that identified intangible assets and unidentified intangible
assets associated with certain acquisitions of branches be
amortized into expense. Accordingly, these intangible assets
will continue to be amortized over their useful lives
(generally 7 years). Management periodically reviews the
useful lives of these assets and adjusts them downward where
appropriate. The amortization expense associated with these
branches was $3.4 million, $1.9 million, and $687 for the
years ended December 31, 2001, 2000 and 1999, respectively.
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.
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.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 1. Summary of Significant Accounting Policies - continued
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. BancShares has no potentially
dilutive securities.
Earnings per common share are calculated based on the
following amounts for the years ended December 31:
2000 1999 2001
------------------------------------------------------------------------------------------------------------------
Net income ...................................... $ 8,241 $ 3,734 $ 3,679
Less: Preferred dividends ....................... (364) (377) (395)
------------------------------------------------------------------------------------------------------------------
Net income applicable to common shares .......... $ 7,877 $ 3,357 $ 3,284
==================================================================================================================
Weighted average common shares
outstanding during the period ................. 114,717 117,743 119,137
==================================================================================================================
Comprehensive Income
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:
39
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) arising during period.............. $ 3,069 $1,089 $(2,116)
Reclassification adjustment for (gains) losses
included in net income..................................... (1,783) 254 -
--------------------------------------------------------------------------------------------------------------------------
Total tax effect............................................. $ 1,286 $1,343 $(2,116)
==========================================================================================================================
Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("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. This pronouncement does not have an
effect on BancShares' consolidated financial statements as
banking is considered to be BancShares only segment.
Derivatives
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards ("SFAS") No. 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,
(collectively referred to as derivatives) and for hedging
activities. This statement, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000
and was adopted by the Company on January 1, 2001 with no
material impact to the Company's consolidated financial
statements.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 1. Summary of Significant Accounting Policies - continued
New Accounting Standards
The FASB has also issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of FASB
Statement No. 125." It revises the standards for accounting
for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, but it
carries over most of SFAS No. 125's provisions without
reconsideration. This statement is effective for transfers and
servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. This statement is
effective for recognition and reclassification of collateral
and disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000.
This Statement was adopted by the Company on April 1, 2001
with no material impact to the Company's consolidated
statements.
Note 2. Investment Securities
The amortized cost and estimated fair values of investment
securities at December 31 were as follows:
December 31, 2001 December 31, 2000
------------------------------------------- -------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------------------
SECURITIES
HELD-TO-MATURITY:
40
U. S. Government................ $ 33,057 $ 468 $ - $ 33,525 $ 73,215 $ 433 $( 24) $ 73,624
Obligations of states and
political subdivisions........ 16,294 335 (12) 16,617 22,230 464 (1) 22,693
Corporate debenture............. - - - - 100 - (1) 99
------------------------------------------------------------------------------------------------------------------------------------
49,351 803 (12) 50,142 95,545 897 (26) 96,416
------------------------------------------------------------------------------------------------------------------------------------
SECURITIES
AVAILABLE-FOR-SALE:
U. S. Government................ 103,840 1,712 (14) 105,538 73,997 509 (31) 74,475
Marketable equity securities ... 11,044 14,880 (41) 25,883 13,324 14,232 (157) 27,399
Obligations of states and
political subdivisions........ 7,916 243 (76) 8,083 8,177 387 - 8,564
Mortgage-backed securities...... 15,619 59 (250) 15,428 1,135 11 (11) 1,135
------------------------------------------------------------------------------------------------------------------------------------
138,419 16,894 (381) 154,932 96,633 15,139 (199) 111,573
------------------------------------------------------------------------------------------------------------------------------------
TOTALS......................... $187,770 $17,697 $ (393) $205,074 $192,178 $16,036 $(225) $207,989
====================================================================================================================================
Securities with a par value of $87,105 were pledged at
December 31, 2001 to secure public deposits and for other
purposes as required by law and contractual arrangement.
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, 2001, 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.
Amortized Fair
Cost Value
----------------------------------------------------------------------------------------------------------------
Securities held-to-maturity:
Due in one year or less ................................... $ 33,198 $ 33,593
Due after one year through five years ..................... 10,628 10,873
Due after five years through ten years .................... 4,762 4,800
Due after ten years ...................................... 763 876
----------------------------------------------------------------------------------------------------------------
$ 49,351 $ 50,142
================================================================================================================
Available-for-sale securities:
Due in one year or less ................................... $ 47,306 $ 48,338
Due after one year through five years ..................... 58,796 59,528
Due after five years through ten years .................... 2,793 2,889
Due after ten years ....................................... 2,861 2,866
Mortgage-backed securities ................................ 15,619 15,428
Marketable equity securities .............................. 11,044 25,883
----------------------------------------------------------------------------------------------------------------
$138,419 $154,932
================================================================================================================
41
Sales of securities available-for-sale having a cost basis of
$2,796 in 2001, $593 in 2000 and $55 in 1999 resulted in gross
realized gains of $4,625 for 2001, $98 for 2000 and $1 for
1999. Other gross realized gains on investment securities in
2000 and 1999 were attributable to issuer calls of debt
securities.
During 2000, management determined that certain marketable
equity securities had declines in their fair value that were
deemed to be other than temporary. Accordingly, a loss of $855
was recorded and the carrying amount of the investment was
reduced.
Note 3. Loans
Loans by type were as follows: December 31,
2001 2000
----------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural ........................................... $ 92,293 $ 91,936
Real estate:
Construction ................................................................. 52,414 14,621
Mortgage:
One to four family residential ............................................... 132,513 115,473
Commercial ................................................................... 134,562 126,472
Equityline ................................................................... 42,504 40,468
Other ........................................................................ 24,823 39,069
Consumer ......................................................................... 39,581 38,795
Lease financing .................................................................. 26,610 30,132
-----------------------------------------------------------------------------------------------------------------------------------
Total loans .................................................................. $ 545,300 $ 496,966
===================================================================================================================================
Loans held for sale (included in one-to-four family residential loans) ........... $ 11,092 $ 1,807
Loans serviced for others (excluded from total loans) ............................ $ 179,567 $ 177,093
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 3. Loans - continued
On December 31, 2001 total loans to directors, executive
officers and related individuals and organizations were
$1,123. On December 31, 2000 total loans to directors,
executive officers and related individuals and organizations
were $933. During 2001, $415 of new loans were made to this
group and repayments totaled $225. 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:
2001 2000 1999
------------------------------------------------------------------------------------------------
Balance at beginning of year ................ $7,284 $6,188 $5,962
Sale of credit card portfolio ............... (95) -- --
Allowance from branch acquisitions .......... -- 800 --
Provision for loan losses ................... 1,000 475 830
Loans charged off ........................... (802) (534) (748)
Loan recoveries ............................. 249 355 144
------------------------------------------------------------------------------------------------
Balance at end of the year .................. $7,636 $7,284 $6,188
================================================================================================
At December 31, 2001 and 2000, Southern had nonaccrual loans
of $407 and $478, respectively. At December 31, 2001 Southern
had $28 of restructured loans and at December 31, 2000
Southern had no
42
restructured loans. At December 31, 2001 and 2000 Southern had
accruing loans past due 90 days or more totaling $1,565 and $1,081,
respectively. The amount of foregone interest on nonaccrual and
restructured loans at December 31, 2001, 2000 and 1999, was not
material for the periods presented. On December 31, 2001 Southern had
loans considered to be impaired of $197. On December 31, 2000 Southern
had no loans considered to be impaired.
Note 5. Premises and Equipment
The components of premises and equipment were as follows:
December 31,
2001 2000
--------------------------------------------------------------------------------
Land ....................................... $ 6,677 $ 6,248
Buildings and improvements ................. 25,738 22,825
Furniture and equipment .................... 9,895 8,575
Construction-in-progress ................... 2,204 1,515
--------------------------------------------------------------------------------
44,514 39,163
Less: accumulated depreciation ............. (11,831) (9,850)
--------------------------------------------------------------------------------
$ 32,683 $ 29,313
================================================================================
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 6. Income Taxes
The components of income tax expense (benefit) for the years ended
December 31 were as follows:
2001 2000 1999
--------------------------------------------------------------------------------------------------
Current:
Federal ......................................... $ 3,551 $ 1,224 $ 1,568
State ........................................... 186 6 5
--------------------------------------------------------------------------------------------------
$ 3,737 1,230 1,573
--------------------------------------------------------------------------------------------------
Deferred:
Federal ......................................... (682) (230) (423)
--------------------------------------------------------------------------------------------------
$ 3,055 $ 1,000 $ 1,150
--------------------------------------------------------------------------------------------------
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:
2001 2000 1999
--------------------------------------------------------------------------------------------------
Expected income tax expense at stated rate (34%) .. $ 3,840 $ 1,609 $ 1,642
Increase (decrease) in income tax expense
resulting from:
Tax exempt income ................................. (773) (1,009) (911)
Amortization of intangible assets ................. 63 88 126
State income tax (net of federal benefit) ......... 123 4 4
Change in federal valuation allowance ............. (225) 320 --
Other, net ........................................ 27 (12) 289
--------------------------------------------------------------------------------------------------
43
$ 3,055 $ 1,000 $ 1,150
================================================================================
Effective tax rate .................... 27% 21% 24%
================================================================================
Significant components of BancShares' deferred tax liabilities and
(assets) are as follows:
December 31,
2001 2000
--------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation ............................. $ 888 $ 845
Leased assets ............................ 267 336
Investment securities .................... 6,365 5,080
Other .................................... 382 303
-------- --------
Gross deferred tax liabilities .......... 7,902 6,564
--------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses ................ (2,944) (2,808)
Intangible assets ........................ (2,649) (1,788)
Other .................................... (710) (1,133)
--------------------------------------------------------------------------------
Gross deferred tax assets ............... (6,303) (5,729)
-------- --------
Valuation allowance ...................... (658) (819)
-------- --------
Net deferred tax liability ............... $ 2,257 $ 1,654
================================================================================
A valuation allowance for deferred tax assets of $658 was required at
December 31, 2001 for certain deferred state tax benefits and for
certain charitable contribution carry forwards. A valuation allowance
for deferred tax assets of $819 was required at December 31, 2000 for
similar reasons. Management has determined that it is more likely than
not that the net deferred tax asset can be supported
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 6. Income Taxes - continued
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 charges of approximately $1,286 and $1,343 for
the years ended December 31, 2001 and 2000, respectively, have been
recorded directly to shareholders' equity.
Note 7. Deposits
Deposits at December 31 are summarized as follows:
2001 2000
--------------------------------------------------------------------------------
Demand ................................... $128,368 $107,695
Checking with interest ................... 88,748 83,964
Savings .................................. 58,272 58,419
Money market accounts .................... 82,599 71,390
Time ..................................... 380,672 377,017
--------------------------------------------------------------------------------
Total deposits .......................... $738,659 $698,485
================================================================================
Total time deposits with a denomination of $100 or more were $105,111
and $81,656 at December 31, 2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of all time deposits
were:
2002............................ $ 334,960
44
2003 ............................... 27,628
2004 ............................... 9,503
2005 ............................... 8,581
2006 and thereafter ................ -
-------------------------------------------------------------------------------
Total time deposits............... $ 380,672
===============================================================================
Note 8. Short-Term Borrowings and Long-Term Obligations
Short-term Borrowings
Short-term borrowings at December 31, were:
2001 2000
------------------------------------------------------------------------------
U.S. Treasury tax and loan accounts ........... $ 463 $ 1,359
Repurchase agreements ......................... 17,683 14,068
------------------------------------------------------------------------------
Total short-term borrowings ................. $ 18,146 $ 15,427
==============================================================================
The U. S. Treasury tax and loan accounts averaged $1,400 in 2001 and
$1,126 in 2000. The highest month-end balance of the U. S. Treasury
tax and loan accounts was $2,366 in 2001 and $2,150 in 2000. The
average rate on U. S. Treasury tax and loan accounts was 3.17% in 2001
and 5.95% in 2000. The repurchase agreements averaged $14,681 in 2001
and $7,124 in 2000. The highest month-end balance of the repurchase
agreements was $17,969 in 2001 and $14,068 in 2000. The average rate
on repurchase agreements in 2001 and 2000 was 2.55% and 5.03%. At
December 31, 2001, $87,105 of investment securities were pledged for
repurchase agreements. The securities collateralizing the repurchase
agreements have been delivered to a third party custodian for
safekeeping.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 8. Short-Term Borrowings and Long-Term Obligations - continued
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.
Note 9. Acquisitions and dispositions
BancShares has consummated numerous bank branch 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 considered
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, 2001:
Deposit
45
Assets Liabilities Resulting
Date Institution/Location Acquired Assumed Intangible
---------------------------------------------------------------------------------------------------------
November 2000 First-Citizens Bank & Trust Company (1) ............. $15,349 $15,349 $1,428
Nashville, North Carolina
November 2000 First-Citizens Bank & Trust Company (1) ............. 50,764 50,764 5,261
Rocky Mount, North Carolina
April 2000 Centura Bank ........................................ 10,322 10,322 1,136
Nashville, North Carolina
April 2000 Centura Bank ........................................ 8,003 8,003 622
Battleboro, North Carolina
April 2000 Centura Bank ........................................ 11,068 11,065 1,107
Sharpsburg, North Carolina
February 2000 Cooperative Bank for Savings, SSB ................... 7,124 7,117 532
Robersonville, North Carolina
September 1999 First-Citizens Bank & Trust Company (1) ............. 14,837 14,835 1,335
Ahoskie, North Carolina
(1) See Note 15.
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.
46
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 10. Retirement Plans - continued
The following sets forth pertinent information regarding the pension
plan for the periods indicated:
2001 2000 1999
------------------------------------------------------------------------------------------
Change in benefit obligation
Net benefit obligation at beginning of year ......... $ 8,331 $ 7,414 $ 7,647
Service cost ........................................ 549 422 413
Interest cost ....................................... 703 576 533
Actuarial (gain) loss ............................... 1,331 257 (898)
Gross benefits paid ................................. (292) (338) (281)
------------------------------------------------------------------------------------------
Net benefit obligation at end of year ............... $10,622 $ 8,331 $ 7,414
==========================================================================================
Change in plan assets
Fair value of plan assets at beginning of year ...... $ 7,743 $ 7,483 $ 6,936
Actual return on plan assets ........................ 186 183 351
Employer contributions .............................. 124 415 476
Gross benefits paid ................................. (292) (338) (280)
------------------------------------------------------------------------------------------
Fair value of plan assets at end of year ............ $ 7,761 $ 7,743 $ 7,483
==========================================================================================
Funded status at end of year ........................ $(2,860) $ (588) $ 69
Unrecognized net actuarial loss (gain) .............. 1,749 97 (511)
Unrecognized prior service cost ..................... 48 56 64
Unrecognized net transition asset ................... (63) (103) (143)
------------------------------------------------------------------------------------------
Net amount recognized as a liability in the consolidated
47
balance sheets at end of year ............... $(1,126) $ (538) $(521)
=====================================================================================
Assumptions as of December 31:
Discount rate ............................... 7.00% 7.25% 7.50%
Expected return on plan assets .............. 8.50% 8.50% 8.50%
Rate of compensation increase ............... 4.75% 4.75% 4.75%
Components of net periodic benefit cost:
Service cost ................................ $ 549 $ 422 $ 413
Interest cost ............................... 703 576 533
Expected return on assets ................... (584) (535) (464)
Amortization of:
Transition asset .......................... (40) (40) (40)
Prior service cost ........................ 9 9 8
Actuarial loss ............................ 76 - 77
--------------------------------------------------------------------------------------
Total net periodic benefit cost $ 713 $ 432 $ 527
======================================================================================
Employees are also eligible to participate in a matching
savings plan after one year of service. During 2001 Southern
made participating contributions to this plan of $342 compared
to $286 during 2000 and $263 during 1999.
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
$10,812 during 2001 of which $10,550 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, 2001, Southern was
considered to be "well capitalized" by the FDIC. There are no
conditions or events since December 31, 2001 that management
believes have changed the category of Southern.
Southern's capital ratios as of December 31 are set forth below:
2001 2000
-------------------------------------------------------------------------
Tier 1 capital ....................... $ 60,458 $ 51,865
Total capital ........................ 70,916 61,630
Risk-adjusted assets ................. 548,884 489,540
48
Average tangible assets ................................ 820,605 744,328
Tier 1 capital ratio ................................... 11.01% 10.59%
Total capital ratio .................................... 12.92% 12.59%
Leverage capital ratio ................................. 7.37% 6.97%
The primary source of funds for the dividends paid by BancShares to
its shareholders is dividends received from its Banking subsidiary.
Southern Bank is restricted as to dividend payout by state laws
applicable to banks and may pay dividends only out of retained
earnings. Should at anytime its surplus be less than 50% of its
paid-in capital stock, Southern Bank may not declare a dividend until
it has transferred from retained earnings to surplus 25% of its
undivided profits or any lesser percentage that may be required to
restore its surplus to an amount equal to 50% of its paid-in capital
stock. Additionally, dividends paid by Southern Bank may be limited by
the need to retain sufficient earnings to satisfy minimum capital
requirements imposed by the FDIC. Dividends on BancShares' common
shares may be paid only after dividends on preferred Series "B" and
"C" shares have been paid. Common share dividends are based upon
BancShares' profitability and are paid at the discretion of the Board
of Directors. Management does not expect any of the foregoing
restrictions to materially limit its ability to pay dividends
comparable to those paid in the past. At December 31, 2001 BancShares'
investment in Southern was restricted as to transfer to BancShares an
amount equal to the level of regulatory capital, approximately $71
million, without obtaining prior regulatory approval.
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.
49
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, 2001 and
December 31, 2000 amounted to $2,125 and $3,008. Outstanding
commitments to lend at December 31, 2001 and December 31, 2000 were
$154,636 and $136,950. Undisbursed advances on customer lines of
credit at December 31, 2001 and December 31, 2000 were $45,940 and
$48,506. Outstanding standby letters of credit and commitments to lend
at December 31, 2001 generally expire within one year, wheras
commitments associated with undisbursed advances on customer lines of
credit at December 31, 2001 generally expire within one to five years.
At December 31, 2001, commitments to sell loans amounted to $3,718. At
December 31, 2000 there were no commitments to sell loans.
BancShares does not have any special purpose entities or other similar
forms of off-balance sheet financing arrangements.
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 been under criticism for potential health risks.
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.
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, 2001 and 2000
and condensed statements of income and cash flows for the three years
ended December 31, 2001.
December 31,
CONDENSED BALANCE SHEETS 2001 2000
----------------------------------------------------------------------------------------------------
ASSETS
Cash ........................................................... $ 1,545 $ 1,108
Investment securities available-for-sale ....................... 15,361 11,694
Other assets ................................................... 470 989
Investment in subsidiaries ..................................... 76,620 71,790
----------------------------------------------------------------------------------------------------
Total assets ............................................... $93,996 $85,581
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities ............................................ $ 2,856 $ 2,188
Notes payable .................................................. 23,711 23,711
----------------------------------------------------------------------------------------------------
Total liabilities .......................................... 26,567 25,899
Shareholders' equity ........................................... 67,429 59,682
----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ................. $93,996 $85,581
====================================================================================================
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
2001 2000 1999
-----------------------------------------------------------------------------------------------------
Dividends from bank subsidiary ......................................... 2,359 $ 2,376 $ --
Securities (losses) gains .......................................... 2,856 (727) --
Other .................................................................. 437 264 192
----------------------------------------------------------------------------------------------------------------------------
Total income .......................................................... 5,652 1,913 192
Interest expense ..................................... (2,129) (2,129) (2,142)
Other expense .......................................................... (83) (65) (65)
----------------------------------------------------------------------------------------------------------------------------
(Loss) income before equity in undistributed
income of subsidiaries ............................. 3,440 (281) (2,015)
Equity in undistributed income of subsidiaries ......................... 4,801 4,015 5,694
----------------------------------------------------------------------------------------------------------------------------
Net income ............................................................ $ 8,241 $ 3,734 $ 3,679
============================================================================================================================
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 13. Parent Company Financial Statements (continued)
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income ......................................................... $ 8,241 $ 3,734 $ 3,679
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Equity in undistributed net income of subsidiary ................... (4,801) (4,015) (5,694)
Loss on impairment of available for sale securities ................ -- 855 --
Gains on sales and issuer calls of securities ...................... (2,856) (128) --
Decrease in other assets ........................................... 519 158 186
Increase (decrease) in accrued liabilities ......................... 668 262 (678)
----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES .............................................. 1,771 866 (2,507)
----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale (purchase) of investments ................................... (553) (16) 1,225
----------------------------------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES ............................................... (553) (16) 1,225
----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Dividends paid ..................................................... (537) (554) (573)
Purchase and retirement or redemption of stock ..................... (244) (1,050) (85)
----------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACT......................................... (781) (1,604) (658)
----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................................... 437 (754) (1,940)
CASH AND CASH EQUIVALENTS AT
51
THE BEGINNING OF YEAR ............................................... 1,108 1,862 3,802
--------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT THE END OF YEAR ..................................................... $1,545 $1,108 $1,862
==========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
PAID DURING THE YEAR FOR:
Interest ............................................................ $2,129 $2,129 $2,142
Income taxes ........................................................ $ -- $ -- $ 4
==========================================================================================================================
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, overnight funds sold, and accrued interest
receivable
The carrying amounts for cash and due from banks, overnight funds sold
and accrued interest receivable are equal to their fair values due to
the short term nature of these financial instruments.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 14. Fair Value of Financial Instruments (continued)
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.
Loans
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 borrowings and accrued interest payable
The carrying amounts for short-term borrowings and accrued interest
payable are equal to the fair values due to the short term nature of
these financial instruments.
52
Long-term obligations
The fair value of long-term obligations is the market value at
the last trade date in 2001 and 2000.
Commitments
Southern's commitments to extend credit have no carrying value
and are generally at variable rates and/or have relatively short
terms to expiration. Accordingly, these financial instruments are
deemed to have no material fair value.
Limitations on Fair Value Assumptions
Fair value estimates are made by management at specific points in
time based on relevant information about the financial instrument
and the market. These estimates do not reflect any premium or
discount that could result from offering for sale at one time
BancShares' entire holdings of a particular financial instrument
nor are potential taxes and other expenses that would be incurred
in an actual sale considered. Because no market exists for a
significant portion of BancShares' financial instruments, fair
value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions
and/or the methodology used could significantly affect the
estimates disclosed. Similarly, the fair values disclosed could
vary significantly from amounts realized in actual transactions.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 14. Fair Value of Financial Instruments (continued)
Limitations on Fair Value Assumptions - continued
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.
The estimated fair values of BancShares' financial instruments at
December 31 are as follows:
2001 2000
--------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks...................... $ 40,811 $ 40,811 $ 42,944 $ 42,944
Overnight funds sold......................... 22,365 22,365 12,840 12,840
Investment securities:
Held-to-maturity........................... 49,351 50,142 95,545 96,416
Available-for-sale......................... 154,932 154,932 111,573 111,573
Loans........................................ 537,664 564,762 489,682 486,480
Accrued interest receivable.................. 6,097 6,097 6,482 6,482
Financial liabilities:
Deposits..................................... $ 738,659 742,862 $698,485 $700,313
53
Short-term borrowings........................ 18,146 18,146 15,427 15,427
Long-term obligations........................ 23,000 23,230 23,000 20,125
Accrued interest payable..................... 3,228 3,228 4,117 4,117
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, 2001 beneficially owned 32,856
shares, or 28.77%, of BancShares' outstanding common stock and
4,966 shares, or 1.37%, of BancShares' outstanding Series B
preferred stock. At the same date, the second significant
shareholder beneficially owned 27,522 shares, or 24.10%, of
BancShares' outstanding common stock.
These two significant shareholders are directors and executive
officers of the Corporation and at December 31, 2001,
beneficially owned 2,524,210 shares, or 28.67%, and 1,421,621
shares, or 16.15%, of the Corporation's outstanding Class A
common stock, and 649,188 shares, or 38.35%, and 199,052
shares, or 11.76%, of the Corporation's outstanding Class B
common stock. The above totals include 472,855 Class A common
shares, or 5.37%, and 104,644 Class B common shares, or 6.18%,
that are considered to be beneficially owned by both of the
shareholders and, therefore, are included in each of their
totals.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 15. Related Parties - continued
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 2000 and
1999.
The following table lists the various charges paid to the
Corporation during the years ended December 31:
2001 2000 1999
--------------------------------------------------------------------------------------------
Data and item processing................... $ 2,821 $ 2,461 $ 2,156
Forms, supplies and equipment.............. 476 302 281
Trustee for employee benefit plans......... 64 88 89
Consulting fees............................ 102 83 86
Other services............................. 52 80 136
--------------------------------------------------------------------------------------------
$ 3,515 $ 3,014 $ 2,748
============================================================================================
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 $23,974 at December 31, 2001 and $26,205 at
December 31, 2000. Southern's wholly-owned subsidiary, Goshen,
Inc. paid $87 and $99 to an Insurance Company owned by the
Corporation for the sale of insurance written in connection
with loans made by Southern in 2001 and 2000, 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 a cost basis of $2.6 million and $465,
respectively, at both December 31, 2001 and 2000. The Class A
common stock had a fair value of $12.2 million and $10.0
million at December 31, 2001 and 2000, respectively. The Class
B common stock had a fair value of $2.2 million and $1.6
million at December 31, 2001 and 2000, respectively.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATED: March 13, 2002 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 Directors March 13, 2002
-----------------------------------
R. S. Williams
/s/ John C. Pegram, Jr. President, Chief Executive Officer and Director March 5, 2002
----------------------------------- (principal executive officer)
John C. Pegram, Jr.
/s/ David A. Bean Treasurer (principal financial and accounting officer) March 5, 2002
-----------------------------------
David A. Bean
/s/ Bynum R. Brown Director March 11, 2002
-----------------------------------
Bynum R. Brown
/s/ William H. Bryan Director March 5, 2002
-----------------------------------
William H. Bryan
55
/s/ Robert J. Carroll Director March 7, 2002
------------------------------
Robert J. Carroll
/s/ Hope H. Connell Director March 8, 2002
------------------------------
Hope H. Connell
/s/ J. Edwin Drew Director March 8, 2002
------------------------------
J. Edwin Drew
/s/ Moses B. Gillam, Jr. Director March 7, 2002
------------------------------
Moses B. Gillam, Jr.
/s/ Leroy C. Hand, Jr. Director March 12, 2002
------------------------------
LeRoy C. Hand, Jr.
/s/ Frank B. Holding Director March 8, 2002
------------------------------
Frank B. Holding
/s/ M. J. McSorley Director March 8, 2002
------------------------------
M. J. McSorley
/s/ W. Hunter Morgan Director March 7, 2002
------------------------------
W. Hunter Morgan
/s/ Charles I. Pierce Director March 5, 2002
------------------------------
Charles I. Pierce, Sr.
/s/ W. A. Potts Director March 5, 2002
------------------------------
W. A. Potts
/s/ Charles L. Revelle, Jr. Director March 11, 2002
------------------------------
Charles L. Revelle, Jr.
/s/ Charles O. Sykes Director March 5, 2002
------------------------------
Charles O. Sykes
/s/ John N. Walker Director March 5, 2002
------------------------------
John N. Walker
EXHIBIT INDEX
Exhibit Exhibit
Number
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 FormS-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)
56
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 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)
10.3 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.)
10.4 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).
10.5 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).
22 Subsidiaries of the Registrant (filed as exhibit 22 to the
Registrant's 1999 Annual Report on Form 10-K and incorporated herein
by reference)
99 Registrant's definitive Proxy Statement dated March 22, 2002 for the
2001 Annual Shareholders' Meeting (previously filed)
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO DAVID A. BEAN,
SECRETARY, TREASURER AND CHIEF FINANCIAL OFFICER OF SOUTHERN BANCSHARES (N.C.),
INC.
57