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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 June 30, 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 quarter covered by this report.
114,104 shares
Part I-FINANCIAL INFORMATION
Item 1-Financial Statements.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
----------------- ---------------
(Dollars in thousands except per share data)
ASSETS
Cash and due from banks $ 44,780 $ 40,811
Overnight funds sold 12,485 22,365
Investment securities: ($95,517 and $87,105 pledged for repurchase agreements,
respectively)
Available-for-sale, at fair value (amortized cost $137,365 and $138,419,
respectively) 158,228 154,932
Held-to-maturity, at amortized cost (fair value $38,810 and $50,142, 38,148 49,351
respectively)
Loans 561,187 545,300
Less allowance for loan losses (8,219) (7,636)
----------------- -----------------
Net loans 552,968 537,664
Premises and equipment 32,880 32,683
Intangible assets 8,336 9,916
Accrued interest receivable 5,562 6,097
Other assets 752 1,409
----------------- -----------------
Total assets $ 854,139 $ 855,228
================= =================
LIABILITIES
Deposits:
Noninterest-bearing $127,155 $ 128,368
Interest-bearing 605,121 610,291
----------------- -----------------
Total deposits 732,276 738,659
Short-term borrowings 18,277 18,146
Long-term obligations 23,000 23,000
Accrued interest payable 1,802 3,228
Other liabilities 5,143 4,766
----------------- -----------------
Total liabilities 780,498 787,799
----------------- -----------------
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value;
408,728 shares authorized; 362,581 and 363,373 shares
issued and outstanding at June 30, 2002 and December
31, 2001, respectively 1,766 1,770
Series C non-cumulative preferred stock, no par value; 43,631 shares
authorized; 39,716 shares issued and outstanding at both June 30, 2002 and
December 31, 2001, respectively 553 553
Common stock, $5 par value; 158,485 shares authorized; 114,104 and 114,208
shares issued and outstanding at June 30, 2002 and December 31, 2001,
respectively 570 571
Surplus 10,000 10,000
Retained earnings 47,933 44,388
Accumulated other comprehensive income 12,819 10,147
----------------- -----------------
Total shareholders' equity 73,641 67,429
----------------- -----------------
Total liabilities and shareholders' equity $ 854,139 $ 855,228
================= =================
The accompanying notes are an integral part of these
consolidated financial statements.
2
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands except share and per share data)
Interest income:
Loans $10,158 $10,969 $20,239 $21,855
Investment securities:
U. S. Government 1,475 2,241 3,135 4,426
State, county and municipal 307 356 609 815
Other 483 169 834 299
------- ------- ------- -------
Total investment securities interest income 2,265 2,766 4,578 5,540
Overnight funds sold 115 287 256 695
------- ------- ------- -------
Total interest income 12,538 14,022 25,073 28,090
Interest expense:
Deposits 3,259 6,182 6,951 12,847
Short-term borrowings 58 131 90 308
Long-term obligations 518 518 1,035 1,035
------- ------- ------- -------
Total interest expense 3,835 6,831 8,076 14,190
------- ------- ------- -------
Net interest income 8,703 7,191 16,997 13,900
Provision for loan losses 450 250 900 400
------- ------- ------- -------
Net interest income after
provision for loan losses 8,253 6,941 16,097 13,500
Noninterest income:
Service charges on deposit accounts 1,329 1,291 2,598 2,466
Investment securities gains, net 563 297 778 4,624
Other service charges and fees 425 371 814 725
Sale of credit card portfolio - 250 - 250
Gain (loss) on sale of loans 61 (46) 94 (46)
Other 3 98 35 243
------- ------- ------- -------
Total noninterest income 2,381 2,261 4,319 8,262
Noninterest expense:
Personnel 3,732 3,490 7,440 6,920
Data processing 670 617 1,317 1,226
Intangibles amortization 843 985 1,726 2,017
Occupancy 704 623 1,403 1,241
Furniture and equipment 518 399 1,003 744
Professional fees 205 157 398 300
Other 879 1,156 1,789 2,286
------- ------- ------- -------
Total noninterest expense 7,551 7,427 15,076 14,734
------- ------- ------- -------
Income before income taxes 3,083 1,775 5,340 7,028
Income taxes 910 590 1,540 1,640
------- ------- ------- -------
Net income 2,173 1,185 3,800 5,388
------- ------- ------- -------
Other comprehensive income net of tax:
Unrealized gains arising during period 2,751 1,244 3,185 4,993
Less: reclassification adjustment for
gains included in net income 371 196 513 3,052
------- ------- ------- -------
Total comprehensive income $2,380 $1,048 $2,672 $1,941
======= ======= ======= =======
Per share information:
Net income per common share $18.27 $9.53 $31.75 $45.28
Cash dividends declared on common shares 0.37 0.37 0.75 0.75
Weighted average common shares outstanding 114,111 114,933 114,123 115,022
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in thousands except per share data)
(Unaudited)
Preferred Stock Common Stock
-------------------------------------------------------- -------------------------
Series B Series C
--------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------ ----------- ------------ ---------- ------------- ---------
Balance, December 31, 2000 367,524 $1,790 39,825 $555 115,209 $576
Net income
Purchase and retirement of stock (1,562) (8) (335) (1)
Cash dividends:
Common stock ($.75 per share)
Preferred B ($.44 per share)
Preferred C ($.44 per share)
Unrealized gain on securities
available-for-sale, net of tax
------------ ----------- ------------ ---------- ------------- ---------
Balance, June 30, 2001 365,962 $1,782 39,825 $555 114,874 $575
============ =========== ============ ========== ============= =========
Balance, December 31, 2001 363,373 $1,770 39,716 $553 114,208 $571
Net income
Purchase and retirement of stock (792) (4) (104) (1)
Cash dividends:
Common stock ($.75 per share)
Preferred B ($.44 per share)
Preferred C ($.44 per share)
Other
Unrealized gain on securities
available-for-sale, net of tax
------------ ----------- ------------ ---------- ------------- ---------
Balance, June 30, 2002 362,581 $1,766 39,716 $553 114,104 $570
============ =========== ============ ========== ============= =========
Accumulated
Other
Compre- Total
Retained hensive Shareholders'
Surplus Earnings Income Equity
---------- ------------ --------------- ----------------
Balance, December 31, 2000 $10,000 $36,901 $9,860 $59,682
Net income 5,388 5,388
Purchase and retirement of stock (65) (74)
Cash dividends:
Common stock ($.75 per share) (85) (85)
Preferred B ($.44 per share) (162) (162)
Preferred C ($.44 per share) (18) (18)
Unrealized gain on securities
available-for-sale, net of tax 1,941 1,941
----------- ----------- ------------ ------------
Balance, June 30, 2001 $10,000 $41,959 $11,801 $66,672
=========== ============ ============ ============
Balance, December 31, 2001 $10,000 $44,388 $10,147 $67,429
Net income 3,800 3,800
Purchase and retirement of stock (25) (30)
Cash dividends:
Common stock ($.75 per share) (86) (86)
Preferred B ($.44 per share) (159) (159)
Preferred C ($.44 per share) (18) (18)
Other 33 33
Unrealized gain on securities
available-for-sale, net of tax 2,672 2,672
---------- ------------ ---------- -----------
Balance, June 30, 2002 $10,000 $47,933 $12,819 $73,641
=========== ============ ============ ============
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)
Six months ended
June 30,
(Thousands) 2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net income $ 3,800 $ 5,388
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 900 400
Investment securities gain, net (778) (4,624)
(Gain) loss on sale of loans (94) 46
Loss on sale or abandonment of property and equipment 30 37
Premium amortization and discount accretion of investments, net 315 (35)
Amortization of intangibles 1,726 2,017
Depreciation 1,207 757
Net decrease in accrued interest receivable 535 378
Net decrease in accrued interest payable (1,426) (379)
Net increase in intangible assets (146) -
Net decrease (increase) in other assets 823 (764)
Net increase in other liabilities 377 1,816
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,269 5,037
----------- -----------
INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities
available-for-sale 19,716 25,323
Proceeds from maturities and issuer calls of investment securities
held-to-maturity 22,075 29,803
Proceeds from sale of investment securities available-for sale 1,781 -
Proceeds from sale of loans 29,118 14,551
Purchases of investment securities held-to-maturity (6,516) (7,713)
Purchases of investment securities available-for-sale (26,014) (32,000)
Net increase in loans (45,394) (55,468)
Purchases of fixed assets (1,434) (2,344)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (6,668) (27,848)
----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and interest-bearing demand deposits 12,076 (567)
Net (decrease) increase in time deposits (18,459) 16,591
Net change in short-term borrowed funds 131 (329)
Other 33 -
Cash dividends paid (263) (265)
Purchase and retirement of stock (30) (74)
----------- -----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (6,512) 15,356
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (5,911) $ (7,455)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 63,176 55,784
----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 57,265 $ 48,329
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:
Interest $ 9,502 $ 14,569
Income taxes $ 1,180 $ 1,287
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities available-for-sale, net of deferred tax $ 2,672 $ 1,941
Foreclosed loans transferred to other real estate $ 166 $ 49
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. BancShares irrevocably
and unconditionally guarantees the Trust's obligations. Southern, which began
operations January 29, 1901, has a wholly-owned subsidiary, Goshen, Inc. which
acts as agent for credit life and credit accident and health insurance written
in connection with loans made by Southern. BancShares and Southern are
headquartered in Mount Olive, North Carolina.
The consolidated financial statements in this report are unaudited. In the
opinion of management, all adjustments (none of which were other than normal
accruals) necessary for a fair presentation of the financial position and
results of operations for the quarters 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. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses for the reporting periods. 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.
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.
6
Cash And Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
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.
Statement 142 requires 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 following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of June 30, 2002 and December 31,
2001 and the gross carrying amount of unamortized intangible assets as of June
30, 2002:
June 30, 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 $13,189 $20,682 $11,604
Mortgage servicing
rights 1,667 1,053 1,521 912
--------------------------------------------------- -----------------------------------------------
Total $22,349 $14,242 $22,203 $12,516
=================================================== ===============================================
Unamortized intangible
assets:
Goodwill $ 229 - $ 229 -
=================================================== ===============================================
The remaining intangible assets, totaling $8.1 million at June 30, 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
$1.7 million and $2.0 million for the six months ended June 30, 2002 and 2001,
respectively.
There was no change in the gross carrying amount of unamortized goodwill at June
30, 2002 compared to December 31, 2001.
7
Amortization expense on identified amortizing intangible assets totaled $1.7
million and $2.0 million for the six months ended June 30, 2002 and 2001,
respectively. Amortization expense on goodwill for the six months ended June 30,
2001 was $102,000.
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 expectations for loan
prepayments.
The following table presents the adjusted effect on net income and net income
per share excluding the amortization of goodwill for the six months ended June
30, 2002 and 2001 and for the years ended December 31, 2001, 2000 and 1999:
For the three months For the six months
ended June 30 ended June 30
(Unaudited) (Unaudited)
(Dollars in thousands,
except per share
data) 2002 2001 2002 2001
------------------------------------------------ --------------------------------------------------
Net income $2,173 $1,185 $3,800 $5,388
Add back:
Goodwill amortization $ - $ 49 $ - $ 102
------------------------------------------------ --------------------------------------------------
$2,173 $1,234 $3,800 $5,490
================================================ ==================================================
Earnings per common
share:
As reported $18.27 $ 9.53 $31.75 $45.28
Goodwill amortization $ - $ 0.43 $ - $ 0.89
------------------------------------------------ --------------------------------------------------
Adjusted
earnings
per common
share $18.27 $ 9.96 $31.75 $46.17
================================================ ==================================================
For the years ended December 31
(Dollars in thousands,
except 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
=======================================================================
8
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
June 30, 2002
-----------------------------------------------------------
(In thousands, unaudited) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ -------------- -------------- --------------
SECURITIES HELD-TO-MATURITY:
U.S. Government $18,016 $223 $ - $18,239
Obligations of states
and political subdivisions 20,132 439 - 20,571
------------ -------------- -------------- --------------
38,148 662 - 38,810
------------ -------------- -------------- --------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government $103,924 1,414 (1) $105,337
Marketable equity securities 11,078 18,892 - 29,970
Obligations of states
and political subdivisions 7,656 330 (15) 7,971
Mortgage-backed securities 14,707 243 - 14,950
------------ -------------- -------------- --------------
137,365 20,879 (16) 158,228
------------ -------------- -------------- --------------
Totals $175,513 $21,541 $(16) $197,038
============ ============== ============== ==============
December 31, 2001
------------------------------------------------------------
(In thousands, unaudited) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ -------------- -------------- --------------
SECURITIES HELD-TO-MATURITY:
U.S. Government $33,057 $468 $ - $ 33,525
Obligations of states
and political subdivisions 16,294 335 (12) 16,617
------------ -------------- ------------- --------------
49,351 803 (12) 50,142
----------- -------------- ------------- --------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government $103,840 1,712 (14) $105,538
Marketable equity securities 11,044 14,880 (41) 25,883
Obligations of states
and political subdivisions 7,916 243 (76) 8,083
Mortgage-backed securities 15,619 59 (250) 15,428
----------- -------------- -------------- --------------
138,419 16,894 (381) 154,932
----------- -------------- -------------- --------------
Totals $187,770 $17,697 $(393) $205,074
============ ============== ============== ==============
Note 4. ALLOWANCE FOR LOAN LOSSES
(Unaudited)
(Dollars in thousands) Six Months Ended June 30,
----------------------------------------
2002 2001
----------------- -----------------
Balance at beginning of year $7,636 $7,284
Provision for loan losses 900 400
Loans charged off (404) (351)
Loan recoveries 87 58
Sale of credit card portfolio - (95)
----------------- -----------------
Balance at end of the period $8,219 $7,296
================= =================
9
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. The following table presents the components of
the earnings per share computations:
Note 5. EARNINGS PER COMMON SHARE
(Unaudited) (Unaudited)
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- -----------------------------------------
2002 2001 2002 2001
------------- ----------------- ------------------ ---------------------
Net income $ 2,173 $ 1,185 $ 3,800 $ 5,388
Less: Preferred dividends (88) (90) (177) (180)
------------- ----------------- ------------------ ---------------------
Net income applicable to common shares $ 2,085 $ 1,095 $ 3,623 $ 5,208
============= ================= ================== =====================
Weighted average common shares
outstanding during the period 114,111 114,933 114,123 115,022
============= ================= ================== =====================
Note 6. Related Parties
BancShares has entered into various service contracts with another bank holding
company (the "Corporation") and its subsidiary. The Corporation has two
significant shareholders, who also are significant shareholders of BancShares.
The first significant shareholder is a director of BancShares and, at June 30,
2002, beneficially owned 32,856 shares, or 28.79%, of BancShares' outstanding
common stock and 4,966 shares, or 1.38%, of BancShares' outstanding Series B
preferred stock. At the same date, the second significant shareholder
beneficially owned 27,422 shares, or 24.03%, of BancShares' outstanding common
stock.
These two significant shareholders are directors and executive officers of the
Corporation and at June 30, 2002, beneficially owned 2,529,080 shares, or
28.75%, and 1,404,121 shares, or 15.96%, of the Corporation's outstanding Class
A common stock, and 650,678 shares, or 38.66%, and 199,052 shares, or 11.83%, of
the Corporation's outstanding Class B common stock. The above totals include
472,855 Class A common shares, or 5.38%, and 104,644 Class B Common shares, or
6.22%, that are considered to be beneficially owned by both of the shareholders
and, therefore, are included in each of their totals.
A subsidiary of the Corporation is First-Citizens Bank & Trust Company ("First
Citizens"). In May 2001 Southern sold its $3.2 million credit card portfolio to
First Citizens, recording a gain of approximately $250,000 on the sale. Southern
continues to offer its customers a credit card with the Southern Bank brand
through First Citizens but the loans are owned by First Citizens.
The following table lists the various charges paid to the Corporation during the
six months ended June 30, 2002 and the six months ended June 30, 2001:
(Dollars in thousands) (Unaudited)
Six Months Ended June 30,
------------------------------------
2002 2001
----------------- -----------------
Data and item processing $1,146 $1,160
Forms, supplies and equipment 266 314
Trustee for employee benefit plans 31 32
Consulting fees 48 51
Other services 91 63
----------------- -----------------
$1,582 $1,620
================= =================
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - SIX MONTHS ENDED
2002 VS. SIX MONTHS ENDED 2001
INTRODUCTION
The net income of BancShares decreased approximately $1.6 million from $5.4
million in the first six months of 2001 to $3.8 million in the first six months
of 2002, a decrease of 29.47%. This decrease resulted primarily from $4.6
million of gains on available-for-sale securities in 2001 that exceeded
securities gains of $778,000 recorded in 2002. Increased support staff and the
opening of a new home office in September 2001 resulted in increased operating
expenses for the six months ended June 30, 2002. The opening of a new branch in
January 2002 resulted in increased net interest income, increased noninterest
income, increased personnel expense and increased operating expenses for the six
months ended June 30, 2002.
Per share net income available to common shares for the first six months of 2002
was $31.75, a decrease of $13.53, or 29.88%, from $45.28 for the first six
months of 2001. The annualized return on average equity decreased to 10.84%, for
the period ended June 30, 2002, from 11.49% for the period ended June 30, 2001
and the annualized return on average assets decreased to 0.89%, for the period
ended June 30, 2002, from 0.90% for the period ended June 30, 2001.
At June 30, 2002, BancShares' assets totaled $854.1 million, a decrease of $1.1
million, or 0.13%, from the $855.2 million reported at December 31, 2001. During
this six month period, cash and due from banks increased $4.0 million, or 9.73%
from $40.8 million to $44.8 million. During this six month period, overnight
funds sold decreased $9.9 million, or 44.18% from $22.4 million to $12.5
million. During this six month period, loans increased $15.9 million, or 2.91%,
from $545.3 million to $561.2 million. During the six months ended June 30, 2002
investment securities decreased $7.9 million, or 4.03% from $204.3 million at
December 31, 2001 to $196.4 million at June 30, 2002. Total deposits decreased
$6.4 million, or 0.86% from $738.7 million at December 31, 2001 to $732.3
million at June 30, 2002. The above changes resulted principally from the
seasonal impact of the agricultural markets served by Southern.
11
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.
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 QUALITY AND PROVISION FOR LOAN LOSSES.
ACQUISITIONS AND CONSOLIDATIONS
Southern did not acquire any additional locations or close and consolidate any
existing locations in the six months ended June 30, 2002 or 2001. Southern did
open one additional location in an existing market in January 2002.
Southern has signed an agreement with RBC Centura Bank to purchase an existing
RBC Centura branch in Scotland Neck, North Carolina. This purchase, subject to
regulatory approval, is expected to be completed in the fourth quarter of 2002
and is expected to increase Southern's deposits by approximately $24.5 million
and is expected to increase Southern's loans by approximately $5.9 million.
Southern expects to pay approximately $2.8 million for this acquisition.
Southern has received regulatory approval to close and consolidate its existing
limited service office in Turkey, North Carolina. Southern has a full service
Branch located 3.5 miles West and a full service Branch located 5 miles East of
the Turkey limited service office. Southern expects to close and consolidate
this limited service office in the third quarter of 2002.
Southern has also received regulatory approval to close and consolidate its
existing limited service office in Calypso, North Carolina. Southern has a full
service Branch located 4.0 miles South and a full service Branch located 3.8
miles North of the Calypso limited service office. Southern expects to close and
consolidate this limited service office in the fourth quarter of 2002.
12
INTEREST INCOME
Interest and fees on loans decreased $1.6 million, or 7.39%, from $21.9 million
for the six months ended June 30, 2001 to $20.2 million for the six months ended
June 30, 2002. This decrease resulted from lower loan portfolio yields due to
the declining interest rate environment in 2001. Average loans for the six
months ended June 30, 2002 were $544.1 million, an increase of 6.48% from $511.0
million for the prior year period. This increase in average loans was
principally the result of growth within existing branches and one new branch
opened in Rocky Mount, North Carolina in January 2002. The yield on the loan
portfolio was 7.50% for the six months ended June 30, 2002 and 8.50% for the six
months ended June 30, 2001.
Interest income from investment securities, including U.S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities decreased $962,000 or 17.36%, and totaled $4.6 million in the six
months ended June 30, 2002 and $5.5 million in the six months ended June 30,
2001. This decrease was due to a decrease in the yield on the investment
portfolio that more than offset an increase in the volume of average investment
securities. Investment securities for the six months ended June 30, 2002 was
$204.6 million compared to $188.6 million for the same 2001 period. The increase
in volume principally resulted from deposit growth. The yield on investment
securities was 5.91% for the six-month period ended June 30, 2001 and 4.94% for
the six-month period ended June 30, 2002.
Interest income on overnight funds sold decreased $439,000, or 63.17% from
$695,000 for the six months ended June 30, 2001 to $256,000 for the six months
ended June 30, 2002. This decrease in income resulted from both a decrease in
the average overnight funds sold to $16.2 million for the six months ended June
30, 2002 from an average of $27.4 million for the six months ended June 30, 2001
and a decrease in the yield on overnight funds. The decrease in average
overnight funds resulted from an increase in loans. Average overnight funds sold
yields decreased to 1.66% for the six months ended June 30, 2002 from 5.04% for
the six months ended June 30, 2001.
Total interest income decreased $3.0 million or 10.74%, from $28.1 million for
the six months ended June 30, 2001 to $25.1 million for the six months ended
June 30, 2002. This decrease was the result of a 106 basis point decrease in
average earning asset yields that more than offset an increase of $34.5 million
in average earning assets.
As a result of the overall decline in market rates, average earning asset yields
for the six months ended June 30, 2002 decreased to 6.64% from the 7.70% yield
on average earning assets for the six months ended June 30, 2001. Average
earning assets increased from $727.0 million in the six months ended June 30,
2001 to $761.5 million in the six months ended June 30, 2002. This $34.5 million
increase in the average earning assets resulted primarily from existing branches
and the opening of one new branch in Rocky Mount, North Carolina in January
2002.
13
INTEREST EXPENSE
Total interest expense decreased $6.1 million, or 43.09%, from $14.2 million in
the six months ended June 30, 2001 to $8.1 million for the six months ended June
30, 2002. The principal reasons for this decrease were declines in the cost of
funds for both deposit and short-term borrowings. As a result of the overall
decline in market rates, BancShares' total cost of funds decreased from 4.44%
for the six months ended June 30, 2001 to 2.50% for the six months ended June
30, 2002. Average interest-bearing deposits were $612.6 million in the six
months ended June 30, 2002, an increase of $12.7 million from the $599.9 million
average in the six months ending June 30, 2001. The increase in interest-bearing
deposits was primarily the result of growth within existing branches and the
opening of one new branch in January 2002.
NET INTEREST INCOME
Net interest income before provision for loan losses was $17.0 million for the
six months ended June 30, 2002 and $13.9 million for the six months ended June
30, 2001.
The interest rate spread for the six months ended June 30, 2002 was 4.14%, an
increase of 87 basis points from the 3.27% interest rate spread for the six
months ended June 30, 2001. The increase in the interest rate spread was
primarily due to the average rate on interest-bearing liabilities repricing
downward more than the average yield on interest-earning assets which had
experienced most of its market related adjustments in 2001.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the six months ended June 30, 2002 management recorded $900,000 as a
provision for loan losses. Management made a $400,000 addition to the provision
for loan losses for the six months ended June 30, 2001. Management increased the
provision in consideration of the continued recessionary economy and the
increase in net loan charge offs for the six months ended June 30, 2002 compared
to the six months ended June 30, 2001.
During the first six months of 2002 management charged-off loans totaling
$404,000 and received recoveries of $87,000, resulting in net charge-offs of
$317,000. During the same period in 2001, $351,000 in loans were charged-off and
recoveries of $58,000 were received, resulting in net charge-offs of $293,000.
The ratio of charge-offs to average loans increased from 0.10% for the year
ended December 31, 2001 to an annualized 0.12% for the six months ended June 30,
2002. For the six months ended June 30, 2002 $900,000 was added to the allowance
for loan losses through charges to the operations of BancShares. The allowance
for loan losses accordingly increased $583,000 from December 31, 2001. The
following table presents comparative Asset Quality ratios of BancShares:
14
June 30, December 31, June 30,
2002 2001 2001
----------------- ----------------- ---------------
Ratio of annualized net loans charged off
to average loans 0.12% 0.10% 0.11%
Allowance for loan losses
to loans 1.46% 1.40% 1.36%
Non-performing loans
to loans 0.25% 0.37% 0.37%
Non-performing loans and assets
to total assets 0.17% 0.24% 0.25%
Allowance for loan losses
to non-performing loans 596.88% 381.80% 362.99%
The allowance for loan losses represented 1.46% of gross loans at June 30, 2002.
The allowance for loan losses represented 1.40% of gross loans at December 31,
2001. The allowance for loan losses to loans ratio was impacted by management's
decision to increase the provision for loan losses due to continued declines in
economic conditions, an overall increase in the commercial loan portfolio and an
overall reduction in the mortgage loan portfolio. Loans increased $15.9 million,
or 2.91% from $545.3 million at December 31, 2001 to $561.2 million at June 30,
2002. During the second quarter of 2001 BancShares sold its credit card
portfolio. The allowance related to this portfolio was $95,000 at the time of
sale in 2001. See the table above for the effect of the sale on the allowance.
The ratio of nonperforming loans to total loans, decreased from 0.37% at
December 31, 2001 to 0.25% at June 30, 2002. Nonperforming loans and assets to
total assets decreased to 0.17% at June 30, 2002 from 0.24% at December 31,
2001. The allowance for loan losses to nonperforming loans represented 596.88%
of nonperforming loans at June 30, 2002, an increase from the 381.80% at
December 31, 2001. The above performance improvements resulted primarily from a
decrease in nonperforming loans to $1.4 million at June 30, 2002 from $1.9
million at December 31, 2001. The nonperforming loans at June 30, 2002 included
$427,000 of nonaccrual loans, $950,000 of accruing loans 90 days or more past
due and no 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 $80,000 of
assets classified as other real estate at June 30, 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 June 30, 2002 allowance for loan losses to be adequate
to cover the losses and risks inherent in the loan portfolio at June 30, 2002
and will continue to monitor its portfolio and to adjust the relative level of
the allowance as needed. BancShares' had impaired loans of $282,000 at June 30,
2002 compared to $197,000 at December 31, 2001 and no additional allowances for
loan losses were required for these impaired loans.
15
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 haveserious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Management believes it has established the allowance in accordance with
generally accepted accounting principles and in consideration of the current
economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Southern's allowance for loan losses
and losses on other real estate owned. Such agencies may require Southern to
recognize adjustments to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
NONINTEREST INCOME
During the six months ended June 30, 2002, BancShares realized a $3.9 million
decrease in noninterest income primarily as a result of $4.6 million in gains on
the sales of available-for-sale investment securities in the six months ended
June 30, 2001 compared to $778,000 in gains on the sales of available-for-sale
investment securities in the six months ended June 30, 2002. In May 2001
Southern sold its $3.2 million credit card portfolio, recording a gain of
approximately $250,000 on the sale.
Service charges on deposit accounts for the six months ended June 30, 2002
increased $132,000 and other service charges and fees for the six months ended
June 30, 2002 increased $89,000 over the six months ended June 30, 2001
primarily as a result of growth within the existing branches and the opening of
one new branch in January 2002.
NONINTEREST EXPENSE
Noninterest expense increased $342,000 or 2.32%, from $14.7 million in the six
months ended June 30, 2001 to $15.1 million in the six months ended June 30,
2002.
16
This increase was primarily due to an increase in personnel expense of $520,000,
or 7.51%, from $6.9 million at June 30, 2001 to $7.4 million at June 30, 2002
and increased occupancy and furniture and equipment expense resulting
principally from the opening of a new branch in January 2002 offset by a
$432,000 reduction in intangibles amortization. The decrease in intangibles
amortization expense principally resulted from the reduction of expense related
to amortizing intangibles of $330,000 and the absence of amortization expense
related to goodwill from the adoption of Statement 142 (see note 1 to
Consolidated Financial Statements), which resulted in a reduction of $102,000
for the six months ending June 30, 2002 compared to the six months ending June
30, 2001.
INCOME TAXES
In the six months ended June 30, 2002, BancShares had income tax expense of $1.5
million, a decrease of $100,000 from $1.6 million in the prior year period. The
majority of this decrease is due to the decline in gains realized on
available-for-sale securities sales in the six months ended June 30, 2002
compared to 2001 which was offset by an increase in the effective tax rate. The
resulting estimated effective tax rate for the six months ended June 30, 2002
was 28.84% compared to 23.34% for the six months ended June 30, 2001. The
effective rate for the six months ended June 30, 2002 increased compared to the
effective rate for the six months ended June 30, 2001 primarily due to a lower
proportion of non-taxable investments. The effective tax rates in 2002 and 2001
differ from the federal statutory rate of 34.00% primarily due to tax exempt
income.
17
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - SECOND QUARTER OF
2002 VS. SECOND QUARTER OF 2001
INTRODUCTION
Net income of BancShares increased $988,000, or 83.38%, and was $1.2 million in
the three months ended June 30, 2001 and $2.2 million in the three months ended
June 30, 2002. The increase in net income for the quarter ended June 30, 2002
resulted principally from increased net interest income.
Per share net income available to common shares for the three months ended June
30, 2002 was $18.27, an increase of $8.74, or 91.71%, from $9.53 in the three
months ended June 30, 2001.
ACQUISITIONS AND CONSOLIDATIONS
Southern had no acquisitions in the three months ended June 30, 2001 or the
three months ended June 30, 2002. Southern did not close and consolidate any
locations in the three months ended June 30, 2001 or the three months ended June
30, 2002.
INTEREST INCOME
Interest and fees on loans decreased $811,000, or 7.39%, from $11.0 million for
the quarter ended June 30, 2001 to $10.2 million for the quarter ended June 30,
2002. This decrease was due to lower 2002 interest rates, which more than offset
the increase in average interest earning assets. Average loans for the quarter
ended June 30, 2002 were $550.7 million, an increase of 5.54% from $521.8
million for the prior year quarter. The yield on the loan portfolio was 8.38%
for the three months ended June 30, 2001 and 7.38% for the three months ended
June 30, 2002.
Interest income from investment securities, including U. S. Treasury and
Government obligations, obligations of state and county subdivisions and other
securities decreased $501,000, or 18.11%, from $2.8 million in the three months
ended June 30, 2001 to $2.3 million in the three months ended June 30, 2002.
This decrease was due to lower yields. Loan growth resulted in decreased average
investment securities for the quarter ended June 30, 2002 to $186.1 million as
compared to $188.5 million for the same 2001 quarter. The yield on investment
securities was 5.92% for the quarter ended June 30, 2001 and 4.92% for the
quarter ended June 30, 2002.
18
Interest income on overnight funds sold decreased $172,000, or 59.93%, from
$287,000 for the quarter ended June 30, 2001 to $115,000 for the quarter ended
June 30, 2002. This decrease in income resulted from a decrease in rates that
more than offset the effect of an increase in average overnight funds. The
volume increase resulted primarily from increased deposits. The average
overnight funds sold was $24.3 million for the quarter ended June 30, 2001
compared to an average of $25.4 million for the quarter ended June 30, 2002.
Average overnight federal funds sold yields were 1.79% for the quarter ended
June 30, 2002 down from 4.66% for the quarter ended June 30, 2001.
Total interest income decreased $1.5 million, or 10.58%, from $14.0 million for
the quarter ended June 30, 2001 to $12.5 million for the quarter ended June 30,
2002. This decrease was primarily the result of decreased average earning asset
yields.
Average earning asset yields for the quarter ended June 30, 2002 decreased to
6.60% from the 7.62% yield on average earning assets for the quarter ended June
30, 2001. Average earning assets increased from $734.6 million in the quarter
ended June 30, 2001 to $763.2 million in the quarter ended June 30, 2002. This
$28.6 million increase in the average earning assets resulted primarily from
growth within existing branches and the opening of one new branch in January
2002.
INTEREST EXPENSE
Total interest expense decreased $3.0 million or 43.86%, from $6.8 million in
the three months ended June 30, 2001 to $3.8 million for the second quarter
ended June 30, 2002. The principal reason for this decrease was lower costs of
both deposits and short-term borrowings.
NET INTEREST INCOME
Net interest income before provision for loan losses was $8.7 million for the
three months ended June 30, 2002 and $7.2 million for the three months ended
June 30, 2001.
The interest rate spread for the quarter ended June 30, 2002 was 4.23%, an
increase of 86 basis points from the 3.37% interest rate spread for the quarter
ended June 30, 2001. The increase in the interest rate spread was primarily due
to the average rate on interest-bearing liabilities repricing downward more than
the average yield on interest-earning assets which had experienced most of its
market related adjustments in 2001.
19
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
For the three months ended June 30, 2002 management recorded $450,000 as a
provision for loan losses. Management recorded a $250,000 provision for loan
losses for the quarter ended June 30, 2001. Management increased the provision
in consideration of loan growth and the continued overall recession of the
economy.
During the three months ended June 30, 2002 management charged-off loans
totaling $238,000 and received recoveries of $41,000, resulting in net
charge-offs for the three months ended June 30, 2002 of $197,000. During the
three months ended June 30, 2001, $345,000 in loans were charged-off and
recoveries of $20,000 were received, resulting in net charge-offs of $325,000
for the three months ended June 30, 2001.
NONINTEREST INCOME
During the three months ended June 30, 2002, BancShares' noninterest income
increased $120,000 principally as a result of the sale of available-for-sale
securities. Service charges on deposit accounts for the three months ended June
30, 2002 increased $38,000 and other service charges and fees for the three
months ended June 30, 2002 increased $54,000 from the three months ended June
30, 2001 primarily as a result of growth within the existing branches. The
decrease in other income for the three months ended June 30, 2002 compared to
the three months ended June 30, 2001 is primarily the result of the 2001 sale of
the credit card loan portfolio for a gain of approximately $250,000.
NONINTEREST EXPENSE
Noninterest expense including personnel, occupancy, furniture and equipment,
data processing, FDIC insurance, state assessments, printing, supplies and other
expenses, increased $124,000 or 1.67%, from $7.4 million in the three months
ended June 30, 2001 to $7.6 million in the three months ended June 30, 2002.
This increase was primarily due to an increase in personnel expense of $242,000,
or 6.93%, from $3.5 million for the quarter ended June 30, 2001 to $3.7 million
for the quarter ended June 30, 2002 and increased occupancy and furniture and
equipment expense resulting principally from the opening of one new branch in
January 2002.
20
INCOME TAXES
In the three months ended June 30, 2002, BancShares had income tax expense of
$910,000, an increase of $320,000 from $590,000 in the prior year quarter. This
increase is due primarily to increased earnings as the estimated effective tax
rate decreased to 29.52% for the quarter ended June 30, 2002 from 33.24% for the
quarter ended June 30, 2001. The effective tax rate for the quarters ended June
30, 2002 and 2001 differ from the federal statutory rate of 34.00% primarily due
to tax exempt income.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Sufficient levels of capital are necessary to sustain growth and absorb losses.
Southern Capital Trust I (the "Trust"), a statutory business trust issued $23.0
million of 8.25% Capital Securities ("the Capital Securities") in June 1998
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 are the
primary assets of the Trust. 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 June
30, 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 June 30, 2002 was 7.93%. 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 June 30, 2002, Southern's Total RBC ratio
was 13.39%. 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.
21
The regulatory capital ratios above reflect increases in assets and liabilities
from acquisitions Southern has made. Each acquisition resulted in BancShares
recording intangible assets in its consolidated financial statements, which are
deducted from total equity in the ratio calculations.
The accumulated other comprehensive income was $12.8 million at June 30, 2002,
and $10.1 million at December 31, 2001. Accumulated other comprehensive income
consists entirely of unrealized gains on securities available-for-sale, net
oftaxes. 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:
June 30,
2002
--------------
(Dollars in thousands)
Tier 1 capital $ 64,791
Total capital 75,980
Risk-adjusted assets 567,644
Average tangible assets 816,886
Tier 1 capital ratio (1) 11.41%
Total capital ratio (1) 13.39%
Leverage capital ratio (1) 7.93%
(1) These ratios exceed the minimum ratios required for a bank to be classified
as "well capitalized" as defined by the FDIC.
At June 30, 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 20.64% at June 30, 2002 and 26.33%
at December 31, 2001.
22
The Statement of Cash Flows discloses the principal sources and uses of cash
from operating, investing and financing activities for the six months ended June
30, 2002 and for the six months ended June 30, 2001. Southern has no brokered
deposits. Jumbo time deposits are considered to include all time deposits of
$100,000 or more. Southern 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
June 30, 2002 jumbo time deposits represented 13.27% of total deposits. At
December 31, 2001 jumbo time deposits represented 14.23% 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.
BancShares has obligations under existing contractual obligations that will
require payments in future periods. The following table presents aggregated
information about such payments to be made in future periods. Transaction
deposit accounts with indeterminate maturities have been classified as having
payments due in less than one year.
CONTRACTUAL OBLIGATIONS
As of June 30, 2002
(In thousands)
Payments due by period
----------------------
Less than 1 year 1-3 years 4-5 years Over 5 years Total
Deposits $673,901 $47,848 $10,527 - $732,276
Short-term borrowings 18,277 - - - 18,277
Long-term obligations - - - 23,000 23,000
Lease obligations 57 64 - - 121
- -------------------------------------------------------------------------------------------------------
Total contractual obligations $692,235 $47,912 $10,527 $23,000 $773,674
=======================================================================================================
23
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.
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.
As of June 30, 2002, BancShares had intangible assets totaling $8.3 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 six
months ended June 30, 2001 was $102,000. In accordance with Statement 142,
BancShares performed 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 hereafter.
24
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 bysale 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.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 (Statement 146), "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This Statement applies to costs associated
with an exit activity that does not involve an entity newly acquired in a
business combination or with a disposal activity covered by FASB Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. Those costs
include, but are not limited to, the following: a) termination benefits provided
to current employees that are involuntarily terminated under the terms of a
benefit arrangement that, in substance, is not an ongoing benefit arrangement or
an individual deferred compensation contract (hereinafter referred to as
one-time termination benefits), b) costs to terminate a contract that is not a
capital lease and c) costs to consolidate facilities or relocate employees. This
Statement does not apply to costs associated with the retirement of a long-lived
asset covered by FASB Statement No. 143, Accounting for Asset Retirement
Obligations. A liability for a cost associated with an exit or disposal activity
shall be recognized and measured initially at its fair value in the period in
which the liability is incurred. A liability for a cost associated with an exit
or disposal activity is incurred when the definition of a liability is met. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
impact of adoption on BancShares is not known at this time.
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.
25
OTHER MATTERS
Southern has signed an agreement with RBC Centura Bank to purchase an existing
RBC Centura Branch in Scotland Neck, North Carolina. This purchase, subject to
regulatory approval, is expected to be completed in the fourth quarter of 2002
and is expected to increase Southern's deposits by approximately $21.8 million
and isexpected to increase Southern's loans by approximately $5.6 million.
Southern expects to pay approximately $2.5 million for this acquisition.
Southern has received regulatory approval to close and consolidate its existing
limited service office in Turkey, North Carolina. Southern has a full service
Branch located 3.5 miles West and a full service Branch located 5 miles East of
the Turkey limited service office. Southern expects to close and consolidate
this limited service office in the third quarter of 2002.
Southern has also received regulatory approval to close and consolidate its
existing limited service office in Calypso, North Carolina. Southern has a full
service Branch located 4.0 miles South and a full service Branch located 3.8
miles North of the Calypso limited service office. Southern expects to close and
consolidate this limited service office in the fourth quarter of 2002.
Management is not aware of any other trends, events, uncertainties or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on BancShares' liquidity, capital resources or
other operations.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk:
Market risk reflects the risk of economic loss resulting from adverse changes in
market price and interest rates. This risk of loss can be reflected in either
diminished current market values or reduced potential net interest income in
future periods. BancShares' market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. The structure of
BancShares' loan and deposit portfolios is such that a significant increase in
the prime rate may adversely impact net interest income. Historical prepayment
experience is considered as well as management's expectations based on the
interest rate environment as of June 30, 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 investment portfolio.
26
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 June 30, 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 June 30, 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 2003 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
June 30, 2002. The overall estimated fair market value of financial instruments,
as compared to statement amounts have decreased at June 30, 2002 as compared to
December 31, 2001. Overall loan maturities are shorter, deposit maturities are
longer and overall rates have declined significantly at June 30, 2002.
(Dollars in thousands, unaudited)
Maturing in the years ended June 30
2003 2004 2005 2006 2007
Assets
Loans
Fixed rate $125,546 $32,171 $34,852 $46,894 $55,049
Average rate (%) 7.97% 8.16% 7.86% 7.86% 7.50%
Variable rate $81,790 $22,647 $16,802 $17,618 $20,513
Average rate (%) 6.34% 6.24% 5.80% 6.14% 5.96%
Investment securities
Fixed rate $77,198 $58,541 $1,697 $1,629 $953
Average rate (%) 4.70% 3.60% 8.48% 8.28% 8.18%
Liabilities
Savings and interest
bearing checking
Fixed rate $242,908 - - - -
Average rate (%) 0.90% - - - -
Certificates of deposit
Fixed rate $300,608 $24,679 $20,881 $9,813 -
Average rate (%) 2.70% 3.63% 4.24% 5.50% -
Variable rate $3,944 $2,288 - - -
Average rate (%) 2.13% 2.23% - - -
Long-term debt
Fixed rate - - - - -
Average rate (%) - - - - -
Thereafter Total Fair Value
Assets
Loans
Fixed rate $90,101 $384,613 $386,098
Average rate (%) 7.75% 7.86%
Variable rate $17,204 $176,574 $176,574
Average rate (%) 5.95% 6.17%
Investment securities
Fixed rate $35,495 $175,513 $197,038
Average rate (%) 5.77% 4.64%
Liabilities
Savings and interest
bearing checking
Fixed rate - $242,908 $242,908
Average rate (%) - 0.90%
Certificates of deposit
Fixed rate - $355,981 $365,243
Average rate (%) - 2.94%
Variable rate - $6,232 $6,232
Average rate (%) - 2.17%
Long-term debt
Fixed rate 23,000 $23,000 $23,230
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.
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.
27
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 June 30, 2002 and December 31,
2001amounted to $2.3 million and $2.1 million. Outstanding commitments to lend
at June 30, 2002 and December 31, 2001 were $158.2 million and $154.6 million.
Undisbursed advances on customer lines of credit at June 30, 2002 and December
31, 2001 were $48.6 million and $45.9 million. Outstanding standby letters of
credit and commitments to lend at June 30, 2002 generally expire within one
year, whereas commitments associated with undisbursed advances on customer lines
of credit at June 30, 2002 generally expire within one to five years.
At June 30, 2002, commitments to sell loans amounted to $2.6 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.
28
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 June 30, 2002, which reflected a one year
negative interest-sensitivity gap of $268.7 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 June 30, 2002 as compared to December 31, 2001.
INTEREST-SENSITIVITY ANALYSIS
(Dollars in thousands, unaudited)
June 30, 2002
Non-Rate
1-90 91-180 181-365 Sensitive
Days Days Days & Over
Sensitive Sensitive Sensitive 1 year Total
Earning Assets:
Loans $ 138,660 $ 40,611 $ 28,065 $ 353,851 $561,187
Investment securities 22,148 19,729 35,321 98,315 175,513
Temporary investments 12,485 - - - 12,485
--------------- --------------- -------------- ------------ ----------------
Total earning assets $ 173,293 $ 60,340 $ 63,386 $ 452,166 $749,185
=============== =============== ============== ============ ================
Interest-Bearing Liabilities:
Savings and core time deposits 318,441 74,537 70,504 44,437 507,919
Time deposits of $100,000 and more 33,763 24,889 25,326 13,224 97,202
Short-term borrowings 18,277 - - 18,277
-
Long-term obligations - - - 23,000 23,000
--------------- -------------- ------------- ----------- ----------------
Total interest bearing
liabilities $ 370,481 $ 99,426 $ 95,830 $ 80,661 $646,398
=============== ============== ============= =========== ================
Interest sensitivity gap $(197,188) $ (39,086) $ (32,444) $371,505 $102,787
=============== ============== ============= =========== ================
Cumulative interest sensitivity gap $(197,188) $(236,274) $(268,718) $102,787 $102,787
=============== ============== ============= =========== ================
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.
29
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 17, 2002 the annual meeting of shareholders was held. Seventeen
Directors of BancShares were elected for terms of one year or until their
respective successors are duly elected and qualified and KPMG LLP was ratified
as BancShares' independent accountants for 2002.
Matter For Against Withheld Abstentions Broker Non-Votes
ELECTION OF DIRECTORS:
Bynum R. Brown 96,049 0 775 0 0
William H. Bryan 96,049 0 775 0 0
Robert J. Carroll 96,049 0 775 0 0
Hope H. Connell 96,026 0 798 0 0
J. Edwin Drew 96,049 0 775 0 0
Moses B. Gilliam, Jr. 96,049 0 775 0 0
LeRoy C. Hand, Jr. 96,049 0 775 0 0
Frank B. Holding 96,026 0 798 0 0
M. J. McSorley 96,049 0 775 0 0
W. Hunter Morgan 96,049 0 775 0 0
John C. Pegram, Jr. 96,049 0 775 0 0
Charles I. Pierce, Sr. 96,049 0 775 0 0
W. A. Potts 96,049 0 775 0 0
Charles L. Revelle, Jr. 96,049 0 775 0 0
Charles O. Sykes 96,049 0 775 0 0
John N. Walker 96,049 0 775 0 0
R. S. Williams 96,049 0 775 0 0
RATIFICATION OF INDEPENDENT ACCOUNTANTS:
Matter For Against Withheld Abstentions Broker Non-Votes
KPMG LLP 96,149 23 0 652 0
30
Item 6 - Exhibits:
3.1 Certificate of Incorporation and Certificate of Amendment to the Certificate
of Incorporation of the Registrant (filed as exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-52107) filed May 7, 1998 and
incorporated herein by reference)
3.2 Registrant's Bylaws (filed as exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (No.33-52107) filed May 7, 1998 and incorporated
herein by reference)
4 Southern Bank and Trust Company Indenture dated February 27, 1971 (filed as
exhibit 4 to the Registrant's Registration Statement on Form S-14
(No. 2-78327) filed July 7, 1982 and incorporated herein by reference)
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.
August 12, 2002 /s/ John C. Pegram, Jr.
- --------------- ----------------------------------------
Date John C. Pegram, Jr.,
President and Chief Executive Officer
August 12, 2002 /s/ David A. Bean
- ---------------- ----------------------------------------
Date David A. Bean,
Secretary, Treasurer and Chief Financial
Officer
CERTIFICATION
(Pursuant to 18 U.S.C. Section 1350)
The undersigned hereby certifies that (i) the foregoing Quarterly Report on Form
10-Q filed by Southern BancShares (N.C.), Inc. (the "issuer") for the quarter
ended June 30, 2002, fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 and (ii) the information contained
in that Report fairly presents, in all material respects, the financial
condition and results of operations of the issuer on the dates and for the
periods presented therein.
Date: August 12, 2002 /s/ John C. Pegram, Jr.
----------------------------------------
John C. Pegram, Jr.,
President and Chief Executive Officer
Date: August 12, 2002 /s/ David A. Bean
-----------------------------------------
David A. Bean,
Secretary, Treasurer and Chief Financial
Officer