UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the period ended September 30, 1998
Commission File Number: 0-16471
First Citizens BancShares, Inc
(Exact name of Registrant as specified in its charter)
Delaware 56-1528994
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
239 Fayetteville Street, Raleigh, North Carolina 27601
(Address of principal executive offices) (zip code)
(919) 716-7000
(Registrant's telephone number, including area code)
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 twelve 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 ninety days.
Yes X No _____
Class A Common Stock--$1 Par Value-- 8,905,199 shares Class B Common Stock--$1
Par Value-- 1,720,360 shares (Number of shares outstanding, by class, as of
November 12, 1998)
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1998, December 31, 1997,
and September 30, 1997
Consolidated Statements of Income for the three-month and nine-month
periods ended September 30, 1998, and September 30, 1997
Consolidated Statements of Changes in Shareholders' Equity for the
three-month and nine-month periods ended September 30, 1998, and
September 30, 1997
Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 1998, and September 30, 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Market Risk Disclosure
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. During the quarter ended September 30, 1998,
Registrant filed no Current Reports
on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CITIZENS BANCSHARES, INC.
(Registrant)
Dated: November 12, 1998 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
September 30* December 31# September 30*
(thousands,except share data) 1998 1997 1997
<S> <C> <C> <C>
Assets
Cash and due from banks $435,485 $506,771 $451,772
Investment securities held to maturity 2,069,342 2,456,722 2,432,424
Investment securities available for sale 46,001 26,572 29,530
Federal funds sold 10,000 81,775 70,000
Loans 6,132,422 5,445,772 5,208,195
Less reserve for loan losses 94,135 84,360 83,385
Net loans 6,038,287 5,361,412 5,124,810
Premises and equipment 327,150 278,473 264,066
Income earned not collected 61,096 66,631 63,268
Other assets 207,481 172,753 159,721
Total assets $9,194,842 $8,951,109 $8,595,591
Liabilities
Deposits:
Noninterest-bearing $1,204,633 $1,131,498 $1,104,615
Interest-bearing 6,566,460 6,448,069 6,193,269
Total deposits 7,771,093 7,579,567 7,297,884
Short-term borrowings 534,943 593,824 539,382
Long-term obligations 158,801 10,856 11,482
Other liabilities 86,332 165,222 84,353
Total liabilities 8,551,169 8,349,469 7,933,101
Shareholders' Equity
Common stock:
Class A - $1 par value (8,905,199; 8,905,199;
and 9,633,699 shares issued, respectively) 8,906 8,906 9,634
Class B - $1 par value (1,720,360; 1,722,254;
and 1,756,229 shares issued, respectively) 1,720 1,722 1,756
Surplus 143,760 143,760 143,760
Retained earnings 480,255 437,794 496,673
Unrealized gains on marketable equity securities,
net of taxes 9,032 9,458 10,667
Total shareholders' equity 643,673 601,640 662,490
Total liabilities and shareholders' equity $9,194,842 $8,951,109 $8,595,591
* Unaudited
# Derived from the Consolidated Balance Sheet included in the 1997 Annual Report
on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries
Three Months Ended Nine Months Ended
September 30 September 30
(thousands, except per share data, unaudited) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $123,861 $107,892 $353,512 $317,748
Investment securities:
U. S. Government 32,615 34,732 103,452 96,461
State, county and municipal 50 53 162 203
Other 342 25 378 84
Total investment securities interest income 33,007 34,810 103,992 96,748
Federal funds sold 513 2,792 3,882 7,555
Total interest income 157,381 145,494 461,386 422,051
Interest expense
Deposits 64,013 62,063 192,202 178,778
Short-term borrowings 6,716 6,651 19,287 15,806
Long-term obligations 3,195 233 7,525 611
Total interest expense 73,924 68,947 219,014 195,195
Net interest income 83,457 76,547 242,372 226,856
Provision for loan losses 5,324 1,309 14,986 4,973
Net interest income after provision for loan losses 78,133 75,238 227,386 221,883
Noninterest income
Trust income 3,026 2,808 9,080 8,361
Service charges on deposit accounts 12,067 10,615 34,729 30,865
Credit card income 6,954 5,574 18,489 14,190
Other service charges and fees 9,202 7,306 26,308 20,093
Net gain (loss) on held for sale loans 1,067 1,007 3,270 (300)
Other 3,879 3,777 11,604 10,186
Total noninterest income 36,195 31,087 103,480 83,395
Noninterest expense
Salaries and wages 36,408 31,944 104,451 93,796
Employee benefits 6,885 5,967 20,668 17,883
Occupancy expense 7,131 6,066 20,772 17,571
Equipment expense 8,885 8,337 27,081 23,571
Other 27,000 24,247 78,517 69,141
Total noninterest expense 86,309 76,561 251,489 221,962
Income before income taxes 28,019 29,764 79,377 83,316
Income taxes 9,931 10,746 28,084 30,122
Net income $18,088 $19,018 $51,293 $53,194
Per Share
Net income $1.70 $1.67 $4.77 $4.67
Cash dividends 0.25 0.25 0.75 0.75
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
First Citizens BancShares, Inc. and Subsidiaries
Class A Class B Unrealized
Common Common Retained Securities gains, Total
(thousands,except share data, unaudited) Stock Stock Surplus Earnings Net of taxes Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $9,652 $1,759 $143,760 $453,640 $6,696 $615,507
Redemption of 18,201 shares of Class A
common stock and 2,751 shares of
Class B common stock (18) (3) (1,627) (1,648)
Net income 53,194 53,194
Unrealized securities gains, net of taxes 3,971 3,971
Cash dividends (8,534) (8,534)
Balance at September 30, 1997 $9,634 $1,756 $143,760 $496,673 $10,667 $662,490
Balance at December 31, 1997 $8,906 $1,722 $143,760 $437,794 $9,458 $601,640
Redemption of 1,894 shares of Class B
common stock (2) (202) (204)
Obligation to repurchase common stock (624) (624)
Net income 51,293 51,293
Unrealized securities gains, net of taxes (426) (426)
Cash dividends (8,006) (8,006)
Balance at September 30, 1998 $8,906 $1,720 $143,760 $480,255 $9,032 $643,673
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Nine months ended September 30,
--------------------------------------
(thousands, unaudited) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $51,293 $53,194
Adjustments to reconcile net income to cash (used)
provided by operating activities:
Amortization of intangibles 8,445 6,665
Provision for loan losses 14,986 4,973
Deferred tax expense (benefit) 4,519 (760)
Change in current taxes payable 300 (1,326)
Depreciation 19,833 14,009
Change in accrued interest payable (6,754) (1,849)
Change in income earned not collected 5,535 (3,210)
Origination of loans held for sale (585,608) (312,429)
Proceeds from sale of loans held for sale 507,974 321,909
Loss (gain) on loans held for sale (3,270) 300
Net amortization of premiums and discounts 7,486 5,491
Net change in other assets (9,896) 10,093
Net change in other liabilities (76,327) (3,563)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (61,484) 93,497
- ----------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Net increase in loans outstanding (602,254) (253,192)
Purchases of investment securities held to maturity (479,166) (651,725)
Proceeds from maturities of investment securities held to maturity 838,713 363,770
Net change in federal funds sold 71,775 86,000
Dispositions of premises and equipment 1,544 1,305
Additions to premises and equipment (66,439) (48,594)
Purchase of branches, net of cash paid 249,702 105,535
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 13,875 (396,901)
- ----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in time deposits (328,817) 185,438
Net change in demand and other interest-bearing deposits 224,286 (9,045)
Net change in short-term borrowings (60,936) 151,936
Origination of long-term borrowings 150,000 -
Repurchases of common stock (204) (1,648)
Cash dividends paid (8,006) (8,534)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (23,677) 318,147
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Change in cash and due from banks (71,286) 14,743
Cash and due from banks at beginning of period 506,771 437,029
==================================================================================================================================
Cash and due from banks at end of period $ 435,485 $ 451,772
==================================================================================================================================
Cash payments for:
Interest $ 226,563 $ 197,558
Income taxes 32,520 27,476
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities:
Unrealized (loss) gain on investment securities available for sale $ 426 $ 6,575
Change in obligation to repurchase common stock 624 -
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Financial Summary
Table 1
1998 1997 Nine Months Ended
Third Second First Fourth Third September 30
(thousands, except per share data Quarter Quarter Quarter Quarter Quarter 1998 1997
and ratios)
<S> C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $157,381 $154,535 $149,470 $150,225 $145,494 $461,386 $422,051
Interest expense 73,924 73,643 71,447 72,818 68,947 219,014 195,195
Net interest income 83,457 80,892 78,023 77,407 76,547 242,372 226,856
Provision for loan losses 5,324 5,267 4,395 3,753 1,309 14,986 4,973
Net interest income after provision
for loan losses 78,133 75,625 73,628 73,654 75,238 227,386 221,883
Noninterest income 36,195 35,390 31,895 31,912 31,087 103,480 83,395
Noninterest expense 86,309 84,161 81,019 78,832 76,561 251,489 221,962
Income before income taxes 28,019 26,854 24,504 26,734 29,764 79,377 83,316
Income taxes 9,931 9,309 8,844 9,370 10,746 28,084 30,122
Net income $18,088 $ 17,545 $ 15,660 $ 17,364 $ 19,018 $ 51,293 $ 53,194
Net interest income-taxable equivalent $83,988 $81,397 $78,541 $78,327 $77,052 $243,926 $228,399
Selected Averages
Total assets $9,183,571 $9,142,981 $8,927,355 $8,794,596 $8,411,774 $9,085,612 $8,140,047
Investment securities 2,244,014 2,461,590 2,442,962 2,503,443 2,359,115 2,382,134 2,207,587
Loans 6,024,822 5,711,599 5,474,570 5,324,286 5,073,404 5,739,010 5,006,665
Interest-earning assets 8,305,482 8,269,008 8,067,590 7,994,728 7,632,755 8,214,903 7,400,834
Deposits 7,744,217 7,755,945 7,619,330 7,427,881 7,144,502 7,706,955 6,974,860
Interest-bearing liabilities 7,244,949 7,241,686 7,096,124 6,924,776 6,608,892 7,195,128 6,386,022
Long-term obligations 158,353 159,984 55,814 11,450 12,017 125,422 10,142
Shareholders' equity $635,524 $621,605 $607,608 $649,214 $651,923 $621,521 $635,667
Shares outstanding 10,625,559 10,626,702 10,627,453 11,378,368 11,389,472 10,626,565 11,394,195
Selected Period-End Balances
Total assets $9,194,842 $9,224,848 $9,252,029 $8,951,109 $8,595,591 $9,194,842 $8,595,591
Investment securities 2,115,343 2,348,771 2,526,366 2,483,294 2,461,954 2,115,343 2,461,954
Loans 6,132,422 5,886,315 5,562,831 5,445,772 5,208,195 6,132,422 5,208,195
Interest-earning assets 8,257,765 8,235,086 8,324,197 8,010,841 7,710,619 8,257,765 7,740,149
Deposits 7,771,093 7,798,918 7,873,484 7,579,567 7,297,884 7,771,093 7,297,884
Interest-bearing liabilities 7,260,204 7,291,813 7,327,020 7,052,749 6,744,133 7,260,204 6,744,133
Long-term obligations 158,801 159,456 160,219 10,856 11,482 158,801 11,482
Shareholders' equity $643,673 $628,702 $615,036 $601,640 $662,490 $643,673 $662,490
Shares outstanding 10,625,559 10,625,559 10,627,453 10,627,453 11,389,928 10,625,559 11,389,928
Profitability Ratios (averages) Rate of return (annualized) on:
Total assets 0.78% 0.77% 0.71% 0.78% 0.90% 0.75% 0.87%
Shareholders' equity 11.29 11.32 10.45 10.61 11.57 11.03 11.19
Dividend payout ratio 14.71 14.88 17.99 16.13 14.97 15.53 16.06
Liquidity and Capital Ratios (averages)
Loans to deposits 77.80% 73.64% 71.85% 71.68% 71.01% 74.47% 71.78%
Shareholders' equity to total assets 6.92 6.80 6.81 7.38 7.75 6.84 7.81
Time certificates of $100,000 or more
to total deposits 8.85 9.15 9.77 10.05 9.68 9.29 9.47
Per Share of Stock
Net income $1.70 $1.68 $1.39 $1.55 $1.67 $4.77 $4.67
Cash dividends 0.25 0.25 0.25 0.25 0.25 0.75 0.75
Book value at period end 60.58 59.17 57.87 56.61 58.16 60.58 58.16
Tangible book value at period end 49.17 47.02 45.48 47.11 49.27 49.17 49.27
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Outstanding Loans by Type
Table 2
1998 1997
Third Second First Fourth Third
(thousands) Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Real estate:
Construction and land development $156,892 $140,651 $127,260 $113,735 $108,363
Mortgage:
1-4 family residential 1,327,411 1,351,708 1,370,264 1,411,279 1,411,922
Commercial 1,378,086 1,257,465 1,147,844 1,055,529 970,553
Equity Line 641,746 647,117 626,931 603,714 548,959
Other 157,830 153,074 136,191 136,639 133,661
Commercial and industrial 802,653 756,371 675,136 633,580 588,158
Consumer 1,564,041 1,483,333 1,389,079 1,402,093 1,355,783
Lease financing 91,655 83,713 77,161 74,589 75,922
Other 12,108 12,883 12,965 14,614 14,874
Total loans 6,132,422 5,886,315 5,562,831 5,445,772 5,208,195
Less reserve for loan losses 94,135 90,240 85,985 84,360 83,385
Net loans $6,038,287 $5,796,075 $5,476,846 $5,361,412 $5,124,810
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Investment Securities
Table 3
September 30, 1998 September 30, 1997
Average Taxable Average Taxable
Book Fair Maturity Equivalent Book Fair Maturity Equivalent
(thousands) Value Value (Yrs./Mos.) Yield Value Value (Yrs./Mos.) Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government:
Within one year $1,164,636 $1,172,482 0/7 5.96% $1,054,982 $1,055,159 0/6 5.77%
One to five years 896,153 907,582 1/5 5.78 1,363,244 1,365,991 1/10 5.97
Five to ten years 129 135 7/6 8.38 2,906 2,961 6/0 5.52
Over ten years 3,522 3,629 19/0 7.46 4,855 4,976 19/10 7.50
Total 2,064,440 2,083,828 1/0 5.88 2,425,987 2,429,087 1/3 5.88
State, county and municipal:
Within one year 1,161 1,165 0/3 6.47 910 1,119 0/7 6.23
One to five years 2,766 2,871 3/0 7.30 3,425 3,491 2/11 6.89
Five to ten years - - - - 509 544 5/2 8.16
Over ten years 160 166 18/0 9.14 175 175 19/11 9.14
Total 4,087 4,202 2/10 7.14 5,019 5,329 3/3 6.98
Other
Within one year 510 510 0/2 5.53 853 852 0/4 14.20
One to five years 55 55 3/5 5.47 555 552 1/5 5.42
Five to ten years 250 250 9/11 8.00 10 10 5/4 5.63
Total 815 815 1/8 5.80 1,418 1,414 0/9 12.37
Total securities held to maturity 2,069,342 2,088,845 0/11 5.89% $2,432,424 $2,435,830 1/3 5.89%
Securities available for sale 31,021 46,001 - - 11,788 29,530 - -
Total investment securities $2,100,363 $2,134,846 - - $2,444,212 $2,465,360 - -
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Third Quarter
Table 4
1998 1997 Increase (decrease) due to:
Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
(thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans:
Secured by real estate $3,639,111 $73,464 8.03% $3,092,757 $64,611 8.33% $11,331 ($2,478) $8,853
Commercial and industrial 759,002 17,197 9.30 583,231 13,079 8.68 3,526 592 4,118
Consumer 1,526,648 31,635 8.61 1,305,113 28,731 8.80 4,199 (1,295) 2,904
Lease financing 87,632 1,900 8.67 77,472 1,621 8.85 269 10 279
Other 12,429 170 5.41 14,831 327 7.71 (59) (98) (157)
Total loans 6,024,822 124,366 8.34 5,073,404 108,369 8.52 19,266 (3,269) 15,997
Investment securities:
U. S. Government 2,212,912 32,615 5.85 2,352,277 34,732 5.86 (2,058) (59) (2,117)
State, county and municipal 4,276 76 7.05 5,213 81 6.16 (16) 11 (5)
Other 26,826 342 5.06 1,625 25 6.10 354 (37) 317
Total investment securities 2,244,014 33,033 5.84 2,359,115 34,838 5.86 (1,720) (85) (1,805)
Federal funds sold 36,646 513 5.55 200,237 2,792 5.53 (2,285) 6 (2,279)
Total interest-earning assets $8,305,482 $157,912 7.65% $7,632,756 $145,999 7.62% $15,261 ($3,348) $11,913
Liabilities
Deposits:
Checking With Interest $1,031,261 $ 2,583 0.99% $923,049 $2,478 1.07% $291 ($186) $105
Savings 701,009 3,324 1.88 707,477 3,588 2.01 (32) (232) (264)
Money market accounts 1,132,443 10,151 3.56 933,002 8,806 3.74 1,824 (479) 1,345
Time deposits 3,681,556 47,955 5.17 3,516,673 47,191 5.32 2,152 (1,388) 764
Total interest-bearing deposits 6,546,269 64,013 3.88 6,080,201 62,063 4.05 4,235 (2,285) 1,950
Federal funds purchased 56,467 795 5.59 20,386 284 5.53 505 6 511
Repurchase agreements 86,129 933 4.30 36,894 407 4.38 538 (12) 526
Master notes 332,568 4,000 4.77 313,366 3,689 4.67 229 82 311
U. S. Treasury tax and loan accounts 16,748 221 5.24 13,365 260 7.72 55 (94) (39)
Other short-term borrowings 48,415 767 6.29 132,663 2,011 6.01 (1,307) 63 (1,244)
Long-term obligations 158,353 3,195 8.00 12,017 233 7.69 2,895 67 2,962
Total interest-bearing liabilities $7,244,949 $73,924 4.05% $6,608,892 $68,947 4.14% $7,150 ($2,173) $4,977
Interest rate spread 3.60% 3.48%
Net interest income and net yield
on interest-earning assets $83,988 4.01% $77,052 4.01% $8,111 ($1,175) $6,936
Average loan balances included nonaccrual loans. Yields realted to loans and
securities exempt from both federal and state income taxes, federal income taxes
only, and state income taxes only are stated on a taxable-equivalent basis
assuming a statutory federal income tax rate of 35% for each period, and state
income tax rates of 7.25% for 1998 and 7.5% for 1997.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Nine Months
Table 5
1998 1997 Increase (decrease) due to:
Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
(thousands) Balance Expense Rate Balance Expense Rate Volume Rate Change
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans:
Secured by real estate $3,493,346 $209,735 8.00% $3,100,969 $191,645 8.23% $23,789 ($5,699) $18,090
Commercial and industrial 695,573 47,266 9.30 553,339 36,767 8.48 8,063 2,436 10,499
Consumer 1,456,149 92,073 8.34 1,265,298 85,276 8.92 12,534 (5,737) 6,797
Lease financing 80,862 5,287 8.72 71,834 4,616 8.57 585 86 671
Other 13,080 618 6.31 15,225 878 7.71 (112) (148) (260)
Total loans 5,739,010 354,979 8.26 5,006,665 319,182 8.51 44,859 (9,062) 35,797
Investment securities:
U. S. Government 2,349,471 103,452 5.89 2,199,958 96,461 5.86 6,525 466 6,991
State, county and municipal 4,586 249 7.26 5,775 312 7.22 (64) 1 (63)
Other 28,077 378 1.80 1,854 84 6.06 771 (477) 294
Total investment securities 2,382,134 104,079 5.84 2,207,587 96,857 5.87 7,232 (10) 7,222
Federal funds sold 93,759 3,882 5.54 186,582 7,555 5.41 (3,805) 132 (3,673)
Total interest-earning assets $8,214,903 $462,940 7.53% $7,400,834 $423,594 7.65% $48,286 ($8,940) $39,346
Liabilities
Deposits:
Checking with Interest $1,025,916 $8,033 1.05% $914,580 $7,323 1.07% $869 ($159) $710
Savings 700,488 9,875 1.88 709,681 10,875 2.05 (119) (881) (1,000)
Money market accounts 1,092,622 29,117 3.56 900,416 24,875 3.69 5,211 (969) 4,242
Time deposits 3,730,036 145,177 5.20 3,419,691 135,705 5.31 12,306 (2,834) 9,472
Total interest-bearing deposits 6,549,062 192,202 3.92 5,944,368 178,778 4.02 18,267 (4,843) 13,424
Federal funds purchased 54,326 2,244 5.52 24,916 955 5.12 1,170 119 1,289
Repurchase agreements 72,605 2,331 4.29 28,337 915 4.32 1,426 (10) 1,416
Master notes 313,645 11,129 4.74 295,600 10,103 4.57 633 393 1,026
U. S. Treasury tax and loan accounts 16,650 643 5.16 11,965 702 7.84 228 (287) (59)
Other short-term borrowings 63,418 2,940 6.20 70,694 3,131 5.92 (331) 140 (191)
Long-term obligations 125,422 7,525 8.02 10,142 611 8.05 6,929 (15) 6,914
Total interest-bearing liabilities $7,195,128 $219,014 4.07% $6,386,022 $195,195 4.09% $28,322 ($4,503) $23,819
Interest rate spread 3.46% 3.56%
Net interest income and net yield
on interest-earning assets $243,926 3.97% $228,399 4.13% $19,964 ($4,437) $15,527
Average loan balances included nonaccrual loans. Yields realted to loans and
securities exempt from both federal and state income taxes, federal income taxes
only, and state income taxes only are stated on a taxable-equivalent basis
assuming a statutory federal income tax rate of 35% for each period, and state
income tax rates of 7.25% for 1998 and 7.5% for 1997. </TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1998
<PAGE>
<TABLE>
<CAPTION>
Summary of Loan Loss Expenience and Risk Elements
Table 6
1998
Nine Months Ended
Third Second First Fourth Thir September 30
(thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve balance at beginning of period $90,240 $85,985 $84,360 $83,385 $81,902 $84,360 $81,439
Reserve of acquired loans - - - - 358 - 481
Provision for loan losses 5,324 5,267 4,395 3,753 1,309 14,986 4,973
Net charge-offs:
Charge-offs (2,815) (3,930) (3,409) (3,857) (3,162) (10,154) (10,474)
Recoveries 1,386 2,918 639 1,079 2,978 4,943 6,966
Net charge-offs (1,429) (1,012) (2,770) (2,778) (184) (5,211) (3,508)
Reserve balance at end of period $94,135 $90,240 $85,985 $84,360 $83,385 $94,135 $83,385
Historical Statistics
Balances
Average total loans $6,024,822 $5,711,599 $5,474,570 $5,324,286 $5,073,404 $5,739,010 $5,006,665
Total loans at period-end 6,132,422 5,886,315 5,562,831 5,445,772 5,208,195 6,132,422 5,208,195
Risk Elements
Nonaccrual loans $11,492 $12,335 $14,797 $12,681 $11,983 $11,492 $11,983
Other real estate acquired through foreclosure 1,202 1,170 1,502 1,462 1,450 1,202 1,450
Total nonperforming assets $12,694 $13,505 $16,299 $14,143 $13,433 $12,694 $13,433
Accruing loans 90 days or more past due $4,761 $4,168 $4,837 $3,953 $4,157 $4,761 $4,157
Ratios
Net charge-offs (annualized) to average total loans 0.09% 0.07% 0.21% 0.21% 0.01% 0.12% 0.09%
Reserve for loan losses to total loans at period-end 1.54 1.53 1.55 1.55 1.60 1.54 1.60
Nonperforming assets to total loans plus foreclosed
real estate at period-end 0.21 0.23 0.29 0.26 0.26 0.21 0.26
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1998
<PAGE>
INTRODUCTION
Management's discussion and analysis of earnings and related financial
data are presented to assist in understanding the financial condition and
results of operations of First Citizens BancShares, Inc. and Subsidiaries
("BancShares"). This discussion and analysis should be read in conjunction with
the unaudited Consolidated Financial Statements and related notes presented
within this report. The focus of this discussion concerns BancShares' two
banking subsidiaries. First-Citizens Bank & Trust Company ("FCB") operates
branches in North Carolina and Virginia and West Virginia; and Atlantic States
Bank operates offices in Georgia and North Carolina.
SUMMARY
BancShares realized a slight reduction in earnings during the third
quarter of 1998 compared to the third quarter of 1997. Consolidated net income
during the third quarter of 1998 was $18.1 million, compared to $19.0 million
earned during the corresponding period of 1997. Net income per share during the
third quarter of 1998 totaled $1.70, compared to $1.67 during the third quarter
of 1997. Despite the reduction in net income from the third quarter of 1997 to
the third quarter of 1998, net income per share increased due to a reduction in
average shares outstanding. Annualized return on average assets was 0.78 percent
for the third quarter of 1998 compared to 0.90 percent during the same period of
1997. The 12 basis point reduction between the third quarters of 1997 and 1998
reflects the impact of the reduction in net income despite balance sheet growth.
For the first nine months of 1998, BancShares recorded net income of $51.3
million, compared to $53.2 million earned during the first nine months of 1997.
The 3.6 percent reduction was the net result of higher provision for loan losses
and higher noninterest expenses, partially offset by increases in net interest
income and noninterest income. Net income per share for the first nine months of
1998 was $4.77, compared to $4.67 during the same period of 1997. On an
annualized basis, BancShares returned 0.75 percent on average assets during the
first nine months of 1998 compared to 0.87 percent during the corresponding
period of 1997.
Various profitability, liquidity and capital ratios are presented in
Table 1. To understand the changes and trends in interest-earning assets and
interest-bearing liabilities, refer to the average balance sheets presented in
Table 4 for the third quarter and Table 5 for the first nine months of 1998 and
1997.
INTEREST-EARNING ASSETS
Interest-earning assets for the third quarter of 1998 averaged $8.31
billion, an increase of $672.7 million or 8.8 percent from the third quarter of
1997. For the nine months ended September 30, 1998, earning assets averaged
$8.21 billion, an increase of $814.1 million or 11.0 percent over the same
period of 1997. These increases result from growth in the loan portfolio.
Loans. At September 30, 1998 and 1997, gross loans totaled $6.13
billion and $5.21 billion, respectively. As of December 31, 1997, gross loans
were $5.45 billion. The $924.2 million growth in loans from September 30, 1997
to September 30, 1998 results from growth within BancShares' commercial loans
secured by real estate, small business loans, and consumer loan products. This
growth has resulted from BancShares' strong focus during 1998 on these products.
During the third quarter of 1998, loans averaged $6.02 billion, an
increase of $951.4 million or 18.8 percent from the comparable period of 1997.
Loan growth has resulted from higher demand from commercial and small business
borrowers. This strong demand began during the first quarter and has continued
through the third quarter.
Loans secured by real estate averaged $3.64 billion during the third
quarter of 1998, compared to $3.09 billion during the third quarter of 1997, an
increase of $546.4 million or 17.7 percent. Growth among commercial borrowers
contributed to much of this increase. Consumer loans averaged $1.53 billion
during the third quarter of 1998, compared to $1.31 billion during the same
period of 1997, an increase of $221.5 million or 17.0 percent. Much of that
growth results from indirect automobile financing. Commercial and industrial
loans averaged $759.0 million during the third quarter of 1998, compared to
$583.2 million during the same period of 1997. This increase of $175.8 million
between the two periods is primarily due to growth among small business loans.
<PAGE>
For the year-to-date, gross loans have averaged $5.74 billion for 1998
compared to $5.01 billion for the same period of 1997. This $732.3 million or
14.6 percent increase is likewise due to growth among commercial, small business
and retail customers.
As of September 30, 1998, $208.6 million in fixed-rate residential
mortgage loans are classified as held for sale. All loans held for sale are
carried at the lower of cost or fair value.
Mortgage loan sale activity during the first nine months of 1998 has
resulted from two primary goals. First, as in the past, management seeks to
lessen the exposure to changes in interest rates by selling loans from its
long-term fixed-rate loan portfolio. Second, loan sales provide liquidity to
meet ongoing loan demand. The sales of residential mortgage loans has supported
both objectives.
Management anticipates continued growth among commercial and small
business loans for the rest of 1998. Growth projections are dependent on
interest rate movements, as interest rate changes will affect retail and
commercial loan growth.
Investment securities. At September 30, 1998 and 1997, the investment
portfolio totaled $2.12 billion and $2.46 billion, respectively. At December 31,
1997, the investment portfolio was $2.48 billion.
The 14.8 percent reduction in the investment portfolio since December 31, 1997
resulted from using proceeds from maturing securities to fund current loan
demand. All securities that are classified as held-to-maturity reflect
BancShares' ability and positive intent to hold those investments until
maturity. Available-for-sale securities are reported at their aggregate fair
value. Table 3 presents detailed information relating to the investment
securities portfolio.
Income on Interest-Earning Assets. Interest income amounted to $157.4
million during the third quarter of 1998, an 8.2 percent increase over the third
quarter of 1997. Balance sheet growth in the loan portfolio contributed to
higher interest income in the third quarter of 1998 when compared to the same
period of 1997.
The taxable-equivalent yield on interest-earning assets for the third
quarter of 1998 was 7.65 percent, compared to 7.62 percent for the corresponding
period of 1997. The higher yield on earning assets during 1998 results from the
$951.4 million increase in the number of loans over the third quarter.
Loan interest income for the third quarter of 1998 was $123.9 million,
an increase of $16.0 million or 14.8 percent from the third quarter of 1997, the
result of volume growth. The taxable-equivalent yield on the loan portfolio was
8.34 percent during the third quarter of 1998, compared to 8.52 percent during
the same period of 1997, the decrease primarily resulting from competitive loan
pricing.
For the nine months ended September 30, 1998, loan interest income was
$353.5 million, an increase of $35.8 million or 11.3 percent over the same
period of 1997. The increase in interest income reflects the growth in the loan
portfolio.
Income earned on the investment securities portfolio amounted to $33.0
million during the third quarter of 1998 and $34.8 million during the same
period of 1997, a decrease of $1.8 million or 5.2 percent. This decrease is the
result of a $115.1 million reduction in the average securities portfolio. The
investment securities portfolio taxable-equivalent yield decreased from 5.86
percent for the quarter ended September 30, 1997, to 5.84 percent for the
quarter ended September 30, 1998, the result of market conditions.
For the nine months ended September 30, 1998, interest income from
investment securities was $104.0 million, compared to $96.7 million during the
same period of 1997, an increase of 7.49 percent. This increase is the result of
a $174.5 million increase in the average securities portfolio.
INTEREST-BEARING LIABILITIES.
At September 30, 1998 and 1997, interest-bearing liabilities totaled
$7.26 billion and $6.74 billion, respectively, compared to $7.05 billion as of
December 31, 1997. During the third quarter of 1998, interest-bearing
liabilities averaged $7.24 billion, an increase of $636.1 million or 9.62
percent from the third quarter of 1997. This increase primarily resulted from
growth in interest-bearing deposits and long-term obligations.
Deposits. At September 30, 1998, total deposits were $7.77 billion, an
increase of $473.2 million or 6.5 percent over September 30, 1997. Compared to
the December 31, 1997 balance of $7.58 billion, total deposits have increased
$191.5 million. Acquisitions during 1998 have resulted in the assumption of
$239.9 million in deposit liabilities, net of offices which have subsequently
been sold. Excluding the impact of acquisitions, deposits have displayed normal
seasonal trends during 1998. Normally, deposit balances increase during the
fourth quarter.
<PAGE>
Average interest-bearing deposits were $6.55 billion during the third
quarter of 1998 compared to $6.08 billion during the third quarter of 1997, an
increase of 7.67 percent. The increase is due to growth among average time,
money market and Checking With Interest deposits. Average money market deposits
increased $199.4 million from the third quarter of 1997 to the third quarter of
1998. Average time deposit accounts increased $164.9 million from the third
quarter of 1997 to the third quarter of 1998, while average Checking With
Interest accounts increased $108.2 million between the two periods. Time
deposits of $100,000 or more averaged 8.85 percent of total average deposits
during the third quarter of 1998, compared to 9.68 percent during the same
period of 1997. Deposit growth reflects the impact of acquisitions as well as
the expanding branch network, specifically from in-store locations.
Borrowed Funds. At September 30, 1998, short-term borrowings totaled
$534.9 million compared to $593.8 million at December 31, 1997 and $539.4
million at September 30, 1997. For the quarters ended September 30, 1998 and
1997, short-term borrowings averaged $540.3 million and $516.7 million,
respectively. This increase is the net result of growth among federal funds
purchased, repurchase obligations and overnight borrowings from customers
through the Master Note program and a reduction in short-term notes payable.
Long-term obligations averaged $158.4 million during the third quarter of 1998,
compared to $12.0 million during the third quarter of 1997. The increase in
long-term obligations reflects the impact of the $150 million in trust preferred
securities that were issued during the first quarter of 1998. The trust
preferred securities are thirty year obligations with interest paid
semi-annually at a rate of 8.05 percent. The trust preferred securities qualify
as Tier 1 capital for the holding company.
Expense on Interest-Bearing Liabilities. BancShares' interest expense
amounted to $73.9 million during the third quarter of 1998, a $5.0 million or
7.2 percent increase from the third quarter of 1997. The higher interest expense
was the result of the growth in average interest-bearing liabilities. The rate
on these liabilities was 4.05 percent during the third quarter of 1998, compared
to 4.14 percent during the third quarter of 1997.
For the year-to-date, interest expense was $219.0 million, compared to
$195.2 million for the same period of 1997. The 12.2 percent increase is largely
due to the growth in interest-bearing deposits and long-term obligations. For
both the three and nine month periods ending September 30, 1998 and 1997, lower
rates on interest-bearing liabilities have partially offset the impact of the
growth in average balances of these funding sources.
NET INTEREST INCOME
Net interest income totaled $83.5 million during the third quarter of
1998, an increase of 9.0 percent from the third quarter of 1997. The
taxable-equivalent net yield on interest-earning assets was 4.01 percent for the
third quarter of 1998, equal to the 4.01 percent achieved for the third quarter
of 1997.
The taxable equivalent interest rate spread for the third quarter of 1998 was
3.60 percent compared to 3.48 percent for the same period of 1997.
Net Interest income totaled $242.4 million during the first nine months
of 1998, and increase of 6.84 percent from the same period of 1997. The
taxable-equivalent net yield on interest-earning assets was 3.97 percent for the
nine months ended of 1998, compared to 4.13 percent for the same period of 1997.
The taxable equivalent interest rate spread for the nine months ended September
30, 1998, was 3.46 percent compared to 3.56 percent for the same period of 1997.
For the year-to-date, the thinner spreads and net interest margin demonstrate
the impact of the aggressive pricing that has contributed to the strong asset
growth during the current year.
A principal objective of BancShares' asset/liability management
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. Management is aware of the
potential negative impact that movements in market interest rates may have on
net interest income.
Market risk is the potential economic loss resulting from changes in
market prices and interest rates. This risk can either result in diminished
current fair values or reduced net interest income in future periods. As of
September 30, 1998, BancShares' market risk profile has not changed
significantly from December 31, 1997. Volatility since September 30, 1998 has
resulted in some impact on the fair value of various financial instruments. Due
to the large percentage of fixed-rate assets, the reductions in market rates
have allowed the fair value of certain assets to increase. Likewise, the fair
value of certain fixed-rate liabilities has also increased since the
reductions in key market index rates. Changes in fair value that result from
<PAGE>
movement in market rates can not be predicted with any degree of certainty.
Therefore, the impact tha future changes in market rates will have on the
fair values of financial instruments is uncertain.
ASSET QUALITY
Reserve for loan losses. Management continuously analyzes the growth
and risk characteristics of the total loan portfolio under current economic
conditions in order to evaluate the adequacy of the reserve for loan losses.
Such factors as the financial condition of the borrower, fair market value of
collateral and other considerations are recognized in estimating possible credit
losses. At September 30, 1998, the reserve for loan losses amounted to $94.1
million or 1.54 percent of loans outstanding. This compares to $84.4 million or
1.55 percent at December 31, 1997, and $83.4 million or 1.60 percent at
September 30, 1997.
Management considers the established reserve adequate to absorb losses
that relate to loans outstanding at September 30, 1998. While management uses
available information to establish provisions for loan losses, future additions
to the reserve may be necessary based on changes in economic conditions or other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the reserve for loan losses. Such
agencies may require the recognition of additions to the reserve based on their
judgments of information available to them at the time of their examination. The
provision for loan losses charged to operations during the third quarter of 1998
was $5.3 million, compared to $1.3 million during the third quarter of 1997. Net
charge-offs for the three months ended September 30, 1998 totaled $1.4 million,
compared to net charge-offs of $184,000 during the same period of 1997. On an
annualized basis, these net charge-offs represent 0.09 percent and 0.01 percent
of average loans outstanding during the respective periods. For the nine month
periods ending September 30, total provision for loan losses was $15.0 million
for 1998 and $5.0 million for 1997. The $10.0 million increase primarily results
from additional reserves being established for new loans. Net charge-offs for
the nine month period ended September 30, 1998 totaled $5.2 million, compared to
$3.5 million during the same period of 1997. As a percentage of average loans
outstanding, the net charge-offs represent 0.12 percent and 0.09 percent,
respectively, on an annualized basis. Gross charge-offs totaled $10.2 million
for the nine month period ended September 30, 1998 and $10.5 million for the
nine month period ended September 30,1997. Gross recoveries were $4.9 million
and $7.0 million for the respective periods. Management views the stable gross
charge-offs as evidence of strong asset quality. Management remains committed to
maintaining high levels of credit quality. Table 6 provides details concerning
the reserve and provision for loan losses over the past five quarters and for
the year-to-date for 1998 and 1997. Nonperforming assets. At September 30, 1998,
BancShares' nonperforming assets amounted to $12.7 million or 0.21 percent of
gross loans plus foreclosed properties, compared to $14.1 million at December
31, 1997, and $13.4 million at September 30, 1997. While BancShares views these
levels of nonperforming assets as further evidence of strong asset quality,
management continues to closely monitor nonperforming assets, taking necessary
actions to minimize potential exposure. Further, there has been no significant
change in the carrying value of impaired loans.
NONINTEREST INCOME
During the first nine months of 1998, noninterest income was $103.5
million, compared to $83.4 million during the same period of 1997. The $20.1
million or 24.1 percent increase was primarily due to growth in other service
charge and fee income, growth in credit card income, and growth in service
charges on deposit accounts. During the first nine months of 1998, total other
service charge and fee income was $26.3 million, compared to $20.1 million
earned during the same period of 1997. Significant to this increase was higher
income from ATM-related fees, growth in fees earned by First Citizens Investor
Services, and mortgage servicing income. Results from the sale of residential
mortgage loans and adjustments of loans held for sale to the lower of cost or
fair value are included in noninterest income. BancShares recorded net gains of
$3.3 million for the first nine months of 1998, compared to net losses of
$300,000 during the same period of 1997. The large change in the results from
mortgage sale activity reflects changes in market rates between the two periods.
<PAGE>
Noninterest income from the credit card operation contributed an
additional $4.3 million during the first nine months of 1998 compared to the
same period of 1997, the result of higher merchant income and interchange income
earned from card usage. This increase represents a 30.3 percent increase over
the same period of 1997, primarily due to moving credit card accounts to
Virginia, where laws governing fees are less restrictive.
BancShares also reported a $3.9 million increase in service charges on
deposit accounts during the first nine months of 1998, a 12.5 percent increase.
The increase in service charge income results from increases in commercial
service charges and individual bad check charges. Commercial service charges for
the nine months ended 1998 increased 10.3 percent when compared to the same
period of 1997. Individual bad check charges for the nine months ended 1998
increased 20.9 percent when compared to same period of 1997, the result of a
higher per item change for bad check processing.
NONINTEREST EXPENSE
Noninterest expense was $251.5 million for the first nine months of
1998, a 13.3 percent increase over the $222.0 million recorded during the same
period of 1997. Much of the $29.5 million increase in total noninterest expense
relates to franchise expansion and the investments required to support that
growth. Personnel-related expenses increased $13.4 million during 1998 when
compared to the same period of 1997. This 12.0 percent increase reflects the
growth in employee population required to staff the new branch offices and
in-store locations in North Carolina, Virginia and Georgia. Higher employee
benefits expense reflects increased pension expense and employment taxes.
Equipment expense was $27.1 million during the first nine months of
1998, compared to $23.6 million over the same period of 1997. Much of the $3.5
million or 14.9 percent increase was a result of higher depreciation resulting
from recent hardware and software purchases, and the expansion of the ATM
network.
Occupancy expense was $20.8 million for the first nine months of 1998,
an 18.2 percent increase over the $17.6 million recorded during the same period
of 1997. Much of the $3.2 million increase was the result of higher rent and
depreciation expense for new and renovated branch facilities. This increase also
reflected an increase in utility expenses.
The $9.4 million increase in other expenses resulted from higher
telecommunications expense, cardholder reward program expense, consulting
services, and moving expense. Telecommunications expense reflects the continued
growth of the traditional branch network as well as the various alternative
delivery channels, which are heavily dependent on telecommunications.
The increase in cardholder reward program expense relates to growth in the
cardholder reward program during 1998. This increase is a reflection of higher
credit card usage by cardholders.
The increase in moving expense is a result of relocating various bank
functions to the newly expanded data center. Much of the consulting expense
incurred during 1998 relates to the systems modifications being made in
preparation for the year 2000 ("Y2K"). During the first nine months of 1998,
BancShares incurred $1.4 million in consulting services related to Y2K.
INCOME TAXES
Income tax expense amounted to $28.1 million during the nine months ended
September 30, 1998, compared to $30.1 million during the same period of 1997, a
6.8 percent reduction resulting from lower pre-tax income. The effective tax
rates for these periods were 35.4 percent and 36.2 percent, respectively.
LIQUIDITY
Management relies on the investment portfolio as a source of liquidity,
with maturities designed to provide needed cash flows. Further, retail deposits
generated throughout the branch network have enabled management to fund asset
growth and maintain liquidity. In the event additional liquidity is needed,
BancShares maintains readily available sources to borrow funds through its
correspondent network. Loan growth during the third quarter was funded by growth
in deposits and by liquidity granted from maturity of investment securities.
Deposits are expected to display seasonal growth through the remainder of 1998,
providing funds for projected loan growth.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. At September 30, 1998 and 1997, the leverage
capital ratio of BancShares was 7.3 percent and 6.6 percent, respectively,
surpassing the minimum level of 3 percent. As a percentage of risk-adjusted
assets, BancShares' Tier 1 capital ratio was 9.9 percent at September 30, 1998,
and 10.2 percent as of September 30, 1997. The minimum ratio allowed is 4
percent of risk-adjusted assets. The total risk-adjusted capital ratio was 11.2
percent at September 30, 1998 and 11.4 percent as of September 30, 1997. The
minimum total capital ratio is 8 percent. BancShares and its subsidiary banks
exceed the capital standards established by their respective regulatory agencies
During the second quarter of 1998, BancShares purchased a total of 158,000
shares of its outstanding common stock from a related defined benefit pension
plan. As of December 31, 1997, these shares were classified on the Consolidated
Balance Sheet as other liabilities and were recorded at their fair value. Until
the shares were repurchased, they were reported at their fair value, with the
change in the aggregate fair value reported as an adjustment to retained
earnings. Net income per share has been adjusted for the impact of the change in
fair value prior to their acquisition. The purchase price was based on an
independent appraisal of the investment.
YEAR 2000 PREPARATIONS
BancShares continues to devote significant resources to the efforts related
to preparation for the arrival of year 2000. As is the case with most financial
institutions, BancShares is heavily dependent on technologies which, in turn,
are highly date sensitive.
During 1996, recognizing the significance of the Y2K problem, BancShares
retained a qualified consultant to plan and direct the process by which the Y2K
project would proceed. The consultant works under the supervision of a Y2K
Executive Steering Committee, which includes BancShares' Chief Financial Officer
and Chief Information Officer. This committee provides ongoing updates to the
Board of Directors.
BancShares has divided its Y2K efforts into four areas - mainframe
computing, non-mainframe computing, non-information technology and business
continuity planning. The progress made to date in each of these areas is, in
management's opinion, appropriate.
State of Readiness - With respect to mainframe computing, remediation
and testing has been completed on 42 percent of the applications, while sub-
stantially all remaining applications will be complete before the end of
1998.
With respect to non-mainframe computing, remediation and testing is
underway for substantially all of the mission-critical applications; however,
Y2K compliant versions of some applications will not be received from the
respective vendor to allow for completion of testing until 1999. For certain
applications that, in management's opinion, are at risk of not achieving Y2K
compliance by an acceptable date, contingency actions are underway to identify
suitable alternatives that are Y2K compliant and that may be implemented in a
timely manner.
With respect to non-information technology exposures, management has
identified those assets and services that, in management's opinion, will be
impacted by Y2K. Those assets and services are currently proceeding through a
validation process. For those mission-critical assets and services that will
likely not be compliant by March 31, 1999, contingency plans are being
developed.
Business continuity planning efforts will be initiated during the fourth
quarter of 1998.
Costs - BancShares estimates that the total cost of the Y2K project will
be approximately $8.5 million. Currently, BancShares project the cost of Y2K
efforts will be $4.6 million during 1998 and $1.5 million during 1999. For
the first nine months of 1998, BancShares has recognized expenses totaling
$3.2 million for Y2K compliance. All costs related to the Y2K project are
expensed as incurred.
Risks - The implications of the Y2K problem, whether the result of
BancShares' own failure to achieve readiness or the failure of a material
customer or vendor to achieve readiness, could have a material adverse impact on
BancShares' operations and its results of operations. However, management
believes the efforts underway will minimize the likelihood of such a crisis.
BancShares believes its most reasonably likely worst case scenario will be
a failure by certain customers and vendors to achieve Y2K readiness. With
respect to its customers, BancShares has identified its material borrowers and
has requested disclosures from those borrowers as to their readiness and their
risks. Based on these findings, management has identified customers who, in
management's opinion, may experience some distress as a result of Y2K. The
assessments have been completed on 88 percent of the customers who exceeded the
established parameters.
For key vendors who provide goods and services, BancShares has requested
status reports that describe their efforts to achieve Y2K readiness. Most of the
requests have been honored, and, based on these responses, except for exposures
related to public utilities, there are no known risks among the identified
vendors.
Regulatory agencies that have authority over BancShares and its
subsidiaries have determined that Y2K testing and certification are key safety
and soundness issues in conjunction with regulatory exams. Therefore, failure to
address the Y2K issue in an appropriate manner could result in supervisory
action, including the reduction of the supervisory rating, the denial of
applications for approval of mergers or acquisitions or the imposition of
penalties.
Contingency Plans - Throughout the project, BancShares has developed
contingency plans whenever it is apparent that specific applications will not
achieve Y2K compliance. Based on the respective situation, the inclination to
replace the application or to assess the impact of the non-compliant asset or
service will determine how the matter will be resolved.
For BancShares' most reasonably likely worst case scenario, contingency
plans are already active. As previously described, BancShares has actively
evaluated the status of readiness efforts of key customers and vendors and made
necessary modifications, including downgrading of exposure to customers who are
believed to be at risk of Y2K non-compliance. Management will continue to
evaluate deficiencies that become apparent and to establish contingency plans to
protect BancShares and to minimize its exposure to Y2K uncertainties.
CURRENT ACCOUNTING AND REGULATORY ISSUES
BancShares has adopted several provisions issued by the Financial
Accounting Standards Board ("FASB") during 1998.
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" became effective and was adopted by BancShares during 1998
and modifies the disclosure of earnings to include net income, other
comprehensive income and total comprehensive income. The impact of the adoption
of SFAS 130 is included in the accompanying unaudited interim consolidated
financial statements.
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" requires that public business enterprises report certain
information about operating segments in complete sets of financial statements
and in condensed financial statements of interim periods issued to shareholders,
as well as information about products, services, geographic areas in which they
operate and their major customers. Adoption of SFAS 131 during 1998 is not
expected to have a material impact on BancShares' consolidated financial
statements.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements of pensions and other postretirement benefits and does
not change any measurement or recognition provisions. The adoption of SFAS No.
132 during 1998 will not have a material impact on BancShares consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. As a
result of BancShares' limited use of derivative instruments, the adoption of
SFAS No. 133 should not have a material impact on its consolidated financial
statements.
SFAS No. 133 becomes effective during 2000.
Management is not aware of any current recommendations by regulatory
authorities that, if implemented, would have or would be reasonably likely to
have a material effect on liquidity, capital ratios or results of operations.
<PAGE>
FORWARD-LOOKING STATEMENTS
This 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
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," "anticipate," or other statements concerning
opinions or judgment 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.
<PAGE>
Note A
Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
statements.
In the opinion of management, the consolidated statements contain all
material adjustments necessary to present fairly the financial position of First
Citizens BancShares, Inc. as of and for each of the periods presented, and all
such adjustments are of a normal recurring nature. The preparation of financial
statements in conformity the generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent liabilities at the date of
the financial statements and for the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
These financial statements should be read in conjunction with the financial
statements and notes included in the 1997 First Citizens BancShares, Inc. Annual
Report, which is incorporated by reference on Form 10-K. Certain amounts for
prior periods have been reclassified to conform with statement presentations for
1998. However, the reclassifications have no effect on shareholders' equity or
net income as previously reported.
Note B
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in complete financial
statements. Other comprehensive income includes unrealized gains (losses) on
investment securities that are classified as available for sale. BancShares
adopted SFAS No. 130 in 1998.
<TABLE>
<CAPTION>
The following table displays comprehensive income for the periods indicated:
Three months ended September 30 Nine months ended September 30
1998 1997 1998 1997
(thousands)
<S> <C> <C> <C> <C>
Net income $18,088 $19,018 $51,293 $53,194
Other comprehensive income (loss) (461) 2,297 (426) 3,971
Comprehensive income $17,627 $21,315 $50,867 $57,165
</TABLE>
Note C
Net Income per Share
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share." SFAS
No. 128 establishes standards for computing and reporting earnings per share.
BancShares adopted SFAS No. 128 in 1998. Earnings per share is calculated by
dividing income applicable to common shares by the weighted average number of
common shares outstanding during the period. For 1998, income applicable to
common shares represents net income adjusted for change in the obligation to
purchase common shares.
<TABLE>
<CAPTION>
Net income per share is calculated based on the following amounts for the quarters and nine
months ended September 30:
Three months ended September 30 Nine months ended September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $18,088 $19,018 $51,293 $53,194
Less change in obligation to
purchase common shares 0 0 624 0
Net income applicable to
common shares $18,088 $19,018 $50,669 $53,194
Weighted average common
shares outstanding 10,625,559 11,389,926 10,626,565 11,389,926
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 435,485
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,001
<INVESTMENTS-CARRYING> 2,069,342
<INVESTMENTS-MARKET> 2,088,845
<LOANS> 6,132,422
<ALLOWANCE> 94,135
<TOTAL-ASSETS> 9,194,842
<DEPOSITS> 7,771,093
<SHORT-TERM> 534,943
<LIABILITIES-OTHER> 86,332
<LONG-TERM> 158,801
0
0
<COMMON> 10,626
<OTHER-SE> 643,673
<TOTAL-LIABILITIES-AND-EQUITY> 9,194,842
<INTEREST-LOAN> 353,512
<INTEREST-INVEST> 103,992
<INTEREST-OTHER> 3,882
<INTEREST-TOTAL> 461,386
<INTEREST-DEPOSIT> 192,202
<INTEREST-EXPENSE> 26,812
<INTEREST-INCOME-NET> 242,372
<LOAN-LOSSES> 14,986
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 251,489
<INCOME-PRETAX> 79,377
<INCOME-PRE-EXTRAORDINARY> 51,293
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,293
<EPS-PRIMARY> 4.77
<EPS-DILUTED> 4.77
<YIELD-ACTUAL> 3.97
<LOANS-NON> 11,492
<LOANS-PAST> 4,761
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 84,360
<CHARGE-OFFS> 10,154
<RECOVERIES> 4,943
<ALLOWANCE-CLOSE> 94,135
<ALLOWANCE-DOMESTIC> 94,135
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
