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 June 30, 1999
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
August 13, 1999)
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1999, December 31, 1998,
and June 30, 1998
Consolidated Statements of Income for the three-month and six-month
periods ended June 30, 1999, and June 30, 1998
Consolidated Statements of Changes in Shareholders' Equity for the
six-month periods ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the six-month periods
ended June 30, 1999, and June 30, 1998
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 4. Submission of Matters to a Vote of Security Holders
On April 26, 1999 at the Annual Meeting of Sharesholders of Registrant
two matters were considered by the shareholders:
(a) Election of Directors - The shareholder vote regarding the
election of the nominees for Board of Directors was:
Nominee For Withheld
----------------------------------------------------------------
J.M. Alexander, Jr. 33,051,839 180,446
T.L. Bissett 33,058,798 173,487
B.I. Boyle 33,058,313 173,972
G.H. Broadrick 33,060,698 171,587
H.M. Craig, III 33,061,839 170,446
B.M. Farnsworth 33,058,313 173,972
L.M. Fetterman 33,061,698 170,587
C.P. Holding 33,056,542 175,743
F.B. Holding 33,060,524 171,761
F.B. Holding, Jr. 33,060,639 171,646
L.R. Holding 33,060,598 171,687
C.B.C. Holt 33,058,798 173,487
E.A. Hubbard 33,061,698 170,587
J.B. Hyler, Jr. 33,059,139 173,146
G.D. Johnson 33,057,698 174,587
F.R. Jones 33,061,798 170,487
L.S. Jones 33,058,839 173,446
J.T. Maloney, Jr. 33,058,798 173,487
J.C. Mayo, Jr. 33,059,398 172,887
W. McKay 33,058,798 173,487
B.D. Nash 33,060,098 172,187
L.T. Nunnellee, II 33,059,298 172,987
T.O. Shaw 33,050,198 182,087
R.C. Soles, Jr. 33,061,298 170,987
D.L. Ward, Jr. 33,024,291 207,994
The directors elected at the April 26, 1999 meeting listed above
represent the entire board of directors.
(b) Appointment of KPMG LLP as independed public accountants
The shareholder vote regarding the appointment of KPMG LLP was:
For 33,182,778
Against 7,680
Abstain 41,827
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. During the quarter ended June 30, 1999,
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: August 13, 1999 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
June 30* December 31# June 30*
(thousands, except share data) 1999 1998 1998
<S> <C> <C> <C>
Assets
Cash and due from banks $453,646 $502,955 $485,905
Investment securities held to maturity 1,952,502 2,135,372 2,322,673
Investment securities available for sale 22,974 24,957 26,098
Overnight investments 295,197 232,725 -
Loans 6,376,372 6,195,591 5,886,315
Less reserve for loan losses 96,765 96,115 90,240
- -----------------------------------------------------------------------------------------------------------------
Net loans 6,279,607 6,099,476 5,796,075
Premises and equipment 382,548 367,076 345,015
Income earned not collected 59,101 61,652 66,471
Other assets 182,902 181,574 182,611
- -----------------------------------------------------------------------------------------------------------------
Total assets $9,628,477 $9,605,787 $9,224,848
- -----------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Noninterest-bearing $1,323,017 $1,296,713 $1,213,630
Interest-bearing 6,847,416 6,815,695 6,585,288
- -----------------------------------------------------------------------------------------------------------------
Total deposits 8,170,433 8,112,408 7,798,918
Short-term borrowings 518,350 568,140 547,069
Long-term obligations 156,870 158,801 159,456
Other liabilities 90,254 105,689 90,703
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 8,935,907 8,945,038 8,596,146
Shareholders' Equity
Common stock:
Class A - $1 par value (8,905,199; 8,905,199;
and 8,905,199 shares issued, respectively) 8,906 8,906 8,906
Class B - $1 par value (1,720,360; 1,720,360;
and 1,720,360 shares issued, respectively) 1,720 1,720 1,720
Surplus 143,760 143,760 143,760
Retained earnings 531,356 497,316 464,823
Accumulated other comprehensive income 6,828 9,047 9,493
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 692,570 660,749 628,702
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,628,477 $9,605,787 $9,224,848
- -----------------------------------------------------------------------------------------------------------------
* Unaudited
# Derived from the Consolidated Balance Sheet included in the 1998 Annual Report
on Form 10-K.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
First Citizens BancShares, Inc and Subsidiaries
Second Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries
Three Months Ended June 30 Six Months Ended June 30
(thousands, except per share data; unaudited) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans $124,046 $117,485 $246,701 $229,651
Investment securities:
U. S. Government 28,883 35,662 58,166 70,837
State, county and municipal 37 54 75 112
Other 119 18 239 36
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities interest income 29,039 35,734 58,480 70,985
Overnight investments 3,875 1,316 7,235 3,369
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 156,960 154,535 312,416 304,005
Interest expense
Deposits 60,484 64,315 121,353 128,189
Short-term borrowings 5,180 6,103 10,839 12,571
Long-term obligations 3,157 3,225 6,342 4,330
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 68,821 73,643 138,534 145,090
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 88,139 80,892 173,882 158,915
Provision for loan losses 2,178 5,267 4,840 9,662
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 85,961 75,625 169,042 149,253
Noninterest income
Trust income 3,500 3,023 7,007 6,054
Service charges on deposit accounts 14,209 11,902 25,809 22,662
Credit card income 7,569 6,212 13,891 11,535
Other service charges and fees 12,215 11,289 23,465 21,003
Net gain (loss) on loans held for sale 452 1,114 2,045 2,203
Securities gains - - 777 -
Other 1,326 1,680 4,472 3,521
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest income 39,271 35,220 77,466 66,978
Noninterest expense
Salaries and wages 39,798 34,385 78,895 68,043
Employee benefits 7,765 7,037 15,323 13,783
Occupancy expense 7,355 7,083 14,486 13,641
Equipment expense 9,301 9,416 18,532 18,196
Other 29,168 26,070 57,369 51,210
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 93,387 83,991 184,605 164,873
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 31,845 26,854 61,903 51,358
Income taxes 11,542 9,309 22,552 18,153
- ---------------------------------------------------------------------------------------------------------------------
Net income $20,303 $17,545 $39,351 $33,205
- ---------------------------------------------------------------------------------------------------------------------
Per Share
Net income $1.91 $1.68 $3.70 $3.07
Cash dividends 0.25 0.25 0.50 0.50
- ---------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
First Citizens BancShares, Inc. and Subsidiaries
Accumulated
Class A Class B Other
Common Common Retained Comprehensive Total
(thousands, except share data, unaudited) Stock Stock Surplus Earnings Income Equity
<S> <C> <C> <C> <C> <C> <C>
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 33,205 33,205
Unrealized securities gains, net of taxes 35 35
Cash dividends (5,350) (5,350)
========================================================================================================================
Balance at June 30, 1998 $8,906 $1,720 $143,760 $464,823 $9,493 $628,702
========================================================================================================================
Balance at December 31, 1998 $8,906 $1,720 $143,760 $497,316 $9,047 $660,749
Net income 39,351 39,351
Unrealized securities losses, net of taxes (2,219) (2,219)
Cash dividends (5,311) (5,311)
========================================================================================================================
Balance at June 30, 1999 $8,906 $1,720 $143,760 $531,356 $6,828 $692,570
========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Six months ended June 30
(thousands, unaudited) 1999 1998
<S> <C> <C>
Operating Activities
Net income $39,351 $33,205
Adjustments to reconcile net income to cash
provided (used) by operating activities:
Amortization of intangibles 5,871 5,476
Provision for loan losses 4,840 9,662
Deferred tax expense (benefit) (2,667) 3,988
Change in current taxes payable (5,956) 1,068
Depreciation 15,107 13,091
Change in accrued interest payable (3,753) (2,252)
Change in income earned not collected 2,551 160
Securities gains (777) -
Origination of loans held for sale (311,502) (210,298)
Proceeds from sale of loans held for sale 368,081 210,581
Gain on loans held for sale (2,045) (2,203)
Net amortization of premiums and discounts 6,635 4,995
Net change in other assets (3,072) (12,011)
Net change in other liabilities (5,725) (77,108)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 106,939 (21,646)
- ----------------------------------------------------------------------------------------------------------------
Investing Activities
Net increase in loans outstanding (239,505) (433,702)
Purchases of investment securities held to maturity (486,398) (465,505)
Purchases of investment securities available for sale (2,630) -
Proceeds from maturities of investment securities held to maturity 662,633 594,998
Proceeds from sales of investment securities available for sale 1,710 -
Net change in overnight investments (62,472) 81,775
Dispositions of premises and equipment 6,311 9
Additions to premises and equipment (36,890) (46,082)
Purchase of branches, net of cash received - 249,702
- ----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (157,241) (18,805)
- ----------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in time deposits (28,446) (309,924)
Net change in demand and other interest-bearing deposits 86,471 233,218
Net change in short-term borrowings (51,721) (48,155)
Origination of long-term obligations - 150,000
Proceeds from issuance of common stock - -
Cash dividends paid (5,311) (5,350)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 993 19,585
- ----------------------------------------------------------------------------------------------------------------
Change in cash and due from banks (49,309) (20,866)
Cash and due from banks at beginning of period 502,955 506,771
================================================================================================================
Cash and due from banks at end of period $453,646 $485,905
================================================================================================================
Cash payments for:
Interest $142,288 $148,137
Income taxes 30,199 21,234
Supplemental disclosure of noncash investing and financing activities:
Unrealized securities gains (losses), net of taxes (2,219) 35
Obligation to repurchase common stock - 624
- ----------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 1999
<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 with 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 1998 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
1999. However, the reclassifications have no effect on shareholders' equity or
net income as previously reported.
Note B
Comprehensive Income
The following table displays comprehensive income for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
(thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $20,303 $17,545 $39,351 $33,205
Other comprehensive income (loss) (1,330) (1,244) (2,219) 35
=======================================================================================================================
Comprehensive income $18,973 $16,301 $37,132 $33,240
=======================================================================================================================
</TABLE>
Note C
Net Income per Share
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. BancShares had
no potential common stock for all periods presented.
Net income per share is calculated based on the following amounts for the
three months ended June 30:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
(thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $20,303 $17,545 $39,351 $33,205
Less change in obligation to
purchase common shares - (224) - 624
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common shares $20,303 $17,769 $39,351 $32,581
==================================================================================================================================
Weighted average common shares
outstanding 10,625,559 10,626,702 10,625,559 10,627,076
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Summary
Table 1
1999 1998 Six Months Ended
(thousands, except per share data Second First Fourth Third Second June 30
and ratios) Quarter Quarter Quarter Quarter Quarter 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest income .......................$ 156,960 $ 155,456 $ 158,101 $ 157,381 $ 154,535 $ 312,416 $ 304,005
Interest expense ...................... 68,821 69,713 73,057 73,924 73,643 138,534 145,090
Net interest income ................... 88,139 85,743 85,044 83,457 80,892 173,882 158,915
Provision for loan losses ............. 2,178 2,662 4,893 5,324 5,267 4,840 9,662
Net interest income after provision
for loan losses ................... 85,961 83,081 80,151 78,133 75,625 169,042 149,253
Noninterest income .................... 39,271 38,195 42,439 36,000 35,220 77,466 66,978
Noninterest expense ................... 93,387 91,218 91,226 86,114 83,991 184,605 164,873
Income before income taxes ............ 31,845 30,058 31,364 28,019 26,854 61,903 51,358
Income taxes .......................... 11,542 11,010 11,648 9,931 9,309 22,552 18,153
Net income ............................$ 20,303 $ 19,048 $ 19,716 $ 18,088 $ 17,545 $ 39,351 $ 33,205
Net interest income-taxable equivalent $ 88,703 $ 86,338 $ 85,838 $ 83,988 $ 81,397 $ 175,041 $ 159,938
Selected Averages
Total assets ..........................$ 9,605,512 $ 9,517,513 $ 9,315,347 $ 9,183,571 $ 9,142,981 $ 9,561,845 $ 9,035,770
Investment securities ................. 2,066,519 2,091,575 2,087,308 2,244,014 2,461,590 2,078,978 2,452,339
Loans ................................. 6,289,714 6,180,106 6,169,556 6,024,822 5,711,599 6,235,303 5,593,736
Interest-earning assets ............... 8,659,199 8,558,123 8,413,435 8,305,482 8,269,008 8,618,671 8,168,864
Deposits .............................. 8,139,147 8,018,971 7,914,649 7,744,217 7,755,945 8,079,391 7,688,015
Interest-bearing liabilities .......... 7,490,958 7,495,944 7,410,007 7,244,949 7,241,686 7,508,518 7,169,308
Long-term obligations ................. 157,453 158,307 159,196 158,353 159,984 157,877 108,187
Shareholders' equity ..................$ 683,771 $ 668,087 $ 651,656 $ 635,521 $ 621,605 $ 675,883 $ 614,545
Shares outstanding .................... 10,625,559 10,625,559 10,625,559 10,625,559 10,626,702 10,625,559 10,627,076
Selected Period-End Balances
Total assets ..........................$ 9,628,477 $ 9,702,163 $ 9,605,787 $ 9,194,842 $ 9,224,848 $ 9,628,477 $ 9,224,848
Investment securities ................. 1,975,476 2,099,882 2,160,329 2,115,343 2,348,771 1,975,476 2,348,771
Loans ................................. 6,376,372 6,244,828 6,195,591 6,132,422 5,886,315 6,376,372 5,886,315
Interest-earning assets ............... 8,647,045 8,694,710 8,588,645 8,257,765 8,235,086 8,647,045 8,235,086
Deposits .............................. 8,170,433 8,179,098 8,112,408 7,771,093 7,798,918 8,170,433 7,798,918
Interest-bearing liabilities .......... 7,522,636 7,620,262 7,542,636 7,260,204 7,291,813 7,522,636 7,291,813
Long-term obligations ................. 156,870 157,529 158,801 158,801 159,456 156,870 159,456
Shareholders' equity ..................$ 692,570 $ 676,253 $ 660,749 $ 643,673 $ 628,702 $ 692,570 $ 628,702
Shares outstanding .................... 10,625,559 10,625,559 10,625,559 10,625,559 10,625,559 10,625,559 10,625,559
Profitability Ratios (averages)
Rate of return (annualized) on:
Total assets .......................... 0.85% 0.81% 0.84% 0.78% 0.77% 0.83% 0.74%
Shareholders' equity .................. 11.91 11.56 12.00 11.29 11.32 11.74 10.90
Dividend payout ratio ................. 13.09 13.97 13.51 14.71 14.88 13.51 16.29
Loans to deposits ..................... 77.28% 77.07% 77.95% 77.80% 73.64% 77.18% 72.25%
Shareholders' equity to total assets .. 7.12 7.02 7.00 6.92 6.80 7.07 7.85
Time certificates of $100,000 or more
to total deposits ..................... 8.91 9.04 8.88 8.85 9.15 8.95 9.36
Per Share of Stock
Net income ............................$ 1.91 $ 1.79 $ 1.85 $ 1.70 $ 1.68 $ 3.70 $ 3.07
Cash dividends ........................ 0.25 0.25 0.25 0.25 0.25 0.50 0.50
Book value at period end .............. 65.18 63.64 62.18 60.58 59.17 65.18 59.17
Tangible book value at period end ..... 54.05 52.27 50.73 49.17 47.02 54.05 47.02
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Outstanding Loans by Type
Table 2
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Second First Fourth Third Second
(thousands) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate:
Construction and land development $169,755 $166,123 $157,603 $156,892 $140,651
Mortgage:
1-4 family residential 1,254,010 1,276,945 1,299,508 1,327,411 1,351,708
Commercial 1,641,846 1,594,076 1,495,214 1,378,086 1,257,465
Equity Line 685,924 613,510 617,062 641,746 647,117
Other 164,719 160,690 160,289 157,830 153,074
Commercial and industrial 952,206 889,962 845,068 802,653 756,371
Consumer 1,391,491 1,437,897 1,516,712 1,564,041 1,483,333
Lease financing 106,684 95,557 93,680 91,655 83,713
Other 9,737 10,068 10,455 12,108 12,883
- --------------------------------------------------------------------------------------------------------------------------
Total loans 6,376,372 6,244,828 6,195,591 6,132,422 5,886,315
- --------------------------------------------------------------------------------------------------------------------------
Less reserve for loan losses 96,765 96,340 96,115 94,135 90,240
- --------------------------------------------------------------------------------------------------------------------------
Net loans $6,279,607 $6,148,488 $6,099,476 $6,038,287 $5,796,075
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Investment Securities
Table 3
June 30, 1999 June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
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>
Securities held to maturity:
U. S. Government:
Within one year $1,372,194 $1,372,493 0/6 5.75 % $1,024,510 $1,025,911 0/7 5.84 %
One to five years 572,467 563,890 1/5 5.41 1,286,493 1,289,838 1/6 5.90
Five to ten years 200 203 8/2 8.21 353 341 6/5 7.02
Over ten years 4,519 4,522 23/1 7.07 3,800 3,911 19/4 7.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,949,380 1,941,108 0/10 5.65 2,315,156 2,320,001 1/1 5.87
State, county and municipal:
Within one year 237 241 0/10 7.90 1,611 1,616 0/5 6.30
One to five years 2,410 2,462 2/5 7.21 2,766 2,852 3/3 7.32
Over ten years 160 163 18/2 9.14 175 175 19/2 9.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,807 2,866 3/2 7.38 4,552 4,643 2/10 7.02
Other:
Within one year 10 10 0/1 0.06 2,900 2,899 0/3 7.50
One to five years 55 55 2/8 5.47 65 65 3/3 4.63
Five to ten years 250 250 9/1 2.25 - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 315 315 7/8 2.74 2,965 2,964 0/6 7.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,952,502 1,944,289 0/10 5.65 % 2,322,673 2,327,608 1/1 5.88 %
Marketable equity securities 11,333 22,974 - - 10,352 26,098 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,963,835 1,967,263 - - 2,333,025 2,353,706 - -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Second Quarter
Table 4
1999 1998 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
Total loans $6,289,714 $124,592 7.95 % $5,711,599 $117,961 8.23 % $11,240 ($4,609) $6,631
Investment securities:
U. S. Government 2,038,593 28,883 5.68 2,427,278 35,662 5.89 (5,608) (1,171) (6,779)
State, county and municipal 2,892 55 7.63 4,633 83 7.19 (32) 4 (28)
Other 25,034 119 1.91 29,679 18 0.24 (13) 114 101
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,066,519 29,057 5.64 2,461,590 35,763 5.83 (5,653) (1,053) (6,706)
Overnight investments 302,966 3,875 5.13 95,819 1,316 5.51 2,748 (189) 2,559
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $8,659,199 $157,524 7.30 % $8,269,008 $155,040 7.48 % $8,335 ($5,851) $2,484
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Checking With Interest $1,086,135 $1,782 0.66 % $1,047,360 $2,812 1.08 % $86 ($1,116) ($1,030)
Savings 669,254 2,717 1.63 708,424 3,343 1.89 (176) (450) (626)
Money market accounts 1,328,802 11,157 3.37 1,083,999 9,522 3.52 2,094 (459) 1,635
Time deposits 3,726,677 44,828 4.82 3,742,286 48,638 5.21 (187) (3,623) (3,810)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,810,868 60,484 3.56 6,582,069 64,315 3.92 1,817 (5,648) (3,831)
Federal funds purchased 40,377 472 4.69 54,665 753 5.53 (182) (99) (281)
Repurchase agreements 110,931 978 3.54 71,516 760 4.26 382 (164) 218
Master notes 315,718 3,072 3.90 312,489 3,683 4.73 37 (648) (611)
Other short-term borrowings 55,611 658 4.75 60,963 907 5.97 (72) (177) (249)
Long-term obligations 157,453 3,157 8.04 159,984 3,225 8.09 (50) (18) (68)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $7,490,958 $68,821 3.68 $7,241,686 $73,643 4.08 % $1,932 ($6,754) ($4,822)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.62 % 3.40 %
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $88,703 4.11 % $81,397 3.95 % $6,403 $903 $7,306
- ------------------------------------------------------------------------------------------------------------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state income
taxes, federal income taxes only, or 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 7.00% for 1999 and 7.25 % for 1998.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Six Months
Table 5
1999 1998 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
Total loans $6,235,303 $247,824 7.99 % $5,593,736 $230,613 8.28 % $25,799 ($8,588) $17,211
Investment securities:
U. S. Government 2,050,931 58,166 5.72 2,418,883 70,837 5.91 (10,588) (2,083) (12,671)
State, county and municipal 2,972 111 7.53 4,744 173 7.35 (65) 3 (62)
Other 25,075 239 1.92 28,712 36 0.25 (20) 223 203
- -------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,078,978 58,516 5.68 2,452,339 71,046 5.84 (10,673) (1,857) (12,530)
Overnight investments 304,390 7,235 4.79 122,789 3,369 5.53 4,648 (782) 3,866
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $8,618,671 $313,575 7.32 % $8,168,864 $305,028 7.51 % $19,774 ($11,227) $8,547
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Checking With Interest $1,078,954 $3,706 0.69 % $1,023,200 $5,450 1.07 % $240 ($1,984) ($1,744)
Savings 695,067 5,396 1.57 700,223 6,551 1.89 (46) (1,109) (1,155)
Money market accounts 1,302,195 21,501 3.33 1,072,381 18,966 3.57 3,940 (1,405) 2,535
Time deposits 3,733,927 90,750 4.90 3,754,677 97,222 5.22 (526) (5,946) (6,472)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,810,143 121,353 3.59 6,550,481 128,189 3.95 3,608 (10,444) (6,836)
Federal funds purchased 59,797 1,382 4.66 53,238 1,449 5.49 165 (232) (67)
Repurchase agreements 108,944 1,901 3.52 65,732 1,398 4.29 837 (334) 503
Master notes 313,960 6,040 3.88 304,026 7,129 4.73 213 (1,302) (1,089)
Other short-term borrowings 57,797 1,516 5.29 87,643 2,595 5.97 (834) (245) (1,079)
Long-term obligations 157,877 6,342 8.10 108,187 4,330 8.07 1,992 20 2,012
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities$7,508,518 $138,534 3.72 % $7,169,307 $145,090 4.08 % $5,981 ($12,537) ($6,556)
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.60 % 3.43 %
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $175,041 4.10 % $159,938 3.95 % $13,793 $1,310 $15,103
- -------------------------------------------------------------------------------------------------------------------------------
Average loan balances include nonaccrual loans. Yields related to loans and securities exempt from both federal and state
income taxes, federal income taxes only, or 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 7.00% for 1999 and 7.25 % for 1998.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Summary of Loan Loss Experience and Risk Elements
Table 6
1999 1998
Six Months Ended
Second First Fourth Third Second June 30
(thousands, except ratios) Quarter Quarter Quarter Quarter Quarter 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve balance at beginning of period $96,340 $96,115 $94,135 $90,240 $85,985 $96,115 $84,360
Provision for loan losses 2,178 2,662 4,893 5,324 5,267 4,840 9,662
Net charge-offs:
Charge-offs (3,231) (3,465) (3,913) (2,815) (3,930) (6,696) (7,339)
Recoveries 1,478 1,028 1,000 1,386 2,918 2,506 3,557
- ---------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,753) (2,437) (2,913) (1,429) (1,012) (4,190) (3,782)
- -------------------------------------------------------------------------------------------------------------------------------
Reserve balance at end of period $96,765 $96,340 $96,115 $94,135 $90,240 $96,765 $90,240
=================================================================================================================================
Historical Statistics
Balances
Average total loans $6,289,714 $6,180,106 $6,169,556 $6,024,822 $5,711,599 $6,235,303 $5,593,736
Total loans at period-end 6,376,372 6,244,828 6,195,591 6,132,422 5,886,315 6,376,372 5,886,315
- ---------------------------------------------------------------------------------------------------------------------------------
Risk Elements
Nonaccrual loans $11,465 $12,322 $12,489 $11,492 $12,335 $11,465 $12,335
Other real estate acquired through
foreclosure 2,030 3,062 1,529 1,202 1,170 2,030 1,170
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $13,495 $15,384 $14,018 $12,694 $13,505 $13,495 $13,505
- ---------------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days or more past due $5,181 $5,541 $5,721 $4,761 $4,168 $5,181 $4,168
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios
Net charge-offs (annualized) to average
total loans 0.11 % 0.16 % 0.19 % 0.09 % 0.07 % 0.14 % 0.14 %
Reserve for loan losses to total loans
at period-end 1.52 1.54 1.55 1.54 1.53 1.52 1.53
Nonperforming assets to total loans plus
foreclosed real estate at period-end 0.21 0.25 0.23 0.21 0.23 0.21 0.23
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Second Quarter 1999
<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, West Virginia, and Virginia. Atlantic States Bank operates
offices in Georgia and Florida.
SUMMARY
BancShares realized an increase in earnings during the second quarter of
1999 compared to the second quarter of 1998. Consolidated net income during the
second quarter of 1999 was $20.3 million, compared to $17.5 million earned
during the corresponding period of 1998. Net income per share during the second
quarter of 1999 totaled $1.91, compared to $1.68 during the second quarter of
1998. Return on average assets was 0.85 percent for the second quarter of 1999
compared to 0.77 percent during the same period of 1998.
For the first six months of 1999, BancShares recorded net income of $39.4
million, compared to $33.2 million earned during the first six months of 1998.
The 18.5 percent increase was the net result of higher net interest income and
higher noninterest income as well as a lower provision for loan losses,
partially offset by higher noninterest expense. Net income per share for the
first six months of 1999 was $3.70, compared to $3.07 during the same period of
1998. BancShares returned 0.83 percent on average assets during the first six
months of 1999 compared to 0.74 percent during the corresponding period of 1998.
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 second quarter and Table 5 for the first six months of 1999 and
1998.
INTEREST-EARNING ASSETS
Interest-earning assets for the second quarter of 1999 averaged $8.66
billion, an increase of $390.2 million or 4.7 percent from the second quarter of
1998. For the six months ended June 30, 1999, earning assets averaged $8.62
billion, an increase of $449.8 million or 5.5 percent over the same period of
1998. These increases result from growth in the loan portfolio.
Loans. At June 30, 1999 and 1998, gross loans totaled $6.38 billion and
$5.89 billion, respectively. As of December 31, 1998, gross loans were $6.20
billion. The $490 million growth in loans from June 30, 1998 to June 30, 1999
results from growth within BancShares' commercial and business loan products,
and retail real estate lending. Table 2 details outstanding loans by type for
the past five quarters.
During the second quarter of 1999, loans averaged $6.29 billion, an
increase of $578.1 million or 10.1 percent from the comparable period of 1998.
Loan growth resulted from strong demand for commercial and business loans.
Loans originated for commercial purposes averaged $2.34 billion during the
second quarter of 1999, compared to $1.94 billion during the second quarter of
1998, an increase of $400.4 million or 20.58 percent. Residential mortgage loans
averaged $645.6 million during the second quarter of 1999, a decrease of $181.1
million, or 21.9 percent, during the same period of 1998. The reduction in
residential mortgage loans is due to strong refinance activity in 1998 coupled
with loan rates consummated in late 1998.
For the year-to-date, gross loans have averaged $6.24 billion for 1999
compared to $5.59 billion for the same period of 1998. This $641.6 million or
11.47 percent increase is likewise due to growth among commercial and business
loans and retail real estate lending.
As of June 30, 1999, $29.8 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 six
months of 1999 has resulted from two primary goals. First, as in the past,
management seeks to lessen the exposure to changes in interest rates by selling
portions of its long-term fixed-rate loan production. Second, loan sales provide
liquidity to meet ongoing loan demand. The sales of residential mortgage loans
has supported both objectives.
Despite the recent upward pressure on interest rates, management
anticipates continued growth among commercial and business lending. Management
projects more modest demand for traditional installment loans from retail
customers. All growth projections, however, remain dependent on interest rates,
as any continued upward pressure on interest rates will likely deter retail
borrowers and may also slow commercial loan growth.
Investment securities. At June 30, 1999 and 1998, the investment portfolio
totaled $1.98 billion and $2.35 billion, respectively. At December 31, 1998, the
investment portfolio was $2.16 billion. The 8.6 percent reduction in the
investment portfolio since December 31, 1998 resulted from maturities used to
fund loan growth, which grew at a faster pace than deposits. All securities that
are classified as held-to-maturity reflect BancShares' ability and positive
intent to hold those investments until maturity. Marketable equity securities
are classified as available-for-sale and 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 $157.0
million during the second quarter of 1999, a 1.6 percent increase over the
second quarter of 1998. Balance sheet growth contributed to higher interest
income in the second quarter of 1999 when compared to the same period of 1998.
The taxable-equivalent yield on interest-earning assets for the second
quarter of 1999 was 7.30 percent, compared to 7.48 percent for the corresponding
period of 1998. The lower yield on earning assets during 1999 results primarily
from a reduction in the blended taxable-equivalent loan yield. The commercial
and business loan growth focused on strong underwriting and resulted in high
quality loans with lower yields. Additionally, during 1999, BancShares offered
lower introductory rates on its home equity lines of credit. Substantially all
of these loans will adjust to current market rates during the fourth quarter of
1999.
Loan interest income for the second quarter of 1999 was $124.0 million, an
increase of $6.6 million or 5.58 percent from the second quarter of 1998, due to
volume growth. The taxable-equivalent yield on the loan portfolio was 7.95
percent during the second quarter of 1999, compared to 8.23 percent during the
same period of 1998, the reduction resulting from lower market rates. Further,
during 1999, the composition of the loan portfolio has shifted towards lower
yielding commercial and business loans.
For the six months ended June 30, 1999, loan interest income was $246.7
million, an increase of $17.1 million or 7.42 percent over the same period of
1998. The increase in interest income reflects the growth in the loan portfolio.
Income earned on the investment securities portfolio amounted to $29.0
million during the second quarter of 1999 and $35.7 million during the same
period of 1998, a decrease of $6.7 million or 18.7 percent. This decrease is the
result of a $395.1 million or 16.0 percent decrease in the average securities
portfolio. The investment securities portfolio taxable-equivalent yield fell to
5.64 percent for the quarter ended June 30, 1999, compared to 5.83 percent for
the quarter ended June 30, 1998.
For the six months ended June 30, 1999, interest income from investment
securities was $58.5 million, compared to $71.0 million during the same period
of 1998, a decrease of 17.6 percent. This decrease is the result of a $373.4
million decrease in the average securities portfolio.
INTEREST-BEARING LIABILITIES
At June 30, 1999 and 1998, interest-bearing liabilities totaled $7.52
billion and $7.29 billion, respectively, compared to $7.54 billion as of
December 31, 1998. During the second quarter of 1999, interest-bearing
liabilities averaged $7.5 billion, an increase of $249.30 million or 3.44
percent from the second quarter of 1998. This increase primarily resulted from
growth in interest bearing money market deposits.
Deposits. At June 30, 1999, total deposits were $8.17 billion, an increase
of $371.5 million or 4.8 percent over June 30, 1998. Compared to the December
31, 1998 balance of $8.11 billion, total deposits have increased slightly.
Average interest-bearing deposits were $6.81 billion during the second
quarter of 1999 compared to $6.58 billion during the second quarter of 1998, an
increase of 3.48 percent. Much of the increase is due to average money market
accounts, which increased $244.8 million from the second quarter of 1998 to the
second quarter of 1999. Average time deposits decreased $38.8 million from the
second quarter of 1998 to the second quarter of 1999, while average Checking
With Interest accounts increased $15.6 million between the two periods. Time
deposits of $100,000 or more averaged 8.91 percent of total average deposits
during the second quarter of 1999, compared to 9.15 percent during the same
period of 1998.
Borrowed Funds. At June 30, 1999, short-term borrowings totaled $518.4
million compared to $568.1 million at December 31, 1998 and $547.1 million at
June 30, 1998. For the quarters ended June 30, 1999 and 1998, short-term
borrowings averaged $522.6 million and $499.6 million, respectively. This
increase resulted from growth among repurchase agreements. Long-term obligations
averaged $157.4 million during the second quarter of 1999, compared to $160.0
million during the second quarter of 1998.
Expense on Interest-Bearing Liabilities. BancShares' interest expense
amounted to $68.8 million during the second quarter of 1999, a $4.8 million or
6.5 percent decrease from the second quarter of 1998. The lower interest expense
was the result of rate reductions, the impact of which more than offset the
growth in average interest bearing deposits. The rate on these liabilities was
3.68 percent during the second quarter of 1999 compared to 4.08 percent during
the same period of 1998.
For the year-to-date, interest expense was $138.5 million, compared to
$145.1 million for the same period of 1998. The 4.52 percent decrease results
from lower interest rates.
NET INTEREST INCOME
Net interest income totaled $88.1 million during the second quarter of
1999, an increase of 9.0 percent from the second quarter of 1998. The
taxable-equivalent net yield on interest-earning assets was 4.11 percent for the
second quarter of 1999, an increase of 16 basis points from the 3.95 percent
reported for the second quarter of 1998. The taxable equivalent interest rate
spread for the second quarter of 1999 was 3.62 percent compared to 3.40 percent
for the same period of 1998. The improved interest rate spread and net yield on
interest-earning assets result from growth in interest-earning assets and a
further reduction in interest expense on interest-bearing liabilities than
interest-earning assets.
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 June 30,
1999, BancShares' market risk profile has not changed significantly from
December 31, 1998.
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 probable credit
losses. At June 30, 1999, the reserve for loan losses amounted to $96.8 million
or 1.52 percent of loans outstanding. This compares to $96.1 million or 1.55
percent at December 31, 1998, and $90.2 million or 1.53 percent at June 30,
1998.
Management considers the established reserve adequate to absorb losses that
relate to loans outstanding at June 30, 1999. 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 adjustments 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 second
quarter of 1999 was $2.2 million, compared to $5.3 million during the second
quarter of 1998. For the six month periods ended June 30, total provision for
loan losses was $4.8 million for 1999 and $9.7 million for 1998. The $4.8
million decrease primarily results from the lower rate of growth in the loan
portfolio during 1999. During 1998, BancShares experienced strong loan growth,
which resulted in higher provision for loan losses during that period.
Net charge-offs for the three months ended June 30, 1998 totaled $1.8
million, compared to net charge-offs of $1.0 million during the same period of
1998. On an annualized basis, these net charge-offs represent 0.11 percent and
0.07 percent of average loans outstanding during the respective periods. Net
charge-offs for the six month period ended June 30, 1999 totaled $4.2 million,
compared to $3.8 million during the same period of 1998. As a percentage of
average loans outstanding, the losses represent 0.14 percent for both periods on
an annualized basis. Gross charge-offs totaled $6.7 million and $7.3 million for
the six month periods ended June 30, 1999 and 1998 respectively. Gross
recoveries were $2.5 million and $3.6 million for the respective periods.
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 1999 and 1998.
Nonperforming assets. At June 30, 1999, BancShares' nonperforming assets
amounted to $13.5 million or 0.21 percent of gross loans plus foreclosed
properties, compared to $14.0 million at December 31, 1998, and $13.5 million at
June 30, 1998. Management continues to closely monitor nonperforming assets,
taking necessary actions to minimize potential exposure.
NONINTEREST INCOME
During the first six months of 1999, noninterest income was $77.5 million,
compared to $67.0 million during the same period of 1998. The $10.5 million or
15.7 percent increase was primarily due to growth in service charges on deposits
and improved credit card income. During the first six months of 1999, total
service charges on deposits was $25.8 million, compared to $22.7 million earned
during the same period of 1998. This increase resulted from a revised service
charge structure and increased bad check charges.
Noninterest income from the credit card operation contributed an additional
$2.35 million during the first six months of 1999 compared to the same period of
1998. This increase represents a 20.4 percent increase over the same period of
1998, the result of higher merchant income and interchange income generated by
card usage. BancShares also reported a $2.5 million increase in other service
charges and fees during the first six months of 1999, an 11.7 percent increase.
Growth in mortgage servicing income and fees generated by First Citizens
Investor Services contributed to this increase.
Results from the sale of current production of residential mortgage loans
and adjustments of loans held for sale to the lower of cost or fair value are
included in other income. BancShares recorded net gains of $2.0 million for the
first six months of 1999, compared to net gains on sales of $2.2 million during
the same period of 1998 on available for sale loans.
NONINTEREST EXPENSE
Noninterest expense was $184.6 million for the first six months of 1999, a
12.0 percent increase over the $164.9 million recorded during the same period of
1998. Much of the $19.7 million increase in noninterest expense relates to
franchise expansion and the investments required to support that growth.
Personnel-related expenses increased $12.4 million during 1999 when compared to
the same period of 1998. This 15.1 percent increase reflects the growth in
employee population required to staff new branch offices throughout the
franchise. Employee benefits expense increased $1.5 million or 11.2 percent
during the first six months of 1999, compared to the corresponding period of
1998 due to the larger employee population and increased pension costs.
Occupancy expense increased 6.2 percent during the first six months of
1999, the result of higher rent and depreciation expense for new and renovated
branch facilities.
The $6.2 million increase in other expenses resulted from higher credit
card processing costs, legal expense, and higher ATM related costs.
INCOME TAXES
Income tax expense amounted to $22.6 million during the first six months of
1999, compared to $18.2 million during the same period of 1998, a 24.2 percent
increase resulting from higher pre-tax income. The effective tax rates for these
periods were 36.4 percent and 35.3 percent, respectively, the increase resulting
from higher state income tax obligations.
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.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. At June 30, 1999 and 1998, the leverage capital
ratio of BancShares was 7.56 percent and 7.10 percent, respectively, surpassing
the minimum level of 3 percent. As a percentage of risk-adjusted assets,
BancShares' Tier 1 capital ratio was 10.01 percent at June 30, 1999, and 9.95
percent as of June 30, 1998. The minimum ratio allowed is 4 percent of
risk-adjusted assets. The total risk-adjusted capital ratio was 11.33 percent at
June 30, 1999 and 11.20 percent as of June 30, 1998. The minimum total capital
ratio is 8 percent. BancShares and its subsidiary banks exceed the capital
standards established by their respective regulatory agencies.
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 five areas - mainframe
computing, non-mainframe computing, non-information technology, integration
testing 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
all mission critical applications.
With respect to non-mainframe computing, remediation and testing has been
completed for all of the mission-critical and approximately 95% of non-mission
critical applications. With respect to non-information technology assets and
services, management has identified those that may be impacted by Y2K. Those
assets and services are currently proceeding through a validation process, with
all mission-critical assets and services having been validated.
Business continuity planning efforts are proceeding according to plan. The
three initial phases, project initiation, risk assessment, and continuity plan
development have been completed. Continuity plan validation will be completed by
August 31, 1999.
Costs - BancShares estimates that the total cost of the Y2K project will be
approximately $8.8 million. Currently, BancShares projects the cost of Y2K
efforts will be $1.8 million during 1999. For the first six months of 1999,
BancShares has recognized expenses totaling $1.0 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 all such 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
In June 1998, the Financial Accounting Standards Board ("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
2001 for BancShares.
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.
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.
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