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, 2002 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.
114,114 shares
Part i - FINANCIAL INFORMATION
Item 1 - Financial Statements
(Unaudited)
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES March 31, December 31,
CONSOLIDATED BALANCE SHEETS 2002 2001
--------------- ---------------
(Dollars in thousands except per share data)
ASSETS
Cash and due from banks $ 35,119 $ 40,811
Overnight funds sold 38,430 22,365
Investment securities: ($94,141 and $87,105 pledged for
repurchase agreements, respectively)
Available-for-sale, at fair value (amortized cost
$148,598 and $138,419, respectively) 165,586 154,932
Held-to-maturity, at amortized cost (fair value
$35,099 and $50,142, respectively) 34,568 49,351
Loans 540,619 545,300
Less allowance for loan losses (7,966) (7,636)
--------------- ---------------
Net loans 532,653 537,664
Premises and equipment 33,189 32,683
Intangible assets 9,125 9,916
Accrued interest receivable 5,695 6,097
Other assets 825 1,409
--------------- ---------------
Total assets $ 855,190 $ 855,228
=============== ===============
LIABILITIES
Deposits:
Noninterest-bearing $ 124,566 $ 128,368
Interest-bearing 614,714 610,291
--------------- ---------------
Total deposits 739,280 738,659
Long-term obligations 23,000 23,000
Short-term borrowings 17,064 18,146
Accrued interest payable 2,304 3,228
Other liabilities 4,345 4,766
--------------- ---------------
Total liabilities 785,993 787,799
--------------- ---------------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value;
408,728 shares authorized; 363,373 shares issued and
outstanding at both March 31, 2002 and December 31,2001 1,770 1,770
Series C non-cumulative preferred stock, no par value;
43,631 shares authorized; 39,716 shares issued and
outstanding at both March 31, 2002 and December
31, 2001 553 553
Common stock, $5 par value; 158,485 shares authorized;
114,114 and 114,208 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively 570 571
Surplus 10,000 10,000
Retained earnings 45,865 44,388
Accumulated other comprehensive income 10,439 10,147
--------------- ---------------
Total shareholders' equity 69,197 67,429
--------------- ---------------
Total liabilities and shareholders' equity $ 855,190 $ 855,228
=============== ===============
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,
2002 2001
---- ----
(Dollars in thousands except share and per share data)
Interest income:
Loans $ 10,081 $ 10,886
Investment securities:
U. S. Government 1,660 2,185
State, county and municipal 302 459
Other 351 130
-------------- --------------
Total investment securities interest income 2,313 2,774
Overnight funds sold 141 408
-------------- --------------
Total interest income 12,535 14,068
-------------- --------------
Interest expense:
Deposits 3,692 6,665
Short-term borrowings 32 177
Long-term obligations 517 517
-------------- --------------
Total interest expense 4,241 7,359
-------------- --------------
Net interest income 8,294 6,709
Provision for loan losses 450 150
-------------- --------------
Net interest income after provision for loan losses 7,844 6,559
Noninterest income:
Investment securities gain, net 215 4,327
Service charges on deposit accounts 1,269 1,175
Other service charges and fees 389 354
Gain (loss) on sale of loans 33 (9)
Other 32 154
-------------- --------------
Total noninterest income 1,938 6,001
Noninterest expense:
Personnel 3,708 3,430
Intangibles amortization 813 1,032
Occupancy 699 618
Data processing 647 609
Furniture and equipment 485 345
Professional fees 193 143
Other 980 1,130
-------------- --------------
Total noninterest expense 7,525 7,307
-------------- --------------
Income before income taxes 2,257 5,253
Income taxes 630 1,050
-------------- --------------
Net income 1,627 4,203
-------------- --------------
Other comprehensive income net of tax:
Unrealized gains arising during period 434 3,749
Less: reclassification adjustment for gains included in net income 142 2,856
-------------- --------------
Other comprehensive income $ 292 $ 893
-------------- --------------
Comprehensive income $ 1,919 $ 5,096
============== ==============
Per share information:
Net income per common share $ 13.48 $ 35.73
Cash dividends declared on common shares 0.38 0.38
Weighted average common shares outstanding 114,135 115,113
============== ==============
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, 2002 AND
2001
(Dollars in thousands except per
share data)
(Unaudited)
Preferred Stock Common Stock
---------------------------------------- -------------------
Series B Series C Retained
-------------------- ------------------
Shares Amount Shares Amount Shares Amount Surplus Earnings
--------- --------- --------- -------- ---------- ------- --------- ---------
Balance, December 31, 2000 367,524 $1,790 39,825 $555 115,209 $576 $10,000 $36,901
Net income 4,203
Purchase and retirement of stock (1,053) (5) (189) (1) (44)
Cash dividends:
Common stock ($.38 per share) (43)
Preferred B ($.22 per share) (81)
Preferred C ($.22 per share) (9)
Unrealized gain on securities
available-for-sale, net of tax
--------- --------- --------- -------- ---------- ------- --------- ---------
Balance, March 31, 2001 366,471 $1,785 39,825 $555 115,020 $575 $10,000 $40,927
========= ========= ========= ======== ========== ======= ========= =========
Balance, December 31, 2001 363,373 $1,770 39,716 $553 114,208 $571 $10,000 $44,388
Net income 1,627
Purchase and retirement of stock (94) (1) (18)
Cash dividends:
Common stock ($.38 per share) (43)
Preferred B ($.22 per share) (80)
Preferred C ($.22 per share) (9)
Unrealized gain on securities
available-for-sale, net of tax
--------- --------- --------- -------- ---------- ------- --------- ---------
Balance, March 31, 2002 363,373 $1,770 39,716 $553 114,114 $570 $10,000 $45,865
========= ========= ========= ======== ========== ======= ========= =========
Accumulated
Other
Compre- Total
hensive Shareholders'
Income Equity
------------ ----------------
Balance, December 31, 2000 $9,860 $59,682
Net income 4,203
Purchase and retirement of stock (50)
Cash dividends:
Common stock ($.38 per share) (43)
Preferred B ($.22 per share) (81)
Preferred C ($.22 per share) (9)
Unrealized gain on securities
available-for-sale, net of tax 893 893
------------ -----------------
Balance, March 31, 2001 $10,753 $64,595
============ =================
Balance, December 31, 2001 $10,147 $67,429
Net income 1,627
Purchase and retirement of stock (19)
Cash dividends:
Common stock ($.38 per share) (43)
Preferred B ($.22 per share) (80)
Preferred C ($.22 per share) (9)
Unrealized gain on securities
available-for-sale, net of tax 292 292
------------ -----------------
Balance, March 31, 2002 $10,439 $69,197
============ =================
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) 2002 2001
------------ --------------
OPERATING ACTIVITIES:
Net income $ 1,627 $ 4,203
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 450 150
Investment securities gain, net (215) (4,327)
(Gain) loss on sale of loans (33) 9
Loss on sale or abandonment of property and equipment 30 -
Amortization of intangibles and mortgage servicing rights 813 1,070
Premium amortization and discount accretion of investments, net 140 -
Depreciation 571 313
Net decrease in accrued interest receivable 402 287
Net decrease in accrued interest payable (924) (463)
Net increase in intangible assets (22) -
Net decrease in other assets 517 992
Net (decrease) increase in other liabilities (421) 1,618
------------ --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,935 3,852
------------ --------------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities
available-for-sale 5,194 10,000
Proceeds from maturities and issuer calls of investment securities
held-to-maturity 16,553 17,257
Proceeds from sales of investment securities available-for-sale 726 1,623
Proceeds from sales of loans 18,201 2,375
Purchases of investment securities held-to-maturity (1,780) (5,881)
Purchases of investment securities available-for-sale (16,014) (4,000)
Net increase in loans (13,723) (17,156)
Purchases of fixed assets (1,107) (1,100)
------------ --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 8,050 3,118
------------ --------------
FINANCING ACTIVITIES:
Net increase in demand and interest-bearing demand deposits 11,509 2,105
Net (decrease) increase in time deposits (10,888) 16,039
Net repayments of short-term borrowed funds (1,082) (1,994)
Cash dividends paid (132) (133)
Purchase and retirement of stock (19) (50)
------------ --------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (612) 15,967
------------ --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 10,373 $ 22,937
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 63,176 55,784
------------ --------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 73,549 $ 78,721
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest $ 5,165 $ 5,507
Income taxes $ 510 $ 123
============ ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES DURING THE PERIOD:
Unrealized gains (losses) on available-for-sale
securities, net of deferred tax $ 292 $ 893
Foreclosed loans transferred to other real estate $ 116 $ 52
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 49 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 non-bank subsidiary, Goshen, Inc. whose
insurance agency operations compliment the operations of its parent. Southern
and BancShares are headquartered in Mount Olive, North Carolina. BancShares has
no foreign operations and BancShares' customers are principally located in
eastern North Carolina.
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 accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
statements should be read in conjunction with the consolidated financial
statements and accompanying notes for the year ended December 31, 2001,
incorporated by reference in the 2001 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 overnight funds sold. Overnight and federal funds are
purchased and sold for one day periods.
Goodwill and Other Intangible Assets
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies the
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 required that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The adoption of SFAS No. 141 and 142 did not have a
material impact on the consolidated financial statements of BancShares.
The following is a summary of the gross carrying amount, accumulated
amortization of amortized intangible assets as of March 31, 2002 and December
31, 2001 and the gross carrying amount of unamortized intangible assets as of
March 31, 2002:
March 31, 2002 December 31, 2001
(Unaudited)
(Dollars in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------------------------- ------------------------------------------
Amortized intangible assets:
Branch acquisitions $ 20,682 $ 12,374 $ 20,682 $ 11,604
Mortgage servicing rights
1,104 547 1,013 504
------------------------------------------------- ------------------------------------------
Total $ 21,786 $ 12,921 $ 21,695 $ 12,108
================================================= ==========================================
Unamortized intangible assets:
Goodwill $ 229 - $ 229 -
================================================= ==========================================
7
There was no change in the gross carrying amount of unamortized goodwill at
March 31, 2002 compared to December 31, 2001.
Amortization expense on identified amortizing intangible assets totaled $813,000
and $979,000 for the three months ended March 31, 2002 and 2001, respectively.
Amortization expense on goodwill for the three months ended March 31, 2001 was
$53,000.
The estimated amortization expense for intangible assets for the years ended
December 31, 2002, 2003, 2004, 2005 and 2006 and thereafter is as follows:
Estimated
(Dollars in thousands) Amortization Expense
- -----------------------------------------------------------------------------
2002 $ 3,183
2003 $ 2,489
2004 $ 1,854
2005 $ 1,260
2006 $ 640
2007 and after $ 161
-----------------------
Total $ 9,587
=======================
The actual amortization expense in future periods may be subject to change based
on changes in the useful life of the assets and volume of loan prepayments.
The following table presents the adjusted effect on net income and net income
per share excluding the amortization of goodwill for the three months ended
March 31, 2002 and 2001 and for the years ended December 31, 2001, 2000 and
1999:
For the three months
ended March 31
(Dollars in thousands, except (Unaudited)
per share data) 2002 2001
---------------------------------------------
Net income $ 1,627 $ 4,203
Add back: Goodwill amortization $ - $ 53
---------------------------------------------
$ 1,627 $ 4,256
=============================================
Earnings per common share:
As reported $ 13.48 $ 35.73
Goodwill amortization $ - $ 0.46
---------------------------------------------
Adjusted earnings per common share $ 13.48 $ 36.19
=============================================
(Dollars in thousands, except For the years ended December 31
per share data) 2001 2000 1999
---------------------------------------------------------------------
Net income $ 8,241 $ 3,734 $ 3,679
Add back: Goodwill amortization $ 186 $ 260 $ 509
---------------------------------------------------------------------
$ 8,427 $ 3,994 $ 4,188
=====================================================================
Earnings per common share:
As reported $ 68.66 $ 28.51 $ 27.56
Goodwill amortization $ 1.62 $ 2.21 $ 4.27
---------------------------------------------------------------------
Adjusted earnings per common share $ 70.28 $ 30.72 $ 31.83
=====================================================================
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.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Dollars in thousands
Note 2. Investment securities March 31, 2002 December 31, 2001
(Unaudited)
------------------------------------------------ ---------------------------------------------
(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 $ 18,038 $ 243 $ (1) $ 18,280 $ 33,057 $ 468 $ - $ 33,525
Obligations of states
and political subdivisions 16,530 303 (14) 16,819 16,294 335 (12) 16,617
----------- ---------- ---------- ----------- ----------- ----------- ---------- ----------
34,568 546 (15) 35,099 49,351 803 (12) 50,142
----------- ---------- ---------- ----------- ----------- ----------- ---------- ----------
SECURITIES AVAILABLE-FOR-SALE:
U. S. Government 113,965 1,007 (231) 114,741 103,840 1,712 (14) 105,538
Marketable equity securities 11,562 16,227 - 27,789 11,044 14,880 (41) 25,883
Obligations of states
and political subdivisions 7,916 230 (76) 8,070 7,916 243 (76) 8,083
Mortgage-backed securities 15,155 28 (197) 14,986 15,619 59 (250) 15,428
----------- ---------- ---------- ----------- ----------- ----------- ---------- ----------
148,598 17,492 (504) 165,586 138,419 16,894 (381) 154,932
----------- ---------- ---------- ----------- ----------- ----------- ---------- ----------
Totals $ 183,166 $ 18,038 $ (519) $ 200,685 $ 187,770 $ 17,697 $ (393) $205,074
=========== ========== ========== =========== =========== =========== ========== ==========
During the first quarter of 2002, Bancshares realized a $215,000 gain on the
sale of available-for-sale securities. During the first quarter of 2001,
Bancshares recognized nonrecurring securities gains of $4.3 million from the
sales of available-for-sale securities.
8
Note 4. ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) (Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
------------ ------------
Balance at beginning of year $7,636 $7,284
Provision for loan losses 450 150
Loans charged off (165) (101)
Loan recoveries 45 38
------------ -----------
Balance at end of the period $7,966 $7,371
============ ===========
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 2002 or 2001, the computation of basic and diluted
earnings per share is the same.
Note 5. EARNINGS PER COMMON SHARE (Unaudited)
(Dollars in thousands) Three Months Ended March 31,
----------------------------
2002 2001
------------ ------------
Net income $1,627 $4,203
Less: Preferred dividends (89) (90)
------------ ------------
Net income applicable to common shares $1,538 $4,113
============ ============
Weighted average common shares
outstanding during the period 114,135 115,113
============ ============
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,
2002, beneficially owned 32,856 shares, or 28.79%, of BancShares' outstanding
common stock and 4,966 shares, or 1.37%, of BancShares' outstanding Series B
preferred stock. At the same date, the second significant shareholder
beneficially owned 27,522 shares, or 24.11%, of BancShares' outstanding common
stock.
These two significant shareholders are directors and executive officers of the
Corporation and at March 31, 2002, beneficially owned 2,526,604 shares, or
28.72%, and 1,421,621 shares, or 16.16%, of the Corporation's outstanding Class
A common stock, and 649,188 shares, or 38.46%, and 199,052 shares, or 11.79%, of
the Corporation's outstanding Class B common stock. The above totals include
472,855 Class A common shares, or 5.37%, and 104,644 Class B Common shares, or
6.20%, that are considered to be beneficially owned by both of the shareholders
and, therefore, are included in each of their totals.
The following table lists the various charges paid to the Corporation during the
three months ended March 31, 2002 and the three months ended March 31, 2001:
(Dollars in thousands) (Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
----------- -------------
Data and item processing $520 $578
Forms, supplies and equipment 106 168
Trustee for employee benefit plans 17 16
Consulting fees 23 29
Other services 44 29
----------- -------------
$710 $820
============ =============
9
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FIRST THREE MONTHS OF 2002 VS. FIRST THREE MONTHS OF 2001
INTRODUCTION
BancShares net income decreased $2.6 million, or 61.29%, from $4.2 million in
the first three months of 2001 to $1.6 million in the first three months of
2002. This decrease resulted primarily from gains on available-for-sale
securities in 2001 that did not recur in 2002. The opening of one new branch in
January 2002 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, 2002.
Per share net income available to common shares for the first three months of
2002 was $13.48, a decrease of $22.25, or 62.27%, from $35.73 in 2001. The
return on average equity decreased to 9.47%, for the period ended March 31,
2002, from 10.43% for the period ended March 31, 2001 and the return on average
assets decreased to 0.76%, for the period ended March 31, 2002, from 0.79% for
the period ended March 31, 2001.
At March 31, 2002, BancShares' assets were $855.2 million, the same as reported
at December 31, 2001. During this three month period, loans decreased $4.7
million, or 0.86%, from $545.3 million to $540.6 million. During the three
months ended March 31, 2002 investment securities decreased $4.1 million, or
2.02% from $204.3 million at December 31, 2001 to $200.2 million at March 31,
2002. Total deposits increased $621,000, or 0.08% from $738.7 million at
December 31, 2001 to $739.3 million at March 31, 2002. The above changes
resulted principally from the seasonal impact of the agricultural markets served
by Southern.
CRITICAL ACCOUNTING POLICIES
BancShares' significant accounting policies are set forth in note 1 of the
consolidated financial statements in the annual report on Form 10-K. Of these
significant accounting policies, BancShares considers its policy regarding the
allowance for loan losses to be its single critical accounting policy, because
it requires management's most subjective and complex judgments. In addition,
changes in economic conditions can have a significant impact on the allowance
for loan losses and therefore the provision for loan losses and results of
operations. Bancshares has developed appropriate policies and procedures for
assessing the adequacy of the allowance for loan losses, recognizing that this
process requires a number of assumptions and estimates with respect to its loan
portfolio.
10
BancShares' assessments may be impacted in future periods by changes in economic
conditions, the impact of regulatory examinations, and the discovery of
information with respect to borrowers which is not known to management at the
time of the issuance of the consolidated financial statements. For additional
discussion concerning BancShares' allowance for loan losses and related matters,
see ASSET QUALLITY AND PROVISION FOR LOAN LOSSES.
ACQUISITIONS
Southern did not acquire any additional locations in the three months ended
March 31, 2002 or 2001. Southern did open one additional location in an existing
market during the three months ended March 31, 2002.
INTEREST INCOME
Interest and fees on loans decreased $805,000, or 7.39%, from $10.9 million for
the three months ended March 31, 2001 to $10.1 million for the three months
ended March 31, 2002. This decrease was due to decreased yields on average
loans. Average loans increased $36.1 million, or 7.20%, from $501.3 million for
the three months ended March 31, 2001 to $537.4 million for the three months
ended March 31, 2002. The yield on the loan portfolio decreased from 8.76% in
the three months ended March 31, 2001 to 7.62% in the three months ended March
31, 2002.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities decreased 16.62%, from $2.8 million in the three months ended March
31, 2001 to $2.3 million in the three months ended March 31, 2002. This change
was due to a decrease in yield from 5.94% for the three-month period ended March
31, 2001 to 4.96% for the three-month period ended March 31, 2002. Interest
income on overnight funds sold decreased $267,000 or 65.44%, from $408,000 for
the three months ended March 31, 2001 to $141,000 for the three months ended
March 31, 2002. This decrease in income resulted from decreased yields on
overnight funds sold. Average federal funds sold yields decreased from 5.34% for
the three months ended March 31, 2001 to 1.57% for the three months ended March
31, 2002.
Total interest income decreased $1.5 million or 10.90%, from $14.1 million for
the three months ended March 31, 2001 to $12.5 million for the three months
ended March 31, 2002. This decrease was the result of decreased average earning
asset yields.
As a result of the overall decline in market rates, average earning asset yields
decreased from 7.88% for the three months ended March 31, 2001 to 6.68% for the
three months ended March 31, 2002. Average earning assets increased from $719.4
million in the three months ended March 31, 2001 to $760.9 million in the period
ended March 31, 2002. This $41.5 million increase in the average earning assets
resulted from internal loan growth.
11
INTEREST EXPENSE
Total interest expense decreased $3.1 million or 42.37%, from $7.4 million in
the three months ended March 31, 2001 to $4.2 million for the three months ended
March 31, 2002. The principal reason for this decrease was an overall decrease
in the cost of deposits in the three months ended March 31, 2002 compared to the
three months ended March 31, 2001. As a result of the overall decline in market
rates, BancShares' total cost of funds decreased from 4.69% for the three months
ended March 31, 2001 to 2.62% for the three months ended March 31, 2002. Average
interest-bearing deposits were $615.4 million in the three months ended March
31, 2002, an increase of $19.1 million from the $596.3 million average in the
three months ending March 31, 2001. The increase in average interest-bearing
liabilities was the result of internal growth.
NET INTEREST INCOME
Net interest income increased $1.6 million for the three months ended March 31,
2002 from $6.7 million for the three months ended March 31, 2001 to $8.3 million
for the three months ended March 31, 2002.
The interest rate spread for the three months ended March 31, 2002 was 4.06%, an
increase of 87 basis points from the 3.19% interest rate spread for the three
months ended March 31, 2001.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the three months ended March 31, 2002 management recorded $450,000 as
provision for loan losses. Management recorded a $150,000 addition to the
provision for loan losses for the three months ended March 31, 2001. Management
increased the provision in consideration of the continued recessionary economy
and the increase in net loan charge offs and non-performing loans for the three
months ended March 31, 2002 compared to the three months ended March 31, 2001.
During the first three months of 2002 management charged-off loans totaling
$165,000 and received recoveries of $45,000, resulting in net charge-offs of
$120,000. During the same period in 2001, $101,000 in loans were charged-off and
recoveries of $38,000 were received, resulting in net charge-offs of $63,000.
The following table presents comparative Asset Quality ratios of BancShares:
(Unaudited) (Unaudited)
March 31, December 31, March 31,
2002 2001 2001
------------ ------------ ------------
Ratio of annualized net loans charged off
to average loans 0.09% 0.10% 0.05%
Allowance for loan losses
to loans 1.47% 1.40% 1.44%
Non-performing loans
to loans 0.34% 0.37% 0.31%
Non-performing loans and assets
to total assets 0.23% 0.24% 0.20%
Allowance for loan losses
to non-performing loans 427.59% 381.80% 466.22%
12
The ratio of annualized net charge-offs to average loans outstanding remained
essentially unchanged at 0.09% for the three months ended March 31, 2002
compared to 0.10% for the year ended December 31, 2001. The allowance for loan
losses represented 1.47% of gross loans at March 31, 2002. The allowance for
loan losses represented 1.40% of gross loans at December 31, 2001. Loans
decreased $4.7 million, or 0.86% from $545.3 million at December 31, 2001 to
$540.6 million at March 31, 2002.
The ratio of nonperforming loans to total loans decreased to 0.34% at March 31,
2002 from 0.37% at December 31, 2001. Nonperforming loans and assets to total
assets decreased to 0.23% at March 31, 2002 from 0.24% at December 31, 2001. The
allowance for loan losses to nonperforming loans represented 427.59% of
nonperforming loans at March 31, 2002, an increase from the 381.80% at December
31, 2001.
The nonperforming loans at March 31, 2002 included $385,000 of nonaccrual loans,
$1.5 million of accruing loans 90 days or more past due and $28,000 of
restructured loans. The nonperforming loans at December 31, 2001 included
$407,000 of nonaccrual loans, $1.6 million of accruing loans 90 days or more
past due and $28,000 of restructured loans. BancShares had $146,000 of assets
classified as other real estate at March 31, 2002. BancShares had $64,000 of
assets classified as other real estate at December 31, 2001. Other real estate
is recorded at the lower of cost or fair value less estimated costs to sell.
Subsequent costs directly related to development and improvement of property are
capitalized, whereas costs relating to holding the property are expensed.
Management considers the March 31, 2002 allowance for loan losses to be adequate
to cover the losses and risks inherent in the loan portfolio at March 31, 2002
and will continue to monitor its portfolio and to adjust the relative level of
the allowance as needed. BancShares' had impaired loans of $229,000 at March 31,
2002 compared to $197,000 at December 31, 2001 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.
13
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, 2002, BancShares realized a $4.1 million
decrease in noninterest income compared to the three months ended March 31,
2001. This decrease was principally the result of net gains on
available-for-sale investment securities of $4.3 million in the three months
ended March 31, 2001.
NONINTEREST EXPENSE
Noninterest expense including personnel, occupancy, furniture and equipment,
data processing, FDIC insurance and state assessments, printing and supplies and
other expenses, increased $218,000 or 2.98%, from $7.3 million in the three
months ended March 31, 2001 to $7.5 million in the three months ended March 31,
2002.
This increase was primarily due to an increase in personnel expense of $278,000,
or 8.10%, from $3.4 million at March 31, 2001 to $3.7 million at March 31, 2002,
increased occupancy, furniture and equipment expense and other expenses
resulting primarily from the opening of one new branch and was offset by a
$219,000 reduction in intangibles amortization. The decrease in intangibles
amortization expense principally resulted from the reduction of expense related
to amortizing intangibles of $166,000 and the absence of amortization expense
related to goodwill (see note 1 to Consolidated Financial Statements) which
resulted in a reduction of $53,000 for the quarter ending March 31, 2002
compared to the quarter ending March 31, 2001.
INCOME TAXES
In the three months ended March 31, 2002, BancShares had income tax expense of
$630,000, a decrease of $420,000 from $1.1 million in the prior year period.
This decrease is due to decreased 2002 earnings resulting from the nonrecurring
2001 available-for-sale investment securities transactions discussed above and
an increase in the effective tax rate. The resulting effective tax rate for the
three months ended March 31, 2002 was 27.91%. The effective tax rate for the
three months ended March 31, 2001 was 19.99%. The effective rate for the three
months ended March 31, 2002 increased compared to the effective rate for the
three months ended March 31, 2001 primarily due to a lower proportion of
non-taxable investments. The effective tax rates in 2001 and 2002 differ from
the combined federal and state statutory rates of 38.55% for 2001 and 2002
primarily due to tax exempt income.
14
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 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, 2002.
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, 2002 was 7.65%. At December 31, 2001, Southern's
leverage capital ratio was 7.37%. 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, 2002, Southern's Total RBC ratio
was 13.29%. At December 31, 2001 the RBC ratio was 12.92%. 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 many 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.
15
The accumulated other comprehensive income was $10.4 million at March 31, 2002,
and $10.1 million at December 31, 2001. 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, December 31,
2002 2001
------------ ------------
(Dollars in thousands)
Tier 1 capital $ 62,557 $ 60,458
Total capital 73,166 70,916
Risk-adjusted assets 550,339 548,884
Average tangible assets 818,019 820,605
Tier 1 capital ratio /(1)/ 11.37% 11.01%
Total capital ratio /(1)/ 13.29% 12.92%
Leverage capital ratio /(1)/ 7.65% 7.37%
/(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, 2002 and December 31, 2001, 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."
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, overnight
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 25.99% at March 31, 2002 and 26.33%
at December 31, 2001.
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, 2002 and for the three months ended March 31, 2001. 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, 2002 jumbo time deposits represented 13.91% of total
deposits compared to 14.23% of total deposits at December 31, 2001.
16
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.
CONTRACTURAL OBLIGATIONS
As of March 31, 2002
(In thousands)
Payments due by period
------------------------
Less than 1 year 1-3 years 4-5 years Over 5 years Total
Deposits $687,505 $44,216 $7,559 - $739,280
Short-term borrowings 17,064 - - - 17,064
Long-term obligations - - - 23,000 23,000
Lease obligations 58 77 - - 135
- ----------------------------------------------------------------------------------------------------------
Total contractual obligations $704,627 $44,293 $7,559 $23,000 $779,479
==========================================================================================================
ACCOUNTING AND OTHER MATTERS
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141 (Statement 141), "Business Combinations", and Statement of Financial
Accounting Standards No. 142 (Statement 142), "Goodwill and Other Intangible
Assets". Statement 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Statement 141 also
specifies criteria which must be met for intangible assets acquired in a
purchase method business combination to be recognized and reported apart from
goodwill. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that identifiable intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of".
BancShares adopted the provisions of Statement 141 as of June 30, 2001 and fully
adopted Statement 142 effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 continued to be
amortized in 2001 prior to the adoption of Statement 142 on January 1, 2002.
17
Statement 141 requires, upon adoption of Statement 142, that BancShares evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, BancShares was required to
reassess the useful lives and residual values of all identifiable intangible
assets acquired in purchase business combinations. In addition, any intangible
asset classified as goodwill under Statement 142 will be subjected to a
transitional impairment test during the first six months of 2002 based on the
level of goodwill as of January 1, 2002. Any impairment losses identified as a
result of this transitional impairment test will be recognized in the 2002
statement of income as the effect of a change in accounting principle.
As of March 31, 2002, BancShares had intangible assets totaling $9.1 million.
Management evaluated BancShares's existing intangible assets and goodwill as of
January 1, 2002 and has made appropriate reclassifications in order to conform
to the new criteria in Statement 141 for recognition apart from goodwill, as
further described below.
BancShares determined that upon adoption of Statement 142 on January 1, 2002,
BancShares had $229,000 of goodwill that will no longer be amortized beginning
in 2002. The amortization expense associated with this goodwill during the
quarter ended March 31, 2001 was $53,000. In accordance with Statement 142,
BancShares will perform a transitional impairment test of this goodwill in the
first six months of 2002, and will perform an annual impairment test of the
goodwill in 2002 and thereafter.
The remaining intangible assets, totaling $8.9 million at March 31, 2002, relate
to acquisitions of branches that are being accounted for in accordance with
Statement of Financial Accounting Standards No. 72 (Statement 72), "Accounting
for Certain Acquisitions of Banking and Thrift Institutions." Statement 72,
which was not amended by Statement 142, requires that identified intangible
assets and unidentified intangible assets associated with certain acquisitions
of branches be amortized into expense. Accordingly, these intangible assets will
continue to be amortized over their useful lives (generally 7 years). Management
periodically reviews the useful lives of these assets and adjusts them downward
where appropriate. The amortization expense associated with these branches was
$813,000 and $979,000 for the quarters ended March 31, 2002 and 2001,
respectively.
18
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143 (Statement 143), "Accounting for Asset Retirement Obligations", which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
cost. This standard requires BancShares to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and or normal use of the
assets. BancShares also is to record a corresponding increase to the carrying
amount of the related long-lived asset and to depreciate that cost over the life
of the asset. The liability is changed at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying the
initial fair value measurement. This statement is effective for fiscal years
beginning after June 15, 2002. At this time, BancShares does not believe that
the adoption of Statement 143 on January 1, 2003 will have a material impact on
its financial condition and results of operations.
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (Statement 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard provides guidance on differentiating between long-lived assets to
be held and used, long-lived assets to be disposed of other than by sale and
long-lived assets to be disposed of by sale. Statement 144 supersedes FASB
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Statement 144 also supersedes Accounting Principals Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for fiscal years beginning
after December 15, 2001. BancShares adoption of this statement on January 1,
2002 did not have a material effect on its consolidated financial statements.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of BancShares and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
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.
19
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 as of March 31, 2002. Management seeks to manage this
risk through the use of shorter term 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, 2002. 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, 2002. 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, 2002.
(Dollars in thousands, unaudited) Maturing in the years ended March 31
2003 2004 2005 2006 2007 Thereafter Total Fair Value
Assets
Loans
Fixed rate 128,232 32,426 36,566 38,895 55,972 90,962 383,053 390,040
Average rate (%) 8.06% 8.23% 7.90% 7.93% 7.57% 7.73% 7.92%
Variable rate 70,876 21,018 15,875 15,698 13,359 20,740 157,566 157,566
Average rate (%) 6.53% 6.29% 6.33% 6.21% 5.84% 6.19% 6.34%
Investment securities
Fixed rate 77,155 58,367 6,879 1,592 1,629 37,544 183,166 200,685
Average rate (%) 5.44% 3.67% 4.48% 8.44% 8.28% 5.57% 4.92%
Liabilities
Savings and interest
bearing checking
Fixed rate 244,930 - - - - - 244,930 244,930
Average rate (%) 0.90% - - - - - 0.90%
Certificates of deposit
Fixed rate 313,862 29,442 12,656 7,559 - - 363,519 366,318
Average rate (%) 2.79% 4.64% 4.38% 5.09% - - 3.04%
Variable rate 4,147 2,118 - - - - 6,265 6,265
Average rate (%) 1.96% 2.00% - - - - 1.98%
Long-term debt
Fixed rate - - - - - 23,000 23,000 23,000
Average rate (%) - - - - - 8.25% 8.25%
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
In the normal course of business there are various commitments and contingent
liabilities outstanding, such as guarantees, commitments to extend credit, etc.,
which are not reflected in the accompanying financial statements.
Southern is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit and
undisbursed advances on customer lines of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheet.
20
Southern is exposed to credit loss, in the event of nonperformance by the other
party to the financial instrument, for commitments to extend credit and standby
letters of credit which is represented by the contractual notional amount of
those instruments. Southern uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit and undisbursed advances on customer lines of
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many commitments expire without being drawn, the total commitment amounts
do not necessarily represent future cash requirements. Southern evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by Southern, upon extension of credit is based on
management's credit evaluation of the borrower. Collateral held varies but may
include trade accounts receivable, property, plant, and equipment and
income-producing commercial properties.
Standby letters of credit are commitments issued by Southern to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to
customers.
Outstanding standby letters of credit as of March 31, 2002 and December 31,
2001amounted to $2.3 million and $2.1 million. Outstanding commitments to lend
at March 31, 2002 and December 31, 2001 were $169.0 million and $154.6 million.
Undisbursed advances on customer lines of credit at March 31, 2002 and December
31, 2001 were $49.3 million and $45.9 million. Outstanding standby letters of
credit and commitments to lend at March 31, 2002 generally expire within one
year, whereas commitments associated with undisbursed advances on customer lines
of credit at March 31, 2002 generally expire within one to five years.
At March 31, 2002, commitments to sell loans amounted to $3.4 million. At
December 31, 2001 commitments to sell loans amounted to $3.7 million.
BancShares does not have any special purpose entities or other similar forms of
off-balance sheet financing arrangements.
Southern grants agribusiness, commercial and consumer loans to customers
primarily in eastern North Carolina. Although Southern has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the agricultural industry and in particular the
tobacco segment thereof. For several decades tobacco has been under criticism
for potential health risks.
BancShares is also involved in various legal actions arising in the normal
course of business. Management is of the opinion that the outcome of such
actions will not have a material adverse effect on the consolidated financial
condition of BancShares.
21
A principal objective of BancShares' asset/liability function is to manage
interest rate risk or the exposure to changes in interest rates. Management
maintains portfolios of interest-earning assets and interest-bearing liabilities
with maturities or repricing opportunities that will protect against wide
interest rate fluctuations, thereby limiting, to the extent possible, the
ultimate interest rate exposure. The table below provides BancShares'
interest-sensitivity position as of March 31, 2002, which reflected a one year
negative interest-sensitivity gap of $265.3 million. As a result of this one
year negative gap, increases in interest rates could have an unfavorable impact
on net interest income. It should be noted that this analysis reflects
BancShares' interest sensitivity as of a single point in time and may not
reflect the effects of repricings of assets and liabilities in various interest
rate environments. As a result of the overall low interest rate environment and
customer expectations that the next move in interest rates by the Federal
Reserve will be upward, the overall movement in deposits has been to shorter
term maturities resulting in both the one-year negative interest sensitivity of
financial instruments and the total cumulative negative interest sensitivity gap
being slightly higher at March 31, 2002 as compared to December 31, 2001.
INTEREST-SENSITIVITY ANALYSIS
(Dollars in thousands, unaudited)
March 31, 2002
Non-Rate
1-90 91-180 181-365 Sensitive
Days Days Days & Over
Sensitive Sensitive Sensitive 1 year Total
Earning Assets:
Loans $ 128,944 $ 30,619 $ 39,545 $ 341,511 $ 540,619
Investment securities 20,783 22,171 34,201 106,011 183,166
Temporary investments 38,430 - - - 38,430
----------------- ------------- ------------- ------------ ----------------
Total earning assets $ 188,157 $ 52,790 $ 73,746 $ 447,522 $ 762,215
================= ============= ============= ============ ================
Interest-Bearing Liabilities:
Savings and core time deposits 350,365 62,186 58,713 40,595 511,859
Time deposits of $100,000 and more 50,946 20,434 20,295 11,180 102,855
Short-term borrowings 17,064 - - - 17,064
Long-term obligations - - - 23,000 23,000
----------------- ------------- ------------- ------------ --------------
Total interest bearing liabilities $ 418,375 $ 82,620 $ 79,008 $ 74,775 $ 654,778
================= ============= ============= ============ ==============
Interest sensitivity gap $ (230,218) $ (29,830) $ (5,262) $ 372,747 $ 107,437
================= ============= ============= ============ ==============
Cumulative interest sensitivity gap $ (230,218) $ (260,048) $(265,310) $ 107,437 $ 107,437
================= ============= ============= ============ ==============
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.
22
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.
Dated: May 13, 2002 /s/John C. Pegram, Jr.
--------------------------------
John C. Pegram, Jr.,
President and Chief Executive Officer
Dated: May 13, 2002 /s/David A. Bean
--------------------------------
David A. Bean,
Secretary, Treasurer and Chief
Financial Officer
23