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, 1997. 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.
119,918 shares
SOUTHERN BANCSHARES (N.C.), INC March 31, December 31,
CONSOLIDATED BALANCE SHEETS 1997 1996
________ ________
(Dollars in thousands except per share data) (Unaudited)
S>
ASSETS
Cash and due from banks $24,033 $21,445
Federal funds sold 2,825 11,020
Investment securities:
Held-to-maturity, at amortized cost (fair value $61,261 and $64,559, respectively) 60,626 63,676
Available-for-sale, at fair value (amortized cost $93,949 and $88,504, respectively) 109,462 105,013
Loans, net of unearned income 328,791 317,755
Less allowance for loan losses (6,245) (6,163)
_______ _______
Net Loans 322,546 311,592
Premises and equipment 16,391 15,439
Accrued interest receivable 4,480 3,999
Intangible assets 5,589 5,991
Other assets 1,719 2,583
_______ _______
Total assets $547,671 $540,758
======= =======
LIABILITIES
Deposits:
Noninterest-bearing $ 58,810 $ 64,089
Interest-bearing 422,086 416,477
_______ _______
Total deposits 480,896 480,566
Short-term borrowings 6,732 5,064
Long-term obligations 6,100 1,400
Accrued interest payable 3,681 3,204
Other liabilities 5,527 5,746
_______ _______
Total liabilities 502,936 495,980
_______ _______
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares
authorized and 407,752 shares issued and outstanding at March 31, 1997 and
December 31, 1996 1,986 1,986
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized
and 43,631 shares issued and outstanding at March 31, 1997 and December 31,
1996 578 578
Common stock, $5 par value; 158,485 shares authorized and 119,918 shares issued
and outstanding at March 31, 1997 and December 31, 1996 600 600
Surplus 10,000 10,000
Retained earnings 21,332 20,718
Unrealized gain on securities available-for-sale, net of tax 10,239 10,896
_______ _______
Total shareholders' equity 44,735 44,778
_______ _______
Total liabilities and shareholders' equity $547,671 $540,758
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHERN BANCSHARES (N.C.), INC. (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31,
1997 1996
(Dollars in thousands except share and per share data)
Interest income:
Loans $6,906 $6,355
Investment securities:
U. S. Government 1,588 1,639
State, county and municipal 533 555
Other 118 95
_____ _____
Total investment securities interest income 2,239 2,289
Federal funds sold 110 240
_____ _____
Total interest income 9,255 8,884
Interest expense:
Deposits 4,309 4,359
Short-term borrowings 52 29
Long-term obligations 2 60
_____ _____
Total interest expense 4,363 4,448
_____ _____
Net interest income 4,892 4,436
Provision for loan losses 60 -
_____ _____
Net interest income after provision for loan losses 4,832 4,436
Noninterest income:
Service charges on deposit accounts 648 662
Other service charges and fees 208 179
Investment securities gains, net 3,534 -
Insurance commissions 17 64
Gain (loss) on sale of loans (10) 36
Other 73 110
_____ _____
Total noninterest income 4,470 1,051
Noninterest expense:
Personnel 2,088 1,865
Intangibles amortization 402 413
Data processing 353 360
Furniture and equipment 384 346
Occupancy 325 286
FDIC insurance assessment 27 62
Charitable contributions 4,072 4
Other 814 764
_____ _____
Total noninterest expense 8,465 4,100
_____ _____
Income before income taxes 837 1,387
Income taxes 80 455
____ ____
Net income $757 $932
==== ====
Per share information:
Net income applicable to common shares $5.48 $6.94
Cash dividends declared on common shares .37 .375
Weighted average common shares outstanding 119,918 119,918
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHERN BANCSHARES (N.C.), INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Preferred Stock Unrealized
_______________ Common gain (loss) on
Series B Series C Stock securities
________ ________ _____ available- Total
(dollars in thousands Retained for-sale Shareholders'
except per share data) Shares Amount Shares Amount Shares Amount Surplus Earnings net of taxes Equity
_____________ _____________ _____________ _______ ________ ____________ ______
BALANCE, DECEMBER 31, 1995 408,728 $1,991 43,631 $578 119,918 $600 $10,000 $16,948 $7,046 $37,163
Net Income 932 932
Cash dividends:
Common stock ($.375 per share) (44) (44)
Preferred B ($.22 per share) (90) (90)
Preferred C ($.22 per share) (10) (10)
Change in unrealized gain on
available-for-sale securities,
net of taxes 639 639
_______ _____ ______ ___ _______ ___ ______ ______ _____ ______
BALANCE, MARCH 31, 1996 408,728 $1,991 43,631 $578 119,918 $600 $10,000 $17,736 $7,685 $38,590
BALANCE, DECEMBER 31, 1996 407,752 $1,986 43,631 $578 119,918 $600 $10,000 $20,718 $10,896 $44,778
Net income 757 757
Cash dividends:
Common stock ($.37 per share) (43) (43)
Preferred B ($.22 per share) (90) (90)
Preferred C ($.22 per share) (10) (10)
Change in unrealized gain on
available-for-sale securities,
net of taxes (657) (657)
_______ _____ ______ ___ _______ ___ ______ ______ ______ ______
BALANCE, MARCH 31, 1997 408,752 $1,986 43,631 $578 119,918 $600 $10,000 $21,332 $10,239 $44,735
======= ===== ====== === ======= === ====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHERN BANCSHARES (N.C.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
(Thousands) 1997 1996
OPERATING ACTIVITIES:
Net income $757 $932
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 -
Contribution expense for donation of marketable equity securities 4,072 -
Gain on contribution of marketable equity securities (3,529) -
Gains on sales and issuer calls of securities (5) -
Loss on sale and abandonment of premises and equipment 27 -
Net (accretion) amortization on investments (21) (13)
Amortization of intangibles 402 414
Depreciation 245 240
Net increase in accrued interest receivable (481) (3,636)
Net increase in accrued interest payable 477 298
Net decrease in other assets 864 468
Net increase (decrease) in other liabilities (219) 900
_____ _____
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,649 (397)
_____ _____
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities held-to-maturity 14,703 12,634
Purchases of investment securities held-to-maturity (11,010) (1,345)
Purchases of investment securities available-for-sale (6,264) (19,162)
Net increase in loans (11,014) (9,365)
Additions to premises and equipment (1,226) (969)
______ _____
NET CASH USED IN INVESTING ACTIVITIES (14,811) (18,207)
______ _____
FINANCING ACTIVITIES:
Net decrease in demand and interest bearing demand deposits (8,599) (1,535)
Net increase in time deposits 8,929 7,523
Net proceeds (repayments) of long-term obligations 4,700 (300)
Net proceeds of short-term borrowings 1,668 1,623
Cash dividends paid (143) (144)
______ ______
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,555 7,167
______ ______
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,607) (11,437)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 32,465 42,906
______ ______
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $26,858 $31,469
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest $3,886 $1,485
Income taxes $96 $17
====== =====
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities available-for-sale ($996) $969
=== ===
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHERN BANCSHARES (N. C.), INC.
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 39 banking
offices in eastern North Carolina. Southern, which began operations in
January, 1901, has two non-bank subsidiaries, Goshen, Inc. and Goshen
Properties, Inc. whose insurance operations and property management operations
complement the operations of its parent. BancShares and Southern are
headquartered in Mount Olive, North Carolina.
Principles of Consolidation
The consolidated financial statements include the accounts of BancShares,
and its wholly-owned subsidiary, Southern. The statements also include the
accounts of Goshen, Inc. and Goshen Properties, Inc., wholly-owned subsidiaries
of Southern. BancShares' financial resources are primarily provided by
dividends from Southern and there are no material differences between the
results of operations or financial position of BancShares or of 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, the
valuation of other real estate, the valuation allowance for deferred tax assets
and fair value estimates for financial instruments. The statements should be
read in conjunction with the consolidated financial statements and
accompanying notes for the year ended December 31, 1996, incorporated by
reference in the 1996 Annual Report on Form 10-K.
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.
Management Opinion
The 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.
Note 2. Investment securities March 31, 1997 DECEMBER 31, 1996
Gross Gross Estimated Gross Gross Estimated
(Dollars in thousands) Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
_____ _________ ________ ______ _______ ________ ________ _________
SECURITIES HELD-TO-MATURITY:
U. S. Government $34,551 (39) $34,512 $36,311 91 - $36,402
Obligations of states
and political subdivisions 25,875 679 26,554 27,165 799 (4) 27,960
Corporate securities 200 (5) 195 200 - (3) 197
______ ____ ____ ______ ______ _____ ___ _______
60,626 679 (44) 61,261 63,676 890 (7) 64,559
====== ==== ==== ====== ====== ===== === =======
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government 76,131 8 (376) 75,763 70,121 - (15) 70,106
Marketable equity securities 8,334 15,676 24,010 8,612 16,296 (97) 24,811
Obligations of states
and political subdivisions 7,647 203 (36) 7,814 7,647 278 (4) 7,921
Mortgage-backed securities 1,837 38 1,875 2,124 106 (55) 2,175
______ ______ ____ ______ ______ ______ ___ _______
93,949 15,925 (412) 109,462 88,504 16,680 (171) 105,013
====== ====== ==== ====== ====== ====== === =======
TOTALS $154,575 $16,604 ($456) $170,723 $152,180 $17,570 ($178) $169,572
======= ====== ==== ======= ======= ====== === =======
SOUTHERN BANCSHARES (N.C.), INC.
Notes to consolidated financial statements
(Dollars in thousands except share and per share data)
March 31, December 31,
1997 1996
____ ____
Note 3. LOANS
Loans by type were as follows:
Commercial, financial and agricultural $79,669 $70,881
Real estate - construction 3,588 2,470
Real estate - mortgage 209,522 206,870
Consumer 33,782 35,512
Lease financing 2,591 2,370
_______ _______
Total loans 329,152 318,103
Less unearned income (361) (348)
_______ _______
Total loans less unearned income $328,791 $317,755
======= =======
Loans held for sale $ 2,671 $ 4,143
Loans serviced for others $ 74,672 $ 73,202
March 31, March 31,
(In thousands) 1997 1996
____ ____
Note 4. ALLOWANCE FOR LOAN LOSSES
Balance at beginning of year $6,163 $6,321
Provision for loan losses 60 -
Loans charged off (57) (92)
Loan recoveries 79 61
_____ _____
Balance at end of the period $6,245 $6,290
===== =====
SOUTHERN BANCSHARES (N.C.), INC.
Notes to consolidated financial statements
(Dollars in thousands except share and per share data)
March 31, December 31,
1997 1996
(In thousands) ____ ____
Note 5. Premises and Equipment
Land $ 2,955 $2,783
Buildings and improvements 10,503 9,262
Furniture and equipment 5,915 5,804
Construction-in-progress 3,037 3,467
______ ______
22,410 21,316
Less: accumulated depreciation (6,019) (5,877)
______ ______
$16,391 $15,439
====== ======
Note 6. 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.
Three Months Ended March 31,
1997 1996
____ ____
Net income $757 $932
Less: Preferred dividends (100) (100)
____ ____
Net income applicable to common shares $657 $832
==== ====
Weighted average common shares
outstanding during the period 119,918 119,918
======= =======
SOUTHERN BANCSHARES ((N.C.), INC.
Notes to consolidated financial statements
(Dollars in thousands except share and per share data)
Note 7. 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, 1997, beneficially owned 31,131 shares, or 25.96 percent, of
BancShares' outstanding common stock and 22,171 shares, or 5.44 percent, of
BancShares' outstanding Series B preferred stock. At the same date, the second
significant shareholder beneficially owned 28,127 shares, or 23.46 percent, of
BancShares' outstanding common stock, and 17,205 shares, or 4.22 percent, of
BancShares' Series B preferred stock. The above totals include 17,205 Series B
preferred shares, or 4.22 percent, that are considered to be beneficially owned
by both of the shareholders and, therefore, are included in each of their
totals.
These two significant shareholders are directors and executive officers of
the Corporation and at March 31, 1997, beneficially owned 2,567,982 shares, or
26.64 percent, and 1,694,935 shares, or 17.59 percent, respectively, of the
Corporation's outstanding Class A common stock, and 632,021 shares, or 35.96
percent, and 184,507 shares, or 10.50 percent, respectively, of the
Corporation's outstanding Class B common stock. The above totals include
555,104 Class A common shares, or 5.76 percent, and 116,119 Class B Common
shares, or 6.61 percent, 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"). Southern acquired a branch from First Citizens in the
second quarter of 1996.
The following table lists the various charges paid to the Corporation during
the three months ended:
March 31, March 31,
1997 1996
________ ________
C>
Data and item processing $468 $424
Forms, supplies and equipment 91 40
Trustee for employee benefit plans 16 14
Consulting Fees 19 18
Trust investment services 6 6
Internal auditing services 34 3
Other services 30 44
____ ____
$664 $549
==== ====
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 $6,721 at March 31, 1997 and $8,673 at December 31, 1996.
SOUTHERN BANCSHARES (N.C), INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FIRST THREE MONTHS OF 1997 VS. FIRST THREE MONTHS OF 1996
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
INTRODUCTION
In the first three months of 1997, the net income of Southern BancShares
decreased $175 from $932 in the first three months of 1996 to $757 in the
first three months of 1997, a decrease of 19 percent. This decrease resulted
primarily from a contribution expense of $4,071 that was partially offset by
a securities gain of $3,529 and the resulting reduction in income tax related
to the additional funding of a charitable foundation by the contribution of
available-for-sale securities.
Net income per share for the first three months of 1997 was $5.48 per
common share, a decrease of $1.46, or 21 percent, from $6.94 in 1996. The
return on average equity declined to 7.47 percent, for the period ending March
31, 1997, from 10.79 percent for the period ending March 31, 1996 and the
return on average assets declined to .58 percent, for the period ending March
31, 1997, from .81 percent for the period ending March 31, 1996. At March
31, 1997, BancShares' assets totaled $547,671 an increase of $6,913, or 1
percent, from the $540,758 reported at December 31, 1996. During this three
month period, net loans increased $10,954 or 4 percent, from $311,592 to
$322,546. During the three months ended March 31, 1997 investment securities
increased $1,399, or 1 percent from $168,689 at December 31, 1996 to $170,088
at March 31, 1997. Total deposits increased $330, or 0 percent from $480,566 at
December 31, 1996 to $480,896 at March 31, 1997. The above increases resulted
from internal growth as there were no branch acquisitions or new branches
opened by Southern in the quarter ended March 31, 1997.
INTEREST INCOME
Interest and fees on loans increased $551, or 9 percent, from $6,355 for
the three months ended March 31, 1996 to $6,906 for the three months ended
March 31, 1997. This increase was due to increased loan volume. Average loans
for the three months ending March 31, 1997 were $324 million, an increase of 6
percent from $305 million for the prior year three month period. The yield on
the loan portfolio was 8.6 percent in both the three months ended March 31,
1996 and March 31, 1997.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities decreased $50, or 2 percent, from $2,289 in the three months ended
March 31, 1996 to $2,239 in the three months ended March 31, 1997. This
decrease was due to a decrease in the yield of the investment portfolio that
more than offset an increase in the volume of average investment securities
for the three months ended March 31, 1997 to $148 million as compared to $147
million for the 1996 period. The yield on investment securities was 6.3
percent for the 1996 period ending March 31 and 6.0 percent in the 1997 period
ending March 31.
Interest income on federal funds sold decreased $130, or 54 percent, from
$240 for the three months ended March 31, 1996 to $110 for the three months
ended March 31, 1997. This decrease in income resulted primarily from the
decrease in the average federal funds sold to $9 million for the three months
ended March 31, 1997 from $18 million for the three months ended March
31, 1996. Average federal funds sold yields were 5.2 percent for the three
months ended March 31, 1997 down from 5.5 percent for the three months ended
March 31, 1996.
Total interest income increased $371, or 4 percent, from $8,884 for the
three months ended March 31, 1996 to $9,255 for the three months ended March
31, 1997. This increase was primarily the result of volume increases more
than offsetting a slight overall decrease in average earning asset interest
yields. Average earning asset interest yields for the three months ended
March 31, 1997 decreased to 7.7 percent from the 7.8 percent yield on average
earning assets for the three months ended March 31, 1996. Average earning
assets increased from $459 million in the three months ended March 31, 1996 to
$480 million in the period ended March 31, 1997. This $21 million increase in
the average earning assets resulted from internal growth as BancShares did not
open any new branches or purchase any new branches during the quarter ended
March 31, 1997.
INTEREST EXPENSE
Total interest expense decreased $85 or 2 percent, from $4,448 in the
three months ended March 31, 1996 to $4,363 for the three months ended March
31, 1997. The principal reason for the decrease was a 50 basis point reduction
in the regular savings rate during the quarter ended March 31, 1997 compared to
the the rate paid on regular savings deposits in the quarter ended March 31,
1996. BancShares' total cost of funds decreased from 4.45 percent at March 31,
1996 to 4.13 percent one year later. Average interest bearing deposits were
$425 million in the three months ended March 31, 1997, an increase of $26
million from the $399 million in the three months ending March 31, 1996.
NET INTEREST INCOME
Net interest income was up $456, or 10 percent, from $4,436 for the three
months ended March 31, 1996 to $4,892 for the three months ended March 31,
1997. This increase was primarily due to the increased earning asset volume
and the reduction in the regular savings rate discussed above.
The net interest margin at March 31, 1997 was 3.58 percent, an increase of 25
basis points from 3.33 percent interest margin at March 31, 1996.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the three months ended March 31, 1997 management added $60 as a volume
related addition to the provision for loan losses. Management made no such
addition to the provision for loan losses for the three months ended March 31,
1996. During the first three months of 1997 management charged-off loans
totaling $57 and received recoveries of $79, resulting in net recoveries of
$22. During the same period in 1996, $92 in loans were charged-off and
recoveries of $61 were received, resulting in net charge-offs of $31. The
decrease in net charge-offs was due to both lower charge-offs and increased
recoveries in 1997. The following table presents comparative Asset Quality
ratios of the company:
March 31, December 31,
1997 1996
Ratio of net loans charged off
to average loans, net of unearned income .00% .10%
Allowance for loan losses
to loans, net of unearned income 1.90% 1.94%
Non-performing loans
to loans, net of unearned income .31% .16%
Non-performing loans and assets
to total assets .19% .09%
Allowance for loan losses
to non-performing loans 619% 1,238%
The ratio of net charge-offs to average loans, net of unearned income
outstanding decreased to .00 percent at March 31, 1997 from .10 percent at
December 31, 1996 primarily due to increased recoveries of loans previously
charged off. The allowance for loan losses represented 1.90 percent of loans,
net of unearned income at March 31, 1997, a decrease of 4 basis points from the
December 31, 1996 ratio of 1.94 percent. Loans, net of unearned income
increased $11 million, or 3 percent, from December 31, 1996 to March 31, 1997.
The increase in the ratio of nonperforming loans to loans, net of unearned
income from .16 percent at December 31, 1996 to .31 percent at March 31, 1997
is the result of a slight performance decline in the loan portfolio.
Nonperforming loans and assets to total assets increased to .19 percent at
March 31, 1997 from .09 percent at December 31, 1996. The allowance for loan
losses to nonperforming loans represented 619 percent of nonperforming loans
at March 31, 1997, a decrease from the 1,238 percent at December 31, 1996.
This decrease is primarily the result of an increase in nonperforming loans to
$1,009 at March 31, 1997 from $498 at December 31, 1996. The nonperforming
loans at March 31, 1997 included $162 of nonaccrual loans, $847 of loans 90
days past due and no restructured loans. Other real estate at March 31, 1997
was $12. There was no other real estate at March 31, 1996.
Management considers the March 31, 1997 allowance for loan losses adequate
to cover the losses and risks inherent in the loan portfolio at March 31,
1997 and will continue to monitor its portfolio and to adjust the relative
level of the allowance as needed. BancShares' impaired loans have not
materially changed since December 31, 1996. At March 31, 1997, Southern has no
loans classified for regulatory purposes as loss or doubtful and $798 of loans
classified as substandard. 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.
NONINTEREST INCOME
Bancshares had an increase of $3,534 in net investment securities gains, in
the quarter ended March 31, 1997 principally related to the donation of
available-for-sale securities to the charitable foundation discussed above.
BancShares had losses on the sale of mortgage loans of $10 in the three months
ended March 31, 1997 compared to $36 in gains on the sales of mortgage loans in
the three months ended March 31, 1996. Income from service charges on deposit
accounts, other service charges and fees, insurance commissions and other
noninterest income not detailed above decreased $69, or 7 percent, from $1,015
for the three months ended March 31, 1996 to $946 for the three months ended
March 31, 1997.
NONINTEREST EXPENSE
BancShares had an increase in charitable contribution expense of $4,068
in the quarter ended March 31, 1997 principally related to the
available-for-sale securities donation to provide additional funding to the
charitable foundation discussed above.
Noninterest expense, other than contribution expense, including personnel,
occupancy, furniture and equipment, data processing, FDIC insurance and state
assessments, printing & supplies and other expenses, increased $297 or 7
percent, from $4,096 in the three months ended March 31, 1996 to $4,393 in the
three months ended March 31, 1997.
This increase was primarily due to an increase in personnel expense of
$223, or 12 percent, from $1,865 at March 31 1996 to $2,088 at March 31, 1997
and increased occupancy, furniture and equipment expense and other volume
related expenses resulting from branch acquisitions in June and August of 1996.
INCOME TAXES
In the three months ended March 31, 1997 BancShares had income tax expense
of $80, a decrease of $375, or 82 percent, from $455 in the prior year period.
This decrease was due both to reduced profitability resulting from the donation
of the available-for-sale securities to the charitable foundation discussed
above and the resulting tax benefits of this donation. The resulting effective
tax rates based on the accruals for the three months ended in March 1997 and
1996 were 10 percent and 33 percent, respectively.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Sufficient levels of capital are necessary to sustain growth and absorb
losses. To this end, 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.
In the quarter ended March 31, 1997 BancShares borrowed an additional
$5,000 and gave Southern an additional $5,000 in capital which improved each of
Southern's capital ratios from the levels calculated at December 31, 1996.
One of the regulator guidelines defines minimum requirements for
Southern's leverage capital ratio. Leverage capital equals total equity less
goodwill and certain other intangibles. According to these guidelines,
Southern's leverage capital ratio at March 31, 1997 was 6.28 percent. At
December 31, 1996, Southern's leverage capital ratio was 5.46 percent. 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, 1997, the Total RBC
ratio was 11.84 percent. At December 31, 1996 the RBC ratio was 10.66 percent.
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 on BancShares' financial statements,
which is deducted from total equity in the ratio calculations.
The unrealized gains on securities available for sale at March 31, 1997 of
$15.5 million and at December 31, 1996 of $16.5 million, although a part of
total shareholders' equity, are 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:
March 31, December 31,
1997 1996
Tier 1 capital $ 32,599 $ 27,891
Total capital 36,622 31,861
Risk-adjusted assets 309,181 298,862
Average tangible assets 519,124 510,574
Tier 1 capital ratio 10.54% (1) 9.33% (1)
Total capital ratio 11.84% (1) 10.66% (1)
Leverage capital ratio 6.28% (1) 5.46% (1)
(1) These ratios exceed the minimum ratios required for a bank to be
classified as "well capitalized," as defined by the FDIC.
LIQUIDITY
Liquidity refers to the ability of Southern to generate sufficient funds
to meet its financial obligations and commitments at a reasonable cost.
Maintaining liquidity ensures that funds will be available for reserve
requirements, customer demand for loans, withdrawal of deposit balances and
maturities of other deposits and liabilities. Past experiences help management
anticipate cyclical demands and amounts of cash required. These obligations
can be met by existing cash reserves or funds from maturing loans and
investments, but in the normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentrations, competition and BancShares' overall financial
condition. BancShares' liquid assets include cash and due from banks, federal
funds sold and investment securities available-for-sale. The liquidity ratio,
which is defined as net cash plus short term and marketable securities divided
by net deposits and short term liabilities, was 27 percent at March 31, 1997
and 30 percent at December 31, 1996.
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, 1997 and 1996, respectively. 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, 1997 and at December 31, 1996 jumbo time deposits represented 11
percent and 9 percent, respectively, of total deposits.
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. The following table presents comparative liquidity ratios of BancShares:
March 31, December 31, Legal
1997 1996 Limits
Loans, net of unearned income to total deposits 68% 66% 80% (1)
Interest-bearing deposits to total deposits 88% 87%
Jumbo interest-bearing deposits to total deposits 11% 9%
Loans, net of unearned income to total assets 60% 59% 70% (1)
Liquidity 27% 30% 25% (2)
Temporary investments to volatile liabilities (3) 144% 120% 100% (2)
Volatile liability dependency -6% -3% 0 or (-)
(1) Maximum
(2) Minimum
(3) Volatile Liabilities include certificates of deposit of $100,000 or more, repurchase
agreements, and the Treasury Tax and Loan Account.
ACCOUNTING AND REGULATORY MATTERS
In September 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS
No. 125") which establishes accounting standards for determining when a
liability should be considered extinguished through the transfer of assets to a
creditor or the setting aside of assets dedicated to eventually settling a
liability. The statement provides conditions for determining if a transferor
has surrendered control over transferred financial assets and requirements for
derecognizing a liability when it is extinguished. The statement also
requires the recognition of either a servicing asset or a servicing liability
when an entity undertakes an obligation to service financial assets. Such
servicing assets or liabilities shall be amortized in proportion to and over
the period of the estimated net servicing income or loss, as appropriate.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is to be
only applied on a prospective basis. The application of SFAS 125 is not
anticipated to have a material impact on BancShares financial condition or
results of operations.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FSAB Statement No. 125, an Amendment to FASB
Statement No. 125" ("Statement 127"). Statement 127 delays the implementation
of certain provisions of Statement 125 because the changes required to be made
to information systems and accounting processes to allow compliance with
certain provisions of Statement 125 could not reasonably be expected to be
made in time for adoption on January 1, 1997. As a result of Statement 127,
Statement 125 guidance on transactions involving secured borrowings and
collateral, repurchase agreements, dollar-roll, securities lending and similar
transactions has been deferred until January 1, 1998. The impact from
BancShares' adoption of Statement 125, as amended by Statement 127, is
anticipated to be immaterial to BancShares' consolidated financial statements.
In February 1997 , the FASB issued SFAS No. 128, "Earnings per Share"
("Statement 128"). Statement 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock. This statement simplifies the
standards for computing EPS previously found in APB Opinion No. 15, "Earnings
per Share", and makes them comparable to international EPS standards.
Statement 128 replaces the presentation of primary EPS with a presentation of
basic EPS. Statement 128 also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. Statement 128 provides specific guidance for the computation of
basic and diluted EPS and supercedes Opinion 15, AICPA Accounting
Interpretation 1-102 of Opinion 15, and other related accounting
pronouncements. Statement 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interium periods, with
earlier application not permitted. Additionally, once adopted, restatement
of all prior-period EPS data presented is required.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure" ("Statement 129"). Statement 129
establishes standards for disclosing capital structure information for all
entities and continues the requirements to disclose certain capital structure
information found in APB Opinions No. 10, Omnibus Opinion-1966 and No. 15,
Earnings per Share and FASB Statement No. 47, "Disclosure of Long-Term
Obligations". Statement 129 requires summary explanations within the equity
section of the financial statements of pertinent rights and privileges of the
various securities outstanding such as dividend and liquidation preferences,
voting rights, call or redemption terms, additional issue contract terms and
aggregate and per-share amounts of arrearages in cumulative preferred
dividends. Statement 129 is effective for financial statements for periods
ending after December 15, 1997.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect
of the proposed statements on the consolidated financial statements of
BancShares and monitors the status of changes to issued exposure drafts and to
proposed effective dates.
OTHER EVENTS
BancShares has announced that Mr. John C. Pegram, Jr., Executive Vice
President of Southern, will become President of Southern upon the retirement of
Southern President M. J. McSorley on July 1, 1998.
In the second quarter of 1997, BancShares expects to acquire the $13
million deposit Aurora, $6 million deposit Aulander and $4 million deposit
Hamilton offices of Wachovia Bank of North Carolina, N.A. BancShares expects
to pay a premium of approximately 6 percent on the deposits, or approximately
$1.8 million.
BancShares has made application to open its first offices in Wallace,
Lumberton and Fairmont North Carolina. Subject to regulatory approval, these
offices are planned to open in the fourth quarter of 1997.
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.
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/M. J. McSorley
Dated: May 13, 1997 __________________________________
M. J. McSorley, Vice President
/s/David A. Bean
Dated: May 13, 1997 __________________________________
David A. Bean, Secretary/Treasurer