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, 1998. 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 AND SUBSIDIARY March 31, December 31,
CONSOLIDATED BALANCE SHEETS 1998 1997
________ ________
(Dollars in thousands except per share data) (Unaudited)
S>
ASSETS
Cash and due from banks $24,175 $28,381
Federal funds sold 8,225 10,240
Investment securities:
Held-to-maturity, at amortized cost (fair value $71,873 and $57,294, respectively) 70,886 56,281
Available-for-sale, at fair value (amortized cost $91,477 and $100,978, respectively) 113,754 123,852
Loans 354,206 349,353
Less allowance for loan losses (6,016) (5,971)
Net loans _______ _______
348,190 343,382
Premises and equipment 17,985 18,157
Accrued interest receivable 4,779 4,205
Intangible assets 5,122 5,506
Other assets 773 748
_______ _______
Total assets $593,889 $590,752
======= =======
LIABILITIES
Deposits:
Noninterest-bearing $ 64,055 $ 66,565
Interest-bearing 451,922 446,763
_______ _______
Total deposits 515,977 513,328
Short-term borrowings 6,236 6,826
Long-term obligations 4,300 4,750
Accrued interest payable 3,932 4,394
Other liabilities 6,431 6,470
_______ _______
Total liabilities 536,876 535,768
_______ _______
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value; 408,728 shares authorized;
404,946 shares issued and outstanding at March 31, 1998 and December 31, 1997 1,976 1,976
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized and
43,631 shares issued and outstanding at March 31, 1998 and December 31, 1997 578 578
Common stock, $5 par value; 158,485 shares authorized and 119,918 shares issued
and outstanding at March 31, 1998 and December 31, 1997 600 600
Surplus 10,000 10,000
Retained earnings 29,155 26,733
Unrealized gain on securities available-for-sale, net of tax 14,704 15,097
_______ _______
Total shareholders' equity 57,013 54,984
_______ _______
Total liabilities and shareholders' equity $593,889 $590,752
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31,
1998 1997
(Dollars in thousands except share and per share data)
Interest income:
Loans $7,532 $6,906
Investment securities:
U. S. Government 1,735 1,587
State, county and municipal 481 533
Other 161 119
_____ _____
Total investment securities interest income 2,377 2,239
Federal funds sold 184 110
_____ _____
Total interest income 10,093 9,255
Interest expense:
Deposits 4,656 4,309
Short-term borrowings 70 52
Long-term obligations 76 2
_____ _____
Total interest expense 4,802 4,363
_____ _____
Net interest income 5,291 4,892
Provision for loan losses 60 60
_____ _____
Net interest income after provision for loan losses 5,231 4,832
Noninterest income:
Service charges on deposit accounts 762 648
Other service charges and fees 246 208
Investment securities gains, net 1,788 3,534
Insurance commissions 19 17
Gain (loss) on sale of loans 1 (10)
Other 117 73
_____ _____
Total noninterest income 2,933 4,470
Noninterest expense:
Personnel 2,285 2,088
Intangibles amortization 384 402
Data processing 432 353
Furniture and equipment 332 384
Occupancy 378 333
FDIC insurance assessment 37 27
Charitable contributions - 4,072
Other 940 806
_____ _____
Total noninterest expense 4,788 8,465
_____ _____
Income before income taxes 3,376 837
Income taxes 809 80
_____ ____
Net income $2,567 $757
===== ====
Per share information:
Net income applicable to common shares $20.58 $5.48
Cash dividends declared on common shares .38 .37
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. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
(Thousands) 1998 1997
OPERATING ACTIVITIES:
Net income $2,567 $757
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 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 (1,788) (5)
Loss on sale and abandonment of premises and equipment 3 27
Net accretion of discounts on investments (19) (21)
Amortization of intangibles 384 402
Depreciation 334 245
Net increase in accrued interest receivable (574) (481)
Net (decrease) increase in accrued interest payable (462) 477
Net (increase) decrease in other assets (25) 864
Net decrease in other liabilities (39) (219)
_____ _____
NET CASH PROVIDED BY OPERATING ACTIVITIES 441 2,649
_____ _____
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities available-for-sale 16,000 -
Proceeds from maturities and issuer calls of investment securities held-to-maturity 1,198 14,703
Proceeds from sales of investment securities available-for-sale 1,975 -
Purchases of investment securities held-to-maturity (15,803) (11,010)
Purchases of investment securities available-for-sale (6,463) (6,264)
Net increase in loans (4,868) (11,014)
Additions to premises and equipment (165) (1,226)
______ _____
NET CASH USED IN INVESTING ACTIVITIES (8,126) (14,811)
______ _____
FINANCING ACTIVITIES:
Net decrease in demand and interest bearing demand deposits (1,954) (8,599)
Net increase in time deposits 4,603 8,929
Net (repayments) proceeds of long-term obligations (450) 4,700
Net (repayments) proceeds of short-term borrowings (590) 1,668
Cash dividends paid (145) (143)
______ ______
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,464 6,555
______ ______
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,221) (5,607)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 38,621 32,465
______ ______
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $32,400 $26,858
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest $5,264 $3,882
Income taxes $844 $96
====== =====
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities available-for-sale ($597) ($996)
=== ===
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Preferred Stock Unrealized
_______________________ Common gain 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, 1996 407,752 $1,986 43,631 $578 119,918 $600 $10,000 $20,718 $10,896 $44,778
Net income 757 757
Cash dividends:
Common stock ($.375 per share) (43) (43)
Preferred B ($.22 per share) (90) (90)
Preferred C ($.22 per share) (10) (10)
Change in unrealized gain on
securities available-for-sale,
net of taxes (657) (657)
_______ _____ ______ ___ _______ ___ ______ ______ _____ ______
BALANCE, MARCH 31, 1997 407,752 $1,986 43,631 $578 119,918 $600 $10,000 $21,332 $10,239 $44,735
======= ===== ====== === ======= === ====== ====== ====== ======
BALANCE, DECEMBER 31, 1997 404,946 $1,976 43,631 $578 119,918 $600 $10,000 $26,733 $15,097 $54,984
Net income 2,567 2,567
Cash dividends:
Common stock ($.38 per share) (46) (46)
Preferred B ($.22 per share) (89) (89)
Preferred C ($.22 per share) (10) (10)
Change in unrealized gain on
securities available-for-sale,
net of taxes (393) (393)
_______ _____ ______ ___ _______ ___ ______ ______ ______ ______
BALANCE, MARCH 31, 1998 404,946 $1,976 43,631 $578 119,918 $600 $10,000 $29,155 $14,704 $57,013
======= ===== ====== === ======= === ====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHERN BANCSHARES (N. C.), INC. AND SUBSIDIARY
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 42 banking offices
in eastern North Carolina. Southern, which began operations in January, 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.
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., a wholly-owned subsidiary 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, 1997, incorporated by reference in the
1997 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.
Mortgage Servicing Rights
The estimated value of the right to service mortgage loans for others
("MSR's") is included in other assets on BancShares' consolidated balance
sheet. Capitalization of the MSR's occurs when the underlying loans are sold
or securitized or when rights to service mortgage loans from others are
acquired. Capitalized MSR's are amortized into income over the projected
servicing life of the underlying loans. Capitalized MSR's are periodically
reviewed for impairment based on the excess of the carrying amount of such
rights over their fair value. For purposes of measuring impairment,
capitalized MSR's are stratified on the basis of one or more of the predominant
risk characteristics of the underlying loans, including loan type, term,
interest rate and origination date. Fair value is estimated using current
commitment prices from investors or current quoted market prices to sell
similar products. During the three months ended March 31, 1998, BancShares
acquired the rights to service $51 million in mortgage loans from an affiliate
institution (see note 8) for $522. At March 31, 1998 and December 31, 1997,
MSR's amounted to $632 and $137, respectively. There was no valuation
allowance for MSR's at March 31, 1998 or December 31, 1997.
Management Opinion
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.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
Notes to consolidated financial statements
(Dollars in thousands except share and per share data)
Note 2. Investment securities March 31, 1998 DECEMBER 31, 1997
Gross Gross Estimated 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 $48,962 148 (33) $49,077 $33,969 122 - $34,091
Obligations of states
and political subdivisions 21,824 872 - 22,696 22,212 890 - 23,102
Corporate securities 100 - - 100 100 1 - 101
______ ____ ____ ______ ______ _____ ___ _______
70,886 1,020 (33) 71,873 56,281 1,013 - 57,294
====== ===== ==== ====== ====== ===== === =======
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government 71,475 163 (4) 71,634 82,471 130 (9) 82,592
Marketable equity securities 9,698 21,570 - 31,268 8,119 22,183 (8) 30,294
Obligations of states
and political subdivisions 8,411 490 (2) 8,899 8,411 527 - 8,938
Mortgage-backed securities 1,893 60 - 1,953 1,977 51 - 2,028
______ ______ ____ ______ ______ ______ ___ _______
91,477 22,283 (6) 113,754 100,978 22,891 (17) 123,852
====== ====== ==== ====== ====== ====== === =======
TOTALS $162,363 $23,303 (39) $185,627 $157,259 $23,904 ($17) $181,146
======= ====== ==== ======= ======= ====== === =======
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
Notes to consolidated financial statements
(Dollars in thousands except share and per share data)
March 31, December 31,
1998 1997
____ ____
Note 3. LOANS
Commercial, financial and agricultural $85,254 $84,281
Real Estate:
Construction 4,664 5,209
Mortgage:
One to four family residential 107,389 106,444
Commercial 59,128 58,056
Equityline 27,746 27,759
Other 31,782 27,868
Consumer 33,500 35,780
Lease financing 4,743 3,956
_______ _______
Total loans 354,206 349,353
======= =======
Loans held for sale $ 5,584 $ 3,019
Loans serviced for others $129,047 $ 78,426
Three Months Ended March 31,
____________________________
1998 1997
____ ____
Note 4. ALLOWANCE FOR LOAN LOSSES
Balance at beginning of year $5,971 $6,163
Provision for loan losses 60 60
Loans charged off (41) (57)
Loan recoveries 26 79
_____ _____
Balance at end of the period $6,016 $6,245
===== =====
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
Notes to consolidated financial statements
(Dollars in thousands except share and per share data)
March 31, December 31,
1998 1997
____ ____
Note 5. Premises and Equipment
Land $ 3,381 $3,377
Buildings and improvements 14,337 14,292
Furniture and equipment 6,499 6,387
Construction-in-progress 11 90
______ ______
24,228 24,146
Less: accumulated depreciation (6,243) (5,989)
______ ______
$17,985 $18,157
====== ======
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. BancShares had no
potentially dillutive securities during 1998 or 1997, so there is no
difference in the computation of basic and diluted earnings per share for
the periods presented.
Three Months Ended March 31,
____________________________
1998 1997
____ ____
Net income $2,567 $757
Less: Preferred dividends (99) (100)
____ ____
Net income applicable to common shares $2,468 $657
===== ====
Weighted average common shares
outstanding during the period 119,918 119,918
======= =======
SOUTHERN BANCSHARES ((N.C.), INC. AND SUBSIDIARY
Notes to consolidated financial statements
(Dollars in thousands except share and per share data)
Note 7. COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income". Statement 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Accordingly, BancShares adopted Statement 130 in 1998.
During the three months ended March 31, 1998 and 1997, comprehensive
income, which consisted of net income and changes in net unrealized gains and
losses, net of applicable tax effects, amounted to $2,174 and $100,
respectively.
Note 8. 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, 1998, beneficially owned 32,284 shares, or 26.92 percent, of
BancShares' outstanding common stock and 22,171 shares, or 5.47 percent, of
BancShares' outstanding Series B preferred stock. At the same date, the second
significant shareholder beneficially owned 27,577 shares, or 23.00 percent, of
BancShares' outstanding common stock, and 17,205 shares, or 4.24 percent, of
BancShares' Series B preferred stock. The above totals include 17,205 Series B
preferred shares, or 4.24 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, 1998, beneficially owned 2,553,443 shares, or
28.29 percent, and 1,563,591 shares, or 17.32 percent, respectively, of the
Corporation's outstanding Class A common stock, and 633,171 shares, or 36.10
percent, and 155,874 shares, or 8.89 percent, respectively, of the
Corporation's outstanding Class B common stock. The above totals include
540,170 Class A common shares, or 5.98 percent, and 110,668 Class B Common
shares, or 6.31 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").
The following table lists the various charges paid to the Corporation during
the three months ended:
Three Months Ended March 31,
____________________________
1998 1997
________ ________
C>
Data and item processing $529 $468
Forms, supplies and equipment 106 91
Trustee for employee benefit plans 18 16
Consulting fees 19 19
Trust investment services 5 6
Internal auditing services 1 34
Other services 31 30
____ ____
$709 $664
==== ====
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 $6,959 at March 31, 1998 and $10,071 at December 31, 1997.
During the quarter ended March 31, 1998, BancShares acquired the rights
to service $51 million in mortgage loans from an affiliate institution which
shares the same two significant shareholders as both BancShares and the
Corporation.
SOUTHERN BANCSHARES (N.C), INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FIRST THREE MONTHS OF 1998 VS. FIRST THREE MONTHS OF 1997
INTRODUCTION
In the first three months of 1998, the net income of Southern BancShares
increased $1.8 million from $0.8 million in the first three months of 1997 to
$2.6 million in the first three months of 1998, an increase of 239.10 percent.
This increase resulted primarily from a contribution expense of $4.1 million
which was partially offset by a securities gain of $3.5 million and the
resulting reduction in income tax related to the contribution of marketable
securities to a charitable foundation in the three months ended March 31, 1997.
In the three months ended March 31, 1998 BancShares also sold $0.2 million of
available for sale securities resulting in a gain of $1.8 million.
Net income available to common shares per share for the first three months
of 1998 was $20.58 per common share, an increase of $15.10, or 275.55 percent,
from $5.48 in 1997. The return on average equity increased to 17.95 percent,
for the period ending March 31, 1998, from 6.66 percent for the period ending
March 31, 1997 and the return on average assets increased to 1.72 percent, for
the period ending March 31, 1998, from 0.56 percent for the period ending March
31, 1997. At March 31, 1998, BancShares' assets totaled $593.9 million, an
increase of $3.1 million, or 0.53 percent, from the $590.8 million reported at
December 31, 1997. During this three month period, net loans increased $4.8
million or 1.40 percent, from $343.4 million to $348.2 million. During the
three months ended March 31, 1998 investment securities increased $4.5 million,
or 2.50 percent from $180.1 million at December 31, 1997 to $184.6 million at
March 31, 1998. Total deposits increased $2.6 million, or 0.51 percent from
$513.3 million at December 31, 1997 to $516.0 at March 31, 1998. 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, 1998.
INTEREST INCOME
Interest and fees on loans increased $0.6 million, or 9.06 percent, from
$6.9 million for the three months ended March 31, 1997 to $7.5 million for the
three months ended March 31, 1998. This increase was due to increased loan
volume. Average loans for the three months ending March 31, 1998 were $352.1
million, an increase of 9.07 percent from $322.9 million for the prior year
three month period. The yield on the loan portfolio was 8.56 percent in both
the three months ended March 31, 1998 and 1997.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities increased $.1 million, or 6.16 percent, from $2.2 million in the
three months ended March 31, 1997 to $2.4 million in the three months ended
March 31, 1998. This increase was due to an increase in the volume of average
investment securities for the three months ended March 31, 1998 to $160.8
million as compared to $151.9 million for the 1997 period. The yield on
investment securities was 5.91 percent for both the three months ended March
31, 1998 and 1997.
Interest income on federal funds sold increased $.1 million, or 67.27
percent, from $0.1 million for the three months ended March 31, 1997 to $0.2
million for the three months ended March 31, 1998. This increase in income
resulted primarily from the increase in the average federal funds sold to $13.7
million for the three months ended March 31, 1998 from $8.6 million for the
three months ended March 31, 1997. Average federal funds sold yields were 5.37
percent for the three months ended March 31, 1998 an increase from 5.11 percent
for the three months ended March 31, 1997.
Total interest income increased $0.8 million, or 9.05 percent, from $9.3
million for the three months ended March 31, 1997 to $10.1 million for the
three months ended March 31, 1998. This increase was the result of volume
increases. Average earning asset interest yields for the three months ended
March 31, 1998 and March 31, 1997 were 7.59 percent. Average earning assets
increased from $485.2 million in the three months ended March 31, 1997 to
$531.8 million in the period ended March 31, 1998. This $46.6 million increase
in the average earning assets resulted from the acquisition of three Wachovia
Bank of North Carolina, N. A. branches having approximately $21.1 million in
deposits in May 1997, and from internal growth within the other Southern
branches. BancShares did not open any new branches or purchase any new
branches during the quarter ended March 31, 1998.
INTEREST EXPENSE
Total interest expense increased $0.4 million or 10.06 percent, from $4.4
million in the three months ended March 31, 1997 to $4.8 million for the three
months ended March 31, 1998. The principal reason for the increase was the
increased average interest bearing liabilities from $427.4 million for the
quarter ended March 31, 1997 to $ 464.0 million for the quarter ended March 31,
1998. BancShares' total cost of funds also increased from 4.08 percent at
March 31, 1997 to 4.14 for the quarter ended March 31, 1998. Average interest
bearing deposits were $453.1 million in the three months ended March 31, 1998,
an increase of $31.8 million from the $421.3 million in the three months ended
March 31, 1997. The increase in interest-bearing liabilities was primarily the
result of the 1997 branch purchases discussed above.
NET INTEREST INCOME
Net interest income was up $0.4 million, or 8.16 percent, from $4.9
million for the three months ended March 31, 1997 to $5.3 million for the three
months ended March 31, 1998. This increase was primarily due to the increased
earning asset volume resulting from the 1997 branch purchases discussed above.
The net interest margin at March 31, 1998 was 3.45 percent, a decrease of 10
basis points from the 3.55 percent interest margin at March 31, 1997.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the three months ended March 31, 1998 and 1997 management added $.1
million as volume related additions to the provision for loan losses. During
the first three months of 1998 management charged-off loans totaling $41,000
and received recoveries of $26,000, resulting in net charge-offs of $15,000.
During the same period in 1997, $57,000 in loans were charged-off and
recoveries of $79,000 were received, resulting in net recoveries of $22,000.
The increase in net charge-offs was primarily due to decreased recoveries in
1998. The following table presents comparative Asset Quality ratios of the
company:
March 31, December 31,
1998 1997
Ratio of annualized net loans charged off
to average loans .02% .07%
Allowance for loan losses
to loans 1.70% 1.71%
Non-performing loans
to loans .34% .20%
Non-performing loans and assets
to total assets .21% .13%
Allowance for loan losses
to non-performing loans 504.27% 857.90%
The ratio of net charge-offs to average loans outstanding decreased to an
annualized .02 percent for the quarter ended March 31, 1998 from .07 percent
for the year ended December 31, 1997 primarily due to increased recoveries of
loans previously charged off. The allowance for loan losses represented 1.70
percent of loans, at March 31, 1998, a decrease of 1 basis point from the
December 31, 1997 ratio of 1.71 percent. Loans increased $4.9 million, or 1.39
percent, from December 31, 1997 to March 31, 1998.
The increase in the ratio of nonperforming loans to loans from .20 percent
at December 31, 1997 to .34 percent at March 31, 1998 is the result of a slight
performance decline in the loan portfolio. Nonperforming loans and assets to
total assets increased to .21 percent at March 31, 1998 from .13 percent at
December 31, 1997. The allowance for loan losses to nonperforming loans
represented 504.27 percent of nonperforming loans at March 31, 1998, a decrease
from the 857.90 percent at December 31, 1997. This decrease is primarily the
result of an increase in nonperforming loans to $1.2 million at March 31, 1998
from $0.7 million at December 31, 1997. The nonperforming loans at March 31,
1998 included $0.1 million of nonaccrual loans, $1.1 million of accruing loans
90 days past due and no restructured loans. Other real estate at both March
31, 1998 and December 31, 1997 was $48,000.
Management considers the March 31, 1998 allowance for loan losses adequate
to cover the losses and risks inherent in the loan portfolio at March 31, 1998
and will continue to monitor its portfolio and to adjust the relative level of
the allowance as needed. BancShares' impaired loans were approximately $0.1
million at March 31, 1998. At March 31, 1998, BancShares has no loans
classified for regulatory purposes as loss or doubtful and less than $1.0
million 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 a decrease of $1.7 million in net investment securities
gains, for the quarter ended March 31, 1998 as compared to the prior year
quarter principally related to the donation in the three months ended March 31,
1997 of available-for-sale securities to the charitable foundation discussed
above. BancShares had gains on the sale of mortgage loans of $1,000 in the
three months ended March 31, 1998 compared to $10,000 in losses on the sales of
mortgage loans in the three months ended March 31, 1997. Income from service
charges on deposit accounts, other service charges and fees, insurance
commissions and other noninterest income not detailed above increased $.2
million, or 20.93 percent, from $0.9 million for the three months ended March
31, 1997 to $1.1 million for the three months ended March 31, 1998.
NONINTEREST EXPENSE
BancShares had a decrease in charitable contribution expense of $4.1
million for the quarter ended March 31, 1998 as compared to the prior year
quarter principally related to the available-for-sale securities donation in
the three months ended March 31, 1997 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 and supplies and other expenses, increased $0.4 million
or 8.99 percent, from $4.4 million in the three months ended March 31, 1997 to
$4.8 million in the three months ended March 31, 1998.
This increase was primarily due to an increase in personnel expense of
$0.2 million, or 9.43 percent, from $2.1 million at March 31 1997 to $2.3
million at March 31, 1998 and increased occupancy, furniture and equipment
expense and other volume related expenses resulting from branch acquisitions in
May 1997.
INCOME TAXES
In the three months ended March 31, 1998 BancShares had income tax expense
of $0.8 million, an increase of $0.7 million , or 911.25 percent, from $0.1
million in the prior year period. This increase was due both to increased
profitability resulting from the sale of available-for-sale securities
discussed above and the non-recurring tax benefits in 1997 of the charitable
donation in the three months ended March 31, 1997. The resulting effective tax
rates based on the accruals for the three months ended in March 1998 and 1997
were 23.96 percent and 9.56 percent, respectively. The effective tax rate in
1998 of 23.96 percent differs from the federal statutory rate of 35.00 percent
primarily due to tax exempt income.
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
$5.0 million and contributed an additional $5.0 million in capital to Southern
which improved each of Southern's capital ratios.
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, 1998 was 6.01 percent. At December 31, 1997,
Southern's leverage capital ratio was 6.02 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, 1998, the Total RBC ratio
was 12.68 percent. At December 31, 1997 the RBC ratio was 12.81 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, 1998 of
$22.3 million and at December 31, 1997 of $22.9 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,
1998 1997
Risk-based capital:
Tier 1 capital $ 33,922 $ 33,999
Total capital 37,834 37,876
Risk-adjusted assets 298,452 295,654
Average tangible assets 564,455 564,633
Tier 1 capital ratio 11.37% (1) 11.50% (1)
Total capital ratio 12.68% (1) 12.81% (1)
Leverage capital ratio 6.01% (1) 6.02% (1)
(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, 1998 and December 31, 1997, BancShares was also in
compliance with its regulatory capital requirements and all of its regulatory
capital ratios exceeded the minimum ratios required to be classified as "well
capitalized".
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 31.81 percent at March 31, 1998
and 37.15 percent at December 31, 1997.
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, 1998 and 1997, respectively. BancShares has no brokered
deposits. Jumbo time deposits are considered to include all time deposits of
$0.1 million 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, 1998 and at December 31, 1997 jumbo time deposits represented 11.48
percent and 10.33 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.
ACCOUNTING AND OTHER MATTERS
In February 1998, the FASB issued Statement 132, "Employers' Disclosures
about Pensions and other Postretirement Benefits." This statement standardizes
the disclosure requirements of pensions and other postretirement benefits. This
statement does not change any measurement or recognition provisions, and thus
will not materially impact BancShares net income, but will result in altered
disclosures relating to pension obligations.
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.
In 1997 BancShares developed a plan to deal with the "Year 2000 issue" and
contracted with an industry consultant to review its overall exposure to the
Year 2000 issue. The Year 2000 issue relates to computer programs written
using two digits rather than four to define the applicable year. In 1997
management reviewed the results of the consultant's analysis of BancShares'
data processing Year 2000 exposure and committed the human resources and the
financial resources for BancShares to complete its resolution of the Year 2000
issue in 1998. The total cost of the Year 2000 conversion project for
BancShares is estimated to be $.2 million and is being funded through operating
cash flows. BancShares is expensing all costs associated with the required
systems changes as the costs are incurred. As of December 31, 1997, excluding
personnel costs, $3,000 had been expensed. As of March 31, 1998, excluding
personnel costs, $6,000 additional had been expensed. As discussed above in
Note 7, Related Parties, BancShares utilizes the mainframe system of a related
bank holding company and its subsidiary (the "Corporation") for most of its
mission-critical applications. These systems are currently being remediated,
replaced or retired as part of the Corporation's Year 2000 compliance program.
BancShares' is closely monitoring the Corporation's progress. Based on
discussions with management of the Corporation, BancShares' management does not
expect significant increases in future data processing costs relating to Year
2000 compliance.
In the second quarter of 1998, BancShares expects to acquire the $17.0
million deposit Enfield, North Carolina office of Enfield Savings Bank ("ESB").
The deposits and loans related to ESB's second office are expected to be
transferred and assigned to the Corporation in a purchase and assumption
transaction. In the third quarter of 1998 BancShares expects to acquire,
subject to regulatory approval, the $6.0 million deposit Gates, North Carolina
office of First-Citizens Bank & Trust Company (see note 8 of notes to
consolidated financial statements). BancShares has received approval to open
de novo branches in two new eastern North Carolina markets. These offices are
planned to open in 1999.
The Board of Directors of BancShares has approved the formation of
Southern Capital Trust I, a wholly-owned statutory business trust of BancShares
(the "Trust"), which will issue $20.0 million of Capital Securities maturing in
2028 (the "Capital Securities"). The Trust will invest the proceeds of the
$20.0 million from the Capital Securities in Junior Subordinated Debentures
issued by BancShares (the "Junior Debentures"), which upon consolidation will
be eliminated. The Junior Debentures, with a maturity of 2028, will be the
primary assets of the Trust. With respect to the Capital Securities,
BancShares will irrevocably and unconditionally guarantee the Trust's
obligations. The Capital Securities, once issued, will be included in Tier I
capital for regulatory capital adequacy requirements. The issuance of these
securities is expected to occur in the second quarter of 1998.
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/John C. Pegram, Jr.
Dated: May 6, 1998 __________________________________
John C. Pegram, Jr., President
/s/David A. Bean
Dated: May 6, 1998 __________________________________
David A. Bean, Secretary/Treasurer