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, 2000 Commission File No. 0-10852
SOUTHERN BANCSHARES (N.C.), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1538087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
121 East Main Street
Mount Olive, North Carolina 28365
(Address of Principal Executive offices, Zip Code)
(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, 2001: Common Stock, $5.00 par value - 115,020 shares
Portions of the Registrant's definitive Proxy Statement dated March 23, 2001 for
the 2000 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........................................................................... 24
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.................... 22
Item 6 Selected Financial Data..................................................................... 5
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 4
Item 7A Quantitative and Qualitative Disclosures about Market Risk.................................. 14-16
Item 8 Financial Statements and Supplementary Data
Quarterly Financial Summary for 2000 and 1999............................................... 23
Independent Auditors' Report................................................................ 25
Consolidated Balance Sheets as of December 31, 2000 and 1999................................ 26
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2000, 1999 and 1998............................................................ 27
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998............................................................ 28
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998......................................................................... 29
Notes To Consolidated Financial Statements.................................................. 30-48
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............................................................................. 51
(b) During the quarter ended December 31, 2000, 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 2 through 6 and page 9 of Registrant's definitive Proxy
Statement dated March 23, 2001.
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 Fees", "Executive Compensation" and
"Pension Plan" on pages 7 through 10 of the Registrant's definitive Proxy
Statement dated March 23, 2001.
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 5 of the Registrant's definitive Proxy Statement
dated March 23, 2001.
Information required by Item 13 is incorporated herein by reference to the
information that appears under the caption "Transactions with Related Parties"
on pages 11 through 12 of the Registrant's definitive Proxy Statement dated
March 23, 2001.
2
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 engaged in
commercial banking through 49 offices located primarily in eastern North
Carolina. In terms of total assets, at December 31, 2000, Southern was the
twelfth largest bank in 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 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 121 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, 2000, BancShares and its subsidiaries employed a
full-time staff of 349 and a part-time staff of 32 for a total of 381 employees.
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,
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
3
"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 types 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 121 East Main Street, Mount Olive, North
Carolina. At December 31, 2000 there were 49 Southern offices in North
Carolina.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion provides information concerning changes in the consolidated
financial condition and results of operations of Southern BancShares (N.C.),
Inc. ("BancShares") and its subsidiary, Southern Bank and Trust Company
("Southern"), for 2000, 1999 and 1998. 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 1.49 percent increase in net income during 2000,
compared to 1999. Modest growth in net interest income and noninterest income
in 2000 was largely offset by an increase in noninterest expense, as BancShares
continued to invest in growing its franchise. Consolidated net income was $3.7
million for both 2000 and 1999 and $5.6 million during 1998. The decline in net
income during 1999 from 1998 resulted primarily from nonrecurring1998 gains on
investment securities sales. Net income per share for the year ended December
31, 2000 totaled $28.51 compared to $27.56 in 1999 and $43.40 in 1998. Return
on average assets totaled 0.52 percent during 2000, 0.57 percent during 1999 and
0.91 percent during 1997. 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.
4
Table 1
-------
SELECTED FINANCIAL DATA
-----------------------
(Dollars in thousands, except share data and ratios)
December 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest income....................................... $ 49,909 $ 42,134 $ 41,702 $ 39,055 $ 36,776
Interest expense...................................... 24,932 19,967 20,328 18,827 17,450
------------------------------------------------------------------------------------------------------------
Net interest income................................... 24,977 22,167 21,374 20,228 19,326
Provision for loan losses............................. 475 830 155 60 140
------------------------------------------------------------------------------------------------------------
Net interest income
after provision for loan losses...................... 24,502 21,337 21,219 20,168 19,186
Noninterest income.................................... 5,260 4,946 6,553 9,849 4,508
Noninterest expense................................... 25,028 21,454 20,116 23,064 18,203
------------------------------------------------------------------------------------------------------------
Income before income taxes............................ 4,734 4,829 7,656 6,953 5,491
Income taxes.......................................... 1,000 1,150 2,060 340 1,127
Net income............................................ $ 3,734 $ 3,679 $ 5,596 $ 6,613 $ 4,364
------------------------------------------------------------------------------------------------------------
Selected Year-End Balances
Total assets.......................................... $803,441 $669,232 $649,425 $590,752 $540,758
Investment securities and federal funds sold.......... 219,958 214,583 221,102 190,373 179,709
Loans................................................. 496,966 398,060 364,489 349,216 317,755
Interest-earning assets............................... 704,672 613,340 590,699 544,789 499,164
Deposits.............................................. 698,485 578,250 556,752 513,328 480,566
Interest-bearing liabilities.......................... 629,217 518,727 507,326 458,335 422,941
Shareholders' equity.................................. 59,682 54,944 56,033 54,984 44,778
Common shares outstanding............................. 115,209 118,912 119,266 119,918 119,918
------------------------------------------------------------------------------------------------------------
Selected Average Balances
Total assets.......................................... $716,773 $651,014 $615,828 $567,236 $519,541
Investment securities and federal funds sold.......... 230,927 215,935 182,356 162,936 157,779
Loans................................................. 427,939 380,877 362,298 340,195 310,389
Interest-earning assets............................... 648,553 600,815 573,431 507,971 469,792
Deposits.............................................. 624,173 558,386 526,555 498,303 459,552
Interest-bearing liabilities.......................... 557,625 509,935 463,340 445,354 411,960
Shareholders' equity.................................. 55,370 55,474 56,423 45,703 40,234
Common shares outstanding............................. 117,743 119,137 119,685 119,918 119,918
------------------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Return on average total assets........................ 0.52% 0.57% 0. 91% 1.17% 0.84%
Return on average shareholders' equity................ 6.74 6.63 9.92 14.47 10.85
Dividend payout ratio (1)............................. 14.84 15.57 10.38 8.85 13.45
------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits..................................... 68.56% 68.21% 68.81% 68.27% 67.54%
Shareholders' equity to total assets.................. 7.72 8.52 9.16 8.06 7.74
------------------------------------------------------------------------------------------------------------
Per share of common stock
Net income (2)........................................ $ 28.51 $ 27.56 $ 43.40 $ 51.77 $ 33.00
Cash dividends........................................ 1.50 1.50 1.50 1.50 1.50
Book value (3)........................................ 497.68 441.16 448.82 437.22 352.02
------------------------------------------------------------------------------------------------------------
(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
5
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. In May 1998 Southern acquired the Enfield,
North Carolina office of Enfield Savings Bank and sold the Littleton, North
Carolina office of Enfield Savings Bank to First-Citizens Bank & Trust Company.
In October 1998 Southern acquired the Gates, North Carolina office of
First-Citizens Bank & Trust Company. In December 1998 Southern acquired the Red
Springs, North Carolina office of First Union National Bank. These acquisitions
were accounted for as purchases, and, therefore, the results of operations prior
to purchase of the financial institutions are not included in the consolidated
financial statements. The acquisitions were as follows:
Table 2
-------
BRANCH ACQUISITIONS AND DIVESTITURES
(dollars in thousands)
Loans Deposits
Acquisitions Date Acquired Acquired
--------------------------------------------------------------------------------------------------------------------------------
Cooperative Savings Bank - Robersonville, NC............................................ February 2000 $ 1,335 $ 7,117
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
================================================================================================================================
Enfield Savings Bank - Enfield, NC...................................................... May 1998 $ 16,662 $ 18,041
Enfield Savings Bank - Littleton, NC.................................................... May 1998 (3) (2,420)
First-Citizens Bank & Trust Company - Gates, NC......................................... October 1998 226 5,302
First Union National Bank - Red Springs, NC............................................. December 1998 76 16,440
-------- --------
Net 1998 acquisition totals........................................................ $ 16,961 $ 37,363
================================================================================================================================
INTEREST-EARNING ASSETS
Interest-earning assets averaged $648.6 million during 2000, an increase of
$47.7 million or 7.95 percent over 1999 levels, compared to a $65.5 million or
12.89 percent increase in 1999 over 1998 levels. Growth among interest-earning
assets during 2000 and 1999 was primarily due to increases in loan balances due
to internal growth and the acquisitions discussed above.
Loans. As of December 31, 2000, gross loans outstanding were $497.0
million, a 24.85 percent increase over the December 31, 1999 balance of $398.1
million, which was a 9.21 percent increase over the December 31, 1998 balance of
$364.4 million. Loan growth during 2000 resulted principally from the
acquisitions discussed in table 2 above. Loan growth during 1999 resulted
primarily from internal growth, as the impact of acquisitions during 1999 had
less of an impact on average balances. Loan balances for the last five years are
provided in Table 3.
6
Table 3
-------
LOANS
(Dollars in thousands)
December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Commercial, financial and agricultural......... $ 114,198 $ 101,128 $ 86,980 $ 84,281 $ 70,881
Real estate:
Construction............................. 14,621 647 5,276 5,209 2,470
Mortgage:
One to four family residential.......... 115,473 111,973 113,984 106,444 113,915
Commercial.............................. 126,472 74,873 62,446 58,056 52,686
Equityline.............................. 40,468 30,152 28,698 27,759 18,654
Other.............................. 39,069 32,851 26,846 27,868 21,615
Consumer....................................... 38,795 34,309 36,775 35,643 35,512
Lease financing................................ 7,870 4,307 3,484 3,956 2,022
--------- --------- --------- --------- ---------
Total loans.................. $ 496,966 $ 398,060 $ 364,489 $ 349,216 $ 317,755
========= ========= ========= ========= =========
All information presented in this table relates to domestic loans as BancShares
makes no foreign loans.
Loans secured by real estate averaged $289.6 million during 2000, compared
to $248.0 million during 1999, an increase of 18.79 percent. Much of the $41.6
million increase in real estate secured loans during 2000 was among
construction, commercial real estate and retail home equity loans. Commercial
and industrial loans averaged $107.5 million during 2000 compared to $97.0
million during 1999, an increase of 10.82 percent. Commercial and industrial
loan growth during 2000 resulted from BancShares' continued focus on small and
mid-size commercial customers.
Consumer loans averaged $36.3 million during 2000 compared to $34.6 during
1999. The $1.7 million increase during 2000 was primarily due to the
acquisitions discussed above. Demand for direct installment lending was sluggish
during 2000, as customers who have traditionally favored closed-end installment
lending continue to migrate to revolving lines of credit secured by home equity.
During 2001, management anticipates continued loan growth among loans to
commercial borrowers. Loan demand among small and mid-size businesses remains
strong due to continuing economic growth in BancShares' market areas. Recent
downward trends in interest rates will likely continue growth at rates similar
to 2000 and 1999. Demand among retail customers continues to shift to open-end
credit products such as EquityLine and credit cards. Growth in these areas is
expected during 2001.
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, 2000. Of the gross loans outstanding on December
31, 2000, 19.36 percent have scheduled maturities or repricing dates that extend
beyond five years.
7
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................................ $ 52,531 $ 38,827 $ 22,840 $ 114,198
Real Estate:
Construction.......................................... 14,621 - - 14,621
One to four family residential........................ 26,673 51,829 36,971 115,473
Commercial............................................ 58,177 43,000 25,295 126,472
Equityline............................................ 40,468 - - 40,468
Other................................................. 5,613 23,607 9,849 39,069
Consumer................................................ 17,199 21,596 - 38,795
Lease Financing......................................... 1,810 4,801 1,259 7,870
--------- --------- -------- ---------
Total.............................................. $ 217,092 $ 183,660 $ 96,214 $ 496,966
========= ========= ======== =========
Fixed Rate.............................................. $ 64,028 $ 165,753 $ 80,481 $ 310,262
Variable Rate........................................... 153,064 17,907 15,733 186,704
--------- --------- -------- ---------
Total.............................................. $ 217,092 $ 183,660 $ 96,214 $ 496,966
========= ========= ======== =========
Investment Securities. At December 31, 2000 the investment portfolio
totaled $207.1 million and at December 31, 1999 the investment portfolio totaled
$194.2 million resulting in an increase of $12.9 million or 6.64 percent.
Investment securities averaged $201.1 million during 2000, $182.8 million during
1999 and $164.0 million during 1998. In each period U. S. Treasury and
government agency securities represented substantially all of the portfolio. The
increase in the average securities portfolio during 2000 and 1999 resulted
primarily from growth in deposits, whereas the increase in investment securities
during 1998 arose from the issuance of long-term obligations and from the
investment of funds received in the 1998 branch acquisitions.
The weighted-average maturity of the investment securities portfolio was 19
months at December 31, 2000 and 23 months at December 31, 1999. 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
-------
INVESTMENT SECURITIES December 31,
(Dollars in thousands) --------------------------
2000 1999 1998
---- ---- ----
U.S. Treasury ............................... $126,969 $139,359 $143,350
U.S. Government agencies .................... 20,244 300 -
States and political subdivisions ........... 34,975 33,203 29,281
Other ....................................... 24,930 21,359 28,936
-------- -------- --------
Total investment securities ....... $207,118 $194,221 $201,567
======== ======== ========
Investment Securities At December 31, 2000 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 ............................. $ 68,979 5.53% $ 57,993 6.24% $ - - $ - -
U.S. Government agencies .................. 9,941 6.69 10,003 6.85% - - 300 8.00%
States and political subdivisions ......... 14,945 4.76% 5,380 6.06% 5,596 5.81% 4,486 5.91%
Other ..................................... 13,328 4.82% - - 100 6.75% 1,127 6.09%
--------- ---- -------- ---- ------- ---- ------- ----
Total investment securities ......... $ 107,193 5.44% $ 73,376 6.31% $ 5,696 5.83% $ 5,913 6.05%
========= ======== ======= =======
8
Income on Interest-Earning Assets. Table 6 analyzes the interest-earning
assets and interest-bearing liabilities for the three years ended December 31,
2000. Table 9 identifies the causes for changes in interest income and interest
expense for 2000 and 1999. Interest income amounted to $49.9 million during
2000, a $7.8 million increase from 1999 levels, compared to a $432,000 increase
from 1998 to 1999. Interest income growth during 2000 resulted from both
increased rates and an increased volume of earning assets. During 1999, loan
growth was the primary factor for the increase in interest income over 1998.
Total interest-earning assets yielded 7.78 percent during 2000, a 48 basis
point increase from the 7.30 percent reported in 1999. The average taxable-
equivalent yield on the loan portfolio increased from 8.22 percent in 1999 to
8.67 percent in 2000. The higher loan yield during 2000 reflects general market
conditions throughout the year, consisting primarily of a rising interest rate
environment until late in the year. Loan interest income increased $6.1 million
or 19.45 percent from 1999. This followed an increase of 0.94 percent in loan
interest income in 1999 over 1998. During 2000, the increases in loan interest
income was the result of both loan growth and higher loan yields. During 1999,
the increase in loan interest income was solely due to growth in loan volume as
the average yield on loans declined from 8.56 percent in 1998 to 8.22 percent in
1999.
Interest income earned on the investment portfolio amounted to $11.3 million
for the year ended December 31, 2000, $9.9 million for the year ended December
31, 1999 and $9.7 million for the year ended December 31, 1998. The average
taxable-equivalent yield on the portfolio for 2000 was 6.02 percent. The
average taxable-equivalent yield on the portfolio for 1999 was 5.66 percent.
The average taxable-equivalent yield on the portfolio for 1998 was 6.14 percent.
The $900,000 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 $18.8 million increase in 1999 investment interest income compared
to 1998 investment interest income was solely due to growth in average volume,
as the tax-equivalent yield on investments declined from 6.14 percent in 1998 to
5.66 percent for 1999.
INTEREST-BEARING LIABILITIES
At December 31, 2000 interest-bearing liabilities totaled $629.2 million, an
increase of $110.5 million or 21.30 percent over December 31, 1999. Interest-
bearing liabilities averaged $557.6 million during 2000, an increase of $47.7
million or 9.35 percent over 1999 levels. Interest-bearing deposits contributed
$65.8 million to the 2000 increase in interest-bearing liabilities. During
1999, interest-bearing liabilities averaged $509.9 million, an increase of $31.5
million or 6.59 percent over 1998. The growth during 1999 resulted primarily
from a $23.9 million increase in average interest-bearing deposits and a $7.9
million increase in average long-term obligations.
Deposits. 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 $49.0
million or 10.27 percent compared to 1999. Money market accounts averaged
$60.9 million during 2000, an increase of $7.7 million or 14.45 percent
increase 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 increase over the 1999 average balance. Time deposit balances averaged
$329.9 million during 2000, an increase of $34.5 million or 11.69 percent
increase over the 1999 average balance. The overall growth in average deposits
during 2000 resulted primarily from the acquisitions listed in Table 2 above.
Total deposits averaged $558.4 million in 1999, an increase of $31.8 million
or 6.05 percent increase over the 1998 average balance. Average interest-
bearing deposits were $480.7 million during 1999, an increase of $23.9 million
or 5.23 percent compared to 1998. Money market accounts averaged $53.2 million
during 1999, an increase of $2.1 million or 4.11 percent increase over the 1998
average balance. Checking with interest balances averaged $71.4 million during
1999, an increase of $5.9 million or 9.01 percent increase over the 1998
average balance. Time deposit balances averaged $298.7 million during 1999, an
increase of $12.9 million or 4.50 percent increase over the 1998 average
balance. The overall growth in average deposits during 1999 resulted primarily
from the acquisitions listed in Table 2 above.
BancShares has historically avoided excessive reliance on high-dollar
deposits. At December 31, 2000, these funds were 11.69 percent of total
deposits, compared to 10.44 percent of December 31, 1999 total deposits. Table
7 provides a maturity distribution for these deposits, which totaled $81.7
million at December 31, 2000.
9
Table 6
-------
AVERAGE BALANCE SHEET ITEMS, NET INTEREST DIFFERENTIAL AVERAGE BALANCES AND
AVERAGE RATES EARNED AND PAID
Year ended December 31,
--------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE
------------------------------- ------------------------------- --------
Interest earning assets:
Loans(1)(2)................................ $ 427,939 $ 37,122 8.67% $380,877 $ 31,292 8.22% 362,298
Taxable investment securities.............. 170,223 9,695 5.70% 158,071 8,345 5.28% 141,193
Nontaxable investment
securities(3).......................... 29,882 2,361 7.90% 24,748 2,006 8.11% 22,842
Federal funds sold ........................ 19,882 1,237 6.22% 19,081 968 5.07% 18,321
Other interest earning assets ............. 627 42 6.70% 4,003 204 5.10% 5,367
--------- -------- ------ -------- -------- ------ --------
Total interest earning assets ....... 648,553 50,457 7.78% 586,780 42,815 7.30% 550,021
-------- -------- ------ --------
Non-interest earning assets:
Cash and due from banks ................... 23,384 22,012 19,250
Premises and equipment, net ............... 23,732 19,781 18,304
Other ..................................... 21,104 22,441 28,253
--------- -------- --------
Total assets .......................... $ 716,773 $651,014 $615,828
========= ======== ========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits ......................... $ 91,941 $ 1,019 1.11% $ 83,823 $ 799 0.95% $ 78,283
Savings deposits ........................ 104,503 2,586 2.47% 98,137 2,170 2.21% 92,657
Time deposits ........................... 329,910 18,783 5.69% 298,744 14,685 4.92% 285,869
Short-term borrowed funds ............... 8,271 474 5.73% 6,231 229 3.68% 6,531
Long-term obligations ................... 23,000 2,070 9.00% 23,000 2,084 9.06% 15,056
--------- -------- ------- -------- -------- ----------- -------
Total interest bearing liabilities .... 557,625 24,932 4.47% 509,935 19,967 3.92% 478,396
-------- --------
Non-interest bearing liabilities:
Demand deposits ......................... 97,820 77,682 69,746
Other ................................... 5,958 7,923 11,263
Shareholders' equity .................... 55,370 55,474 56,423
--------- -------- --------
Total liabilities and equity ........ $ 716,773 $651,014 $615,828
========= ======== ========
Interest rate spread(4)................... 3.33% 3.38%
Net interest income and
net interest margin(5). ............ $ 25,525 3.94% $ 22,848 3.89%
======== ========
Year ended December 31,
-----------------------------------------
(Dollars in thousands) 1998
AVERAGE
ASSETS INTEREST RATE
---------------------
Interest earning assets:
Loans(1)(2)................................ $ 31,000 8.56%
Taxable investment securities ............. 8,085 5.73%
Nontaxable investment
securities(3)............................. 1,982 8.68%
Federal funds sold ........................ 972 5.31%
Other interest earning assets ............. 293 5.46%
-------- --------
Total interest earning assets ......... 42,332 7.70%
--------
Non-interest earning assets:
Cash and due from banks ...................
Premises and equipment, net ...............
Other .....................................
Total assets ..........................
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits .......................... $ 1,073 1.37%
Savings deposits ......................... 2,325 2.51%
Time deposits ............................ 15,318 5.36%
Short-term borrowed funds ................ 292 4.47%
Long-term obligations .................... 1,320 8.77%
------- -------
Total interest bearing liabilities .... 20,328 4.25%
-------
Non-interest bearing liabilities:
Demand deposits ..........................
Other ....................................
Shareholders' equity .....................
Total liabilities and equity ..........
Interest rate spread(4).................... 3.45%
Net interest income and
net interest margin(5).. .............. $ 22,004 4.00%
========
(1) Includes non-accrual loans
(2) Interest income includes amortization of loan fees.
(3) The average rate on nontaxable investment securities has been adjusted to
a tax equivalent yield using a 34% tax rate. The taxable equivalent
adjustment was $803 in 2000, $682 in 1999 and $543 in 1998.
(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.
10
Table 7
-------
2000 MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE:
(Dollars in thousands)
Three months or less........................... $32,939
Over three through six months.................. 16,454
Over six months through twelve months.......... 19,509
Over one year through five years............... 12,754
Over five years................................ -
-------
$81,656
=======
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,
2000, short-term borrowings totaled $15.4 million, compared to $5.2 million at
December 31, 1999. For the year ended December 31, 2000, short-term borrowings
averaged $7.1 million, compared to $5.2 million during 1999 and $5.7 million
during 1998. Table 8 provides additional information regarding short-term
borrowed funds.
Table 8
-------
SHORT-TERM BORROWINGS
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Amount Rate Amount Rate Amount Rate
-------------- -------------- -------------
Repurchase agreements:
At December 31............................ $14,068 5.23% $5,223 3.72% $4,953 3.35%
Average during year....................... 7,124 5.03% 5,240 3.58% 5,655 4.09%
Maximum month-end balance during year..... 14,068 6,313 6,459
U. S. Treasury tax and loan accounts:
At December 31............................ $ 1,359 6.29% $1,435 4.78% $ 171 4.11%
Average during year....................... 1,147 5.95% 991 4.15% 876 5.97%
Maximum month-end balance during year..... 2,150 2,035 2,206
Long-Term Obligations. At December 31, 2000 and December 31, 1999, long-term
obligations totaled $23.0 million. For the year ended December 31, 2000 and
December 31, 1999 long-term borrowings averaged $23.0 million, compared to $15.1
million during 1998. The increase from 1998 to 1999 resulted primarily from the
issuance of $23.0 million in long-term obligations in June 1998 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 $24.9
million in 2000, a $4.9 million or 24.9 percent increase from 1999. Interest
expense amounted to $20.0 million in 1999, a $361,000 or 1.78 percent increase
from 1998. The increased interest expense during 2000 was primarily the result
of higher interest rates and growth in volume due to the acquisitions listed in
Table 2. The increased interest expense during 1999 was primarily the result of
growth in volume due to the acquisitions listed in Table 2.
11
As a result of market changes and the shift toward transaction accounts and
money market products, the average cost of interest-bearing deposits increased
to 4.27 percent during 2000, compared to 3.67 percent in 1999 and 4.10 percent
in 1998. Interest expense on total interest-bearing deposits amounted to $22.4
million during 2000, an increase from $5.7 million recorded during 1999.
Interest expense on total interest-bearing deposits amounted to $17.7 million
during 1999, a decrease from $1.1 million recorded during 1998. The 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
decreased interest expense on deposits during 1999 was primarily the result of
an overall decline in the average rate paid on deposits in 1999 compared to
1998. The average rate on time deposits decreased from 5.36 percent in 1998 to
4.92 in 1999 and increased to 5.72 percent in 2000.
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 $228,000 during 1999, a decrease from $292,000
recorded during 1998. The increased interest expense during 2000 was primarily
the result of an increase in interest rates, whereas the decreased interest
expense during 1999 was primarily the result of lower market rates. The average
rate on short-term borrowings decreased from 4.47 percent in 1998 to 3.68 in
1999 and increased to 5.73 percent in 2000.
Interest expense on long-term obligations amounted to $2.1 million for both
2000 and 1999. Interest expense on long-term obligations amounted to $2.1
million during 1999, an increase from $1.3 million recorded during 1998. The
increased interest expense during 1999 was primarily the result of a full year
of interest on the trust preferred capital securities discussed above under Long
Term Obligations. The average rate on long-term borrowings increased from 8.77
percent in 1998 to 9.06 percent in 1999 and 9.00 percent in 2000.
12
Table 9
-------
AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL ANALYSIS OF CHANGES IN
INTEREST DIFFERENTIAL
(Dollars in thousands) December 31, 2000 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 ............................................. $ 5,830 $ 3,868 $ 1,714 $ 248
Taxable investment securities ..................... 1,188 642 664 (118)
Non-taxable investment securities ................. 355 416 (52) (9)
Federal funds sold ................................ 269 41 219 9
------- ------- ------- -------
Total interest income ........................ 7,642 4,967 2,545 130
------- ------- ------- -------
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits ................................... 220 77 134 9
Savings deposits .................................. 416 141 255 20
Time deposits ..................................... 4,098 1,533 2,301 264
Short-term borrowings ............................. 245 75 128 42
Long-term obligations ............................. (14) - (14) -
------- ------- ------- -------
Total interest expense ....................... 4,965 1,826 2,804 335
------- ------- ------- -------
Net interest income ................................. $ 2,677 $ 3,141 $ (259) $ (205)
======= ======= ======= =======
(Dollars in thousands) December 31, 1999 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 ............................................. $ 292 $ 1,590 $(1,232) $ (66)
Taxable investment securities ..................... 171 967 (635) (161)
Non-taxable investment securities ................. 24 165 (130) (11)
Federal funds sold ................................ (4) 40 (44) -
------- ------- ------- -------
Total interest income ........................... 483 2,762 (2,041) (238)
------- ------- ------- -------
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits ................................... (274) 76 (329) (21)
Savings deposits .................................. (155) 138 (278) (15)
Time deposits ..................................... (633) 690 (1,258) (65)
Short-term borrowings ............................. (63) (13) (52) 2
Long-term obligations ............................. 764 697 44 23
------- ------- ------- -------
Total interest expense ....................... (311) 1,588 (1,873) (76)
------- ------- ------- -------
Net interest income ................................. $ 844 $ 1,174 $ (168) $ (162)
======= ======= ======= =======
13
Average loan balances include nonaccrual loans. BancShares earns tax-exempt
interest on certain loans and investment securities due to the borrower or
issuer being either a governmental agency or a quasi-governmental agency. Yields
related to loans and securities exempt from federal income taxes are stated on a
taxable-equivalent basis assuming a statutory federal income tax rate of 34% for
all periods. The taxable equivalent adjustment was $803 in 2000, $682 in 1999
and $543 in 1998.
NET INTEREST INCOME
Net interest income totaled $25.0 million during 2000, an increase of $2.8
million or 12.68 percent from 1999. Net interest income amounted to $22.2
million during 1999, an increase from $21.4 million recorded during 1998. 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 net yield on interest-earning assets was 7.78 percent in 2000, 7.30
percent in 1999 and 7.70 percent in 1998. The higher net yield in 2000 was the
result of increased market rates. The combined increase in loans, investment
securities and overall market rates created a higher-yielding earning asset mix
for 2000 compared to 1999, resulting in an increase in the net interest margin
from 3.89 percent in 1999 to 3.94 percent in 2000. The lower net yields realized
in 1999 compared to 1998 resulted from overall lower 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, 2000, which reflected a one
year negative interest-sensitivity gap of $220.2 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, 2000
Non-Rate
1-30 31-90 91-180 181-365 Sensitive
Days Days Days Days & Over
Sensitive Sensitive Sensitive Sensitive 1 Year Total
Earning Assets:
Loans.......................... $ 94,545 $ 24,208 $ 26,619 $ 64,791 $286,803 $496,966
Investment securities.......... 5,360 19,593 24,468 48,611 94,146 192,178
Temporary investments.......... 12,840 - - - - 12,840
--------- --------- --------- --------- -------- --------
Total earning assets......... $ 112,745 $ 43,801 $ 51,087 $ 113,402 $380,949 $701,984
========= ========= ========= ========= ======== ========
Interest-Bearing Liabilities:
Savings and core time
deposits...................... $ 252,869 $ 56,211 $ 73,059 $ 74,815 $ 52,180 $509,134
Time deposits of $100,000
and more...................... 11,174 21,765 16,454 19,509 12,754 81,656
Short-term borrowings.......... 15,427 - - - - 15,427
Long-term obligations.......... - - - - 23,000 23,000
--------- --------- --------- --------- -------- --------
Total interest bearing
Liabilities................ $ 279,470 $ 77,976 $ 89,513 $ 94,324 $ 87,934 $629,217
========= ========= ========= ========= ======== ========
Interest sensitivity gap....... $(166,725) $ (34,175) $ (38,426) $ 19,078 $293,015 $ 72,767
========= ========= ========= ========= ======== ========
Cumulative interest
sensitivity gap............. $(166,725) $(200,900) $(239,326) $(220,248) $293,015 $ 72,767
========= ========= ========= ========= ======== ========
14
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, 2000. 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, 2000. 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, 2000.
15
Table 11
--------
MARKET RISK
(Dollars in thousands)
Maturing in Years ended December 31
2001 2002 2003 2004 2005 Thereafter Total Fair Value
------------------------------------------------------------------------------------------------------------------------
Assets
Loans:
Fixed rate.............. $ 64,028 $44,603 $55,701 $40,038 $25,411 $80,503 $310,284 $299,798
Average rate (%) 8.58% 8.74% 8.47% 8.64% 8.59% 7.34% 8.27%
Variable rate........... $108,023 $11,972 $11,583 $ 9,244 $ 9,433 $36,427 $186,682 $186,682
Average rate (%) 9.71% 9.64% 9.57% 9.67% 9.60% 8.95% 9.54%
Investment Securities
Fixed rate.............. $ 99,294 $64,065 $ 1,700 $ 1,791 $ 1,279 $23,148 $191,277 $207,088
Average rate (%) 5.98% 6.33% 8.31% 8.32% 8.69% 7.07% 6.29%
Variable rate........... -- -- -- -- -- $ 901 $ 901 $ 901
Average rate (%)........ -- -- -- -- -- 6.88% 6.88%
Liabilities
Savings and interest
bearing checking
Fixed rate.............. $213,773 -- -- -- -- -- $213,773 $213,773
Average rate (%)........ 1.93% -- -- -- -- -- 1.93%
Certificates of deposit
Fixed rate.............. $304,917 $38,669 $18,247 $ 8,017 -- -- $369,850 $371,679
Average rate (%)........ 6.12% 6.39% 6.34% 5.67% -- -- 6.15%
Variable rate........... $ 4,602 $ 2,565 -- -- -- -- $ 7,167 $ 7,167
Average rate(%)......... 5.05% 5.26% -- -- -- -- 5.12%
Short-term borrowings
Variable rate........... $ 15,427 -- -- -- -- -- $ 15,427 $ 15,427
Average rate (%)........ 5.32% -- -- -- -- -- 5.32%
Long-term debt
Fixed rate.............. -- -- -- -- -- $23,000 $ 23,000 $ 20,125
Average rate (%)........ -- -- -- -- -- 8.25% 8.25%
ASSET QUALITY
Nonperforming Assets. Nonperforming asset balances for the past five years are
presented in Table 12. BancShares' nonperforming assets at December 31, 2000
included nonaccrual loans totaling $478,000 and no foreclosed property.
Nonperforming assets as of December 31, 2000 represented 0.31 percent of loans
outstanding. Nonperforming assets totaled $1.6 million at December 31, 2000,
$1.2 million at December 31, 1999 and $1.1 million at December 31, 1998. Of the
$478,000 in nonaccrual loans at December 31, 2000, none were considered to be
impaired. Of the $243,000 in nonaccrual loans at December 31, 1999, none were
considered to be impaired.
16
Table 12
--------
RISK ELEMENTS
December 31,
(Dollars in thousands) 2000 1999 1998 1997 1996
Non accrual loans....................................... $ 478 $ 243 $ 166 $ 230 $ 14
Restructured loans...................................... - 42 42 - 8
Accruing loans past-due 90 days or more................. 1,081 460 805 466 343
------ ------ ------ ------ ------
Total non-performing loans....................... 1,559 745 1,013 696 498
------ ------ ------ ------ ------
Other real estate owned................................. - 414 84 48 -
------ ------ ------ ------ ------
Total non-performing loans and assets..... $1,559 $1,159 $1,097 $ 744 $ 498
====== ====== ====== ====== ======
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.
At December 31, 2000, BancShares' allowance for loan losses was $7.3
million or 1.47 percent of loans outstanding. At December 31, 1999, BancShares'
allowance for loan losses was $6.2 million or 1.55 percent of loans outstanding.
The reduction in the allowance-to-loan ratios since 1999 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 25.41 percent of total loans at December 31, 1999 to 22.98 percent of total
loans at December 31, 2000. Conversely, commercial real-estate loans increased
from 18.81 percent of total loans at December 31, 1999 to 25.45 percent of total
loans at December 31, 2000.
17
Table 13
--------
SUMMARY OF LOAN LOSS EXPERIENCE
December 31,
(Dollars in thousands) 2000 1999 1998 1997 1996
Allowance for loan losses - beginning of year ................ $ 6,188 $ 5,962 $ 5,971 $ 6,163 $ 6,321
Charge - offs:
Commercial, financial and agricultural .................... 84 183 158 47 5
Real estate:
Mortgage:
One to four family residential ................ 67 77 41 86 106
Commercial .................................... 11 121 15 - -
Equityline .................................... 11 10 32 - -
Other ......................................... - - 23 -
Lease financing ........................................... - 16 - - -
Consumer .................................................. 361 341 298 307 428
-------- -------- -------- -------- --------
Total charge-offs .................. 534 748 544 463 539
Recoveries:
Commercial, financial and agricultural .................... 56 11 11 13 -
Real estate:
Construction .......................................... - - - - 19
Mortgage:
One to four family residential .................... 13 25 20 59 131
Commercial ........................................ 99 3 - - -
Equityline ........................................ 19 - 8 - -
Other ............................................. 16 - 5 - -
Consumer .................................................. 152 105 67 139 91
-------- -------- -------- -------- --------
Total recoveries ................... 355 144 111 211 241
-------- -------- -------- -------- --------
Net charge-offs .............................................. 179 604 433 252 298
Provision for loan losses .................................... 475 830 155 60 140
Additions from bank acquisitions ............................ 800 - 269 - -
-------- -------- -------- -------- --------
Allowance for loan losses - end of year .................... $ 7,284 $ 6,188 $ 5,962 $ 5,971 $ 6,163
======== ======== ======== ======== ========
Average loans outstanding during the year .................... $427,939 $380,877 $362,298 $340,195 $310,389
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans
outstanding ............................................. 0.04% 0.16% 0.12% 0.07% 0.10%
======== ======== ======== ======== ========
The provision for loan losses charged to operations was $475,000 during
2000 compared to $830,000 during 1999 and $155,000 in 1998. The provision for
loan losses in 2000 was primarily a result of the $16.8 million in net loan
growth, excluding the impact of acquisitions. The provision for loan losses was
negatively impacted in 1999 by the effects of the September 1999 hurricanes on
BancShares' borrowers. When compared to 1998, the provision for loan losses for
1999 was also impacted by the substantial growth in the loan portfolio during
1999. Excluding acquisitions, the loan portfolio grew a net total of $25.3
million in 1999, compared to a net decrease, excluding acquisitions, of $1.4
million in 1998.
Net charge-offs during 2000 decreased by $425,000 from 1999 net charge-offs
of $604,000. Net charge-offs during 1999 increased by $171,000 over 1998 net
charge-offs of $433,000. The percentage of charge-offs, net of recoveries, to
average outstanding loans was 0.04 percent in 2000, 0.16 percent in 1999 and
0.12 percent in 1998. 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, 2000 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.
18
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 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
2000 total loans 1999 total loans 1998 total loans 1997 total loans 1996 total loans
---- ---- ---- ---- ----
Commercial,
financial and
agricultural............ $3,000 23% $2,450 25% $2,200 24% $2,149 24% $2,214 22%
Real estate:
Construction ........ 100 3% 100 2% 100 2% 60 1% 76 1%
Mortgage:
One to four
family
residential ...... 1,100 23% 1,100 28% 1,100 31% 1,194 30% 1,245 36%
Commercial ....... 550 25% 550 19% 550 17% 537 17% 566 17%
Equityline ....... 200 8% 200 8% 200 8% 239 8% 204 6%
Other ............ 184 8% 188 8% 212 7% 239 8% 248 6%
Consumer ............. 2,050 8% 1,500 9% 1,500 10% 1,493 10% 1,537 11%
Lease financing ...... 100 2% 100 1% 100 1% 60 2% 73 1%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total ........ $7,284 100% $6,188 100% $5,962 100% $5,971 100% $6,163 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
NONINTEREST INCOME
Total noninterest income was $5.3 million for the year ended December 31,
2000, an increase of $314,000 or 6.35 percent. This compares to $4.9 million for
the year ended December 31, 1999 and $6.6 million for the year ended December
31, 1998. Net securities losses of $746,000 were realized in the year ended
December 31, 2000. In 1998 $1.8 million 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
20.95 percent for 1996 to 24.05 percent for 2000.
19
Table 15
--------
NONINTEREST INCOME
(Dollars in thousands)
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts.......... $3,942 $3,497 $3,199 $2,918 $2,664
Other service charges and fees............... 1,275 1,192 1,025 868 780
Investment securities (losses) gains, net ... (746) 1 1,789 5,567 460
Gain (loss) on sale of loans................. 38 (272) (112) 52 (158)
Credit card merchant discount................ 532 425 291 220 163
Other........................................ 219 103 361 224 599
------------------------------------------------------------------------------------------------------------
Total noninterest income........... $5,260 $4,946 $6,553 $9,849 $4,508
============================================================================================================
Income from service charges on deposit accounts was $3.9 million for the year
ended December 31, 2000, an increase of 12.73 percent. Service charge income was
$3.5 million for the year ended December 31, 1999 compared to $3.2 million for
the year ended December 31, 1998.
Income from other service charges and fees was $1.3 million for the year ended
December 31, 2000, an increase of 6.96 percent. Other service charges and fee
income was $1.2 million for the year ended December 31, 1999 and $1.0 million
for the year ended December 31, 1998.
Gains and losses resulting from sales of available-for-sale securities was a
net loss of $746,000 for the year ended December 31, 2000, compared to gains of
$1,000 for 1999 and $1.8 million for the year ended December 31, 1998.
NONINTEREST EXPENSE
Total noninterest expense for the year ended December 31, 2000 of $25.0
million was a 16.66 percent increase over the year ended December 31, 1999 and
compared to a 6.65 percent increase for the year ended December 31, 1999 over
the year ended December 31, 1998. Table 16 presents the components of
noninterest expense for the last five years.
Personnel expense was $11.8 million for the year ended December 31, 2000, an
increase of $946,000 or 8.76 percent over the year ended December 31, 1999
compared to a $10.8 million or 13.72 percent increase for the year ended
December 31, 1999 over the year ended December 31, 1998. 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 365 full time equivalent employees at December 31, 2000,
compared to 327 at December 31, 1999 and 310 at December 31, 1998. The increase
during 2000 and 1999 was 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
(Dollars in thousands)
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------
Personnel............................. $11,751 $10,805 $ 9,501 $ 8,763 $ 7,975
Intangibles amortization.............. 2,603 1,942 1,534 1,755 1,638
Data processing....................... 2,224 1,852 1,829 1,598 1,440
Furniture and equipment............... 1,650 1,534 1,502 1,633 1,314
Occupancy............................. 2,106 1,633 1,567 1,388 1,203
Professional fees..................... 705 286 715 649 632
FDIC insurance assessment............. 122 114 115 112 772
Charitable contributions.............. - 9 2 4,076 589
Other................................. 3,989 3,622 3,430 3,090 2,640
-----------------------------------------------------------------------------------------------------------
Total noninterest expense.. $25,028 $21,454 $20,116 $23,064 $18,203
===========================================================================================================
20
Intangibles amortization was $2.6 million for the year ended December 31,
2000, an increase of $661,000 or 34.04 percent over the year ended December 31,
1999 compared to a $408,000 or 26.60 percent increase for the year ended
December 31, 1999 over the year ended December 31, 1998. Increases in each
period resulted from the acquisitions discussed above in Table 2.
Data processing expense was $2.2 million for the year ended December 31, 2000,
an increase of $372,000 or 20.09 percent over the year ended December 31, 1999
compared to a $23,000 or 1.26 percent decrease for the year ended December 31,
1999 from the year ended December 31, 1998. 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 discussed above in Table 2 and the
opening of a new office in Greenville, North Carolina in September 2000 and
Clinton, North Carolina in November 1999.
Furniture and equipment expense was $1.7 million for the year ended December
31, 2000, an increase of $116,000 or 7.56 percent over the year ended December
31, 1999 compared to a $32,000 or 2.13 percent increase for the year ended
December 31, 1999 over the year ended December 31, 1998. Increases in each
period resulted primarily from the acquisitions discussed above in Table 2 and
the opening of a new office in Greenville, North Carolina in September 2000 and
Clinton, North Carolina in November 1999.
Occupancy expense was $2.1 million for the year ended December 31, 2000, an
increase of $473,000 or 28.97 percent over the year ended December 31, 1999
compared to a $25,000 or 1.74 percent increase for the year ended December 31,
1999 over the year ended December 31, 1998. Increases in each period resulted
primarily from the acquisitions discussed above in Table 2 and the opening of a
new office in Greenville, North Carolina in September 2000 and Clinton, North
Carolina in November 1999.
INCOME TAXES
For the year ended December 31, 2000, BancShares recorded total income tax
expense of $1.0 million, compared to $1.2 million of income tax expense for the
year ended December 31, 1999 and $2.1 million for the year ended December 31,
1998. BancShares' effective tax rate declined from 26.91 percent for the year
ended December 31, 1998 to 23.81 percent for the year ended December 31, 1999
and to 21.12 percent for the year ended December 31, 2000. This reduction in the
effective tax rate primarily resulted from an increase in non-taxable
investments in 1999 and 2000.
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 11.78 percent for the year ended December 31, 2000, 6.05 percent
for the year ended December 31, 1999 and 5.67 percent for the year ended
December 31, 1998.
At December 31, 2000 the investment portfolio totaled $207.1 million or 25.78
percent of total assets. At December 31, 1999 the investment portfolio totaled
$194.2 million or 29.02 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.
SHAREHOLDER'S EQUITY AND CAPITAL ADEQUACY
BancShares maintains adequate capital balances and exceeds all minimum
regulatory capital requirements. Table 17 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.
21
Table 17
--------
ANALYSIS OF SOUTHERN'S CAPITAL ADEQUACY
Southern's capital ratios as of December 31 are set forth below:
2000 1999 1998
Tier 1 capital(1)......... $ 51,865 $ 55,398 $ 49,198
Total capital............. 61,630 62,967 53,234
Risk-adjusted assets...... 489,540 386,761 311,341
Average tangible assets... 744,328 654,268 582,955
Tier 1 capital ratio (1).. 10.59% 14.32% 15.80%
Total capital............. 12.59% 16.28% 17.10%
Leverage capital ratio.... 6.97% 8.47% 8.44%
(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 decline in capital ratios during 2000 reflect the impact of the
acquisitions as discussed above under Table 2. The rate of return on average
shareholders' equity for the year ended December 31, 2000 was 6.74 percent
compared to 6.63 percent for the year ended December 31, 1999 and 9.92 percent
for the year ended December 31, 1998. The increased return recorded during 2000
resulted principally from the growth in earnings. The decline in return recorded
during 1999 resulted from a decline in 1999 earnings, which was attributable to
a decrease in investment securities gains of $1.8 million for 1999 compared to
1998.
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 2000 totaled $706,000, a
decrease of $413,000 or 36.91 percent from the fourth quarter of 1999. Average
interest-earning assets for the fourth quarter of 2000 increased $86.5 million
or 14.23 percent over the fourth quarter of 1999. Average loans for the fourth
quarter of 2000 increased $73.7 million or 18.67 percent over the fourth quarter
of 1999. Average investment securities for the fourth quarter of 2000 increased
$16.1 million or 8.73 percent over the fourth quarter of 1999. Each of these
earning asset categories increased primarily as a result of the acquisitions
discussed in Table 2.
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, 2000 was 329. 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.
22
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.
Table 18
--------
SELECTED QUARTERLY DATA
2000 1999
Fourth Third Second First Fourth Third Second First
-----------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income........................... $13,770 $12,610 $12,193 $11,336 $11,096 $10,533 $10,277 $10,227
Interest expense.......................... 7,250 6,422 5,942 5,318 5,188 4,946 4,890 4,943
-----------------------------------------------------------------------------------------------------------------------
Net interest income....................... 6,520 6,188 6,251 6,018 5,908 5,587 5,387 5,284
Provision for loan losses................. 175 150 75 75 245 465 60 60
-----------------------------------------------------------------------------------------------------------------------
Net income after provision for
loan losses.............................. 6,345 6,038 6,176 5,943 5,663 5,122 5,327 5,224
Noninterest income........................ 1,477 1,809 1,490 484 1,089 1,480 1,239 1,138
Noninterest expense....................... 6,916 6,191 6,129 5,792 5,283 5,401 5,339 5,430
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes................ 906 1,656 1,537 635 1,469 1,201 1,227 932
Income taxes.............................. 200 340 330 130 350 290 270 240
-----------------------------------------------------------------------------------------------------------------------
Net income................................ $ 706 $ 1,316 $ 1,207 $ 505 $ 1,119 $ 911 $ 957 $ 692
=======================================================================================================================
Net income applicable to
common shares........................... $ 613 $ 1,223 $ 1,112 $ 409 $ 1,017 $ 811 $ 861 $ 595
=======================================================================================================================
PER SHARE OF STOCK
Net income per share of common
stock.................................... 5.26 10.41 9.40 3.44 8.54 6.81 7.22 4.99
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..................................... 195.00 195.00 185.00 185.00 185.00 185.00 185.00 175.00
Low...................................... 195.00 185.00 185.00 185.00 185.00 185.00 185.00 175.00
Preferred B sales price
High..................................... 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Low...................................... 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Preferred C sales price
High..................................... 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Low...................................... 11.25 11.25 11.25 11.25 11.25 11.25 11.25 11.25
Interest income for the fourth quarter of 2000 increased $2.7 million or
24.10 percent over the fourth quarter of 1999 primarily as a result of increased
average loans, increased average securities and increased yields on loans and
securities.
23
Average interest-bearing liabilities increased $77.9 million from the fourth
quarter of 1999 to the fourth quarter of 2000 primarily as a result of the
acquisitions discussed in Table 2. The rate on total interest-bearing
liabilities increased from 3.93 percent for the fourth quarter of 1999 to 4.75
percent for the fourth quarter of 2000.
Net interest income increased $612,000 from the fourth quarter of 1999 to the
fourth quarter of 2000 primarily as a result of the acquisitions discussed in
Table 2. In the fourth quarter of 1999, in order to meet the anticipated
liquidity needs related to the Year 2000 issue, management increased cash and
federal funds balances which resulted in lower net interest income for the
fourth quarter of 1999.
Non-interest income for the fourth quarter of 2000 increased $388,000 or 35.63
percent over the fourth quarter of 1999 and non-interest expense for the fourth
quarter of 2000 increased $1.6 million or 30.91 percent over the fourth quarter
of 1999 primarily as a result of the acquisitions discussed in Table 2.
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 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 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 is
not expected to materially impact the Company.
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.
24
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, 2000
and 1999, 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, 2000. 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, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Raleigh, North Carolina
February 16, 2001
25
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except for per share data)
December 31,
2000 1999
----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks............................................................................. $ 42,944 $ 28,524
Federal funds sold.................................................................................. 12,840 20,370
Investment securities:
Held-to-maturity, at amortized cost (fair value of $96,416 and $99,979, respectively).............. 95,545 100,129
Available-for-sale, at fair value (amortized cost of $96,633 and $83,095, respectively)............ 111,573 94,084
Loans............................................................................................... 496,966 398,060
Less allowance for loan losses..................................................................... (7,284) (6,188)
----------------------------------------------------------------------------------------------------------------------------
Net loans........................................................................................... 489,682 391,872
Premises and equipment.............................................................................. 29,313 21,257
Accrued interest receivable......................................................................... 6,482 4,730
Intangible assets................................................................................... 13,789 6,411
Other assets........................................................................................ 1,273 1,855
----------------------------------------------------------------------------------------------------------------------------
Total assets...................................................................................... $803,441 $669,232
============================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing................................................................................ $107,695 $ 89,181
Interest-bearing................................................................................... 590,790 489,069
----------------------------------------------------------------------------------------------------------------------------
Total deposits...................................................................................... 698,485 578,250
Short-term borrowings............................................................................... 15,427 6,658
Long-term obligations............................................................................... 23,000 23,000
Accrued interest payable............................................................................ 4,117 4,471
Other liabilities................................................................................... 2,730 1,909
----------------------------------------------------------------------------------------------------------------------------
Total liabilities................................................................................. 743,759 614,288
----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares authorized;
367,524 and 397,370 shares issued and outstanding at December 31, 2000 and
December 31, 1999, respectively.................................................................... 1,790 1,936
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized;
39,825 shares issued and outstanding at December 31, 2000 and December 31,
1999, respectively................................................................................. 555 555
Common stock, $5 par value; 158,485 shares authorized; 115,209 and 118,912 shares
issued and outstanding at December 31, 2000 and December 31, 1999, respectively.................... 576 595
Surplus............................................................................................. 10,000 10,000
Retained earnings................................................................................... 36,901 34,606
Accumulated other comprehensive income.............................................................. 9,860 7,252
----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity........................................................................ 59,682 54,944
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity........................................................ $803,441 $669,232
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
26
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,
2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans................................................................................... $ 37,377 $ 31,292 $ 31,000
Investment securities:
U. S. Government...................................................................... 8,753 7,454 7,149
State, county and municipal........................................................... 1,966 1,728 1,792
Other................................................................................. 576 692 789
----------------------------------------------------------------------------------------------------------------------------
Total investment securities interest income.......................................... 11,295 9,874 9,730
Federal funds sold...................................................................... 1,237 968 972
----------------------------------------------------------------------------------------------------------------------------
Total interest income................................................................ 49,909 42,134 41,702
Interest expense:
Deposits................................................................................ 22,388 17,655 18,716
Short-term borrowings................................................................... 474 228 292
Long-term obligations................................................................... 2,070 2,084 1,320
----------------------------------------------------------------------------------------------------------------------------
Total interest expense................................................................ 24,932 19,967 20,328
----------------------------------------------------------------------------------------------------------------------------
Net interest income................................................................... 24,977 22,167 21,374
Provision for loan losses............................................................... 475 830 155
----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses................................... 24,502 21,337 21,219
Noninterest income:
Service charges on deposit accounts................................................... 3,942 3,497 3,199
Other service charges and fees........................................................ 1,275 1,192 1,025
Investment securities (loss) gain, net................................................ (746) 1 1,789
Gain (loss) on sale of loans.......................................................... 38 (272) (112)
Credit card merchant discount......................................................... 532 425 291
Other................................................................................. 219 103 361
----------------------------------------------------------------------------------------------------------------------------
Total noninterest income.............................................................. 5,260 4,946 6,553
Noninterest expense:
Personnel............................................................................... 11,751 10,805 9,501
Intangibles amortization................................................................ 2,603 1,722 1,534
Data processing......................................................................... 2,224 1,852 1,829
Furniture and equipment................................................................. 1,650 1,534 1,502
Occupancy............................................................................... 2,106 1,633 1,605
Professional fees....................................................................... 705 286 715
Other................................................................................... 3,989 3,622 3,430
Total noninterest expense............................................................. 25,028 21,454 20,116
----------------------------------------------------------------------------------------------------------------------------
Income before income taxes............................................................... 4,734 4,829 7,656
Income taxes............................................................................. 1,000 1,150 2,060
----------------------------------------------------------------------------------------------------------------------------
Net income............................................................................ 3,734 3,679 5,596
----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) arising during period......................................... 3,100 (4,109) (2,554)
Less: reclassification adjustment for (losses) gains included in net income............. (492) 1 1,181
Other comprehensive income (loss)....................................................... 2,608 (4,110) (3,735)
----------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss)........................................................... $ 6,342 $ (431) $ 1,861
============================================================================================================================
Per share information:
Net income per common share............................................................. $ 28.51 $ 27.56 $ 43.40
Cash dividends declared on common shares................................................ 1.50 1.50 1.50
Weighted average common shares outstanding.............................................. 117,743 119,137 119,685
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
27
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands except for per share data)
Preferred Stock Common
-----------------------------------
Series B Series C Stock Retained
----------------- ----------------- -----------------
Shares Amount Shares Amount Shares Amount Surplus Earnings
----------------- ----------------- ----------------- --------- ----------
BALANCE, DECEMBER 31, 1997...................... 405,645 $1,976 43,631 $578 119,918 $600 $10,000 $26,733
------------------------------------------------------------------------------------------------------------------------------
Net income...................................... -- -- -- -- -- -- -- 5,596
Purchase and retirement of stock................ (6,992) (34) (3,258) (16) (652) (4) -- (177)
Cash dividends:
Common stock ($1.50 per share)................ -- -- -- -- -- -- -- (179)
Preferred B ($.90 per share).................. -- -- -- -- -- -- -- (363)
Preferred C ($.90 per share).................. -- -- -- -- -- -- -- (39)
Unrealized loss on securities available-
for-sale, net of tax of $1,924................ -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998...................... 398,653 $1,942 40,373 $562 119,266 $596 $10,000 $31,571
------------------------------------------------------------------------------------------------------------------------------
Net income...................................... -- -- -- -- -- -- -- 3,679
Purchase and retirement of stock................ (1,283) (6) (548) (7) (354) (1) -- (71)
Cash dividends:
Common stock ($1.50 per share)................ -- -- -- -- -- -- -- (178)
Preferred B ($.90 per share).................. -- -- -- -- -- -- -- (359)
Preferred C ($.90 per share).................. -- -- -- -- -- -- -- (36)
Unrealized loss on securities available-
for-sale, net of tax of $2,116................ -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999...................... 397,370 $1,936 39,825 $555 118,912 $595 $10,000 $34,606
------------------------------------------------------------------------------------------------------------------------------
Net income...................................... -- -- -- -- -- -- -- 3,734
Purchase and retirement of stock................ (29,846) (146) -- -- (3,703) (19) -- (885)
Cash dividends:
Common stock ($1.50 per share)................ -- -- -- -- -- -- -- (177)
Preferred B ($.90 per share).................. -- -- -- -- -- -- -- (341)
Preferred C ($.90 per share).................. -- -- -- -- -- -- -- (36)
Unrealized gain on securities available-
for-sale, net of tax of $1,343................ -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000...................... 367,524 $1,790 39,825 $555 115,209 $576 $10,000 $36,901
==============================================================================================================================
Accumulated
Other
Compre- Total
hensive Shareholders'
Income Equity
-------- --------
BALANCE, DECEMBER 31, 1997.................... $15,097 $54,984
------------------------------------------------------------------------
Net income.................................... -- 5,596
Purchase and retirement of stock.............. -- (231)
Cash dividends:
Common stock ($1.50 per share).............. -- (179)
Preferred B ($.90 per share)................ -- (363)
Preferred C ($.90 per share)................ -- (39)
Unrealized loss on securities available-
for-sale, net of tax of $1,924.............. (3,735) (3,735)
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998.................... $11,362 $56,033
------------------------------------------------------------------------
Net income.................................... -- 3,679
Purchase and retirement of stock.............. -- (85)
Cash dividends:
Common stock ($1.50 per share).............. -- (178)
Preferred B ($.90 per share)................ -- (359)
Preferred C ($.90 per share)................ -- (36)
Unrealized loss on securities available-
for-sale, net of tax of $2,116.............. (4,110) (4,110)
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999.................... $ 7,252 $54,944
------------------------------------------------------------------------
Net income.................................... -- 3,734
Purchase and retirement of stock.............. -- (1,050)
Cash dividends:
Common stock ($1.50 per share).............. -- (177)
Preferred B ($.90 per share)................ -- (341)
Preferred C ($.90 per share)................ -- (36)
Unrealized gain on securities available-
for-sale, net of tax of $1,343.............. 2,608 2,608
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000.................... $ 9,860 $59,682
========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
28
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year ended December 31,
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income......................................................................... $ 3,734 $ 3,679 $ 5,596
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses........................................................ 475 830 155
Deferred income taxes............................................................ (230) (423) (167)
Loss on impairment of available-for-sale securities.............................. 855 - -
Gains on sales and issuer calls of securities.................................... (109) (1) (1,789)
Loss on sale and abandonment of premises and equipment........................... 8 119 116
Loss (gain) on sale of loans..................................................... (38) 272 112
Net (accretion of discounts) amortization of premiums on investments............. (114) 50 (54)
Amortization of intangibles and mortgage servicing rights........................ 2,708 1,942 1,534
Depreciation..................................................................... 1,713 1,482 1,394
Net increase in accrued interest receivable...................................... (1,752) (159) (366)
Net increase (decrease) in accrued interest payable.............................. (354) (34) 111
Net (increase) decrease in other assets.......................................... 627 113 (1,006)
Net decrease in other liabilities................................................ (303) (1,679) ( 507)
--------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................... 7,220 6,191 5,129
--------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of
investment securities available-for-sale......................................... 30,165 44,734 46,625
Proceeds from maturities and issuer calls of
investment securities held-to-maturity........................................... 58,324 43,889 5,569
Proceeds from sales of investment securities available-for-sale.................... 1,604 30 1,976
Purchases of investment securities held-to-maturity................................ (58,679) (57,458) (42,786)
Purchases of investment securities available-for-sale.............................. (41,000) (28,000) (32,046)
Net (increase) decrease in loans................................................... (16,775) (25,321) 1,392
Purchases of fixed assets.......................................................... (6,304) (3,655) (1,653)
Sales of fixed assets.............................................................. -- -- 48
Net cash received for bank and branches acquired................................... 7,555 3,991 13,144
--------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES.............................................. (25,110) (21,790) (7,731)
--------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (decrease) increase in demand and interest-bearing demand deposits............. (11,721) 9,426 14,592
Net increase (decrease) in time deposits........................................... 29,336 (2,763) (8,531)
Proceeds from issuance of long-term obligations.................................... -- -- 23,000
Debt issuance costs................................................................ -- -- (862)
Payments of long-term obligations.................................................. -- -- (4,750)
Net proceeds (repayments) of short-term borrowed funds............................. 8,769 1,534 (1,702)
Cash dividends paid................................................................ (554) (573) (581)
Purchase and retirement of stock................................................... (1,050) (85) (231)
--------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................... 24,780 7,539 20,935
--------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................................................... 6,890 (8,060) 18,333
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF YEAR.............................................................. 48,894 56,954 38,621
--------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR........................................ $ 55,784 $ 48,894 $ 56,954
================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE YEAR FOR:
Interest.......................................................................... $ 25,286 $ 20,001 $ 20,217
Income taxes...................................................................... $ 1,224 $ 894 $ 2,977
================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Unrealized gains (losses) on available-for-sale securities, net of deferred tax... $ 2,608 ($ 4,110) ($ 3,735)
The accompanying notes are an integral part of these financial statements.
29
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 1. Summary of Significant Accounting Policies
BancShares
Southern BancShares (N.C.), Inc. ("BancShares") is the holding company
for Southern Bank and Trust Company ("Southern"), which operates 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 generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. The most significant estimates made by BancShares in
the preparation of its consolidated financial statements are the
determination of the allowance for loan losses and fair value
estimates for financial instruments.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation. Such reclassifications had no effect on net
income or shareholders' equity as previously reported.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and federal funds sold. Federal funds
are purchased and sold for one day periods.
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.
30
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.
Loans
Loans are stated at principal amounts outstanding, reduced by unearned
income and an allowance for loan losses.
Southern originates certain residential mortgages with the intent to
sell. Such loans held-for-sale are included in loans in the
accompanying consolidated balance sheets at the lower of cost or fair
value as determined by outstanding commitments from investors or
current quoted market prices.
Interest income on substantially all loans is recognized in a manner
that approximates the level yield method when related to the principal
amount outstanding. Accrual of interest is discontinued on a loan when
management believes the borrower's financial condition is such that
collection of principal or interest is doubtful. Loans are returned to
the accrual status when the factors indicating doubtful collectibility
cease to exist.
Management considers a loan to be impaired when based on current
information or events, it is probable that a borrower will be unable
to pay all amounts due according to the contractual terms of the loan
agreement. Impaired loans are valued using either the discounted
expected cash flow method or the collateral value. When the ultimate
collectibility of the impaired loan's principal is doubtful, all cash
receipts are applied to principal. Once the recorded principal
balance has been reduced to zero, future cash receipts are applied to
interest income, to the extent that any interest has been foregone.
Future cash receipts are recorded as recoveries of any amounts
previously charged-off.
Southern provides an allowance for loan losses on a reserve basis and
includes in operating expenses a provision for loan losses determined
by management. The allowance is reduced by charge-offs and increased
by subsequent recoveries. Management's periodic evaluation of the
adequacy of the allowance is based on Southern's past loan loss
experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's experience, the estimated
value of any underlying collateral, current economic conditions and
other risk factors. Management believes it has established the
allowance in accordance with generally accepted accounting principles
and in consideration of the current economic environment. While
management uses the best information available to make evaluations,
future adjustments may be necessary.
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.
31
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 1. Summary of Significant Accounting Policies - continued
Mortgage Servicing Rights
The estimated value of the right to service mortgage loans for others
("MSRs") is included in other assets on BancShares consolidated
balance sheet. Capitalization of MSRs occurs when the underlying loans
are sold. Capitalized MSRs are amortized into income over the
projected servicing life of the underlying loans. Capitalized MSRs
are periodically reviewed for impairment.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated lives of
the assets, ranging from 15 to 31.5 years for buildings and
improvements and 3 to 10 years for furniture and equipment.
Intangible Assets
Intangible assets, primarily core deposit intangibles and goodwill,
are generally amortized on an accelerated basis over a period of 5 to
10 years. Intangible assets are subject to periodic review and are
adjusted for any impairment of value.
Income Taxes
BancShares uses the asset and liability method to account for deferred
income taxes. The objective of the asset and liability method is to
establish deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the income tax
basis of BancShares' assets and liabilities at enacted rates expected
to be in effect when such amounts are realized or settled.
Recognition of deferred tax assets is based on management's belief
that it is "more likely than not" that the tax benefit associated with
certain temporary differences will be realized. A valuation allowance
is recorded for deferred tax assets when the "more likely than not"
standard is not met.
Shareholders' Equity
Common shareholders are entitled to one vote per share and both
classes of preferred shareholders are entitled to one vote for each 38
shares owned of a class. Dividends on BancShares' common stock may be
paid only after annual dividends of $.90 per share on both preferred
series "B" and "C" shares have been paid.
Earnings per common share 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.
32
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 calculated based on the following
amounts for the years ended December 31:
2000 1999 1998
---------------------------------------------------------------------------------------------------
Net income.............................................. $ 3,734 $ 3,679 $ 5,596
Less: Preferred dividends............................... (377) (395) (402)
---------------------------------------------------------------------------------------------------
Net income applicable to common shares................. $ 3,357 $ 3,284 $ 5,194
===================================================================================================
Weighted average common shares
outstanding during the period.......................... 117,743 119,137 119,685
===================================================================================================
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:
2000 1999 1998
---------------------------------------------------------------------------------------------------
Unrealized gains (losses) arising during period......... $ 1,597 $(2,116) $(2,532)
Less: Reclassification adjustment for (gains) losses
included in net income.................................. 254 -- (608)
---------------------------------------------------------------------------------------------------
Total tax effect........................................ $ 1,343 $(2,116) $(1,924)
===================================================================================================
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. The provisions of Statement 131
were effective for fiscal years beginning after December 31, 1997.
Adoption of this pronouncement did not have a material effect on
BancShares' consolidated financial statements as banking is considered
to be BancShares only segment.
33
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 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.
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 is not expected to materially impact the Company.
Note 2. Investment Securities
The amortized cost and estimated fair values of investment securities
at December 31 were as follows:
December 31, 2000 December 31, 1999
---------------------------------------------- --------------------------------------------
Gross Gross Gross Estimated Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------
SECURITIES
HELD-TO-MATURITY:
U. S. Government......... $ 73,215 433 ( 24) 73,624 $ 80,298 12 (499) 79,811
Obligations of states and
political subdivisions. 22,230 464 (1) 22,693 19,731 347 (6) 20,072
Corporate debenture...... 100 -- (1) 99 100 -- (4) 96
------------------------------------------------------------------------------------------------------------------------
95,545 897 (26) 96,416 100,129 359 (509) 99,979
------------------------------------------------------------------------------------------------------------------------
SECURITIES
AVAILABLE-FOR-SALE:
U. S. Government......... 73,997 509 (31) 74,475 57,968 -- (551) 57,417
Marketable equity
securities.............. 13,324 14,232 (157) 27,399 10,262 12,559 (1,112) 21,709
Obligations of states and
political subdivisions 8,177 387 -- 8,564 13,472 178 (72) 13,578
Mortgage-backed
securities.............. 1,135 11 (11) 1,135 1,393 14 (27) 1,380
------------------------------------------------------------------------------------------------------------------------
TOTALS.................. $192,178 16,036 (225) 207,989 $183,224 13,110 (2,271) 194,063
========================================================================================================================
Securities with a par value of $78,155 were pledged at December 31,
2000 to secure public deposits and for other purposes as required by
law and contractual arrangement.
34
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, 2000, 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.................................................. $ 65,912 $ 66,057
Due after one year through five years.................................... 25,906 26,314
Due after five years through ten years................................... 2,774 2,920
Due after ten years...................................................... 953 1,125
--------------------------------------------------------------------------------------------------------------------
$ 95,545 $ 96,416
====================================================================================================================
Available-for-sale securities:
Due in one year or less.................................................. $ 33,255 $ 33,256
Due after one year through five years.................................... 42,468 42,992
Due after five years through ten years................................... 2,923 3,091
Due after ten years...................................................... 3,528 3,700
Mortgage-backed securities............................................... 1,135 1,135
Marketable equity securities............................................. 13,324 27,399
--------------------------------------------------------------------------------------------------------------------
$ 96,633 $111,573
====================================================================================================================
Sales of securities available-for-sale having a cost basis of $593 in
2000, $55 in 1999 and $187 in 1998 resulted in gross realized gains of
$98 for 2000, $1 for 1999 and $1,789 for 1998. Other gross realized
gains on investment securities in 2000, 1999 and 1998 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,
2000 1999
-------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural..................................... $114,198 $101,128
Real estate:
Construction........................................................... 14,621 8,647
Mortgage:
One to four family residential......................................... 115,473 111,793
Commercial............................................................. 126,472 74,873
Equityline............................................................. 40,468 30,152
Other.................................................................. 39,069 32,851
Consumer................................................................... 38,795 34,309
Lease financing............................................................ 7,870 4,307
-------------------------------------------------------------------------------------------------------------------
Total loans............................................................ $496,966 $398,060
===================================================================================================================
Loans held for sale (included in one-to-four family residential loans)..... $ 1,807 $ 3,508
Loans serviced for others (excluded from total loans)...................... $177,093 $180,345
35
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 3. Loans - continued
On December 31, 2000 total loans to directors, executive officers and
related individuals and organizations were $933. On December 31, 1999
total loans to directors, executive officers and related individuals
and organizations were $1,108. During 2000, $25 of new loans were
made to this group and repayments totaled $200. 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:
2000 1999 1998
--------------------------------------------------------------------------------
Balance at beginning of year.............. $6,188 $5,962 $5,971
Allowance from branch acquisitions........ 800 -- 269
Provision for loan losses................. 475 830 155
Loans charged off......................... (534) (748) (544)
Loan recoveries........................... 355 144 111
--------------------------------------------------------------------------------
Balance at end of the year................ $7,284 $6,188 $5,962
================================================================================
At December 31, 2000 and 1999, Southern had nonaccrual loans of $478
and $243, respectively. At December 31, 2000 Southern had no
restructured loans and at December 31, 1999 Southern had restructured
loans of $42. At December 31, 2000 and 1999 Southern had accruing
loans past due 90 days or more totaling $1,081 and $460, respectively.
The amount of foregone interest on nonaccrual and restructured loans
at December 31, 2000, 1999 and 1998, was not material for the periods
presented. At December 31, 2000 and 1999, Southern's impaired loans
were less than the nonaccrual and restructured loan amounts presented
above and no additional allowances for loan losses were required for
these impaired loans.
Note 5. Premises and Equipment
The components of premises and equipment were as follows:
December 31,
2000 1999
--------------------------------------------------------------------------------
Land............................................. $ 6,248 $ 4,822
Buildings and improvements....................... 22,825 17,254
Furniture and equipment.......................... 8,575 7,407
Construction-in-progress......................... 1,515 12
--------------------------------------------------------------------------------
39,163 29,495
Less: accumulated depreciation................... (9,850) (8,238)
--------------------------------------------------------------------------------
$29,313 $21,257
================================================================================
36
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:
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Current:
Federal.................................................................... $1,224 $1,568 $2,221
State...................................................................... 6 5 6
-----------------------------------------------------------------------------------------------------------------------
1,230 1,573 2,227
-----------------------------------------------------------------------------------------------------------------------
Deferred:
Federal.................................................................... (230) (423) (167)
-----------------------------------------------------------------------------------------------------------------------
$1,000 $1,150 $2,060
-----------------------------------------------------------------------------------------------------------------------
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:
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Expected income tax expense at stated rate (34%)............................ $1,609 $1,642 $2,603
Increase (decrease) in income tax expense
resulting from:
Tax exempt income........................................................... 1,009) (911) (908)
Amortization of intangible assets........................................... 88 126 143
State income tax (net of federal benefit)................................... 4 4 2
Change in valuation allowance............................................... 320 -- --
Other, net.................................................................. (12) 289 220
-----------------------------------------------------------------------------------------------------------------------
$1,000 $1,150 $2,060
Effective tax rate......................................................... 21% 24% 27%
=======================================================================================================================
Significant components of BancShares' deferred tax liabilities and
(assets) are as follows:
December 31,
2000 1999
------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation...................................................................... $ 749 $ 554
Leased assets..................................................................... 297 178
Investment securities............................................................. 5,080 3,737
Other............................................................................. 351 392
----- -----
Gross deferred tax liabilities................................................... 6,477 4,861
------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses......................................................... (2,476) (2,104)
Intangible assets................................................................. (1,560) (1,082)
Other............................................................................. (1,010) (912)
------ ------
Gross deferred tax assets........................................................ (5,046) (4,098)
-----------------------------------------------------------------------------------------------------------------------
Valuation allowance............................................................... 320 --
------ ------
Net deferred tax asset............................................................ (4,726) (4,098)
------ ------
Net deferred tax liability........................................................ $1,751 $ 763
========================================================================================================================
37
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 6. Income Taxes - continued
A valuation allowance for deferred tax assets of $320,000 was required
at December 31, 2000. A valuation allowance for deferred tax assets
was not required at December 31, 1999. Management has determined that
it is more likely than not that the net deferred tax asset can be
supported by carrybacks to federal taxable income in the carryback
period. A portion of the change in the net deferred tax liability
relates to unrealized gains and losses on securities available-for-
sale. The related deferred tax (charges) benefits of approximately
($2,608) and $2,116 for the years ended December 31, 2000 and 1999,
respectively, have been recorded directly to shareholders' equity.
Note 7. Deposits
Deposits at December 31 are summarized as follows:
2000 1999
--------------------------------------------------------------------------
Demand....................... $107,695 $ 89,181
Checking with interest....... 83,964 75,969
Savings...................... 58,419 57,398
Money market accounts........ 71,390 55,701
Time......................... 377,017 300,001
--------------------------------------------------------------------------
Total deposits.............. $698,485 $578,250
==========================================================================
Total time deposits with a denomination of $100 or more were $81,656
and $60,384 at December 31, 2000 and 1999, respectively.
At December 31, 2000, the scheduled maturities of all time deposits
were:
2001......................................... $309,519
2002......................................... 41,234
2003......................................... 18,247
2004......................................... 8,017
2005 and thereafter.......................... -
--------------------------------------------------------------------------
Total time deposits....................... $377,017
==========================================================================
Note 8. Short-Term Borrowings and Long-Term Obligations
Short-term Borrowings
Short-term borrowings at December 31, were:
2000 1999
--------------------------------------------------------------------------
U.S. Treasury tax and loan accounts...... $ 1,359 $ 1,435
Repurchase agreements.................... 14,068 5,223
--------------------------------------------------------------------------
Total short-term borrowings............. $15,427 $ 6,658
==========================================================================
The U.S. Treasury tax and loan accounts averaged $1,126 in 2000 and
$991 in 1999. The highest month-end balance of the U.S. Treasury tax
and loan accounts was $2,150 in 2000 and $2,035 in 1999. The average
rate on U.S. Treasury tax and loan accounts was 5.95% in 2000 and
4.15% in 1999. The repurchase agreements averaged $7,124 in 2000 and
$5,240 in 1999. The highest month-end balance of the repurchase
agreements was $14,068 in 2000 and $6,313 in 1999. The average rate on
repurchase agreements in 2000 and 1999 was 5.03% and 3.58%. At
December 31, 2000, $78,154 of investment securities were pledged for
repurchase agreements. The securities collateralizing the repurchase
agreements have been delivered to a third party custodian for
safekeeping.
38
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, 2000:
Deposit
Assets Liabilities
Acquired Assumed Resulting
Date Institution/Location (Sold) (Sold) 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
Sharpsburg, North Carolina
April 2000 Centura Bank.................................... 1,068 11,065 1,107
Battleboro, 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
39
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 9. Acquisitions and dispositions - continued
December 1998 First Union National Bank..................... 16,440 16,440 1,685
Red Springs, North Carolina
October 1998 First-Citizens Bank & Trust Company (1)....... 5,309 5,302 186
Gates, North Carolina
May 1998 Enfield Savings Bank ......................... 18,174 18,041 448
Enfield, North Carolina
May 1998 Enfield Savings Bank (2)...................... (2,420) (2,420) (85)
Littleton, North Carolina
(1) See Note 15.
(2) Represents the sale of this branch to First-Citizens Bank & Trust
Company (1).
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.
40
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:
2000 1999 1998
---------------------------------------------------------------------------------------------------
Change in benefit obligation
Net benefit obligation at beginning of year............... $7,414 $7,647 $6,598
Service cost.............................................. 422 413 356
Interest cost............................................. 576 533 489
Actuarial (gain) loss..................................... 257 (898) 414
Gross benefits paid....................................... (338) (281) (210)
---------------------------------------------------------------------------------------------------
Net benefit obligation at end of year..................... $8,331 $7,414 $7,647
===================================================================================================
Change in plan assets
Fair value of plan assets at beginning of year............ $7,483 $6,936 $5,943
Actual return on plan assets.............................. 183 351 920
Employer contributions.................................... 415 476 283
Gross benefits paid....................................... (338) (280) (210)
---------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year.................. $7,743 $7,483 $6,936
===================================================================================================
Funded status at end of year.............................. $ (588) $ 69 $ (711)
Unrecognized net actuarial loss (gain).................... 97 (511) 352
Unrecognized prior service cost........................... 56 64 73
Unrecognized net transition asset......................... (103) (143) (184)
---------------------------------------------------------------------------------------------------
Net amount recognized as a liability in the consolidated
balance sheets at end of year............................. $ (538) $ (521) $ (470)
===================================================================================================
Assumptions as of December 31:
Discount rate............................................. 7.25% 7.50% 6.75%
Expected return on plan assets............................ 8.50% 8.50% 8.00%
Rate of compensation increase............................. 4.75% 4.75% 4.50%
Components of net periodic benefit cost:
Service cost.............................................. $ 422 $ 413 $ 356
Interest cost............................................. 576 533 489
Expected return on assets................................. (535) (464) (395)
Amortization of:
Transition asset.......................................... (40) (40) (41)
Prior service cost........................................ 9 8 8
Actuarial loss............................................ - 77 67
---------------------------------------------------------------------------------------------------
Total net periodic benefit cost........................... $ 432 $ 527 $ 484
===================================================================================================
Employees are also eligible to participate in a matching savings plan
after one year of service. During 2000 Southern made participating
contributions to this plan of $286 compared to $263 during 1999 and
$245 during 1998.
41
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 11. Regulatory Requirements and Restrictions
BancShares and its banking subsidiary are subject to certain
requirements imposed by state and federal banking statutes and
regulations. These regulations establish guidelines for minimum
capital levels, restrict certain dividend payments and require the
maintenance of noninterest-bearing reserve balances at the Federal
Reserve Bank. Such reserves averaged $12,993 during 2000 of which
$9,709 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, 2000, Southern was considered to be "well capitalized" by
the FDIC.
Southern's capital ratios as of December 31 are set forth below:
2000 1999
-------------------------------------------------------------------------------
Tier 1 capital................................ $ 51,865 $ 55,398
Total capital................................. 61,630 62,967
Risk-adjusted assets.......................... 489,540 386,761
Average tangible assets....................... 744,328 654,268
Tier 1 capital ratio.......................... 10.59% 14.32%
Total capital ratio........................... 12.59% 16.28%
Leverage capital ratio........................ 6.97% 8.47%
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, 2000, Southern
had available for the payment of dividends undivided profits of
approximately $22.9 million, unless declaration of dividends for such
amount would reduce the regulatory capital of Southern below the
minimum levels discussed above. At December 31, 2000, approximately
$35.8 million of BancShares' investment in Southern was restricted as
to transfer to BancShares without obtaining prior regulatory approval.
42
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
Note 12. Commitments, Contingencies and Concentration of Credit Risk
In the normal course of business there are various commitments and
contingent liabilities outstanding, such as guarantees, commitments to
extend credit, etc., which are not reflected in the accompanying
financial statements.
Southern is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend
credit, standby letters of credit and undisbursed advances on customer
lines of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet.
Southern is exposed to credit loss, in the event of nonperformance by
the other party to the financial instrument, for commitments to extend
credit and standby letters of credit which is represented by the
contractual notional amount of those instruments. Southern uses the
same credit policies in making these commitments and conditional
obligations as it does for on-balance-sheet instruments.
Commitments to extend credit and undisbursed advances on customer
lines of credit are agreements to lend to a customer as long as there
is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many commitments
expire without being drawn, the total commitment amounts do not
necessarily represent future cash requirements. Southern evaluates
each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by Southern, upon
extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include trade accounts
receivable, property, plant, and equipment and income-producing
commercial properties.
Standby letters of credit are commitments issued by Southern to
guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
Outstanding standby letters of credit as of December 31, 2000 and
December 31, 1999 amounted to $3,008 and $3,060. Outstanding
commitments at December 31, 2000 and December 31, 1999 were $136,950
and $111,988. Undisbursed advances on customer lines of credit at
December 31, 2000 and December 31, 1999 were $48,506 and $51,782.
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.
Management is unable to predict the impact of the contingencies
inherent in this market segment as it relates to Southern.
BancShares is also involved in various legal actions arising in the
normal course of business. Management is of the opinion that the
outcome of such actions will not have a material adverse effect on the
consolidated financial condition of BancShares.
43
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, 2000 and 1999
and condensed statements of income and cash flows for the three years
ended December 31, 2000.
December 31,
CONDENSED BALANCE SHEETS 2000 1999
------------------------------------------------------------------------------
ASSETS
Cash............................................ $ 1,108 $ 1,862
Investment securities available-for-sale........ 11,694 12,011
Other assets.................................... 989 1,147
Investment in subsidiaries...................... 71,790 65,561
------------------------------------------------------------------------------
Total assets................................... $85,581 $80,581
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities............................. $ 2,188 $ 1,926
Notes payable................................... 23,711 23,711
Total liabilities.............................. 25,899 25,637
Shareholders' equity............................ 59,682 54,944
------------------------------------------------------------------------------
Total liabilities and shareholders' equity..... $85,581 $80,581
==============================================================================
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
2000 1999 1998
----------------------------------------------------------------------------------------
Dividends from bank subsidiary.................. $ 2,376 $ -- $ 3,090
Securities (losses) gains..................... (727) __ __
Other dividends................................. 264 192 152
----------------------------------------------------------------------------------------
Total income................................... 1,913 192 3,242
Interest expense................................ (2,129) (2,142) (1,320)
Other expense................................... (65) (65) (293)
----------------------------------------------------------------------------------------
(Loss) income before equity in undistributed
income of subsidiaries......................... (281) (2,015) 1,629
Equity in undistributed income of subsidiaries.. 4,015 5,694 3,967
----------------------------------------------------------------------------------------
Net income..................................... $ 3,734 $ 3,679 $ 5,596
========================================================================================
44
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,
2000 1999 1998
-------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income.............................................. $ 3,734 $ 3,679 $ 5,596
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Equity in undistributed net income of subsidiary........ (4,015) (5,694) (3,967)
Loss on impairment of available for sale securities..... 855 -- --
Gains on sales and issuer calls of securities........... (128) -- --
Decrease (increase) in other assets..................... 158 186 (543)
Increase (decrease) in accrued liabilities.............. 262 (678) (959)
Decrease in accrued interest payable.................... -- -- (9)
-------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES.................................... 866 (2,507) 118
-------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale (purchase) of investments......................... (16) 1,225 (1,787)
Investments in subsidiaries............................. -- -- (12,711)
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES.................................... (16) 1,225 (14,498)
-------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Dividends paid.......................................... (554) (573) (581)
Purchase and retirement or redemption of stock.......... (1,050) (85) (231)
Change in notes payable, net............................ -- -- 18,961
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES.................................... (1,604) (658) 18,149
-------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS........................................ (754) (1,940) 3,769
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF YEAR................................... 1,862 3,802 33
-------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT THE END OF YEAR....................................... $ 1,108 $ 1,862 $ 3,802
=================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
PAID DURING THE YEAR FOR:
Interest................................................ $ 2,129 $ 2,142 $ 1,329
Income taxes............................................ $ -- $ 4 $ 11
=================================================================================================
Note 14. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
Cash and due from banks, federal funds sold, and accrued interest
receivable The carrying amounts for cash and due from banks, federal
funds sold and accrued interest receivable are. equal to their fair
values due to the short term nature of these financial instruments.
45
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.
Long-term obligations
The fair value of long-term obligations is the market value at the
last trade date in 2000 and 1999.
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.
46
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:
2000 1999
------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks.......... $ 42,944 $ 42,944 $ 28,524 $ 28,524
Federal funds sold............... 12,840 12,840 20,370 20,370
Investment securities:
Held-to-maturity................ 95,545 96,416 100,129 99,979
Available-for-sale.............. 111,573 111,573 94,084 94,084
Loans............................ 489,682 486,480 391,872 390,034
Accrued interest receivable...... 6,482 6,482 4,730 4,730
Financial liabilities:
Deposits......................... $698,485 $700,313 $578,250 $593,498
Short-term borrowings............ 15,427 15,427 6,658 6,658
Long-term obligations............ 23,000 20,125 23,000 19,838
Accrued interest payable......... 4,117 4,117 4,471 4,471
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, 2000
beneficially owned 32,526 shares, or 28.23%, of BancShares'
outstanding common stock and 4,966 shares, or 1.35%, of BancShares'
outstanding Series B preferred stock. At the same date, the second
significant shareholder beneficially owned 27,577 shares, or 23.94%,
of BancShares' outstanding common stock.
These two significant shareholders are directors and executive
officers of the Corporation and at December 31, 2000, beneficially
owned 2,524,468 shares, or 28.64%, and 1,477,495 shares, or 16.76%, of
the Corporation's outstanding Class A common stock, and 649,188
shares, or 37.86%, and 199,052 shares, or 11.61%, of the Corporation's
outstanding Class B common stock. The above totals include 478,728
Class A common shares, or 5.43%, and 104,644 Class B common shares, or
6.10%, that are considered to be beneficially owned by both of the
shareholders and, therefore, are included in each of their totals.
47
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, 1999 and 1998
and sold a branch to First Citizens in 1998.
The following table lists the various charges paid to the Corporation
during the years ended December 31:
2000 1999 1998
-------------------------------------------------------------------------
Data and item processing............. $2,461 $2,156 $2,345
Forms, supplies and equipment........ 302 281 231
Trustee for employee benefit plans... 88 89 79
Consulting fees...................... 83 86 78
Other services....................... 80 136 135
-------------------------------------------------------------------------
$3,014 $2,748 $2,868
=========================================================================
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 $26,205 at
December 31, 2000 and $8,583 at December 31, 1999. Southern's wholly-
owned subsidiary, Goshen, Inc. paid $99 and $94 to an Insurance
Company owned by the Corporation for the sale of insurance written in
connection with loans made by Southern in 2000 and 1999, 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
December 31, 2000 and 1999. The Class A common stock had a fair value
of $10.0 million and $8.7 million at December 31, 2000 and 1999,
respectively. The Class B common stock had a fair value of $1.6
million at both December 31, 2000 and 1999.
48
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: February 27, 2001 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 February 27, 2001
---------------------------
R. S. Williams
/s/John C. Pegram, Jr. President, Chief Executive Officer and Director February 27, 2001
---------------------------
John C. Pegram, Jr. (principal executive officer)
/s/David A. Bean Treasurer (principal financial and accounting officer) February 27, 2001
---------------------------
David A. Bean
/s/Bynum R. Brown Director March 13, 2001
---------------------------
Bynum R. Brown
/s/William H. Bryan Director February 27, 2001
---------------------------
William H. Bryan
/s/D. Hugh Carlton Director February 27, 2001
---------------------------
D. Hugh Carlton
/s/Robert J. Carroll Director March 1, 2001
---------------------------
Robert J. Carroll
/s/Hope H. Connell Director March 1, 2001
---------------------------
Hope H. Connell
/s/J. Edwin Drew Director March 1, 2001
---------------------------
J. Edwin Drew
/s/Sam E. Ewell, Jr. Director March 6, 2001
---------------------------
Sam E. Ewell, Jr.
/s/Moses B. Gillam, Jr. Director March 2, 2001
---------------------------
Moses B. Gillam, Jr.
/s/Leroy C. Hand, Jr. Director March 1, 2001
---------------------------
LeRoy C. Hand, Jr.
/s/J. D. Hines Director March 5, 2001
---------------------------
J. D. Hines
/s/Frank B. Holding Director February 27, 2001
---------------------------
Frank B. Holding
/s/George A. Hux Director March 5, 2001
---------------------------
George A. Hux
49
/s/M. J. McSorley Director February 27, 2001
----------------------------
M. J. McSorley
/s/W. Hunter Morgan Director March 2, 2001
----------------------------
W. Hunter Morgan
/s/Charles I. Pierce Director March 1, 2001
Charles I. Pierce, Sr.
/s/ W. A. Potts Director March 6, 2001
----------------------------
W. A. Potts
/s/Charles L. Revelle, Jr. Director March 9, 2001
Charles L. Revelle, Jr.
/s/Watson N. Sherrod, Jr. Director March 5, 2001
----------------------------
Watson N. Sherrod, Jr.
/s/ Charles O. Sykes Director February 27, 2001
----------------------------
Charles O. Sykes
/s/ Raymond M. Sykes Director March 5, 2001
----------------------------
Raymond M. Sykes
/s/John N. Walker Director February 27, 2001
----------------------------
John N. Walker
50
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)
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 Employment Agreement between Watson N. Sherrod, Jr. and Southern
Bank and Trust Company (filed as exhibit 10.4 to the Registrant's
1998 Annual Report on Form 10-K and incorporated herein by
reference)
10.4 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.)
10.5 Form of Guarantee Agreement (filed as Exhibit 4.5 to Amendment
No. 1 to Registrant's Registration Statement on Form S-4
(No. 33 3-52107) filed June 3, 1998 and incorporated herein by
reference).
10.6 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 23, 2001 for
the 2000 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.
51