SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001 Commission File No. 0-10852
SOUTHERN BANCSHARES (N.C.), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1538087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
121 East Main Street Mount Olive, North Carolina 28365
(Address of Principal Executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (919) 658-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of the Registrant's common stock as of
the close of the period covered by this report.
115,020 shares
Part i - FINANCIAL INFORMATION
Item 1 - Financial Statements
(Unaudited)
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES March 31, December 31,
CONSOLIDATED BALANCE SHEETS 2001 2000
------------ -------------
(Dollars in thousands except per share data)
ASSETS
Cash and due from banks $ 35,521 $ 42,944
Federal funds sold 43,200 12,840
Investment securities:
Available-for-sale, at fair value (amortized cost $91,103 and $96,633, respectively) 107,397 111,573
Held-to-maturity, at amortized cost (fair value $87,404 and $96,416, respectively) 86,024 95,545
Loans 511,666 496,966
Less allowance for loan losses (7,371) (7,284)
--------- ---------
Net loans 504,295 489,682
Premises and equipment 30,108 29,313
Intangible assets 12,719 13,789
Accrued interest receivable 6,195 6,482
Other assets 243 1,273
--------- ---------
Total assets $ 825,702 $ 803,441
========= =========
LIABILITIES
Deposits:
Noninterest-bearing $ 110,626 $ 107,695
Interest-bearing 606,003 590,790
--------- ---------
Total deposits 716,629 698,485
Long-term obligations 23,000 23,000
Short-term borrowings 13,433 15,427
Accrued interest payable 3,654 4,117
Other liabilities 4,391 2,730
--------- ---------
Total liabilities 761,107 743,759
--------- ---------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares
authorized; 366,471 and 367,524 shares issued and outstanding at March 31, 2001 and
December 31, 2000, respectively 1,785 1,790
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized; 39,825
shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively 555 555
Common stock, $5 par value; 158,485 shares authorized; 115,020 and 115,209 shares
issued and outstanding at March 31, 2001 and December 31, 2000, respectively 575 576
Surplus 10,000 10,000
Retained earnings 40,927 36,901
Accumulated other comprehensive income 10,753 9,860
--------- ---------
Total shareholders' equity 64,595 59,682
--------- ---------
Total liabilities and shareholders' equity $ 825,702 $ 803,441
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Three Months Ended March 31,
2001 2000
---- ----
(Dollars in thousands except share and per share data)
Interest income:
Loans $ 10,886 $ 8,434
Investment securities:
U. S. Government 2,185 1,958
State, county and municipal 459 478
Other 130 156
--------- ---------
Total investment securities interest income 2,774 2,592
Federal funds sold 408 310
--------- ---------
Total interest income 14,068 11,336
Interest expense:
Deposits 6,665 4,738
Short-term borrowings 177 63
Long-term obligations 517 517
--------- ---------
Total interest expense 7,359 5,318
--------- ---------
Net interest income 6,709 6,018
Provision for loan losses 150 75
--------- ---------
Net interest income after provision for loan losses 6,559 5,943
Noninterest income:
Investment securities (loss) gain, net 4,327 (843)
Service charges on deposit accounts 1,175 862
Other service charges and fees 354 305
Other 145 135
--------- ---------
Total noninterest income 6,001 459
Noninterest expense:
Personnel 3,430 2,823
Intangibles amortization 1,032 457
Occupancy 618 495
Data processing 609 471
Furniture and equipment 345 382
Professional fees 143 229
Other 1,130 910
--------- ---------
Total noninterest expense 7,307 5,767
--------- ---------
Income before income taxes 5,253 635
Income taxes 1,050 130
--------- ---------
Net income 4,203 505
--------- ---------
Other comprehensive income (loss) net of tax:
Unrealized gains (losses) arising during period 3,749 (1,880)
Less: reclassification adjustment for gains (losses) included in net income 2,856 (556)
--------- ---------
Other comprehensive income (loss) $ 893 $ (1,324)
--------- ---------
Comprehensive income (loss) $ 5,096 $ (819)
========= =========
Per share information:
Net income per common share $ 35.73 $ 3.44
Cash dividends declared on common shares 0.38 0.38
Weighted average common shares outstanding 115,113 118,773
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Dollars in thousands except per share data)
(Unaudited)
Preferred Stock Common Stock Accumulated
---------------------------------- --------------- Other Total
Series B Series C Compre- Share-
------------------- -------------- Retained hensive holders'
Shares Amount Shares Amount Shares Amount Surplus Earnings Income Equity
-------- ---------- ------ ------- ------- -------- ------- -------- ------ -------
Balance, December 31, 1999 397,370 $ 1,936 39,825 $ 555 118,912 $ 595 $10,000 $34,606 $ 7,252 $54,944
Net income 505 505
Purchase and retirement of stock (200) (2) (386) (2) (70) (74)
Cash dividends:
Common stock ($.38 per share) (45) (45)
Preferred B ($.22 per share) (87) (87)
Preferred C ($.22 per share) (9) (9)
Unrealized loss on securities
available-for-sale, net of tax benefit
of $682 (1,324) (1,324)
-------- ------- -------- ----- -------- ----- ------- ------- ------- -------
Balance, March 31, 2000 397,170 $ 1,934 39,825 $ 555 118,526 $ 593 $10,000 $34,900 $ 5,928 $53,910
======== ======= ======== ===== ======== ===== ======= ======= ======= =======
Balance, December 31, 2000 367,524 $ 1,790 39,825 $ 555 115,209 $ 576 $10,000 $36,901 $ 9,860 $59,682
Net income 4,203 4,203
Purchase and retirement of stock (1,053) (5) (189) (1) (44) (50)
Cash dividends:
Common stock ($.38 per share) (43) (43)
Preferred B ($.22 per share) (81) (81)
Preferred C ($.22 per share) (9) (9)
Unrealized gain on securities
available-for-sale, net of tax of $460 893 893
-------- ------- -------- ----- -------- ----- ------- ------- ------- -------
Balance, March 31, 2000 366,471 $ 1,785 39,825 $ 555 115,020 $ 575 $10,000 $40,927 $10,753 $64,595
======== ======= ======== ===== ======== ===== ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
(In thousands) 2001 2000
------------- ----------
OPERATING ACTIVITIES:
Net income $ 4,203 $ 505
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 150 75
Loss on impairment of available-for-sale securities -- 855
Investment securities gain, net (4,327) (12)
Amortization of intangibles and mortgage servicing rights 1,070 502
Depreciation 313 413
Net decrease (increase) in accrued interest receivable 287 (485)
Net decrease in accrued interest payable (463) (41)
Net decrease in other assets 992 54
Net increase (decrease) in other liabilities 1,609 (117)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,834 1,749
-------- --------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities available-for-sale 10,000 6,598
Proceeds from maturities and issuer calls of investment securities held-to-maturity 17,257 15,228
Proceeds from sales of investment securities available-for-sale 1,623 --
Purchases of investment securities held-to-maturity (5,881) (33,089)
Purchases of investment securities available-for-sale (4,000) (5,000)
Net cash received for bank and branches acquired -- 5,157
Net increase in loans (14,763) (6,364)
Purchases of fixed assets (1,100) (543)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,136 (18,013)
-------- --------
FINANCING ACTIVITIES:
Net increase in demand and interest-bearing demand deposits 2,105 2,470
Net increase in time deposits 16,039 5,399
Net (repayments) proceeds of short-term borrowed funds (1,994) 9
Cash dividends paid (133) (141)
Purchase and retirement of stock (50) (74)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,967 7,663
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 22,937 $ (8,601)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 55,784 48,894
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 78,721 $ 40,293
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest $ 5,507 $ 5,360
Income taxes $ 123 $ 233
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES DURING THE PERIOD:
Unrealized gains (losses) on available-for-sale securities, net of deferred tax $ 893 $ (1,324)
The accompanying notes are an integral part of these consolidated financial
statements.
5
SOUTHERN BANCSHARES (N. C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary Of Significant Accounting Policies
Basis of Financial Statement Presentation
Southern BancShares (N. C.), Inc. ("BancShares") is the holding company for
Southern Bank and Trust Company ("Southern"), which operates 48 banking offices
in eastern North Carolina, and Southern Capital Trust I (the "Trust"), a
statutory business trust that issued $23.0 million of 8.25% Capital Securities
("the Capital Securities") in June 1998 maturing in 2028. Southern, which began
operations January 29, 1901, has a wholly-owned subsidiary, Goshen, Inc. which
acts as agent for credit life and credit accident and health insurance written
in connection with loans made by Southern. BancShares and Southern are
headquartered in Mount Olive, North Carolina.
The consolidated financial statements in this report are unaudited. In the
opinion of management, all adjustments (none of which were other than normal
accruals) necessary for a fair presentation of the financial position and
results of operations for the periods presented have been included.
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 statements should be read in conjunction
with the consolidated financial statements and accompanying notes for the year
ended December 31, 2000, incorporated by reference in the 2000 Annual Report on
Form 10-K.
6
Principles Of Consolidation
The consolidated financial statements include the accounts of BancShares and its
wholly-owned subsidiaries, Southern and the Trust. The statements also include
the accounts of Goshen, Inc., a wholly-owned subsidiary of Southern. BancShares'
financial resources are primarily provided by dividends from Southern. All
significant intercompany balances have been eliminated in consolidation.
Cash And Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and federal funds sold. Federal funds are purchased and sold for
one day periods.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. This statement, as amended by Statement 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application of all provisions of this statement was encouraged. BancShares
adopted this statement on January 1, 2001 with no impact to the Company's
consolidated financial statements.
Reclassifications
Certain prior period balances have been reclassified to conform to the current
period presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
Note 2. Investment securities March 31, 2001
(Unaudited) December 31, 2000
---------------------------------------------- --------------------------------------------
(In thousands) Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ----------- ------------ --------- --------- ---------- ----------- ---------
SECURITIES HELD-TO-MATURITY:
U.S. Government $ 56,981 687 -- $ 57,668 $ 73,215 433 $ (24) $ 73,624
Obligations of states
and political subdivisions 28,943 693 (1) 29,635 22,230 464 (1) 22,693
Corporate debenture 100 1 -- 101 100 -- (1) 99
--------- --------- --------- --------- --------- --------- --------- ---------
86,024 1,381 (1) 87,404 95,545 897 (26) 96,416
--------- --------- --------- --------- --------- --------- --------- ---------
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government 57,998 939 -- 58,937 73,997 509 (31) 74,475
Marketable equity securities 13,951 14,835 (57) 28,729 13,324 14,232 (157) 27,399
Obligations of states
and political subdivisions 18,178 570 (1) 18,747 8,177 387 -- 8,564
Mortgage-backed securities 976 11 (3) 984 1,135 11 (11) 1,135
--------- --------- --------- --------- --------- --------- --------- ---------
91,103 16,355 (61) 107,397 96,633 15,139 (199) 111,573
--------- --------- --------- --------- --------- --------- --------- ---------
Totals $ 177,127 $ 17,736 $ (62) $ 194,801 $ 192,178 $ 16,036 $ (225) $ 207,989
========= ========= ========= ========= ========= ========= ========= =========
7
During the three months ended March 31, 2000, management of BancShares reviewed
its portfolio of securities available-for-sale and determined that certain
marketable equity securities had declines in their value that were deemed to be
other than temporary. Accordingly, BancShares recorded a charge of $855,000 to
investment securities gains (losses) in the accompanying consolidated statement
of income and comprehensive income for the three months ended March 31, 2000 for
this amount and reduced the carrying amount of the related investments
accordingly. There can be no certainty that future charges to earnings for other
than temporary declines in the fair values of these or other investment
securities will not be required. During the first quarter of 2001, Bancshares
recognized a non recurring securities gain of $1.0 million. This gain was
recognized as a result of a business combination involving a company in which
BancShares had an equity investment.
Note 4. ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) (Unaudited)
Three Months Ended March 31,
----------------------------------------
2001 2000
------------------ ------------------
Balance at beginning of year $7,284 $6,188
Provision for loan losses 150 75
Loans charged off (101) (101)
Loan recoveries 38 22
------------------ ------------------
Balance at end of the period $7,371 $6,184
================== ==================
Note 5. Earnings Per Common Share
Earnings per common share are computed by dividing income applicable to common
shares by the weighted average number of common shares outstanding during the
period. Income applicable to common shares represents net income reduced by
dividends paid to preferred shareholders. Since BancShares had no potentially
dilutive securities during 2001 or 2000, the computation of basic and diluted
earnings per share is the same.
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------------
2001 2000
---------------- --------------
Net income $4,203 $505
Less: Preferred dividends (90) (96)
---------------- --------------
Net income applicable to common shares $4,113 $409
================ ==============
Weighted average common shares
outstanding during the period 115,113 118,773
================ ==============
8
Note 6. 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, who also are significant shareholders of BancShares.
The first significant shareholder is a director of BancShares and, at March 31,
2001, beneficially owned 32,607 shares, or 28.35%, of BancShares' outstanding
common stock and 4,966 shares, or 1.36%, of BancShares' outstanding Series B
preferred stock. At the same date, the second significant shareholder
beneficially owned 27,522 shares, or 23.93%, of BancShares' outstanding common
stock.
These two significant shareholders are directors and executive officers of the
Corporation and at March 31, 2001, beneficially owned 2,527,204 shares, or
28.67%, and 1,452,494 shares, or 16.48%, of the Corporation's outstanding Class
A common stock, and 649,188 shares, or 37.91%, and 199,052 shares, or 11.62%, 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
6.11%, that are considered to be beneficially owned by both of the shareholders
and, therefore, are included in each of their totals.
A subsidiary of the Corporation is First-Citizens Bank & Trust Company ("First
Citizens"). In 2000 Southern acquired two Rocky Mount, North Carolina offices
and one Nashville, North Carolina office of First Citizens containing $66.1
million of deposits and $75.8 million of loans. Southern paid $6.7 million to
First Citizens for this acquisition.
The following table lists the various charges paid to the Corporation during the
three months ended March 31, 2001 and the three months ended March 31, 2000:
(Dollars in thousands)
Three Months Ended March 31,
------------------------------
2001 2000
-------------- ------------
Data and item processing $578 $605
Forms, supplies and equipment 168 62
Trustee for employee benefit plans 16 22
Consulting fees 29 20
Other services 29 29
-------------- ------------
$820 $738
============== ============
9
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - FIRST THREE MONTHS OF 2001 VS. FIRST
THREE MONTHS OF 2000
INTRODUCTION
In the first three months of 2001, the net income of BancShares increased $3.7
million from $505,000 in the first three months of 2000 to $4.2 million in the
first three months of 2001, an increase of 732.28%. This increase resulted
primarily from gains on available-for-sale securities in 2001 and an adjustment
for unrealized investment security losses, considered other than temporary, in
2000, that did not recur in 2001. One branch acquisition in February 2000, three
branch acquisitions in April 2000, the opening of one new branch in September
2000 and three branch acquisitions in November 2000 resulted in increased net
interest income, increased other noninterest income and increased personnel
expense and other related operating expenses for the three months ended March
31, 2001.
Annualized per share net income available to common shares for the first three
months of 2001 was $35.73, an increase of $32.29, or 938.66%, from $3.44 in
2000. The return on average equity increased to 10.43%, for the period ended
March 31, 2001, from 3.72% for the period ended March 31, 2000 and the return on
average assets increased to 0.79%, for the period ended March 31, 2001, from
0.30% for the period ended March 31, 2000.
At March 31, 2001, BancShares' assets were $825.7 million, an increase of $22.3
million, or 2.77%, from the $803.4 million reported at December 31, 2000. During
this three month period, loans increased $14.7 million, or 2.96%, from $497.0
million to $511.7 million. During the three months ended March 31, 2001
investment securities decreased $13.7 million, or 6.61% from $207.1 million at
December 31, 2000 to $193.4 million at March 31, 2001. Total deposits increased
$18.1 million, or 2.60% from $698.5 million at December 31, 2000 to $716.6
million at March 31, 2001. The above changes resulted principally from the
seasonal impact of the agricultural markets served by Southern .
ACQUISITIONS
In February 2000 Southern acquired $1.3 million of loans and $7.1 million of
deposits of the Robersonville, North Carolina office of Cooperative Bank for
Savings, Inc. In April 2000 Southern acquired $5.1 million of loans and $29.4
million of deposits of the Battleboro, Nashville and Sharpsburg, North Carolina
offices of Centura Bank. In November 2000 Southern acquired $75.8 million of
loans and $66.1 million of deposits of the Nashville and Rocky Mount, North
Carolina offices of First-Citizens Bank & Trust Company, a related party. These
acquisitions were accounted for as purchases, and, therefore, the results of
operations prior to purchase of the financial institutions are not included in
the consolidated financial statements.
10
The proforma impact of the acquisitions, as though they had been made at the
beginning of the period presented, is not material to BancShares' consolidated
financial statements, however the comparisons of the three months ended March
31, 2001 to the three months ended March 31, 2000 are impacted by the above
transactions.
INTEREST INCOME
Interest and fees on loans increased $2.5 million, or 29.07%, from $8.4 million
for the three months ended March 31, 2000 to $10.9 million for the three months
ended March 31, 2001. This increase was due to both increased loans as a result
of the acquisitions previously discussed and internal loan growth, as well as
increased yields on average loans. Average loans increased $102.5 million, or
25.72%, from $398.7 million for the three months ended March 31, 2000 to $501.3
million for the three months ended March 31, 2001. The yield on the loan
portfolio increased from 8.52% in the three months ended March 31, 2000 to 8.76%
in the three months ended March 31, 2001.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased 7.02%, from $2.6 million in the three months ended March
31, 2000 to $2.8 million in the three months ended March 31, 2001. This change
was due to both an increase in yield from 5.43% for the three-month period ended
March 31, 2000 to 5.94% for the three-month period ended March 31, 2001 and an
increase in the volume of average investment securities from $201.6 million for
the three months ended March 31, 2000 to $203.7 million for the three months
ended March 31, 2001. Interest income on federal funds sold increased $98,000 or
31.61%, from $310,000 for the three months ended March 31, 2000 to $408,000 for
the three months ended March 31, 2001. This increase in income resulted from
increased average balances as average federal funds sold increased from $21.9
million for the three months ended March 31, 2000 to an average of $30.6 million
for the three months ended March 31, 2001. Average federal funds sold yields
decreased from 5.67% for the three months ended March 31, 2000 to 5.34% for the
three months ended March 31, 2001.
Total interest income increased $2.7 million or 24.10%, from $11.3 million for
the three months ended March 31, 2000 to $14.1 million for the three months
ended March 31, 2001. This increase was the result of volume increases resulting
from the acquisitions previously discussed, increased earning asset volume from
loan growth, and a 43 basis point increase in average earning asset yields.
Average earning asset yields increased from 7.45% for the three months ended
March 31, 2000 to 7.88% for the three months ended March 31, 2001. Average
earning assets increased from $613.1 million in the three months ended March 31,
2000 to $719.4 million in the period ended March 31, 2001. This $103.3 million
increase in the average earning assets resulted primarily from the acquisitions
previously discussed and internal loan growth.
11
INTEREST EXPENSE
Total interest expense increased $2.0 million or 38.38%, from $5.3 million in
the three months ended March 31, 2000 to $7.4 million for the three months ended
March 31, 2001. The principal reason for this increase was the acquisitions
previously discussed. BancShares' total cost of funds increased from 4.10% for
the three months ended March 31, 2000 to 4.69% for the three months ended March
31, 2001. Average interest-bearing deposits were $596.3 million in the three
months ended March 31, 2001, an increase of $100.2 million from the $496.1
million average in the three months ending March 31, 2000. The increase in
average interest-bearing liabilities was primarily the result of the
aforementioned acquisitions.
NET INTEREST INCOME
Net interest income increased to $691,000 for the three months ended March 31,
2001 from $6.0 million for the three months ended March 31, 2000 to $6.7 million
for the three months ended March 31, 2001.
The interest rate spread for the three months ended March 31, 2001 was 3.19%, a
decrease of 16 basis points from the 3.35% interest rate spread for the three
months ended March 31, 2000.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the three months ended March 31, 2001 management recorded $150,000 as
provision for loan losses. Management recorded a $75,000 addition to the
provision for loan losses for the three months ended March 31, 2000.
During the first three months of 2001 management charged-off loans totaling
$101,000 and received recoveries of $38,000, resulting in net charge-offs of
$63,000. During the same period in 2000, $100,000 in loans were charged-off and
recoveries of $21,000 were received, resulting in net charge-offs of $79,000.
The following table presents comparative Asset Quality ratios of BancShares:
(Unaudited)
March 31, December 31,
2001 2000
------------ ------------
Ratio of annualized net loans charged off
to average loans 0.05% 0.04%
Allowance for loan losses
to loans 1.44% 1.47%
Non-performing loans
to loans 0.31% 0.31%
Non-performing loans and assets
to total assets 0.20% 0.19%
Allowance for loan losses
to non-performing loans 466.22% 467.22%
The ratio of annualized net charge-offs to average loans outstanding increased
to 0.05% for the three months ended March 31, 2001 from 0.04% for the year ended
December 31, 2000. The allowance for loan losses represented 1.44% of loans at
March 31, 2001. The allowance for loan losses represented 1.47% of loans at
December 31, 2000. Loans increased $14.7 million, or 2.96% from $497.0 million
at December 31, 2000 to $511.7 million at March 31, 2001.
12
The ratio of nonperforming loans to loans was 0.31% at both December 31, 2000
and March 31, 2001. Nonperforming loans and assets to total assets increased to
0.20% at March 31, 2001 from 0.19% at December 31, 2000. The allowance for loan
losses to nonperforming loans represented 466.22% of nonperforming loans at
March 31, 2001, a decrease from the 467.22% at December 31, 2000. The
nonperforming loans at March 31, 2001 included $270,000 of nonaccrual loans,
$980,000 of accruing loans 90 days or more past due and no restructured loans.
BancShares had $52,000 of assets classified as other real estate at March 31,
2001. BancShares had no assets classified as other real estate at December 31,
2000.
Management considers the March 31, 2001 allowance for loan losses to be adequate
to cover the losses and risks inherent in the loan portfolio at March 31, 2001
and will continue to monitor its portfolio and to adjust the relative level of
the allowance as needed. BancShares' 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.
Management actively maintains a current loan watch list and knows of no other
loans which are material and (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources, or (ii) represent material
credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Southern's allowance for loan losses
and losses on other real estate owned. Such agencies may require Southern to
recognize adjustments to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
NONINTEREST INCOME
During the three months ended March 31, 2001, BancShares realized a $5.5 million
increase in noninterest income compared to the three months ended March 31,
2001. This increase was primarily the result of net gains on available-for-sale
investment securities of $4.3 million in the three months ended March 31, 2001
and $843,000 of net losses on available-for-sale investment securities in the
three months ended March 31, 2000. During the first quarter of 2001, Bancshares
recognized a non recurring securities gain of $1.0 million. This gain was
recognized as a result of a business combination involving a company in which
BancShares had an equity investment.
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During the three months ended March 31, 2000, management of BancShares reviewed
its portfolio of securities available-for-sale and determined that certain
marketable equity securities had declines in their value that were deemed to be
other than temporary. Accordingly, BancShares recorded a charge of $855,000 to
investment securities gains (losses) in the accompanying consolidated statement
of income and comprehensive income for the three months ended March 31, 2000 for
this amount and reduced the carrying amount of the related investments
accordingly. There can be no certainty that future charges to earnings for other
than temporary declines in the fair values of these or other investment
securities will not be required.
NONINTEREST EXPENSE
Noninterest expense including personnel, occupancy, furniture and equipment,
data processing, FDIC insurance and state assessments, printing and supplies and
other expenses, increased $1.5 million or 26.70%, from $5.8 million in the three
months ended March 31, 2000 to $7.3 million in the three months ended March 31,
2001.
This increase was primarily due to an increase in personnel expense of $607,000,
or 21.50%, from $2.8 million at March 31, 2000 to $3.4 million at March 31, 2001
and increased intangibles amortization, occupancy, furniture and equipment
expense and other expenses resulting primarily from the acquisitions previously
discussed.
INCOME TAXES
In the three months ended March 31, 2001, BancShares had income tax expense of
$1.1 million, an increase of $920,000 from $130,000 in the prior year period.
This increase is due primarily to increased earnings resulting from the
available-for-sale investment securities transactions discussed above. The
resulting effective tax rate for the three months ended March 31, 2001 was
19.99%. The effective tax rate for the three months ended March 31, 2000 was
20.47%. The effective tax rates in 2000 and 2001 differ from the federal
statutory rates of 35.00% for 2000 and 2001 primarily due to tax exempt income.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Sufficient levels of capital are necessary to sustain growth and absorb losses.
In June 1998, the Trust issued $23.0 million of 8.25% Capital Securities
maturing in 2028. The Trust invested the $23.0 million proceeds in Junior
Subordinated Debentures issued by BancShares (the "Junior Debentures") which,
upon consolidation of BancShares, are eliminated. The Junior Debentures, with a
maturity of 2028, are the primary assets of the Trust. With respect to the
Capital
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Securities, BancShares irrevocably and unconditionally guarantees the Trust's
obligations.
BancShares contributed Capital Securities proceeds of $12.0 million to Southern
which are included in Tier I capital for Southern's regulatory capital adequacy
requirements. BancShares has similar regulatory capital adequacy requirements as
Southern and is in compliance with those capital adequacy requirements at March
31, 2001.
The Federal Reserve Board, which regulates BancShares, and the Federal Deposit
Insurance Corporation, which regulates Southern, have established minimum
capital guidelines for the institutions they supervise.
Regulatory guidelines define minimum requirements for Southern's leverage
capital ratio. Leverage capital equals total equity less goodwill and certain
other intangibles and is measured relative to total adjusted assets as defined
by regulatory guidelines. According to these guidelines, Southern's leverage
capital ratio at March 31, 2001 was 7.76%. At December 31, 2000, Southern's
leverage capital ratio was 6.97%. Both of these ratios are greater than the
level designated as "well capitalized" by the FDIC.
Southern is also required to meet minimum requirements for Risk Based Capital
("RBC"). Southern's assets, including loan commitments and other off-balance
sheet items, are weighted according to federal guidelines for the risk
considered inherent in each asset. At March 31, 2001, Southern's Total RBC ratio
was 13.44%. At December 31, 2000 the RBC ratio was 12.59%. Both of these ratios
are greater than the level designated as "well capitalized" by the FDIC.
The regulatory capital ratios reflect increases in assets and liabilities from
the acquisitions Southern has made. Each of the acquisitions required the
payment of a premium for the deposits received. Each of these premiums resulted
in increased intangible assets, which is deducted from total equity in the ratio
calculations.
The accumulated other comprehensive income was $10.8 million at March 31, 2001,
and $9.9 million at December 31, 2000. Accumulated other comprehensive income
consists entirely of unrealized net gains on securities available-for-sale, net
of taxes. Although a part of total shareholders' equity, accumulated other
comprehensive income is not included in the calculation of either the RBC or
leverage capital ratios pursuant to regulatory definitions of these capital
requirements. The following table presents capital adequacy calculations and
ratios of Southern:
(Unaudited)
March 31,
2001
---------------
(Dollars in thousands)
Tier 1 capital $ 60,119
Total capital 70,484
Risk-adjusted assets 524,489
Average tangible assets 774,535
Tier 1 capital ratio (1) 11.46%
Total capital ratio (1) 13.44%
Leverage capital ratio (1) 7.76%
(1) These ratios exceed the minimum ratios required for a bank to be
classified as "well capitalized" as defined by the FDIC.
At March 31, 2001 and December 31, 2000, BancShares was also in compliance with
its regulatory capital requirements and all of its regulatory capital ratios
exceeded the minimum ratios required by the regulators to be classified as "well
capitalized".
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LIQUIDITY
Liquidity refers to the ability of Southern to generate sufficient funds to meet
its financial obligations and commitments at a reasonable cost. Maintaining
liquidity ensures that funds will be available for reserve requirements,
customer demand for loans, withdrawal of deposit balances and maturities of
other deposits and liabilities. Past experiences help management anticipate
cyclical demands and amounts of cash required. These obligations can be met by
existing cash reserves or funds from maturing loans and investments, but in the
normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include cash and due from banks, federal
funds sold and investment securities available-for-sale. The liquidity ratio,
which is defined as cash plus short term available-for-sale securities divided
by deposits plus short term liabilities, was 28.19% at March 31, 2001 and 33.48%
at December 31, 2000.
The Statement of Cash Flows discloses the principal sources and uses of cash
from operating, investing and financing activities for the three months ended
March 31, 2001 and for the three months ended March 31, 2000. BancShares has no
brokered deposits. Jumbo time deposits are considered to include all time
deposits of $100,000 or more. BancShares has never aggressively bid on these
deposits. Almost all jumbo time deposit customers have other relationships with
Southern, including savings, demand and other time deposits, and in some cases,
loans. At March 31, 2001 jumbo time deposits represented 12.21% of total
deposits compared to 11.69% of total deposits at December 31, 2000.
Management believes that BancShares has the ability to generate sufficient
amounts of cash to cover normal requirements and any additional needs which may
arise, within realistic limitations, and management is not aware of any known
demands, commitments or uncertainties that will affect liquidity in a material
way.
ACCOUNTING AND OTHER MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. This statement, as amended by Statement 137, is effective for all
fiscal quarters of fiscal years
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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.
Other matters
Management is not aware of any other trends, events, uncertainties, or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on BancShares' liquidity, capital resources or
other operations.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk:
Market risk reflects the risk of economic loss resulting from adverse changes in
market price and interest rates. This risk of loss can be reflected in either
diminished current market values or reduced potential net interest income in
future periods. BancShares' market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. The structure of
BancShares' loan and deposit portfolios is such that a significant increase in
the prime rate may adversely impact net interest income. Historical prepayment
experience is considered as well as management's expectations based on the
interest rate environment and the core deposits without contractual maturity
level as of March 31, 2001. Management seeks to manage this risk through the use
of shorter term
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maturities. The composition and size of the investment portfolio is managed so
as to reduce the interest rate risk in the deposit and loan portfolios while at
the same time maximizing the yield generated from the loan portfolio.
The table below presents in tabular form the contractual balances and the
estimated fair value of financial instruments at their expected maturity dates
as of March 31, 2001. The expected maturity categories take into consideration
historical prepayment experience as well as management's expectations based on
the interest rate environment as of March 31, 2001. For core deposits without
contractual maturity (i.e., interest bearing checking, savings and money market
accounts), the table presents principal cash flows as maturing in 2002 since
they are subject to immediate repricing. Weighted average variable rates in
future periods are based on the implied forward rates in the yield curve as of
March 31, 2001.
(Dollars in thousands, unaudited) Maturing in the years ended March 31
2002 2003 2004 2005 2006 Thereafter Total Fair Value
Assets
Loans
Fixed rate 68,565 45,782 53,811 39,381 30,809 80,401 318,749 323,476
Average rate (%) 8.59% 8.79% 8.49% 8.62% 8.54% 7.20% 8.25%
Variable rate 110,244 13,934 11,559 11,079 9,531 36,570 192,917 192,917
Average rate (%) 8.92% 8.27% 8.25% 8.30% 8.26% 8.17% 8.62%
Investment securities
Fixed rate 95,435 53,359 1,517 2,222 1,673 21,067 175,273 193,992
Average rate (%) 6.17% 6.02% 7.96% 8.06% 8.41% 6.82% 6.27%
Variable rate - - - - - 809 809 809
Average rate (%) - - - - - 6.64% 6.64%
Liabilities
Savings and interest
bearing checking
Fixed rate 212,947 - - - - - 212,947 212,947
Average rate (%) 1.76% - - - - - 1.76%
Certificates of deposit
Fixed rate 344,305 18,836 15,041 7,986 - - 386,168 390,275
Average rate (%) 5.93% 5.79% 6.30% 5.70% - - 5.93%
Variable rate 4,518 2,370 - - - - 6,888 6,888
Average rate (%) 4.14% 4.31% - - - - 4.20%
Long-term debt
Fixed rate - - - - - 23,000 23,000 23,000
Average rate (%) - - - - - 8.25% 8.25%
Part ii - OTHER INFORMATION
Item 5. Other Information.
Forward-looking statements
The foregoing discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifiers such as "expect," "believe," "estimate," "plan," "project" or other
statements concerning opinions or judgments of BancShares and its management
about future events. Factors that could influence the accuracy of such
forward-looking statements include, but are not limited to, the financial
success or changing strategies of BancShares' customers, actions of government
regulators, the level of market interest rates, and general economic conditions.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN BANCSHARES (N.C.), INC.
/s/John C. Pegram, Jr.
Dated: May 07, 2001 __________________________________________
John C. Pegram, Jr.,
President and Chief Executive Officer
/s/David A. Bean
Dated: May 04, 2001 ___________________________________________
David A. Bean,
Secretary, Treasurer and Chief Financial Officer
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