10-K 1 d10k.htm FORM 10-K Form 10-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2004

 

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   (I.R.S. Employer      
of incorporation or organization)           Identification Number)

 

116 East Main Street

Mount Olive, North Carolina 28365

(Address of Principal Executive Offices, Zip Code)

 

(919) 658-7000

(Registrant’s Telephone Number, including Area Code)

 


 

     Securities registered pursuant to:     
         Section 12(b) of the Act:    8.25% Junior Subordinated Debentures
         Section 12(g) of the Act:    Series B non-cumulative preferred stock, no par value

 


 

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 by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨     No x

 

The aggregate market value of the Registrant’s common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $47.2 million. (There is no established market, published quotes or reported prices for the Registrant’s common stock. The market value of shares held by nonaffiliates has been calculated based on prices known to management of Registrant in privately negotiated transactions.)

 

The number of shares outstanding of the Registrant’s common stock as of March 07, 2004: Common Stock, $5.00 par value—109,452 shares

 

Portions of the Registrant’s definitive Proxy Statement dated March 22, 2005 for the 2005 Annual Meeting of Shareholders are incorporated by reference into Part III.

 



CROSS REFERENCE INDEX

 

              Page
Number


 

PART I

   Item 1   Business    3  
     Item 2   Properties    8  
     Item 3   Legal Proceedings    33  
     Item 4   Submission of Matters to a Vote of Security Holders    None  

PART II

   Item 5   Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities    34  
     Item 6   Selected Financial Data    12  
     Item 7   Management’s Discussion and Analysis of Financial Condition and Results of Operations    9  
     Item 7A   Quantitative and Qualitative Disclosures about Market Risk    23  
     Item 8   Financial Statements and Supplementary Data       
         Quarterly Financial Summary for 2004 and 2003    32-33  
         Reports of Independent Registered Public Accounting Firms    37-38  
         Consolidated Balance Sheets as of December 31, 2004 and 2003    39  
         Consolidated Statements of Income and Comprehensive Income       
         for the years ended December 31, 2004, 2003 and 2002    40  
         Consolidated Statements of Shareholders’ Equity for the years       
         ended December 31, 2004, 2003 and 2002    41  
         Consolidated Statements of Cash Flows for the years ended       
         December 31, 2004, 2003 and 2002    42  
         Notes To Consolidated Financial Statements    43-64  
     Item 9   Changes in and Disagreements with Accountants on Accounting       
         and Financial Disclosures    None  
     Item 9A   Controls and Procedures    36  
     Item 9B   Form 8-K Required Disclosures Not Reported    None  

PART III

   Item 10   Directors and Executive Officers of Registrant      *
     Item 11   Executive Compensation      *
     Item 12   Security Ownership of Certain Beneficial Owners and Management       
         and Related Stockholder Matters      *
     Item 13   Certain Relationships and Related Transactions      *
     Item 14   Principal Accountant Fees and Services      *

PART IV

   Item 15   Exhibits and Financial Statement Schedules       
           (1)   Financial Statements (see Item 8 for Reference)       
           (2)   Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable, except as referred to in Item 8       
           (3)   The Exhibits listed in the Exhibit Index are being filed or furnished with or incorporated into this report    67  

SIGNATURES

        65-66  

EXHIBIT INDEX

        67  

*   Information required by Item 10 is incorporated herein by reference to the information that appears under the captions “Section 16(a) Beneficial Ownership Reporting Compliance,” “PROPOSAL 1: ELECTION OF DIRECTORS”, “Executive Officers”, “Audit Committee—Function” and “Audit Committee—Members” on pages 4, 5, 6 and 10 of Registrant’s definitive Proxy Statement dated March 22, 2005, and the information that appears under the captions “Code of Ethics”, “Audit Committee Financial Expert” and “Procedures for Shareholder Recommendations to Nominating Committee” on pages 35 of this report.

 

     Information required by Item 11 is incorporated herein by reference to the information that appears under the captions “Director Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Executive Compensation” on pages 5, 8 and 10 of the Registrant’s definitive Proxy Statement dated March 22, 2005.

 

     Information required by Item 12 is incorporated herein by reference to the information that appears under the caption “Beneficial Ownership of Voting Securities” on pages 2 through 4 of the Registrant’s definitive Proxy Statement dated March 22, 2005.

 

     Information required by Item 13 is incorporated herein by reference to the information that appears under the caption “Transactions with Related Parties” on page 12 and 13 of the Registrant’s definitive Proxy Statement dated March 22, 2005.

 

     Information required by Item 14 is incorporated herein by reference to the information that appears under the caption “Services and Fees During 2004” on page 14 of the Registrant’s definitive Proxy Statement dated March 22, 2005.

 

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BUSINESS

 

General.    Southern BancShares (N.C.), Inc. (hereinafter, with all of its subsidiaries, referred to as “BancShares” or “Registrant”), is a bank holding company which was organized during 1986 as the successor to Southern BancShares (N.C.), Inc., a North Carolina corporation (“SBS”). SBS was formed in 1982 as the parent company of Southern Bank and Trust Company (“Southern”). During 1986, SBS was merged into BancShares to effect the reincorporation of Southern’s parent company in Delaware.

 

Southern is BancShares’ principal operating subsidiary and is currently engaged in commercial banking through 53 offices located primarily in eastern North Carolina.

 

Bancshares’ executive offices are located at 116 East Main Street, Mount Olive, North Carolina 28365, and its telephone number is (919) 658-7000.

 

BancShares’ principal assets are its investments in and receivables from its bank subsidiary and its investment securities portfolio. Its primary sources of income are dividends from its bank subsidiary and interest income on its investment securities portfolio. Certain laws and regulations restrict the ability of Southern to transfer funds to BancShares in the form of cash dividends or loans. All significant activities of BancShares and its subsidiaries are banking related so that BancShares operates within one industry segment. Neither BancShares nor its subsidiaries has any foreign operations.

 

Services.    Southern provides a full range of banking and financial services to individuals, small and medium-sized businesses and governmental units located in its banking markets, including regular and interest checking accounts, money market, savings and time deposit accounts, personal and business loans and a variety of other services incidental to commercial banking. Southern has a wholly-owned subsidiary, Goshen, Inc., which acts as a trustee and agent for credit life and credit accident and health insurance written in connection with loans made by Southern.

 

Employees.    All of BancShares’ Officers serve as Officers of Southern. BancShares has no employees of its own. As of December 31, 2004, Southern employed 406 full-time employees (including executive officers) and 34 part-time employees. Southern is not a party to any collective bargaining agreement with its employees and it considers its relations with its employees to be good.

 

Supervision and Regulation.    The business and operations of BancShares and Southern are subject to extensive federal and state governmental regulation and supervision.

 

BancShares is a bank holding company registered with the Federal Reserve Board (the “FRB”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). It is subject to supervision and examination by, and the regulations and reporting requirements of, the FRB. Under the BHCA, a bank holding company’s activities are limited to banking, managing or controlling banks, or engaging in any other activities which the FRB determines to be closely related and a proper incident to banking or managing or controlling banks. The internal affairs of BancShares, including the rights of its shareholders, are governed by Delaware law and by its Articles of Incorporation and Bylaws. BancShares files periodic reports under the Securities Exchange Act of 1934 and is subject to the jurisdiction of the Securities and Exchange Commission.

 

The BHCA prohibits a bank holding company from acquiring direct or indirect control of more than 5.0% of the outstanding voting stock, or substantially all of the assets, of any financial institution, or merging or consolidating with another bank holding company or savings bank holding company, without prior approval of the FRB. Additionally, the BHCA generally prohibits bank holding companies from engaging in, or acquiring ownership or control of more than 5.0% of the outstanding voting stock of any company that engages in a non-banking activity unless that activity is determined by the FRB to be closely related and a proper incident to managing or controlling banks.

 

There are a number of obligations and restrictions imposed by law on a bank holding company and its insured bank subsidiaries that are designed to minimize potential loss to depositors and the FDIC insurance funds. For example, if a bank holding company’s insured bank subsidiary becomes “undercapitalized,” the bank holding company is required to guarantee (subject to certain limits) the subsidiary’s compliance with the terms of any capital restoration plan filed with its

 

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federal banking agency. A bank holding company is required to serve as a source of financial strength to its bank subsidiaries and to commit resources to support those banks in circumstances where it otherwise might not do so, absent such policy. Under the BHCA, the FRB may require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary if the FRB determines that the activity or control constitutes a serious risk to the financial soundness and stability of a bank subsidiary of the bank holding company.

 

Regulation of Southern.    Southern is an insured, state-chartered bank. Southern’s deposits are insured by the FDIC’s Bank Insurance Fund, and is subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Commissioner of Banks (the “Commissioner”). Southern is not a member of the Federal Reserve System.

 

As an insured bank, Southern is prohibited from engaging as a principal in an activity that is not permitted for national banks unless (i) the FDIC determines that the activity would pose no significant risk to the deposit insurance fund and (ii) Southern is, and continues to be, in compliance with all applicable capital standards. Southern is also prohibited from directly acquiring or retaining any equity investment of a type or in an amount not permitted for national banks.

 

The FDIC and the Commissioner regulate all areas of Southern’s business, including its reserves, loans, mergers, the payment of dividends, and other aspects of its operations. The regulators conduct regular examinations of Southern, and Southern must furnish periodic reports to its regulators containing detailed financial and other information regarding its affairs. The federal and state regulators have broad powers to enforce laws and regulations that apply to Southern and to require corrective action of conditions that affect its safety and soundness. Among others, these powers include issuing cease and desist orders, imposing civil penalties, removing officers and directors, and the ability otherwise to intervene in the operation and management of Southern if examinations of and reports filed by Southern reflect the need to do so.

 

Even though it is not a member of the Federal Reserve System, the business of Southern is influenced by the monetary and fiscal policies of the FRB. The actions and policy directives of the FRB determine to a significant degree the cost and the availability of funds obtained from money market sources for lending and investing and also influence, directly and indirectly, the rates of interest paid by Southern on time and savings deposits. Additionally, Southern’s earnings are affected by general economic conditions, management policies, changes in state and Federal legislation and actions of various regulatory authorities, including those referred to above.

 

The following paragraphs summarize some of the other significant statutes and regulations that affect BancShares and Southern, but they are not a complete discussion of all the laws that affect their business. Each paragraph is qualified in its entirety by reference to the particular statutory or regulatory provision or proposal being described.

 

Gramm-Leach-Bliley Act.    The federal Gramm-Leach-Bliley Act (the “GLB Act”) adopted by Congress during 1999 has dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them.

 

The GLB Act permits bank holding companies to become “financial holding companies” and, in general (i) expands opportunities to affiliate with securities firms and insurance companies; (ii) overrides certain state laws that would prohibit certain banking and insurance affiliations; (iii) expands the activities in which banks and bank holding companies may participate; (iv) requires that banks and bank holding companies engage in some activities only through affiliates owned or managed in accordance with certain requirements; and (v) reorganizes responsibility among various federal regulators for oversight of certain securities activities conducted by banks and bank holding companies.

 

Among its other provisions, the GLB Act also contains extensive customer privacy protection provisions which require banks to adopt and implement policies and procedures for the protection of the financial privacy of their customers, including procedures that allow customers to elect that certain financial information not be disclosed to certain persons. Under these provisions, a bank must provide to its customers, at the inception of the customer relationship and annually thereafter, the Bank’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The GLB Act provides that, except for certain limited exceptions, a bank may not provide such personal information to unaffiliated third parties unless the bank discloses to the customer that such information may be so

 

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provided and the customer is given the opportunity to opt out of such disclosure. A bank may not disclose to a non- affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLB Act permits states to adopt customer privacy protections that are stricter than those contained in the Act, and it makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

 

BancShares has not chosen to become a “financial holding company,” and to date it has not engaged in any new activity authorized as a result of the GLB Act. The GLB Act has expanded opportunities for Southern to provide other services and obtain other revenues in the future. However, this expanded authority also may present it with new challenges as its larger competitors are able to expand their services and products into areas that are not feasible for smaller, community oriented financial institutions.

 

Payment of Dividends.    Under current law, BancShares is authorized to pay dividends such as are declared by its Board of Directors, provided that no such distribution results in its insolvency on a going concern or balance sheet basis. However, BancShares is a legal entity separate and distinct from Southern, and its principal source of funds with which it can pay dividends to its shareholders is dividends it receives from Southern. Therefore, BancShares’ ability to pay dividends effectively is subject to the same limitations that apply to Southern.

 

In general, Southern may pay dividends only from its undivided profits. However, if its surplus is less than 50 percent of its paid-in capital stock, then Southern’s directors may not declare any cash dividend until it has transferred from undivided profits to surplus 25 percent of its undivided profits or any lesser percentage necessary to raise its surplus to an amount equal to 50 percent of its paid-in capital stock.

 

Under federal law, and as an insured bank, Southern is prohibited from making any capital distributions, including paying a cash dividend, if it is, or after making the distribution it would become, “undercapitalized” as that term is defined in the Federal Deposit Insurance Act (the “FDIA”). Additionally, if in the opinion of the FDIC an insured bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the FDIC may require, after notice and hearing, that the bank cease and desist from that practice. The federal banking agencies have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The federal agencies have issued policy statements which provide that insured banks generally should only pay dividends out of current operating earnings, and under the FDIA no dividend may be paid by an FDIC-insured bank while it is in default on any assessment due the FDIC. The payment of dividends by Southern also may be affected or limited by other factors, such as requirements that its regulators have the authority to impose to maintain its capital above regulatory guidelines.

 

Capital Adequacy.    BancShares and Southern each is required to comply with the capital adequacy standards established by the FRB in the case of BancShares, and by the FDIC in the case of Southern. The FRB and FDIC have promulgated risk-based capital and leverage capital guidelines for determining the adequacy of the capital of a bank holding company or a bank, and all applicable capital standards must be satisfied for a bank holding company or a bank to be considered in compliance with these capital requirements.

 

Under the risk-based capital measure, the minimum ratio (“Total Capital Ratio”) of an entity’s total capital (“Total Capital”) to its risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%. At least half of Total Capital must be composed of common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, qualifying non-cumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets (“Tier 1 Capital”). The remainder (“Tier 2 Capital”) may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of loan loss reserves. A bank or bank holding company that does not satisfy minimum capital requirements may be required to adopt and implement a plan acceptable to its federal banking regulator to achieve an adequate level of capital.

 

Under the leverage capital measure, the minimum ratio (the “Leverage Capital Ratio”) of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, is 3.0% for entities that meet certain specified criteria, including having the highest regulatory rating. All others generally are required to maintain an additional cushion of 100 to 200 basis points above the stated minimum. The guidelines also provide that banks experiencing internal growth or making

 

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acquisitions will be expected to maintain strong capital positions substantially above the minimum levels without significant reliance on intangible assets, and a bank’s “Tangible Leverage Ratio” (deducting all intangibles) and other indicia of capital strength also will be taken into consideration by banking regulators in evaluating proposals for expansion or new activities.

 

The following table lists Southern’s capital ratios at December 31, 2004:

 

     Minimum Required
Ratio


    Required Ratio To Be
Well Capitalized


    Southern’s Ratio at
December 31, 2004


 

Risk-based capital ratios:

                  

Tier I capital to risk-weighted assets

   4.00 %   6.00 %   11.32 %

Total capital to risk-weighted assets

   8.00 %   10.00 %   13.45 %

Leverage capital ratio

   3.00 %   5.00 %   7.39 %

 

The FRB and the FDIC also consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of an entity’s capital adequacy. The bank regulatory agencies’ methodology for evaluating interest rate risk requires banks with excessive interest rate risk exposure to hold additional amounts of capital against their exposure to losses resulting from that risk. The regulators also require banks to incorporate market risk components into their risk-based capital. Under these market risk requirements, capital is allocated to support the amount of market risk related to a bank’s trading activities.

 

Capital categories are determined solely for the purpose of applying “prompt corrective action” rules described below which have been adopted by the various federal banking regulators, and they do not necessarily constitute an accurate representation of a bank’s overall financial condition or prospects for other purposes. A failure to meet capital guidelines could subject a bank holding company or bank to a variety of enforcement remedies under those rules, including the issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on the taking of brokered deposits, and certain other restrictions on its business. As described below, substantial additional restrictions can be imposed on banks that fail to meet applicable capital requirements.

 

Prompt Corrective Action.    Current federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”), and it is required to take certain mandatory supervisory actions, and is authorized to take other discretionary actions, with respect to banks in the three undercapitalized categories. The severity of any actions taken will depend upon the capital category in which a bank is placed. Generally, subject to a narrow exception, current federal law requires the FDIC to appoint a receiver or conservator for a bank that is critically undercapitalized.

 

Under the FDIC’s rules implementing the prompt corrective action provisions, an insured, state-chartered bank that (1) has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or greater, and (2) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC, is considered to be “well capitalized.” A bank with a Total Capital Ratio of 8.0% or greater, a Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater, is considered to be “adequately capitalized.” A bank that has a Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than 4.0%, or a Leverage Ratio of less than 4.0%, is considered to be “undercapitalized.” A bank that has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio of less than 3.0%, is considered to be “significantly undercapitalized,” and a bank that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.” For purposes of these rules, the term “tangible equity” includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards, plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets (with various exceptions). A bank may be deemed to be in a capitalization category lower than indicated by its actual capital position if it receives an unsatisfactory examination rating.

 

A bank that is categorized as “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to submit an acceptable capital restoration plan to the FDIC. An “undercapitalized” bank also is generally prohibited from increasing its average total assets, making acquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In

 

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addition, the FDIC has authority with respect to any “undercapitalized” bank to take any of the actions it is required to or may take with respect to a “significantly undercapitalized” bank if it determines that those actions are necessary to carry out the purpose of the law. On December 31, 2004, Southern had capital sufficient to qualify as “well capitalized.”

 

Reserve Requirements.    Under regulations of the FRB, all FDIC-insured banks must maintain average daily reserves against their transaction accounts. No reserves are required to be maintained on the first $7.0 million of transaction accounts, but reserves equal to 3.0% must be maintained on the aggregate balances of those accounts between $7.0 million and $47.6 million, and reserves equal to 10.0% must be maintained on aggregate balances in excess of $47.6 million. Those percentages are subject to adjustment by the FRB. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of Southern’s interest-earning assets.

 

FDIC Insurance Assessments.    The FDIC currently uses a risk-based assessment system that takes into account the risks attributable to different categories and concentrations of assets and liabilities for purposes of calculating deposit insurance assessments to be paid by insured banks. The risk-based assessment system categorizes banks as “well capitalized,” “adequately capitalized” or “undercapitalized.” These three categories are substantially similar to the prompt corrective action categories described above, with the “undercapitalized” category including banks that are “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized” for prompt corrective action purposes. Banks also are assigned by the FDIC to one of three supervisory subgroups within each capital group, with the particular supervisory subgroup to which a bank is assigned being based on a supervisory evaluation provided to the FDIC by the Bank’s primary federal banking regulator and information which the FDIC determines to be relevant to the Bank’s financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the Bank’s state supervisor). A different insurance assessment rate (ranging from zero to 27 basis points) applies to each of the nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups). A bank’s assessment rate is determined based on the capital category and supervisory subgroup to which it is assigned.

 

The FDIC may terminate a bank’s deposit insurance upon a finding that the bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

 

The FDIC is charged with the responsibility of maintaining the adequacy of the Bank Insurance Fund and the Savings Association Insurance Fund, and the amounts paid by banks for deposit insurance is influenced not only by the bank’s capital category and supervisory subgroup but also by the adequacy of the insurance fund at any time. FDIC insurance assessments could be increased substantially in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the insurance fund.

 

Restrictions on Transactions with Affiliates.    Southern is subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

 

    a bank’s loans or extensions of credit to, or investment in, its affiliates;

 

    assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve Board;

 

    the amount of loans or extensions of credit by a bank to third parties which are collateralized by the securities or obligations of the bank’s affiliates; and

 

    a bank’s guarantee, acceptance or letter of credit issued on behalf of one of its affiliates.

 

For purposes of Section 23A, BancShares and any other company or entity controlled by or under common control with BancShares, will be treated as an affiliate of Southern.

 

The total amount of the above transactions by Southern is limited in amount, as to any one affiliate, to 10% of Southern’s capital and surplus and, as to all affiliates combined, to 20% of Southern’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. Southern also must comply with other provisions of Section 23A designed to avoid the taking of low-quality assets from an affiliate.

 

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Southern is also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits a bank from engaging in the above transactions with its affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

 

Federal law also places restrictions on Southern’s ability to extend credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

 

USA Patriot Act of 2001.    The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Act is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institutions of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws which require various new regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The Act has required financial institutions to adopt new policies and procedures to combat money laundering, and it grants the Secretary of the Treasury broad authority to establish regulations and impose requirements and restrictions on financial institutions’ operations.

 

Community Reinvestment.    Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the federal bank regulatory agencies, an insured bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for banks, nor does it limit a bank’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the federal bank regulatory agencies, in connection with their examination of insured banks, to assess Southern’s records of meeting the credit needs of its communities, using the ratings of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of certain applications by those banks. All insured banks are required to make public disclosure of their CRA performance ratings. Southern received an “outstanding” rating in its most recent CRA examination.

 

Sarbanes-Oxley Act of 2002.    The Sarbanes-Oxley Act of 2002 (the “SOX Act”) represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. Among other requirements, the SOX Act established: (1) new requirements for audit committees of listed companies, including independence, expertise, and responsibilities; (2) additional responsibilities regarding financial statements for the chief executive officers and chief financial officers of reporting companies; (3) new standards for auditors and regulation of audits; (4) increased disclosure and reporting obligations for reporting companies regarding various matters relating to corporate governance, and (5) new and increased civil and criminal penalties for violation of the securities laws.

 

Statistical Data.    Certain statistical disclosures for bank holding companies required by SEC Guide 3 regulations are included in the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

PROPERTIES

 

BancShares does not own or lease any real property. Except for five tracts of land that are leased and upon which are constructed leasehold improvements for the conduct of its banking business, Southern owns all of the real property utilized in its operations.

 

Southern’s home office is located at 116 East Main Street, Mount Olive, North Carolina. All of Southern’s offices are in North Carolina. At December 31, 2004 there were 53 Southern offices.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

This discussion provides information concerning changes in the consolidated financial condition and results of operations of Southern BancShares (N.C.), Inc. (“BancShares”) and its subsidiary, Southern Bank and Trust Company (“Southern”), for 2004, 2003 and 2002. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements, related notes and selected financial data presented elsewhere herein.

 

Summary

 

BancShares’ earnings and cash flows are primarily derived from the commercial banking activities conducted by Southern. Southern’s commercial banking activities include commercial and consumer lending, deposit and cash management products and various other financial management products and services typically associated with commercial banking. Southern gathers interest-bearing and noninterest-bearing deposits from retail and commercial customers and gathers supplemental short-term funding through various non-deposit sources. The liquidity generated from these funding sources is primarily invested in interest-earning assets consisting of various types of loans, investment securities, overnight funds sold investments and the banking premises and equipment used in the delivery of financial services.

 

Numerous factors influence customer demand for Southern’s deposit and loan products including the overall economy within Southern’s markets and the overall level of financial services competition within those markets. During 2004 and 2003, overall economic uncertainty and very low interest rates managed by the Federal Reserve significantly impacted customer demand for both deposit and loan products. The low interest rate market caused some customers to choose shorter term deposit products including short-term certificates of deposit, transaction, savings and money market accounts. The low interest rate market also provided many customers with an opportunity to refinance existing loans and the ability to either reduce their overall loan requirements or to increase their loan requirements at much lower interest rates.

 

The overall strength of the economy also influences the quality and collectibility of loans and the level of customer bankruptcies. Southern utilizes various asset and liability management tools to minimize the potential adverse impact of economic trends and to maximize opportunities provided by favorable economic trends.

 

Financial institutions typically focus their strategic planning and operating goals on maximizing profitability and the improvement of the return on average assets and return on average shareholders equity performance profitability measures. BancShares has historically placed significant emphasis on asset quality, liquidity and capital conservation, even when those goals may ultimately be detrimental to current period earnings performance as reflected by the return on average assets and return on average shareholders equity performance measures so, BancShares’ return on average assets and return on average equity has historically compared unfavorably to financial institutions of similar size.

 

BancShares strategic analysis of its corporate and competitive strengths indicate many opportunities for growth and expansion of financial services within its markets. Southern operates in diverse eastern North Carolina geographic markets that offer opportunities to expand varying types of services to existing customers as well as opportunities to expand market share through strategic acquisitions of branch locations from competitor financial institutions. Southern also believes that, through superior customer service, there are opportunities to increase earnings performance by attracting customers of its financial competitors.

 

BancShares focuses on mitigating, where possible, growth and profitability risks. BancShares has limited control of risks such as economic, competitive and regulatory risks. Southern considers overall economic risk to be its greatest risk area. Primarily, economic risks of recession, rapid changes in market interest rates and significant increases in inflation are of the most concern to Management. Southern’s smaller asset size and limited capital resources, as compared to its primary market financial service competitors, require significant and constant Management attention to all areas of economic risk.

 

An analysis of BancShares’ overall financial condition and growth can be made by examining the changes and trends in the interest-earning asset and interest-bearing components in the following tables, discussions, consolidated financial statements and notes to the consolidated financial statements. Tables and discussions are also presented detailing the impact of branch acquisitions, capital position, loan loss experience, allowances for loan losses, non-interest expenses and non-interest income.

 

9


Consolidated net income was $5.8 million for 2004 compared to $8.1 million for 2003 and $9.1 million for 2002. Net income per share for the year ended December 31, 2004 totaled $49.12 compared to $68.72 in 2003 and $76.77 in 2002. Return on average assets totaled 0.56 percent during 2004, 0.85 percent during 2003 and 1.05 percent during 2002. Table 1 provides a five year summary of financial information for BancShares.

 

BancShares experienced an 28.06 percent decrease in net income during 2004, compared to 2003. The principal core earnings cause of this decrease was reduced net interest income created by the low interest rate market managed by the Federal Reserve during 2004 that resulted in total interest earning assets continuing to reprice downward faster than interest bearing liabilities. The resulting decrease in the interest rate spread reduced 2004 net interest earnings significantly. In addition, in 2004, income, considered to be noncore earnings, consisting of gains on sales of available-for-sale securities and gains on the sales of mortgage loans, totaled $871,000, a 67.34 percent decrease from $2.7 million for such noncore 2003 income.

 

BancShares experienced an 11.52 percent decrease in net income during 2003, compared to 2002. The principal cause of this decrease was reduced net interest income created by declining interest rate market managed by the Federal Reserve during 2003 that resulted in interest earning assets repricing downward faster than interest bearing liabilities. In addition, in 2003, income considered to be noncore earnings and consisting of gains on sales of available-for-sale securities and gains on the sales of mortgage loans, totaled $2.7 million, a 4.82 percent decrease from $2.9 million for such noncore 2002 income.

 

In 2002, as a result of the overall economy, there were greater opportunities for management to realize earnings from the sale of securities. In 2003, as a result of the significantly increased mortgage financing and refinancing resulting from the Federal Reserve’s maintaining the lowest interest rates in several decades, there were significantly increased opportunities for management to profitably sell mortgage loans. In 2004 the Federal Reserve began to slowly increase market interest rates resulting in significantly decreased mortgage financing, refinancing and opportunities for management to profitably sell mortgage loans.

 

An analysis of BancShares’ financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities. Such an analysis also requires an evaluation of noninterest income and noninterest expenses. In recent years, increasing total noninterest income has been a significant focus for BancShares. The introduction of new revenue sources and modifications to existing products and services has allowed service related noninterest income to grow.

 

In recent years the recognition of gains and losses on sales of mortgage loans and the recognition of gains and losses on sales of available-for-sale securities has also had a significant impact on total noninterest income, although management does not consider these sources of noninterest income to be a core source of revenues for BancShares. The sale of mortgage loans also results in the recognition of mortgage servicing rights (MSRs) income. MSRs represent the estimated value of the right to service mortgage loans for others. Capitalization of MSRs occurs when the underlying mortgage loans are sold and the servicing rights for the mortgage loans sold are retained. Capitalized MSRs are amortized into income over the projected servicing life of the underlying loans.

 

Franchise expansion has also contributed to the growth in noninterest income, but has also resulted in large increases in noninterest expense, especially personnel-related costs, occupancy expenses, equipment expenses and intangible asset amortization expenses. In 2004 one denovo branch was opened in the second quarter and two branch acquisitions were completed in the third quarter. In 2003 one denovo branch was opened in the first quarter and one branch acquisition was completed in the fourth quarter. Management continues to look for growth opportunities offered though acquisition opportunities and to plan for denovo branch expansion. The acquisition of existing branches from other financial institutions also results in the payment of acquisition premiums which are allocated to non-earning assets or charged to operating earnings over time.

 

Members of the Holding family, including Frank B. Holding who serves as a Director and as Chairman of BancShares’ Executive Committee, have been actively involved in the management of BancShares. Currently, various members of the Holding family control an aggregate of 70.06% of BancShares’ common stock. Southern is party to contracts with an affiliated financial institution, First-Citizens Bank & Trust Company, Raleigh, North Carolina, pursuant to which Southern is provided with various management consulting, support and data processing services. See “Beneficial Ownership of Voting Securities” and “Transactions with Related Parties” in Note 15, Related Parties in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS contained in this report.

 

10


CRITICAL ACCOUNTING POLICIES

 

BancShares’ significant accounting policies are set forth in note 1 of the consolidated financial statements. Of these significant accounting policies, BancShares considers its policy regarding the allowance for loan losses to be its primary 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.

 

11


Table 1

SELECTED FINANCIAL DATA

 

     December 31,

 
     2004

    2003

    2002

    2001

    2000

 
     (Dollars in thousands, except per share data)  

Summary of Operations

                                        

Interest income

   $ 45,326     $ 46,083     $ 49,422     $ 54,928     $ 49,807  

Interest expense

     12,260       12,932       15,592       25,980       24,932  
    


 


 


 


 


Net interest income

     33,066       33,151       33,830       28,948       24,875  

Provision for loan losses

     1,200       1,800       1,950       1,000       475  
    


 


 


 


 


Net interest income after provision for loan losses

     31,866       31,351       31,880       27,948       24,400  
    


 


 


 


 


Noninterest income

     11,021       12,487       10,670       12,983       5,336  

Noninterest expense

     35,150       32,494       29,593       29,635       25,002  
    


 


 


 


 


Income before income taxes

     7,737       11,344       12,957       11,296       4,734  

Income taxes

     1,938       3,283       3,846       3,055       1,000  
    


 


 


 


 


Net income

   $ 5,799     $ 8,061     $ 9,111     $ 8,241     $ 3,734  
    


 


 


 


 


Selected Year-End Balances

                                        

Total assets

   $ 1,057,450     $ 1,016,027     $ 920,603     $ 855,228     $ 803,441  

Loans

     644,191       631,171       617,150       545,300       496,966  

Investment securities and overnight funds sold

     347,384       293,046       221,180       226,648       219,958  

Interest-earning assets

     991,670       898,645       838,634       772,309       704,672  

Deposits

     910,522       876,510       796,772       738,659       698,485  

Long-term obligations

     23,711       23,711       23,000       23,000       23,000  

Interest-bearing liabilities

     766,488       741,936       687,004       651,437       629,217  

Shareholders’ equity

     96,018       88,518       77,509       67,429       59,682  

Common shares outstanding

     110,126       111,530       113,649       114,208       115,209  

Selected Average Balances

                                        

Total assets

   $ 1,030,134     $ 953,895     $ 869,546     $ 833,716     $ 716,773  

Loans

     636,245       634,687       565,292       527,204       427,939  

Investment securities and overnight funds sold

     290,122       245,844       214,646       232,317       230,927  

Interest-earning assets

     926,327       880,755       797,619       747,059       659,074  

Deposits

     890,176       825,202       749,914       720,958       624,173  

Long-term obligations

     23,711       23,002       23,000       23,000       23,000  

Interest-bearing liabilities

     756,990       709,352       660,267       646,072       557,625  

Shareholders’ equity

     91,049       83,403       72,854       65,544       55,370  

Common shares outstanding

     110,828       112,070       113,961       114,717       117,743  

Profitability Ratios (averages)

                                        

Return on average total assets

     0.56 %     0.85 %     1.05 %     0.99 %     0.52 %

Return on average shareholders’ equity

     6.37       9.67       12.51       12.57       6.74  

Dividend payout ratio (1)

     9.18       6.59       5.84       6.52       14.84  

Liquidity and Capital Ratios (averages)

                                        

Loans to deposits

     71.47 %     76.91 %     75.38 %     73.13 %     68.56 %

Shareholders’ equity to total assets

     8.84       8.74       8.38       7.86       7.72  

Per share of common stock

                                        

Net income (2)

   $ 49.12     $ 68.72     $ 76.77     $ 68.66     $ 28.51  

Cash dividends

     1.60       1.58       1.50       1.50       1.50  

Book value (3)

     851.21       773.07       661.68       570.07       497.68  

(1)   Total common and preferred dividends paid for the year ended December 31 divided by net income for the year ended December 31
(2)   Net income less preferred dividends paid for the year ended December 31 divided by the average number of common shares out-standing for the year ended December 31
(3)   Shareholders’ equity less Preferred B and C stock at December 31 divided by the number of common shares outstanding at December 31

 

12


Branch Acquisitions

 

During both 2004 and 2003, Southern purchased North Carolina branch offices of other banks. These branch acquisitions were accounted for as purchases, and, therefore, the results of operations prior to purchase of these branch offices are not included in the consolidated financial statements. Information regarding these purchases is contained in the following table:

 

Table 2

BRANCH ACQUISITIONS

 

     Date

   Loans
Acquired


   Deposits
Acquired


          (dollars in thousands)

Capital Bank-Seaboard, NC

   September 2004    $ 8,441    $ 18,231

Capital Bank-Woodland, NC

   September 2004      2,262      9,808
         

  

2004 Branch Acquisition Totals

        $ 10,703    $ 28,039
         

  

RBC Centura- Norlina, NC

   October 2003    $ 1,220    $ 18,280
         

  

2003 Branch Acquisition Totals

        $ 1,220    $ 18,280
         

  

 

INTEREST-EARNING ASSETS

 

Interest-earning assets include loans, investment securities and overnight investments. Interest-earning assets reflect varying interest rates based on the risk level and maturity of the asset. Riskier investments typically carry a higher rate and expose the investor to potentially higher levels of default. Southern has historically focused on maintaining high asset quality requiring management to perform significant underwriting and monitoring procedures. Southern’s investment portfolio includes primarily United States Treasury and government agency securities. The level of investment securities is primarily the result of overall loan and deposit trends. When deposit growth exceeds loan growth the excess liquidity primarily increases investment securities. When loan growth exceeds deposit growth primarily maturing investment securities are utilized to fund the loan growth rather than being reinvested into the securities market. Southern maintains an operating liquidity level of overnight funds sold investments with other financial institutions that are within Southern’s risk tolerance levels.

 

Interest-earning assets averaged $926.3 million during 2004, an increase of $45.6 million or 5.17 percent over 2003 levels, compared to a $83.1 million or 10.42 percent increase in 2003 over 2002 levels. Growth among average interest-earning assets during 2004 was primarily due to the September acquisitions of Seaboard and Woodland and internal growth.

 

Loans.    Loan production is principally driven by the eastern North Carolina economy. Management seeks commercial lending opportunities collateralized by real estate. Traditional mortgage loan production is also a goal of management. Most mortgage loan production is then sold into the mortgage secondary markets with the servicing rights retained by the Bank. Loan demand in recent years for consumer loans has declined as consumers have responded to retailer financing promotions and utilized mortgage equity lines of credit to finance their purchases.

 

13


As of December 31, 2004, gross loans outstanding were $644.2 million, a 2.06 percent increase over the December 31, 2003 balance of $631.2 million, which was a 2.27 percent increase over the December 31, 2002 balance of $617.2 million. Loan growth during 2003 resulted principally from internal loan growth, the de novo opening of the Kenansville Branch in February and the October acquisition of the Norlina branch. Loan growth during 2004 resulted principally from internal loan growth, the September acquisitions of the Seaboard and Woodland branches and the de novo opening of the Manteo branch in May. Loan balances for the last five years are provided in Table 3.

 

Table 3

LOANS

 

     December 31,

     2004

   2003

   2002

   2001

   2000

     (Dollars in thousands)

Commercial, financial and agricultural

   $ 90,653    $ 92,944    $ 93,855    $ 92,293    $ 91,936

Real estate:

                                  

Construction

     62,438      65,484      61,800      52,414      14,621

Mortgage:

                                  

Commercial

     200,588      186,847      176,357      134,562      126,472

One to four family residential

     133,976      122,534      136,909      132,513      115,473

Equityline

     57,153      49,876      49,071      42,504      40,468

Other

     30,313      47,385      27,956      24,823      39,069

Consumer

     42,771      35,925      40,130      39,581      38,795

Lease financing

     26,299      30,176      31,072      26,610      30,132
    

  

  

  

  

Total loans

   $ 644,191    $ 631,171    $ 617,150    $ 545,300    $ 496,966
    

  

  

  

  


All information presented in this table relates to domestic loans as BancShares makes no foreign loans.

 

During 2005, management anticipates increased loan growth among loans to commercial borrowers due to the continued relatively low interest rate environment and the overall improvement in the economy. Demand among retail customers has principally shifted to open-end credit products such as equityline loans and continued growth in equityline loans is expected during 2005.

 

14


To minimize the potential adverse impact of interest rate fluctuations, management monitors the maturity and repricing distribution of the loan portfolio. BancShares offers variable rate loan products and fixed rate callable loans to reduce interest rate risk. Table 4 details the maturity and repricing distribution as of December 31, 2004. Of the gross loans outstanding on December 31, 2004, 18.24 percent have scheduled maturities or repricing dates that extend beyond five years.

 

Table 4

LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY

 

     Within
One Year


   After One Year But
Within Five Years


   After
Five Years


   Total

     (Dollars in thousands)

Commercial and Financial

   $ 11,785    $ 57,111    $ 21,757    $ 90,653

Real Estate:

                           

Commercial

     26,076      126,370      48,142      200,588

One to four family residential

     17,417      84,405      32,154      133,976

Construction

     62,438                62,438

Equityline

     57,153                57,153

Other

     3,569      20,989      5,755      30,313

Consumer

     5,560      26,946      10,265      42,771

Lease Financing

     3,419      16,568      6,312      26,299
    

  

  

  

Total

   $ 187,417    $ 332,389    $ 124,385    $ 644,191
    

  

  

  

Fixed Rate

   $ 62,660    $ 150,578    $ 100,410    $ 313,648

Variable Rate

     124,757      181,811      23,975      330,543
    

  

  

  

Total

   $ 187,417    $ 332,389    $ 124,385    $ 644,191
    

  

  

  

 

Investment Securities.    Due to the relatively slow recovery of the eastern North Carolina economy in 2004, loan production opportunities continued to be weak. As a result of the deposit growth in existing markets, the Seaboard and Woodland branch acquisitions, relatively weak loan demand and the expected continuance of the relatively low interest rate market management by the Federal Reserve in the short-term, investments in primarily two-year maturity or less, held-to-maturity, U. S. Treasury securities have been made by management. At December 31, 2004 the investment portfolio totaled $311.5 million and at December 31, 2003 the investment portfolio totaled $253.0 million resulting in an increase of $58.5 million or 23.12 percent. Investment securities averaged $245.7 million during 2004, $191.2 million during 2003 and $199.6 million during 2002. In each period U. S. Treasury and government agency securities represented substantially all of the portfolio. The increase in the average securities portfolio in 2004 and 2003 resulted primarily from deposit growth in existing locations and the acquisitions. The decrease in the average securities portfolio during 2002 resulted primarily from growth in loans.

 

15


The weighted-average maturity of the investment securities portfolio was 19 months at December 31, 2004 and 21 months at December 31, 2003. Management continues to maintain a portfolio of securities with short maturities and call dates, consistent with BancShares’ focus on liquidity. Investment securities available for sale include marketable equity securities that are recorded at their fair value, with the unrealized net gain included as a component of shareholders’ equity, net of deferred taxes. Table 5 presents detailed information relating to the consolidated balance sheet value of the investment securities portfolio.

 

Table 5

INVESTMENT SECURITIES

 

     December 31,

     2004

   2003

   2002

     (Dollars in thousands)

U.S. Government agencies

   $ 21,012    $ 90,105    $ 95,061

U.S. Treasury

     185,798      86,904      20,251

States and political subdivisions

     42,432      28,606      33,332

Other

     62,270      47,411      41,911
    

  

  

Total investment securities

   $ 311,512    $ 253,026    $ 190,555
    

  

  

 

     Investment Securities At December 31, 2004 Maturing

 
     Within One Year
Amount Yield


    After One But
Within Five Years
Amount Yield


    After Five But
Within Ten Years
Amount Yield


    After Ten Years
Amount Yield


 

U.S. Government agencies

   $ 21,012    1.76 %   $        $        $     

U. S. Treasury

     81,161    1.66 %     104,637    2.42 %                  

States and political subdivisions

     25,323    2.82 %     6,002    5.97 %     9,475    4.33 %     1,632    6.01 %

Other

                       61,670    5.05 %     600    6.92 %
    

  

 

  

 

  

 

  

Total investment securities

   $ 127,496    2.09 %   $ 110,639    2.61 %   $ 71,145    4.96 %   $ 2,232    6.59 %
    

        

        

        

      

 

Income on Interest-Earning Assets.    Table 6 analyzes the interest-earning assets and interest-bearing liabilities for the three years ended December 31, 2004. Table 9 identifies the causes for changes in interest income and interest expense for 2004 and 2003. Interest income amounted to $45.9 million during 2004, a $473,000 decrease from 2003 levels, compared to a $3.6 million decrease from 2002 to 2003. During both 2004 and 2003, decreased interest rates were the primary factors for the decrease in interest income from the respective prior years.

 

Total interest-earning assets yielded 4.96 percent during 2004, a 31 basis point decrease from the 5.27 percent reported in 2003. The average taxable-equivalent yield on the loan portfolio decreased from 6.28 percent in 2003 to 6.03 percent in 2004. The decreased loan yield during 2004 reflects general market conditions throughout the year, consisting primarily of a very low interest rate environment. Loan interest income decreased $1.5 million or 3.86 percent from 2003. This followed a decrease of 1.71 percent in loan interest income in 2003 from 2002. During 2004, the decrease in loan interest income was the result of loan growth offset by lower loan yields. During 2003, the decrease in loan interest income was the result of loan growth with lower loan yields as the average yield on loans declined from 7.18 percent in 2002 to 6.28 percent in 2003.

 

Interest income earned on the investment portfolio amounted to $7.0 million for the year ended December 31, 2004, $5.9 million for the year ended December 31, 2003 and $8.9 million for the year ended December 31, 2002. The average taxable-equivalent yield on the portfolio for 2004 was 2.86 percent. The average taxable-equivalent yield on the portfolio for 2003 was 3.11 percent. The average taxable-equivalent yield on the portfolio for 2002 was 4.48 percent. The $1.1 million increase in investment interest income during 2004 results from an increase in average volume that more than offset a decrease in average yields. The $3.0 million decrease in 2003 investment interest income compared to 2002 investment interest income was due to decreased average yields from 4.48 percent in 2002 to 3.11 percent for 2003 that more than offset an increase in average volume.

 

16


INTEREST-BEARING LIABILITIES

 

Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Southern’s primary funding source is deposits. Other short-term funding sources include commercial customer requirements for cash management services and a borrowing line of credit from another financial institution. Long-term borrowings also provide capital strength under guidelines established by the Federal Reserve.

 

At December 31, 2004 interest-bearing liabilities totaled $766.5 million, an increase of $24.6 million or 3.31 percent over December 31, 2003. Interest-bearing liabilities averaged $757.0 million during 2004, an increase of $47.6 million or 6.72 percent over 2003 levels. Interest-bearing deposits increased $45.9 million. During 2003, interest-bearing liabilities averaged $709.4 million, an increase of $49.1 million or 7.41 percent over 2002.

 

Deposits.    Total deposits averaged $890.2 million in 2004, an increase of $65.0 million or 7.87 percent over the 2003 average balance. Average interest-bearing deposits were $716.9 million during 2004, an increase of $45.9 million or 6.84 percent compared to 2003. Money market accounts averaged $128.3 million during 2004, an increase of $18.3 million or 16.66 percent over the 2003 average balance. Checking with interest balances averaged $110.9 million during 2004, an increase of $12.7 million or 12.90 percent over the 2003 average balance. Time deposit balances averaged $402.6 million during 2004, an increase of $7.4 million or 1.87 percent from the 2003 average balance. The overall growth in average deposits during 2004 resulted primarily from internal growth within the existing branches, the de novo opening of the Manteo branch and the acquisitions of the Seaboard and Woodland branches.

 

Total deposits averaged $825.2 million in 2003, an increase of $75.3 million or 10.04 percent over the 2002 average balance. Average interest-bearing deposits were $671.0 million during 2003, an increase of $50.3 million or 8.11 percent compared to 2002. Money market accounts averaged $110.0 million during 2003, an increase of $15.6 million or 16.52 percent over the 2002 average balance. Checking with interest balances averaged $98.2 million during 2003, an increase of $8.4 million or 9.31 percent over the 2002 average balance. Time deposit balances averaged $395.2 million during 2003, an increase of $20.1 million or 5.37 percent from the 2002 average balance. The overall growth in average deposits during 2003 resulted primarily from internal growth within the existing branches, the opening of the Kenansville branch and the acquisition of the Norlina branch.

 

17


Table 6

AVERAGE BALANCE SHEET ITEMS, NET INTEREST DIFFERENTIAL AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID

 

 

    Year ended December 31,

 
    2004

    2003

    2002

 
    AVERAGE
BALANCE


  INTEREST

  AVERAGE
RATE


    AVERAGE
BALANCE


  INTEREST

  AVERAGE
RATE


    AVERAGE
BALANCE


  INTEREST

  AVERAGE
RATE


 
    (Dollars in thousands)  

ASSETS

                                                     

Interest earning assets:

                                                     

Loans (1) (2)

  $ 636,245   $ 38,348   6.03 %   $ 634,687   $ 39,888   6.28 %   $ 565,292   $ 40,582   7.18 %

Taxable investment securities

    215,668     5,450   2.53 %     166,478     4,760   2.86 %     175,953     7,339   4.17 %

Nontaxable investment securities (3)

    30,013     1,586   5.29 %     24,677     1,178   4.77 %     23,600     1,600   6.78 %

Overnight funds sold.

    44,441     554   1.23 %     54,689     537   0.98 %     32,453     500   1.54 %

Other interest earning assets

                224     48   21.43 %     321     18   5.61 %
   

 

 

 

 

 

 

 

 

Total interest earning assets

    926,367     45,938   4.96 %     880,755     46,411   5.27 %     797,619     50,039   6.27 %
   

 

       

 

       

 

     

Non-interest earning assets:

                                                     

Cash and due from banks

    34,838                 31,813                 30,732            

Premises and equipment, net

    35,370                 33,665                 32,865            

Other

    33,559                 7,662                 8,330            
   

             

             

           

Total assets

  $ 1,030,134               $ 953,895               $ 869,546            
   

             

             

           

LIABILITIES & EQUITY

                                                     

Interest bearing liabilities:

                                                     

Demand deposits

  $ 110,921     122   0.11 %   $ 114,072     204   0.18 %   $ 105,357     315   0.30 %

Savings deposits

    203,351     1,484   0.73 %     161,682     1,291   0.80 %     140,228     1,713   1.22 %

Time deposits

    402,605     8,597   2.14 %     395,213     9,289   2.35 %     375,077     11,291   3.01 %

Short-term borrowed funds

    16,402     160   0.98 %     15,243     120   0.78 %     16,605     203   1.22 %

Long-term obligations (6)

    23,711     1,897   8.00 %     23,142     2,028   8.76 %     23,000     2,070   9.00 %
   

 

 

 

 

 

 

 

 

Total interest bearing liabilities

    756,990     12,260   1.62 %     709,352     12,932   1.82 %     660,267     15,592   2.36 %
   

 

       

 

       

 

     

Non-interest bearing liabilities:

                                                     

Demand deposits

    173,300                 154,235                 129,252            

Other

    8,795                 6,905                 7,173            

Shareholders’ equity

    91,049                 83,403                 72,854            
   

             

             

           

Total liabilities and equity

  $ 1,030,134               $ 953,895               $ 869,546            
   

             

             

           

Interest rate spread (4)

              3.34 %               3.45 %               3.91 %

Net interest income and net interest margin (5)

        $ 33,678   3.64 %         $ 33,479   3.80 %         $ 34,447   4.32 %
         

             

             

     

(1)   Average balances include non-accrual loans.
(2)   Interest income includes amortization of loan fees.
(3)   The average rate on nontaxable investment securities has been adjusted to a tax equivalent yield using a combined federal and state tax rate of 38.55%. The taxable equivalent adjustment was $612 in 2004, $328 in 2003 and $617 in 2002.
(4)   Interest rate spread is the difference between interest earning asset yield and interest bearing liability rate.
(5)   Net interest margin is net interest income divided by average earning assets.
(6)   Interest expense for long-term obligations includes amortization of issuance costs related to the capital securities.

 

18


BancShares has historically avoided excessive reliance on high-dollar time deposits, which are generally defined as time deposit accounts with balances in excess of $100,000. At December 31, 2004, these funds were 13.07 percent of total deposits, compared to 13.89 percent of December 31, 2003 total deposits. Table 7 provides a maturity distribution for these deposits, which totaled $119.0 million at December 31, 2004.

 

Table 7

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31, 2004:

 

     (Dollars in
thousands)


Three months or less

   $ 34,966

Over three through six months

     25,260

Over six months through twelve months

     22,791

Over one year through five years

     35,982

Over five years

    
    

     $ 118,999
    

 

Short-Term Borrowings.    BancShares has access to various short-term borrowings, including the purchase of federal funds, overnight repurchase obligations and credit lines with various correspondent banks. At December 31, 2004, short-term borrowings totaled $16.0 million, compared to $15.9 million at December 31, 2003. For the year ended December 31, 2004, short-term borrowings averaged $16.4 million, compared to $15.2 million during 2003 and $16.6 million during 2002. Table 8 provides additional information regarding short-term borrowed funds.

 

Table 8

SHORT-TERM BORROWINGS

 

     2004

    2003

    2002

 
     Amount

   Rate

    Amount

   Rate

    Amount

   Rate

 
     (Dollars in thousands)  

Repurchase agreements:

                                       

At December 31

   $ 14,152    1.85 %   $ 14,643    0.59 %   $ 12,278    1.01 %

Average during year

     15,071    0.98 %     13,941    0.79 %     15,179    1.21 %

Maximum month-end balance during year

     16,899            16,488            16,425       

U. S. Treasury tax and loan accounts:

                                       

At December 31

   $ 1,865    1.87 %   $ 1,227    0.94 %   $ 2,062    1.01 %

Average during year

     1,331    0.95 %     1,303    0.80 %     1,426    1.31 %

Maximum month-end balance during year

     2,053            2,085            2,106       

 

Long-Term Obligations.    In June 1998 $23.0 million in long-term obligations were issued. These long-term obligations provide capital to support continued growth. Management views these securities as an effective way to provide capital resources without diluting current ownership. Under current regulatory standards, these long-term obligations qualify as capital. At both December 31, 2004 and December 31, 2003, long-term obligations totaled $23.7 million. In prior years the long-term obligations consisted of Trust Securities issued by a finance subsidiary that were included in BancShares consolidated financial statements. As a result of the adoption of a new accounting standard in the fourth quarter of 2003, long-term obligations include $23.7 million of junior subordinated debentures at both December 31, 2004 and December 31, 2003. See the Notes To Consolidated Financial Statements for a detailed discussion of FASB Interpretation No. 46 (and FIN 46R as subsequently amended), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.”

 

19


Expense of Interest-Bearing Liabilities.    Interest expense amounted to $12.3 million in 2004, a $672,000 or 5.20 percent decrease from 2003. Interest expense amounted to $12.9 million in 2003, a $2.7 million or 17.05 percent decrease from 2002. The decreased interest expenses in 2004 and 2003 were primarily due to market interest rates managed by the Federal Reserve.

 

As a result of overall market interest rates, the average cost of interest-bearing deposits decreased to 1.42 percent during 2004, compared to 1.61 percent in 2003 and 2.15 percent in 2002. Interest expense on total interest-bearing deposits amounted to $10.2 million during 2004, a decrease from the $10.8 million recorded during 2003. Interest expense on total interest-bearing deposits amounted to $10.8 million during 2003, a decrease from $13.3 million recorded during 2002. The decreased interest expenses on deposits during 2004 and 2003 were primarily the result of overall changes in market interest rates managed by the Federal Reserve. For 2003 and most of 2004 the Federal Reserve managed short-term rates downward to extremely low levels which resulted in significant reductions in the spread between the cost of interest-bearing liabilities and the yields on interest-bearing assets. In the last half of 2004 the Federal Reserve began to slowly raise short-term market rates. If the Federal Reserve continues to manage an increase in short-term rates, management expects the spread between interest-bearing assets and the cost of interest-bearing liabilities to significantly improve in 2005. The average rate on time deposits decreased from 3.01 percent in 2002 to 2.35 percent in 2003 and decreased to 2.14 percent in 2004.

 

Interest expense on short-term borrowings amounted to $160,000 during 2004, an increase from $120,000 or a 33.33 percent increase from 2003. Interest expense on short-term borrowings amounted to $120,000 during 2003, a decrease from $203,000 recorded during 2002. The increased interest expense during 2004 was the result of both increased average balances and increased short-term rates. The average rate on short-term borrowings decreased from 1.22 percent in 2002 to 0.79 percent in 2003 and increased to 0.98 percent in 2004.

 

Interest expense on long-term obligations amounted to $1.9 million for 2004 and $2.0 million for 2003 and $2.1 million for 2002. The average rate on long-term borrowings was 9.00 percent in 2002, 8.76% in 2003 and 8.00% in 2004.

 

20


Table 9

AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL

 

     December 31, 2004 Increase (Decrease)

 
     TOTAL
CHANGE
2003-
2004


    AMOUNT
ATTRIBUTABLE
TO CHANGE IN
VOLUME (1)


    AMOUNT
ATTRIBUTABLE
TO CHANGE IN
RATE (1)


 
     (Dollars in thousands)  

ASSETS

                        

Interest earning assets:

                        

Loans

   $ (1,541 )   $ 96     $ (1,637 )

Taxable investment securities

     690       1,325       (635 )

Non-taxable investment securities

     409       268       141  

Federal funds sold and other

     (31 )     (138 )     107  
    


 


 


Total interest income

     (473 )     1,551       (2,024 )
    


 


 


LIABILITIES & EQUITY

                        

Interest bearing liabilities:

                        

Demand deposits

     (82 )     (5 )     (77 )

Savings deposits

     193       318       (125 )

Time deposits

     (693 )     166       (859 )

Short-term borrowings

     40       10       30  

Long-term obligations

     (130 )     48       (178 )
    


 


 


Total interest expense

     (672 )     537       (1,209 )
    


 


 


Net interest income

   $ 199     $ 1,014     $ (815 )
    


 


 


 

     December 31, 2003 Increase (Decrease)

 
     TOTAL
CHANGE
2002-
2003


    AMOUNT
ATTRIBUTABLE
TO CHANGE IN
VOLUME (1)


    AMOUNT
ATTRIBUTABLE
TO CHANGE IN
RATE (1)


 
     (Dollars in thousands)  

ASSETS

                        

Interest earning assets:

                        

Loans

   $ (694 )   $ 4,689     $ (5,383 )

Taxable investment securities

     (2,579 )     (335 )     (2,244 )

Non-taxable investment securities

     (422 )     63       (485 )

Federal funds sold and other

     67       268       (201 )
    


 


 


Total interest income

     (3,628 )     4,685       (8,313 )
    


 


 


LIABILITIES & EQUITY

                        

Interest bearing liabilities:

                        

Demand deposits

     (111 )     20       (131 )

Savings deposits

     (422 )     214       (636 )

Time deposits

     (2,002 )     540       (2,542 )

Short-term borrowings

     (83 )     (13 )     (70 )

Long-term obligations

     (42 )     13       (55 )
    


 


 


Total interest expense

     (2,660 )     774       (3,434 )
    


 


 


Net interest income

   $ (968 )   $ 3,911     $ (4,879 )
    


 


 



(1)   The variance due to rate and volume is allocated equally between the changes in rate and volume.

 

Average loan balances include nonaccrual loans. BancShares earns tax-exempt interest on certain loans and investment securities due to the borrower or issuer being either a governmental agency or a quasi-governmental agency. Yields related to loans and securities exempt from federal income taxes are stated on a taxable-equivalent basis assuming a combined federal and state income tax rate of 38.55% for all periods. The taxable equivalent adjustment was $612 in 2004, $328 in 2003 and $617 in 2002.

 

21


NET INTEREST INCOME

 

Net interest income totaled $33.1 million during 2004, a decrease of $85,000 or 0.26 percent from 2003. Net interest income amounted to $33.2 million during 2003, a decrease from $33.8 million recorded during 2002. Table 9 presents the annual changes in net interest income by components due to changes in volume, yields and rates. Table 9 is presented on a taxable-equivalent basis to adjust for the tax-exempt status of income earned on certain loans, leases and municipal securities.

 

The average yield on interest-earning assets was 4.96 percent in 2004, 5.27 percent in 2003 and 6.27 percent in 2002. The lower average yields in 2004 and 2003 were the result of decreased market rates. Overall lower market rates created a lower-yielding earning asset mix for 2004 compared to 2003, resulting in a decrease in the net interest margin from 3.80 percent in 2003 to 3.64 percent in 2004. The lower net yields realized in 2003 compared to 2002 also resulted from overall lower market rates for earning assets.

 

Rate Sensitivity.    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. As a result of the overall weak 2004 economy, consumer concerns over the economy’s impact on the equity markets and the Federal Reserve managing very low interest rates, consumers have moved cash into the shorter maturity deposit products of the Bank. Table 10 provides BancShares’ interest-sensitivity position as of December 31, 2004, which reflected a one year negative interest-sensitivity gap of $258.9 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.

 

Table 10

INTEREST-SENSITIVITY ANALYSIS

 

     December 31, 2004

    

1-90

Days
Sensitive


    91-180
Days
Sensitive


    181-365
Days
Sensitive


   

Non-Rate
Sensitive
& Over

1 Year


   Total

     (Dollars in thousands)

Interest Earning Assets:

                                     

Loans

   $ 63,895     $ 46,205     $ 77,317     $ 456,774    $ 644,191

Investment securities

     25,496       38,831       62,951       184,234      311,512

Temporary investments

     35,967                        35,967
    


 


 


 

  

Total earning assets

   $ 125,358     $ 85,036     $ 140,268     $ 641,008    $ 991,670
    


 


 


 

  

Interest-Bearing Liabilities:

                                     

Savings and core time deposits

   $ 397,236     $ 58,493     $ 54,800     $ 97,232    $ 607,761

Time deposits of $100,000 and more

     34,966       25,260       22,791       35,982      118,999

Short-term borrowings

     16,017                        16,017

Long-term obligations

                       23,711      23,711
    


 


 


 

  

Total interest bearing liabilities

   $ 448,219     $ 83,753     $ 77,591     $ 156,925    $ 766,488
    


 


 


 

  

Interest sensitivity gap

   $ (322,861 )   $ 1,283     $ 62,677     $ 484,083    $ 225,182
    


 


 


 

  

Cumulative interest sensitivity gap

   $ (322,861 )   $ (321,578 )   $ (258,901 )   $ 225,182    $ 225,182
    


 


 


 

  

 

22


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, since its interest bearing liabilities generally mature or reprice faster than its interest earning assets. Management seeks to manage this risk through the use of shorter term maturities where possible. 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 December 31, 2004. The expected maturity categories take into consideration historical prepayment experience as well as management’s expectations based on the interest rate environment as of December 31, 2004. 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 2005 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 December 31, 2004.

 

Table 11

MARKET RISK

 

     Maturing in Years ended December 31

     2005

    2006

    2007

    2008

    2009

    Thereafter

    Total

    Fair Value

     (Dollars in thousands)
Assets                                                               

Loans

                                                              

Fixed rate

   $ 62,660     $ 45,766     $ 53,663     $ 28,955     $ 22,194     $ 100,410     $ 313,648     $ 312,581

Average rate (%)

     7.02 %     7.02 %     7.02 %     6.86 %     6.83 %     6.47 %     6.82 %      

Variable rate

   $ 124,757     $ 58,842     $ 50,909     $ 46,871     $ 25,189     $ 23,975     $ 330,543     $ 330,543

Average rate (%)

     6.11 %     5.81 %     5.70 %     5.63 %     5.76 %     5.57 %     5.86 %      

Investment Securities

                                                              

Fixed rate

   $ 127,496     $ 107,950     $ 885     $ 840     $ 964     $ 73,377     $ 311,512     $ 311,075

Average rate (%)

     2.09 %     2.54 %     5.65 %     5.58 %     5.72 %     5.06 %     2.73 %      

Liabilities

                                                              

Savings and interest bearing checking

                                                              

Fixed rate

   $ 512,508                                   $ 512,508     $ 512,508

Average rate (%)

     0.54 %                                   0.54 %      

Certificates of deposit

                                                              

Fixed rate

   $ 259,975     $ 42,786     $ 55,245     $ 33,702                 $ 391,708     $ 394,827

Average rate (%)

     1.83 %     2.89 %     3.56 %     3.44 %                 2.32 %      

Variable rate

   $ 4,035     $ 1,481                             $ 5,516     $ 5,516

Average rate (%)

     1.82 %     1.93 %                             1.85 %      

Short-term borrowings

                                                              

Variable rate

   $ 16,017                                   $ 16,017     $ 16,017

Average rate (%)

     1.85 %                                   1.85 %      

Long-term debt

                                                              

Fixed rate

                                 $ 23,711     $ 23,711     $ 24,541

Average rate (%)

                                   8.00 %     8.00 %      

 

23


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 sheets.

 

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.

 

Outstanding standby letters of credit as of December 31, 2004 and December 31, 2003 amounted to $5.9 million and $3.6 million. Outstanding commitments to lend at December 31, 2004 and December 31, 2003 were $182.1 million and $182.7 million and include undisbursed advances on customer lines of credit at December 31, 2004 of $64.3 million and $57.4 million at December 31, 2003. Outstanding standby letters of credit and commitments to lend at December 31, 2004 generally expire within one year, whereas commitments associated with undisbursed advances on customer lines of credit at December 31, 2004 generally expire within one to five years.

 

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. The maximum potential amount of undiscounted future payments related to standby letters of credit at December 31, 2004 is $5.9 million. At December 31, 2004, BancShares considers the amount to be immaterial and has recorded no liability for the current carrying amount of the obligation to perform as a guarantor and no liability is considered necessary. Substantially all standby letters of credit are secured by real estate and/or guaranteed by third parties in the event BancShares had to advance funds to fulfill the guarantee.

 

At December 31, 2004, commitments to sell loans amounted to $11.5 million. At December 31, 2003 commitments to sell loans amounted to $2.2 million.

 

BancShares does not have any special purpose entities or other similar forms of off-balance sheet financing arrangements other than the trust preferred securities discussed in detail in the notes to the consolidated financial statements.

 

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.

 

24


ASSET QUALITY

 

Maintaining excellent asset quality is one of the key performance measures for, and a primary focus area of, BancShares’ Management. BancShares and Southern dedicate significant resources to ensuring prudent lending practices, loan performance monitoring and management and prudent, timely recognition of losses. In some cases property that was used as collateral for loans is foreclosed to satisfy repayment of the loan. Upon completion of foreclosure, this property is classified as an other real estate nonperforming asset. Such other real estate nonperforming assets are aggressively marketed by Management.

 

Nonperforming Assets.    Nonperforming asset balances for the past five years are presented in Table 12. BancShares’ nonperforming assets of $2.2 million at December 31, 2004 included nonaccrual loans totaling $1.1 million, accruing loans past due 90 days or more totaling $577,000 and $525,000 of foreclosed property. Nonperforming assets as of December 31, 2004 represented 0.34 percent of loans outstanding. Nonperforming assets totaled $2.2 million at December 31, 2004, $2.9 million at December 31, 2003 and $3.5 million at December 31, 2002. Of the $1.1 million in nonaccrual loans at December 31, 2004, $832,000 were considered to be impaired. Of the $868,000 in nonaccrual loans at December 31, 2003, $547,000 were considered to be impaired.

 

Table 12

RISK ELEMENTS

 

     Year ended December 31,

     2004

   2003

   2002

   2001

   2000

     (Dollars in thousands)

Accruing loans past due 90 days or more

   $ 577    $ 1,665    $ 2,180    $ 1,565    $ 1,081

Nonaccrual loans

     1,087      868      918      407      478

Restructured loans

               25      28     
    

  

  

  

  

Total nonperforming loans

     1,664      2,533      3,123      2,000      1,559
    

  

  

  

  

Other real estate owned

     525      406      411      64     
    

  

  

  

  

Total nonperforming loans and assets

   $ 2,189    $ 2,939    $ 3,534    $ 2,064    $ 1,559
    

  

  

  

  

 

Management continually monitors the loan portfolio to ensure that problem loans have been identified as nonperforming. Should economic conditions deteriorate, the inability of distressed customers to service their existing debt could cause higher levels of nonperforming assets.

 

Allowance for Loan Losses.    Management evaluates the risk characteristics of the loan portfolio under current economic conditions, reviews the financial condition of the borrower, estimates the fair market value of the loan collateral and considers any other pertinent factors to estimate current credit losses. Southern provides an allowance for loan losses on a reserve basis and includes in operating expenses a provision for loan losses determined by management. The allowance is reduced by charge-offs and increased by subsequent recoveries. Management’s periodic evaluation of the adequacy of the allowance is based on Southern’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect borrowers’ experience, the estimated value of any underlying collateral, current economic conditions and other risk factors. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and in consideration of the current economic environment. While management uses the best information available to make evaluations, future adjustments may be necessary.

 

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 additions to the allowances based on the examiners’ judgments about information available to them at the time of their examinations.

 

At December 31, 2004, BancShares’ allowance for loan losses was $10.3 million or 1.59 percent of loans outstanding. At December 31, 2003, BancShares’ allowance for loan losses was $10.1 million or 1.60 percent of loans outstanding. The increase in the allowance-to-loan ratios since 2002 is primarily attributable to continued loan growth and the overall continued sluggish economy. Traditional commercial loans (commercial loans other than those secured by real estate)

 

25


generally have a higher level of credit risk than commercial real estate loans; as a result, the commercial real estate loans generally have a lower level of allowance for loan losses when compared to traditional commercial loans. As a percentage of total loans, traditional commercial loans increased from 11.37 percent of total loans at December 31, 2003 to 14.07 percent of total loans at December 31, 2004.

 

As a result of the continued sluggish eastern North Carolina economy in 2004, the Bank experienced both an increase in loan charge-offs and a decrease in recoveries of loans previously charged-off. The provision for loan losses charged to operations was $1.2 million during 2004 compared to $1.8 million during 2003 and $2.0 million in 2002. The provision for loan losses charged to operations in 2004 was primarily due to the continued sluggishness of the eastern North Carolina economy and the $13.0 million increase in outstanding loans.

 

Net charge-offs during 2004 increased by $233,000 from 2003 net charge-offs of $803,000. Net charge-offs during 2003 increased by $315,000 from 2002 net charge-offs of $488,000. The percentage of charge-offs, net of recoveries, to average outstanding loans was 0.16 percent in 2004, 0.13 percent in 2003 and 0.09 percent in 2002. Table 13 provides details concerning the allowance and provision for loan losses for the past five years.

 

Table 13

SUMMARY OF LOAN LOSS EXPERIENCE

 

     Year ended December 31,

 
     2004

    2003

    2002

    2001

    2000

 
     (Dollars in thousands)  

Allowance for loan losses—beginning of year

   $ 10,095     $ 9,098     $ 7,636     $ 7,284     $ 6,188  

Charge-offs:

                                        

Consumer

     353       314       392       354       361  

Real estate:

                                        

Mortgage:

                                        

Commercial

     83       32       101       46       11  

Equityline

     116       25       67             11  

One to four family residential

     226       129       19             67  

Other

           21       54       133        

Lease financing

                              

Commercial, financial and agricultural

     419       595       81       269       84  
    


 


 


 


 


Total charge-offs

     1,197       1,116       714       802       534  
    


 


 


 


 


Recoveries:

                                        

Consumer

     91       86       106       83       152  

Commercial, financial and agricultural

     17       179       86       46       56  

Real estate:

                                        

Construction

                              

Mortgage:

                                        

One to four family residential

     23       28                   13  

Commercial

     26       11       22             99  

Equityline

     4                         19  

Other

           9       12       120       16  
    


 


 


 


 


Total recoveries

     161       313       226       249       355  
    


 


 


 


 


Net charge-offs

     1,036       803       488       553       179  
    


 


 


 


 


Provision for loan losses

     1,200       1,800       1,950       1,000       475  

Reduction for sale of credit card portfolio

                       95        

Additions from bank acquisitions

                             800  
    


 


 


 


 


Allowance for loan losses—end of year

   $ 10,259     $ 10,095     $ 9,098     $ 7,636     $ 7,284  
    


 


 


 


 


Average loans outstanding during the year

   $ 636,245     $ 634,687     $ 565,292     $ 527,204     $ 427,939  
    


 


 


 


 


Ratio of net charge-offs to average loans outstanding

     0.16 %     0.13 %     0.09 %     0.10 %     0.04 %
    


 


 


 


 


 

26


Table 14 details management’s allocation of the allowance among the various loan types. The process to allocate the allowance for loan losses considers, among other factors, whether the borrower is a retail or commercial customer, whether the loan is secured or unsecured, and whether the loan is an open or closed-end agreement. Generally, loans to commercial customers are evaluated individually and assigned a credit grade using such factors as the borrower’s cash flow, the value of any underlying collateral and the value of any guarantees, while loans to retail customers are evaluated among groups of loans with similar characteristics. These ratings, prior loss experience and current economic conditions become the basis for the allowance allocation shown in Table 14.

 

Table 14

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

 

     December 31,

 
     2004

   % of
loans in
each
category
to total
loans


    2003

   % of
loans in
each
category
to total
loans


    2002

   % of
loans in
each
category
to total
loans


    2001

   % of
loans in
each
category
to total
loans


    2000

   % of
loans in
each
category
to total
loans


 
     (Dollars in thousands)  

Commercial, financial and agricultural

   $ 4,400    14 %   $ 4,300    15 %   $ 3,800    15 %   $ 2,800    17 %   $ 3,000    19 %

Consumer

     2,000    6 %     2,000    6 %     2,000    7 %     2,000    6 %     2,050    8 %

Real estate:

                                                                 

Construction

     300    10 %     300    10 %     300    10 %     300    10 %     100    3 %

Mortgage:

                                                                 

One to four family residential

     1,200    21 %     1,200    19 %     1,200    22 %     1,200    24 %     1,100    23 %

Commercial

     1,500    31 %     1,500    30 %     1,000    29 %     550    25 %     550    25 %

Equityline

     300    9 %     200    8 %     200    8 %     200    8 %     200    8 %

Other

     159    5 %     195    7 %     198    4 %     186    5 %     184    8 %

Lease financing

     400    4 %     400    5 %     400    5 %     400    5 %     100    6 %
    

  

 

  

 

  

 

  

 

  

Total

   $ 10,259    100 %   $ 10,095    100 %   $ 9,098    100 %   $ 7,636    100 %   $ 7,284    100 %
    

  

 

  

 

  

 

  

 

  

 

NONINTEREST INCOME

 

Management considers the growth of noninterest income essential to maintaining profitability performance levels. The primary sources of noninterest income are deposit and loan related service charges and fees. Other significant noncore noninterest income is derived from the sale of mortgage loans into the secondary market and the periodic sale of available-for-sale investment securities.

 

Total noninterest income was $11.0 million for the year ended December 31, 2004, a decrease of $1.5 million or 11.74 percent. This compares to $12.5 million for the year ended December 31, 2003 and $10.7 million for the year ended December 31, 2002. There were $229,000 of net securities gains realized in 2004. Net securities gains of $282,000 were realized in the year ended December 31, 2003. Net securities gains of $10.7 million were realized in the year ended December 31, 2002. There were $662,000 of net gains on sale of mortgage loans realized in 2004, a decrease of $1.8 million, or 72.94 percent, from the net mortgage loan sales gains of $2.4 million realized in the year ended December 31, 2003. Net mortgage loan sales gains of $1.3 million were realized in the year ended December 31, 2002.

 

27


Table 15 presents the components of noninterest income for the last five years. In recent years management has searched for various opportunities to enhance noninterest income through new products, new services, new fees and marketing changes to existing products. Net interest income has increased 32.62 percent from 2000 to 2004. Excluding securities gains, noninterest income, as a percentage of net interest income, has increased from 24.05 percent for 2000 to 32.64 percent for 2004.

 

Table 15

NONINTEREST INCOME

 

     Year Ended December 31,

 
     2004

   2003

   2002

   2001

   2000

 
     (Dollars in thousands)  

Service charges on deposit accounts

   $ 7,090    $ 6,714    $ 5,688    $ 5,080    $ 3,942  

Other service charges and fees

     2,474      2,253      1,786      1,482      1,275  

Gain (loss) on sale of loans

     662      2,446      1,297      729      38  

Investment securities gains (losses), net

     229      282      1,569      4,625      (746 )

Other

     566      792      330      1,067      751  
    

  

  

  

  


Total noninterest income

   $ 11,021    $ 12,487    $ 10,670    $ 12,983    $ 5,260  
    

  

  

  

  


 

Income from service charges on deposit accounts has increased primarily as a result of growth in the existing branches, the opening of new branches and acquisitions of branches from other financial institutions within the Bank’s eastern North Carolina markets. Income from service charges on deposit accounts was $7.1 million for the year ended December 31, 2004, an increase of 5.60 percent. Deposit account service charge income was $6.7 million for the year ended December 31, 2003 compared to $5.7 million for the year ended December 31, 2002.

 

Income from other service charges and fees includes mortgage loan commitment fees, mortgage loan servicing fees, automated teller machine fees, check cashing fees and other miscellaneous non deposit related customer service fees. Increases in this category of noninterest income are the result primarily of customer account growth within the existing branches, the opening of new branches and the acquisitions of branches from other financial institutions. In 2004 the decreased mortgage lending activity resulting from rising interest rates resulted in significant decreases in the mortgage related fees and charges in this category of noninterest income. In 2003 the increased mortgage lending activity resulting from the very low interest rates resulted in significant increases in the mortgage related fees and charges in this category of noninterest income. Income from other service charges and fees was $2.5 million for the year ended December 31, 2004, an increase of 9.81 percent. Other service charges and fee income was $2.3 million for the year ended December 31, 2003 and $1.8 million for the year ended December 31, 2002.

 

Gains and losses resulting from sales of available-for-sale securities was a net gain of $229,000 for the year ended December 31, 2004, compared to net gains of $282,000 for 2003 and $1.6 million for the year ended December 31, 2002.

 

Southern sells mortgage loan production into the secondary mortgage markets and retains servicing on the loans sold. The resulting interest rate market managed by the Federal Reserve and the timing of interest rate changes within the market directly impacts the level of gains or losses that are realized on mortgage loans sold. Gain on sale of loans decreased $1.8 million from $2.4 million in 2003 to $$662,000 in 2004 as a result of both decreased mortgage loan production and decreased sales of mortgage loans into the secondary market.

 

Other noninterest income decreased $226,000 from $792,000 in 2003 to $566,000 in 2004 primarily as a result of a 2003 gain realized on the donation of a vacant banking facility. Other noninterest income increased $462,000 from $330,000 in 2002 to $792,000 in 2003 primarily as a result of the gain realized on the donation of a vacant banking facility.

 

28


NONINTEREST EXPENSE

 

The primary noninterest expenses are personnel salaries and benefits, occupancy and equipment costs related to branch offices and data processing hardware, software product and service delivery costs. Noninterest expenses also include the expensing of intangibles amortization consisting of the costs of acquiring branch locations from other financial institutions and the expensing of mortgage servicing rights resulting from the sale of mortgage loans into the secondary mortgage markets for which servicing was retained.

 

Personnel expense was $18.6 million for the year ended December 31, 2004, an increase of $1.9 million or 11.63 percent over the year ended December 31, 2003 compared to a $1.7 million or 11.54 percent increase for the year ended December 31, 2003 over the year ended December 31, 2002. Increases in each period resulted primarily from merit increases, growth in incentive-based compensation, additional personnel due to the acquisitions discussed in Table 2 and the opening of new offices in Manteo, North Carolina in May 2004 and Kenansville, North Carolina in February 2003. BancShares had 431 full time equivalent employees at December 31, 2004, compared to 427 at December 31, 2003 and 386 at December 31, 2002.

 

Total noninterest expense for the year ended December 31, 2004 of $35.2 million was $2.7 million higher then the year ended December 31, 2003. Total noninterest expense for the year ended December 31, 2003 was $2.9 million higher than the year ended December 31, 2002. Table 16 presents the components of noninterest expense for the last five years.

 

Table 16

NONINTEREST EXPENSE

 

     Year Ended December 31,

     2004

   2003

   2002

   2001

   2000

     (Dollars in thousands)

Personnel

   $ 18,568    $ 16,633    $ 14,912    $ 13,867    $ 11,751

Occupancy

     3,551      3,158      2,853      2,624      2,106

Data processing

     3,612      3,049      2,731      2,461      2,224

Furniture and equipment

     2,041      2,025      1,896      1,874      1,650

Intangibles amortization

     1,496      1,675      1,818      3,852      2,603

Professional fees

     893      980      666      600      705

Charitable contributions

     422      907      398          

FDIC insurance assessment

     126      124      134      127      122

Other

     4,441      3,943      4,185      4,230      3,867
    

  

  

  

  

Total noninterest expense

   $ 35,150    $ 32,494    $ 29,593    $ 29,635    $ 25,028
    

  

  

  

  

 

Intangibles amortization was $1.5 million for the year ended December 31, 2004, a decrease of $179,000 or 10.69 percent from the year ended December 31, 2003 compared to a $143,000 or 7.87 percent decrease for the year ended December 31, 2003 from the year ended December 31, 2002. The acquisitions in 2004 and 2003 are listed in Table 2.

 

Data processing expense was $3.6 million for the year ended December 31, 2004, an increase of $563,000 or 18.47 percent over the year ended December 31, 2003 compared to a $318,000 or 11.64 percent increase for the year ended December 31, 2003 over the year ended December 31, 2002. In the year acquisitions are made, substantial one time data processing costs are incurred to convert customer account information files from the selling institution’s data processing files to BancShares’ data processing files. Increases and decreases in each period resulted primarily from the acquisitions listed in Table 2 and the opening of new offices in Manteo, North Carolina in May 2004 and Kenansville, North Carolina in February 2003.

 

Furniture and equipment expense was $2.0 million for the year ended December 31, 2004, an increase of $16,000 or 0.79 percent over the year ended December 31, 2003 compared to a $129,000 or a 6.80 percent increase for the year ended December 31, 2003 over the year ended December 31, 2002. Increases in each period resulted primarily from the acquisitions listed in Table 2, the opening of a new branch in Kenansville, North Carolina in 2003 and the opening of a new branch in Manteo, North Carolina in 2004.

 

Occupancy expense was $3.6 million for the year ended December 31, 2004, an increase of $393,000 or 12.44 percent over the year ended December 31, 2003 compared to a $303,000 or 10.62 percent increase for the year ended December 31, 2003 over the year ended December 31, 2002. Increases in each period resulted primarily from the acquisitions listed in Table 2, the opening of a new branch in Kenansville, North Carolina in 2003 and the opening of a new branch in Manteo, North Carolina in 2004.

 

29


INCOME TAXES

 

For the year ended December 31, 2004, BancShares recorded total income tax expense of $1.9 million, compared to $3.3 million of income tax expense for the year ended December 31, 2003 and $3.8 million for the year ended December 31, 2002. BancShares’ effective tax rate decreased from 29.68 percent for the year ended December 31, 2002 to 28.94 percent for the year ended December 31, 2002 to 25.05 percent for the year ended December 31, 2004. The decreases in the effective tax rates from 2002 to 2004 primarily resulted from increases in the ratios of tax exempt earnings to total decreased earnings.

 

RELATED PARTY TRANSACTIONS

 

BancShares has entered into various service contracts with another bank holding company, First Citizens BancShares, Inc. (the “Corporation”) and its subsidiary First-Citizens Bank & Trust Company (“First Citizens”). The Corporation has two significant shareholders, which are also significant shareholders of BancShares. The first significant shareholder is a director of BancShares and at December 31, 2004 beneficially owned 32,751 shares, or 29.74%, of BancShares’ outstanding common stock and 4,966 shares, or 1.42%, of BancShares’ outstanding Series B preferred stock. At the same date, the second significant shareholder beneficially owned 27,422 shares, or 24.90%, of BancShares’ outstanding common stock.

 

These two significant shareholders are directors and executive officers of the Corporation and at December 31, 2004, beneficially owned 2,529,534 shares, or 28.89%, and 1,378,670 shares, or 15.74%, of the Corporation’s outstanding Class A common stock, and 664,533 shares, or 39.61%, and 209,742 shares, or 12.50%, of the Corporation’s outstanding Class B common stock. The above totals include 464,804 Class A common shares, or 5.31%, and 104,644 Class B common shares, or 6.24%, that are considered to be beneficially owned by both of the shareholders and, therefore, are included in each of their totals.

 

As more fully discussed in note 15, Southern incurred expenses for various contractual services provided by First Citizens. Data and item processing expenses were incurred for courier services, proof and encoding, imaging, check storage, statement rendering and item processing forms. Management has researched alternative, non-related, providers for such services and believes that it pays fair value for these services. BancShares also has a correspondent relationship with the Corporation. Correspondent account balances with the Corporation included in cash and due from banks totaled $4.2 million at December 31, 2004 and $27.6 million at December 31, 2003. Southern’s wholly-owned subsidiary, Goshen, Inc. paid $67,000 to an Insurance Company owned by the Corporation for the sale of insurance written in connection with loans made by Southern in 2004 compared to $82,000 for such insurance written in 2003. BancShares also owns 127,584 and 22,219 shares of Class A and Class B common stock of the Corporation. The Class A and Class B common stock had an amortized cost of $3.0 million and $465,000, respectively, at December 31, 2004. The Class A common stock had a fair value of $18.9 million and $15.0 million at December 31, 2004 and 2003, respectively. The Class B common stock had a fair value of $3.2 million and $2.7 million at December 31, 2004 and 2003, respectively.

 

BancShares is related through common ownership with Fidelity Bancshares NC Inc., (“Fidelity”) and Heritage BancShares, Inc., (“Heritage”) in that the aforementioned two significant shareholders of BancShares and certain of their related parties are also significant shareholders of Fidelity and Heritage. Fidelity has contracted with BancShares for BancShares to service, on Fidelity’s behalf, $1.9 million of Fidelity’s mortgage loans at December 31, 2004. BancShares provides underwriting and processing services for mortgage loans originated through Fidelity and Heritage.

 

LIQUIDITY

 

Management places great importance on maintaining a highly liquid investment portfolio with maturities structured to meet liquidity requirements. The ability to generate deposits is the primary source of liquidity. The average deposit growth rate was 7.87 percent for the year ended December 31, 2004, 10.01 percent for the year ended December 31, 2003 and 4.02 percent for the year ended December 31, 2002.

 

At December 31, 2004 the investment portfolio totaled $280.5 million or 27.32 percent of total assets. At December 31, 2003 the investment portfolio totaled $253.0 million or 24.92 percent of total assets. Management expects maturing securities combined with other traditional sources of liquidity to provide BancShares liquidity requirements.

 

30


The above liquidity sources have traditionally enabled BancShares to place minimal dependence on borrowed funds to meet liquidity needs, however BancShares has readily available sources for borrowed funds through various correspondent banks.

 

The acquisition of a branch from another financial institution will usually also increase liquidity as Bancshares receives cash for the difference in the liabilities acquired (primarily deposits) and the assets acquired (primarily loans). In 2004, $15.4 million of net cash was acquired through branch acquisitions compared to $15.1 million of net cash acquired in 2003 as a result of branch acquisitions.

 

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.

 

Table 17

CONTRACTURAL OBLIGATIONS

 

     Payments due by period

As of December 31, 2004


   Less than
1 year


   1-3
years


   4-5
years


   Over 5
years


   Total

     (In thousands)

Deposits

   $ 777,308    $ 99,512    $ 33,702    $    $ 910,522

Short-term borrowings

     16,017                     16,017

Long-term obligations

                    23,711      23,711

Lease obligations

     56      97      16           169
    

  

  

  

  

Total contractual cash obligations

   $ 793,381    $ 99,609    $ 33,718    $ 23,711    $ 950,419
    

  

  

  

  

 

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

 

Included in shareholders’ equity is accumulated other comprehensive income which is primarily the unrealized net gains on securities available-for-sale at the date of the period identified. Minimum pension liability also is included in accumulated other comprehensive income. BancShares owns corporate stock and debt securities investments in several financial institutions. As a result of the daily equity market movement of the value of the individual investment instruments, the net after tax value of these investments above or below the recorded cost of the investments, as of the period date indicated, is reported as accumulated other comprehensive income within shareholders’ equity. See the notes to the consolidated statements for a detailed discussion of comprehensive income and minimum pension liability.

 

31


BancShares maintains adequate capital balances and exceeds all minimum regulatory capital requirements. Table 18 provides additional information on the regulatory capital of BancShares. Failure to meet certain capital requirements as defined by BancShares’ regulatory agencies could result in specific regulatory actions that could have a material effect on BancShares’ financial statements.

 

Table 18

ANALYSIS OF SOUTHERN’S CAPITAL ADEQUACY

 

Southern’s capital ratios as of December 31 are set forth below:

 

     2004

    2003

    2002

 

Tier 1 capital (1)

   $ 74,762     $ 72,828     $ 66,546  

Total capital

     88,796       85,594       77,814  

Risk-adjusted assets

     660,431       659,058       625,745  

Average tangible assets

     1,011,519       955,572       867,084  

Tier 1 capital ratio (1)

     11.32 %     11.05 %     10.63 %

Total capital

     13.45 %     12.99 %     12.44 %

Leverage capital ratio

     7.39 %     7.62 %     7.67 %
 
  (1)   The Capital Securities issued in 1998 are considered part of Tier I Capital. The minimum ratio of qualifying total capital to risk weighted assets is 8%, of which 4% must be Tier 1 capital, which is common equity, retained earnings, and a limited amount of perpetual preferred stock, less certain intangibles.

 

The rate of return on average shareholders’ equity for the year ended December 31, 2004 was 6.37 percent compared to 9.20 percent for the year ended December 31, 2003 and 12.51 percent for the year ended December 31, 2002. The decreased rates of return recorded during 2004 and 2003 resulted principally from the reduction in net interest income created by the overall interest rate market structured by the Federal Reserve in 2004 and 2003 that resulted in a significant reduction in the spread between the cost of interest-bearing liabilities and the yield on interest-bearing assets.

 

The Board of Directors of BancShares has authorized the purchase of shares of Common, Preferred B and Preferred C stock up to an amount not to equal or exceed 10% of BancShares’ consolidated net worth during the ensuing year. Management will continue to consider the purchase of outstanding shares when market conditions are favorable and excess capital is available for such purchases.

 

FOURTH QUARTER ANALYSIS

 

BancShares’ net income for the fourth quarter of 2004 totaled $1.6 million, an increase of $48,000 or 3.09 percent from the fourth quarter of 2003. Average interest-earning assets for the fourth quarter of 2004 increased $55.2 million or 5.96 percent over the fourth quarter of 2003. Average loans for the fourth quarter of 2004 increased $9.8 million or 1.54 percent over the fourth quarter of 2003. Average investment securities for the fourth quarter of 2004 increased $80.6 million or 39.12 percent from the fourth quarter of 2003. Average earning assets, average loans and average investment securities increased primarily as a result of internal growth of existing branches, the addition of one new branch in 2004, the addition of one new branch in 2003 and the acquisitions listed in Table 2.

 

Interest income for the fourth quarter of 2004 increased $1.9 million or 19.37 percent from the fourth quarter of 2003 primarily as a result of the increased volume of interest earning assets.

 

Average interest-bearing liabilities increased $37.6 million, or 5.29 percent, from the fourth quarter of 2003 to the fourth quarter of 2004 primarily as a result of growth within existing branches, the addition of one new branch in 2004, the addition of one new branch in 2003 and the acquisitions listed in Table 2. The rate on total interest-bearing liabilities decreased from 1.68 percent for the fourth quarter of 2003 to 1.67 percent for the fourth quarter of 2004.

 

Net interest income in the fourth quarter of 2004 increased $1.8 million from the fourth quarter of 2003 primarily as a result of lower overall interest rates offset by growth within the existing branches, the addition of one new branch in 2004, the addition of one new branch in 2003 and the acquisitions listed in Table 2.

 

32


Non-interest income for the fourth quarter of 2004 decreased $608,000 or 17.04 percent from the fourth quarter of 2003 primarily as a result of reduced gains on sales of loans. Non-interest expense for the fourth quarter of 2004 increased $955,000 or 11.29 percent from the fourth quarter of 2003 primarily as a result of increases in personnel expense, occupancy and other non-interest expenses related to the addition of one new branch in 2004, the addition of one new branch in 2003 and the acquisitions listed in Table 2.

 

During the fourth quarter of 2003, in conjunction with the filing of the state income tax return, it was determined that BancShares would now be likely to pay state income taxes in future years. As a result, the valuation allowance in state deferred tax assets was no longer required. A decrease in tax expense of $280 was recorded in the fourth quarter of 2003. Additionally, the sharp decline in net income before tax in the fourth quarter resulted in the effective tax rate previously estimated during 2003 being overstated. An adjustment was made in the fourth quarter of 2003 to account for the effect of these changes.

 

Table 19

SELECTED QUARTERLY DATA

 

     2004

   2003

     Fourth

   Third

   Second

   First

   Fourth

   Third

   Second

   First

SUMMARY OF OPERATIONS                                                        

Interest income

   $ 11,988    $ 11,225    $ 11,184    $ 10,929    $ 10,043    $ 11,807    $ 12,100    $ 12,133

Interest expense

     3,255      3,073      2,968      2,964      3,066      3,116      3,270      3,480
    

  

  

  

  

  

  

  

Net interest income

     8,733      8,152      8,216      7,965      6,977      8,691      8,830      8,653

Provision for loan losses

     300      300      300      300      450      450      450      450
    

  

  

  

  

  

  

  

Net income after provision for loan losses

     8,433      7,852      7,916      7,665      6,527      8,241      8,380      8,203

Noninterest income

     2,961      2,726      2,551      2,783      3,569      3,039      3,207      2,672

Noninterest expense.

     9,416      8,573      8,606      8,555      8,461      8,663      7,585      7,785
    

  

  

  

  

  

  

  

Income before income taxes

     1,978      2,005      1,861      1,893      1,635      2,617      4,002      3,090

Income taxes

     378      560      602      398      83      864      1,376      960
    

  

  

  

  

  

  

  

Net income

   $ 1,600    $ 1,445    $ 1,259    $ 1,495    $ 1,552    $ 1,753    $ 2,626    $ 2,130
    

  

  

  

  

  

  

  

Net income applicable to common shares

   $ 1,510    $ 1,355    $ 1,172    $ 1,407    $ 1,461    $ 1,660    $ 2,539    $ 2,042
    

  

  

  

  

  

  

  

 

SELECTED QUARTERLY DATA

PER SHARE OF STOCK

 

     2004

   2003

     Fourth

   Third

   Second

   First

   Fourth

   Third

   Second

   First

Net income per share of common stock

   $ 13.69    $ 12.25    $ 10.56    $ 12.62    $ 13.09    $ 14.84    $ 22.71    $ 18.08

Cash dividends—common

     0.40      0.40      0.40      0.40      0.40      0.40      0.40      0.38

Cash dividends—preferred B

     0.23      0.23      0.22      0.22      0.23      0.23      0.22      0.22

Cash dividends—preferred C

     0.23      0.23      0.22      0.22      0.23      0.23      0.22      0.22

 

LEGAL PROCEEDINGS

 

There are no material legal proceedings to which BancShares or its subsidiaries are a party or to which any of their property is subject, other than ordinary, routine litigation incidental to the business of commercial banking.

 

33


MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

There is no established market for BancShares’ common or preferred stock, although the common stock is quoted in the “pink sheets” under the trading symbol “SBNC.”

 

The approximate number of record holders of BancShares’ outstanding common stock at December 31, 2004 was 321. Dividends paid to shareholders of BancShares are dependent upon dividends received by BancShares from Southern. Southern is restricted as to dividend payout by state laws applicable to banks and may pay dividends only out of undivided profits. Should at any time its surplus be less than 50% of its paid-in capital stock, Southern may not declare a dividend until it has transferred from undivided profits to surplus 25% of its undivided profits or any lesser percentage that may be required to restore its surplus to an amount equal to 50% of its paid-in capital stock. Additionally, dividends paid by Southern may be limited by the need to retain sufficient earnings to satisfy minimum capital requirements imposed by the Federal Deposit Insurance Corporation.

 

Dividends on BancShares’ common stock may be paid only after dividends on preferred Series “B” and “C” shares have been paid. Common share dividends are based upon BancShares’ profitability and are paid at the discretion of the Board of Directors. Management does not expect any of the foregoing restrictions to materially limit its ability to pay dividends comparable to those paid in the past. Information regarding dividends paid by BancShares on its outstanding common and preferred stock during each quarter of 2004 and 2003 is contained in the “Per Share of Stock” section of Table 19.

 

Common shareholders are entitled to one vote per share and holders of shares of BancShares’ Series “B” and “C” preferred stock are entitled to one vote for each 38 shares owned.

 

The following table contains information regarding repurchases by BancShares of shares of its outstanding equity securities during the quarter ended December 31, 2004:

 

Table 20

ISSUER REPURCHASES OF EQUITY SECURITIES

 

Period


   Total Number
of Shares
Repurchased (1)


   Average
Price
Paid per
Share


  

Total Number
of Shares
Purchased

as Part of
Publicly
Announced
Plans


   Maximum
Number of
Shares that
may yet be
Purchased
Under the
Plans


Month #1: 10/01/04 through 10/31/04

                     

Common Stock

   490    $ 425.00    N/A    N/A

Series B Preferred Stock

        N/A    N/A    N/A

Series C Preferred Stock

        N/A    N/A    N/A

Month #2: 11/01/04 through 11/30/04

                     

Common Stock

        N/A    N/A    N/A

Series B Preferred Stock

   150    $ 11.25    N/A    N/A

Series C Preferred Stock

        N/A    N/A    N/A

Month #3: 12/01/04 through 12/31/04

                     

Common Stock

        N/A    N/A    N/A

Series B Preferred Stock

   1,318    $ 11.25    N/A    N/A

Series C Preferred Stock

        N/A    N/A    N/A

Total numbers of shares:

                     

Common Stock

   490    $ 425.00    N/A    N/A

Series B Preferred Stock

   1,468    $ 11.25    N/A    N/A

Series C Preferred Stock

        N/A    N/A    N/A

(1)   All purchases were made pursuant to general authority given each year by BancShares’ Board of Directors and not pursuant to a formal repurchase plan or program. Under that authority, BancShares is authorized to repurchase shares of its capital stock from time to time in unsolicited private transactions and/or on the open market. All of the above purchases were unsolicited private transactions. Purchases are subject to various conditions, including price and volume limitations and compliance with applicable law.

 

34


ACCOUNTING AND OTHER MATTERS

 

ACCOUNTING MATTERS

 

The new accounting standards are discussed in detail in the notes to the consolidated financial statements.

 

OTHER MATTERS

 

Code of Ethics

 

BancShares has adopted a code of ethics that applies to all its executive officers, including its principal executive and principal financial and accounting officers. A copy of the code of ethics will be provided without charge to any person upon request. Requests for copies should be directed by mail to Corporate Secretary, Southern BancShares, Inc., Post Office Box 729, Mount Olive, North Carolina 28365, or by telephone to (919) 658-7007.

 

Audit Committee Financial Expert

 

Rules recently adopted by the Securities and Exchange Commission (the “SEC”) require BancShares to disclose whether its Board of Directors has determined that its Audit Committee includes a member who qualifies as an “audit committee financial expert” as that term is defined in the SEC’s rules. To qualify as an audit committee financial expert under the SEC’s rules, a person must have a relatively high level of accounting and financial knowledge or expertise which he or she has acquired through specialized education or training or through experience in certain types of positions. BancShares currently does not have a director who its Board believes can be considered an audit committee financial expert and, for that reason, there is no such person who the Board can appoint to BancShares’ Audit Committee. In the future, financial expertise and experience will be one of many factors that BancShares’ Board considers in selecting candidates to become directors. However, BancShares is not required by any law or regulation to have an audit committee financial expert on its Board or Audit Committee, and the Board believes that small companies such as BancShares will find it difficult to locate persons with the specialized knowledge and experience needed to qualify as audit committee financial experts who are willing to serve as directors without being compensated at levels higher than BancShares currently pays its directors. BancShares’ current Audit Committee members have a level of financial knowledge and experience that its Board believes is sufficient for a bank the size of BancShares that does not engage in a wide variety of business activities. For that reason, the ability to qualify as an audit committee financial expert will not be the primary criteria in the Board’s selection of candidates to become new directors.

 

Amortizable Intangible Assets

 

The determination of the amortizable portion of the total intangible asset recorded related to the Seaboard and Woodland acquisition (and subsequent amortization thereof in 2004) is based upon an internal estimate performed by BancShares.

 

Procedures for Shareholder Recommendations to Nominating Committee

 

BancShares’ Nominating Committee has adopted procedures to be followed by shareholders who wish to recommend candidates to the Committee for its consideration in connection with its recommendation of director nominees to the Board of Directors. A copy of those procedures is attached as an exhibit to this Report. A copy of these procedures will be provided without charge to any person upon request. Requests for copies should be directed by mail to Corporate Secretary, Southern BancShares, Inc., Post Office Box 729, Mount Olive, North Carolina 28365, or by telephone to (919) 658-7007.

 

Management is not aware of any other known trends, events, uncertainties, or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on BancShares’ liquidity, capital resources or other operations.

 

35


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.

 

CONTROLS AND PROCEDURES

 

BancShares’ management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of BancShares’ disclosure controls and procedures, as defined in Section 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), and have concluded that, as of the end of the period covered by this Report, those disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed by BancShares in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods.

 

No change in BancShares’ internal control over financial reporting occurred during the 4th quarter of the period covered by this report that was identified in connection with the above evaluation and that has materially affected, or is reasonably likely to materially affect, BancShares internal control over financial reporting.

 

 

36


LOGO

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders

Southern BancShares (N.C.), Inc.

Mt. Olive, North Carolina

 

We have audited the accompanying consolidated balance sheet of Southern BancShares (N.C.), Inc. and subsidiary (the “Company”) as of December 31, 2004 and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern BancShares (N.C.), Inc. and subsidiary as of December 31, 2004, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

LOGO

Sanford, North Carolina

February 11, 2005

 

37


LOGO

 

KPMG LLP

Suite 1200

150 Fayetteville Street Mall

PO Box 29543

Raleigh, NC 27626-0543

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders

Southern BancShares, Inc.:

 

We have audited the accompanying consolidated balance sheet of Southern Bancshares (N.C.), Inc. and Subsidiaries (the Company) as of December 31, 2003, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern Bancshares (N.C.), Inc. and Subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note A to the consolidated financial statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, and Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions.

 

LOGO

 

March 5, 2004

 

 

KPMG LLP, a U.S. limited liability partnership, is the U.S.

member firm of KPMG International, a Swiss cooperative.

 

38


SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except for shares and per share data)

 

     December 31,

 
     2004

    2003

 
ASSETS                 

Cash and due from banks

   $ 22,283     $ 44,552  

Overnight funds sold

     35,872       40,020  

Investment securities:

                

Available-for-sale, at fair value (amortized cost of $43,600 and $117,903, respectively)

     74,903       143,669  

Held-to-maturity, at amortized cost (fair value of $236,172 and $110,346, respectively)

     236,609       109,357  

Loans

     639,311       628,000  

Loans held for sale

     4,880       3,171  

Less allowance for loan losses

     (10,259 )     (10,095 )
    


 


Net loans

     633,932       621,076  

Accrued interest receivable

     4,929       4,910  

Premises and equipment

     34,513       35,605  

Goodwill

     7,712       6,516  

Intangible assets

     3,687       4,590  

Other assets

     3,010       5,732  
    


 


Total assets

   $ 1,057,450     $ 1,016,027  
    


 


LIABILITIES                 

Deposits:

                

Noninterest-bearing

   $ 183,762     $ 174,155  

Interest-bearing

     726,760       702,355  
    


 


Total deposits

     910,522       876,510  

Accrued interest payable

     1,447       1,364  

Short-term borrowings

     16,017       15,870  

Long-term obligations

     23,711       23,711  

Other liabilities

     9,735       10,054  
    


 


Total liabilities

     961,432       927,509  
    


 


SHAREHOLDERS’ EQUITY                 

Series B non-cumulative preferred stock, no par value; $3,506 and $3,583 liquidation value at December 31, 2004 and December 31, 2003, respectively; 408,728 shares authorized; 350,593 and 358,316 shares issued and outstanding at December 31, 2004 and December 31, 2003, respectively

     1,753       1,745  

Series C non-cumulative preferred stock, no par value; $397 liquidation value at both December 31, 2004 and December 31, 2003; 43,631 shares authorized; 39,657 shares issued and outstanding at both December 31, 2004 and December 31, 2003

     525       552  

Common stock, $5 par value; 158,485 shares authorized; 110,126 and 111,530 shares issued and outstanding at December 31, 2004 and December 31, 2003, respectively

     551       558  

Surplus

     10,000       10,000  

Retained earnings

     64,528       59,919  

Accumulated other comprehensive income

     18,661       15,744  
    


 


Total shareholders’ equity

     96,018       88,518  
    


 


Total liabilities and shareholders’ equity

   $ 1,057,450     $ 1,016,027  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

39


SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Dollars in thousands except for share and per share data)

 

     Year ended December 31,

 
     2004

    2003

    2002

 

Interest income:

                        

Loans

   $ 38,348     $ 39,888     $ 40,582  

Investment securities:

                        

U. S. Government

     3,379       3,112       5,509  

State, county and municipal

     1,107       1,062       1,203  

Other

     1,938       1,484       1,628  
    


 


 


Total investment securities interest income

     6,424       5,658       8,340  

Overnight funds sold

     554       537       500  
    


 


 


Total interest income

     45,326       46,083       49,422  

Interest expense:

                        

Deposits

     10,203       10,784       13,319  

Short-term borrowings

     160       120       203  

Long-term obligations

     1,897       2,028       2,070  
    


 


 


Total interest expense

     12,260       12,932       15,592  
    


 


 


Net interest income

     33,066       33,151       33,830  

Provision for loan losses

     1,200       1,800       1,950  
    


 


 


Net interest income after provision for loan losses

     31,866       31,351       31,880  

Noninterest income:

                        

Service charges on deposit accounts

     7,090       6,714       5,688  

Other service charges and fees

     2,474       2,253       1,786  

Gain on sale of loans

     662       2,446       1,297  

Investment securities gain, net.

     229       282       1,569  

Other

     566       792       330  
    


 


 


Total noninterest income

     11,021       12,487       10,670  

Noninterest expense:

                        

Personnel

     18,568       16,633       14,912  

Data processing

     3,612       3,049       2,731  

Occupancy

     3,551       3,158       2,853  

Furniture and equipment

     2,041       2,025       1,896  

Intangibles amortization

     1,496       1,675       1,818  

Professional fees

     893       980       666  

Other

     4,989       4,974       4,717  
    


 


 


Total noninterest expense

     35,150       32,494       29,593  
    


 


 


Income before income taxes

     7,737       11,344       12,957  

Income taxes

     1,938       3,283       3,846  
    


 


 


Net income

     5,799       8,061       9,111  
    


 


 


Other comprehensive income, net of tax:

                        

Unrealized gains arising during period

     5,235       6,867       4,234  

Less: tax effect

     (2,016 )     (2,647 )     (1,632 )

Less: Reclassification adjustment for gains included in net income

     (229 )     (282 )     (1,569 )

Less: tax effect

     85       109       605  

Minimum pension liability

     (257 )     (94 )     (49 )

Less: tax effect

     99       36       19  

Total other comprehensive income

     2,917       3,989       1,608  
    


 


 


Comprehensive income

   $ 8,716     $ 12,050     $ 10,719  
    


 


 


Per share information:

                        

Net income per common share

   $ 49.12     $ 68.72     $ 76.77  

Cash dividends declared on common shares

     1.60       1.58       1.50  

Weighted average common shares outstanding

     110,828       112,070       113,961  
    


 


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

40


SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands except for share and per share data)

 

    Preferred Stock

                    Accumulated
Other
Compre-
hensive
Income


    Total
Shareholders’
Equity


 
    Series B

    Series C

    Common Stock

        Retained
Earnings


     
    Shares

    Amount

    Shares

    Amount

    Shares

    Amount

    Surplus

     

BALANCE, DECEMBER 31, 2001

  363,373     $ 1,770     39,716     $ 553     114,208     $ 571     $ 10,000   $ 44,388     $ 10,147     $ 67,429  

Net income

                                      9,111             9,111  

Purchase and retirement of stock

  (2,453 )     (12 )   (59 )     (1 )   (559 )     (3 )         (124 )           (140 )

Cash dividends:

                                                                       

Common stock ($1.50 per share)

                                      (170 )           (170 )

Preferred B ($.90 per share)

                                      (326 )           (326 )

Preferred C ($.90 per share)

                                      (36 )           (36 )

Other

                                      33             33  

Minimum pension liability, net of tax

                                            (30 )     (30 )

Unrealized gain on securities available-for-sale, net of tax

                                            1,638       1,638  
   

 


 

 


 

 


 

 


 


 


BALANCE, DECEMBER 31, 2002

  360,920     $ 1,758     39,657     $ 552     113,649     $ 568     $ 10,000   $ 52,876     $ 11,755     $ 77,509  
   

 


 

 


 

 


 

 


 


 


Net income

                                      8,061             8,061  

Purchase and retirement of stock

  (2,604 )     (13 )                 (2,119 )     (10 )         (487 )           (510 )

Cash dividends:

                                                                       

Common stock ($1.58 per share)

                                      (172 )           (172 )

Preferred B ($.90 per share)

                                      (323 )           (323 )

Preferred C ($.90 per share)

                                      (36 )           (36 )

Minimum pension liability, net of tax

                                            (58 )     (58 )

Unrealized gain on securities available-for-sale, net of tax

                                            4,047       4,047  
   

 


 

 


 

 


 

 


 


 


BALANCE, DECEMBER 31, 2003

  358,316     $ 1,745     39,657     $ 552     111,530     $ 558     $ 10,000   $ 59,919     $ 15,744     $ 88,518  
   

 


 

 


 

 


 

 


 


 


Net income

                                      5,799             5,799  

Purchase, retirement and reclass of stock . . . .

  (7,723 )     8             (27 )   (1,404 )     (7 )         (658 )           (684 )

Cash dividends:

                                                                       

Common stock ($1.60 per share)

                                      (177 )           (177 )

Preferred B ($.90 per share)

                                      (319 )           (319 )

Preferred C ($.90 per share)

                                      (36 )           (36 )

Minimum pension liability, net of tax

                                            (158 )     (158 )

Unrealized gain on securities available-for-sale, net of tax

                                            3,075       3,075  
   

 


 

 


 

 


 

 


 


 


BALANCE, DECEMBER 31, 2004

  350,593     $ 1,753     39,657     $ 525     110,126     $ 551     $ 10,000   $ 64,528     $ 18,661     $ 96,018  
   

 


 

 


 

 


 

 


 


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

41


SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year ended December 31,

 
     2004

    2003

    2002

 

OPERATING ACTIVITIES:

                        

Net income

   $ 5,799     $ 8,061     $ 9,111  

Adjustments to reconcile net income to net cash provided (used) by operating activities:

                        

Provision for loan losses

     1,200       1,800       1,950  

Deferred income taxes

     (238 )     (422 )     (681 )

Gains on sales, donations and issuer calls of securities

     (181 )     (282 )     (1,569 )

Loss (gain) on sale and abandonment of premises and equipment

     48       (167 )     117  

Gain on sale of foreclosed assets

     53       22       (89 )

Gain on sale of loans

     (662 )     (2,446 )     (1,297 )

Net amortization (accretion of discounts) of premiums on investments

     631       1,087       646  

Amortization of intangibles and mortgage servicing rights

     1,791       1,928       2,109  

Depreciation

     2,783       2,484       2,401  

Proceeds from sales of loans held for sale

     65,555       132,148       63,173  

Origination of loans held for sale

     (71,365 )     (129,096 )     (98,297 )

Net increase in intangible assets

     (293 )     (549 )     (355 )

Net (increase) decrease in accrued interest receivable

     (19 )     371       816  

Net increase (decrease) in accrued interest payable

     83       (577 )     (1,309 )

Net increase in other assets

     (554 )     (1,689 )     (1,017 )

Net (decrease) increase in other liabilities

     (320 )     365       1,239  
    


 


 


NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES

     4,311       13,038       (23,052 )
    


 


 


INVESTING ACTIVITIES:

                        

Proceeds from maturities and issuer calls of investment securities available-for-sale

     54,015       72,650       43,529  

Proceeds from maturities and issuer calls of investment securities held-to-maturity

     46,398       24,910       42,332  

Proceeds from sales of investment securities available-for-sale

           1,815       3,387  

Purchases of investment securities held-to-maturity

     (143,993 )     (106,081 )     (14,797 )

Purchases of investment securities available-for-sale

     (10,555 )     (49,984 )     (57,134 )

Net decrease (increase) in loans

     4,167       (14,632 )     (32,383 )

Purchases of premises and equipment

     (1,728 )     (5,085 )     (2,059 )

Proceeds from sales of foreclosed assets

     646