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, 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
November 10, 1999)
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1999, December 31, 1998,
and September 30, 1998
Consolidated Statements of Income for the three-month and nine-month
periods ended September 30, 1999, and September 30, 1998
Consolidated Statements of Changes in Shareholders' Equity for the
nine-month periods ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 1999, and September 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. During the quarter ended September 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: November 10, 1999 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
Third Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
September 30* December 31# September 30*
(thousands, except share data) 1999 1998 1998
<S> <C> <C> <C>
Assets
Cash and due from banks $461,792 $502,955 $435,485
Investment securities held to maturity 1,676,825 2,135,372 2,069,342
Investment securities available for sale 22,695 24,957 46,001
Overnight investments 316,158 232,725 10,000
Loans 6,574,807 6,195,591 6,132,422
Less reserve for loan losses 97,965 96,115 94,135
- --------------------------------------------------------------------------------------------------------------------
Net loans 6,476,842 6,099,476 6,038,287
Premises and equipment 386,990 367,076 357,512
Income earned not collected 57,980 61,652 61,096
Other assets 178,433 181,574 177,119
Total assets $9,577,715 $9,605,787 $9,194,842
====================================================================================================================
Liabilities
Deposits:
Noninterest-bearing $1,319,625 $1,296,713 $1,204,633
Interest-bearing 6,742,466 6,815,695 6,566,460
- --------------------------------------------------------------------------------------------------------------------
Total deposits 8,062,091 8,112,408 7,771,093
Short-term borrowings 554,866 568,140 534,943
Long-term obligations 156,840 158,801 158,801
Other liabilities 90,849 105,689 86,332
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 8,864,646 8,945,038 8,551,169
Shareholders' Equity
Common stock:
Class A - $1 par value (8,905,199 shares
issued for all periods) 8,906 8,906 8,906
Class B - $1 par value (1,720,360 shares
issued for all periods) 1,720 1,720 1,720
Surplus 143,760 143,760 143,760
Retained earnings 551,834 497,316 480,255
Accumulated other comprehensive income 6,849 9,047 9,032
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 713,069 660,749 643,673
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,577,715 $9,605,787 $9,194,842
====================================================================================================================
* 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
Third Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries Three Months Nine Months
Ended September 30 Ended September 30
(thousands, except per share data; unaudited) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans $129,434 $123,861 $376,135 $353,512
Investment securities:
U. S. Government 26,497 32,615 84,663 103,452
State, county and municipal 37 50 112 162
Other 165 342 404 378
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities interest income 26,699 33,007 85,179 103,992
Overnight investments 4,091 513 11,326 3,882
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 160,224 157,381 472,640 461,386
Interest expense
Deposits 61,175 64,013 182,528 192,202
Short-term borrowings 6,125 6,716 16,964 19,287
Long-term obligations 3,197 3,195 9,539 7,525
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 70,497 73,924 209,031 219,014
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 89,727 83,457 263,609 242,372
Provision for loan losses 3,329 5,324 8,169 14,986
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 86,398 78,133 255,440 227,386
Noninterest income
Service charges on deposit accounts 14,677 12,067 40,486 34,729
Credit card income 8,367 6,954 22,258 18,489
Gain on sale of branches 4,432 - 4,432 -
Trust income 3,508 3,026 10,515 9,080
Mortgage income 1,134 1,764 5,144 5,071
Other service charges and fees 11,587 10,562 33,087 30,461
Securities gains - - 777 -
Other 2,193 1,627 6,665 5,148
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 45,898 36,000 123,364 102,978
Noninterest expense
Salaries and wages 41,207 36,408 120,102 104,451
Employee benefits 7,733 6,885 23,056 20,668
Occupancy expense 7,597 7,131 22,083 20,772
Equipment expense 9,334 8,885 27,866 27,081
Other 29,233 26,805 86,602 78,015
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 95,104 86,114 279,709 250,987
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 37,192 28,019 99,095 79,377
Income taxes 14,060 9,931 36,612 28,084
=============================================================================================================================
Net income $23,132 $18,088 $62,483 $51,293
=============================================================================================================================
Per Share
Net income $2.18 $1.70 $5.88 $4.77
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 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 51,293 51,293
Unrealized securities losses, 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
=======================================================================================================================
Balance at December 31, 1998 $8,906 $1,720 $143,760 $497,316 $9,047 $660,749
Net income 62,483 62,483
Unrealized securities losses, net of taxes (2,198) (2,198)
Cash dividends (7,965) (7,965)
=======================================================================================================================
Balance at September 30, 1999 $8,906 $1,720 $143,760 $551,834 $6,849 $713,069
=======================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Nine months ended September 30
(thousands, unaudited) 1999 1998
<S> <C> <C>
Operating Activities
Net income $62,483 $51,293
Adjustments to reconcile net income to cash
provided (used) by operating activities:
Amortization of intangibles 8,817 8,445
Provision for loan losses 8,169 14,986
Deferred tax expense (benefit) (4,143) 4,519
Change in current taxes payable (2,944) 300
Depreciation 22,823 19,833
Change in accrued interest payable (7,526) (6,754)
Change in income earned not collected 3,672 5,535
Securities gains (777) -
Gain on sale of branches (4,432)
Origination of loans held for sale (345,347) (585,608)
Proceeds from sale of loans held for sale 392,106 507,974
Gain on loans held for sale (2,047) (3,270)
Net amortization of premiums and discounts 9,720 7,486
Net change in other assets (908) (9,896)
Net change in other liabilities (4,830) (76,327)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 134,836 (61,484)
- ----------------------------------------------------------------------------------------------------------------------------
Investing Activities
Net increase in loans outstanding (467,494) (602,254)
Purchases of investment securities held to maturity (559,826) (459,027)
Purchases of investment securities available for sale (2,315) (20,139)
Proceeds from maturities of investment securities held to maturity 1,008,653 838,713
Proceeds from sales of investment securities available for sale 1,710 -
Net change in overnight investments (83,433) 71,775
Dispositions of premises and equipment 6,003 1,544
Additions to premises and equipment (50,122) (66,439)
Purchase and sale of branches, net of cash transferred (70,067) 249,702
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (216,891) 13,875
- ----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in time deposits (67,456) (328,817)
Net change in demand and other interest-bearing deposits 131,548 224,286
Net change in short-term borrowings (15,235) (60,936)
Origination of long-term obligations - 150,000
Repurchases of common stock - (204)
Cash dividends paid (7,965) (8,006)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 40,892 (23,677)
- ----------------------------------------------------------------------------------------------------------------------------
Change in cash and due from banks (41,163) (71,286)
Cash and due from banks at beginning of period 502,955 506,771
============================================================================================================================
Cash and due from banks at end of period $461,792 $435,485
============================================================================================================================
Cash payments for:
Interest $216,096 $226,563
Income taxes 42,027 32,520
Supplemental disclosure of noncash investing and financing activities:
Unrealized securities losses, net of taxes (2,198) (426)
Obligation to repurchase common stock - 624
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third 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 September 30 Nine Months Ended September 30
(thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $23,132 $18,088 $62,483 $51,293
Other comprehensive income (loss) 21 (461) (2,198) (426)
=======================================================================================================================
Comprehensive income $23,153 $17,627 $60,285 $50,867
=======================================================================================================================
</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 and nine months ended September 30:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
(thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $23,132 $18,088 $62,483 $51,293
Less change in obligation to
purchase common shares - - - 624
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common shares $23,132 $18,088 $62,483 $50,669
==================================================================================================================================
Weighted average common shares
outstanding 10,625,559 10,625,559 10,625,559 10,626,565
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note D
Related Party Transactions
During the third quarter of 1999, BancShares sold eight branch offices to
other banks which, as a result of common ownership, are deemed to be related
parties. These sales generated gains of $4,432 which are included in other
noninterest income.
<PAGE>
<TABLE>
<CAPTION>
Financial Summary
Table 1
1999 1998 Nine Months Ended
Third Second First Fourth Third September 30
(thousands, except per share data and ratios) Quarter Quarter Quarter Quarter Quarter 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $160,224 $156,960 $155,456 $158,101 $157,381 $472,640 $461,386
Interest expense 70,497 68,821 69,713 73,057 73,924 209,031 219,014
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 89,727 88,139 85,743 85,044 83,457 263,609 242,372
Provision for loan losses 3,329 2,178 2,662 4,893 5,324 8,169 14,986
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 86,398 85,961 83,081 80,151 78,133 255,440 227,386
Noninterest income 45,898 39,271 38,195 42,439 36,000 123,364 102,978
Noninterest expense 95,104 93,387 91,218 91,226 86,114 279,709 250,987
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 37,192 31,845 30,058 31,364 28,019 99,095 79,377
Income taxes 14,060 11,542 11,010 11,648 9,931 36,612 28,084
Net income $23,132 $20,303 $19,048 $19,716 $18,088 $62,483 $51,293
====================================================================================================================================
Net interest income-taxable equivalent $90,258 $88,703 $86,338 $85,838 $83,988 $265,299 $243,926
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Averages
Total assets $9,644,135 $9,605,512 $9,517,513 $9,315,347 $9,183,571 $9,589,565 $9,085,612
Investment securities 1,897,593 2,066,519 2,091,575 2,087,308 2,244,014 2,017,852 2,382,134
Loans 6,474,200 6,289,714 6,180,106 6,169,556 6,024,822 6,315,810 5,739,010
Interest-earning assets 8,689,146 8,659,199 8,558,123 8,413,435 8,305,482 8,642,421 8,214,903
Deposits 8,121,209 8,139,147 8,018,971 7,914,649 7,744,217 8,093,473 7,706,955
Interest-bearing liabilities 7,518,874 7,490,958 7,495,944 7,410,007 7,244,949 7,512,009 7,195,128
Long-term obligations 156,856 157,453 158,307 159,196 158,353 157,533 125,422
Shareholders' equity $702,065 $683,771 $668,087 $651,656 $635,521 $684,687 $621,521
Shares outstanding 10,625,559 10,625,559 10,625,559 10,625,559 10,625,559 10,625,559 10,626,565
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Period-End Balances
Total assets $9,577,715 $9,628,477 $9,702,163 $9,605,787 $9,194,842 $9,577,715 $9,194,842
Investment securities 1,699,520 1,975,476 2,099,882 2,160,329 2,115,343 1,699,520 2,115,343
Loans 6,574,807 6,376,372 6,244,828 6,195,591 6,132,422 6,574,807 6,132,422
Interest-earning assets 8,590,485 8,647,045 8,694,710 8,588,645 8,257,765 8,590,485 8,257,765
Deposits 8,062,091 8,170,433 8,179,098 8,112,408 7,771,093 8,062,091 7,771,093
Interest-bearing liabilities 7,454,172 7,522,636 7,620,262 7,542,636 7,260,204 7,454,172 7,260,204
Long-term obligations 156,840 156,870 157,529 158,801 158,801 156,840 158,801
Shareholders' equity $713,069 $692,570 $676,253 $660,749 $643,673 $713,069 $643,673
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 0.95 % 0.85 % 0.81 % 0.84 % 0.78 % 0.87 % 0.75%
Shareholders' equity 13.07 11.91 11.56 12.00 11.29 12.20 11.03
Dividend payout ratio 11.47 13.09 13.97 13.51 14.71 12.76 15.53
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits 79.72 % 77.28 % 77.07 % 77.95 % 77.80 % 78.04 % 74.47%
Shareholders' equity to total assets 7.28 7.12 7.02 7.00 6.92 7.14 6.84
Time certificates of $100,000 or more
to total deposits 8.93 8.91 9.04 8.88 8.85 8.94 9.29
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share of Stock
Net income $2.18 $1.91 $1.79 $1.85 $1.70 $5.88 $4.77
Cash dividends 0.25 0.25 0.25 0.25 0.25 0.75 0.75
Book value at period end 67.11 65.18 63.64 62.18 60.58 67.11 60.58
Tangible book value at period end 56.31 54.05 52.27 50.73 49.17 56.31 49.17
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Outstanding Loans by Type
Table 2
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Third Second First Fourth Third
(thousands) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate:
Construction and land development $170,467 $169,755 $166,123 $157,603 $156,892
Mortgage:
1-4 family residential 1,311,314 1,254,010 1,276,945 1,299,508 1,327,411
Commercial 1,732,853 1,641,846 1,594,076 1,495,214 1,378,086
Equity Line 706,271 685,924 613,510 617,062 641,746
Other 162,098 164,719 160,690 160,289 157,830
Commercial and industrial 971,199 952,206 889,962 845,068 802,653
Consumer 1,400,144 1,391,491 1,437,897 1,516,712 1,564,041
Lease financing 111,338 106,684 95,557 93,680 91,655
Other 9,123 9,737 10,068 10,455 12,108
- --------------------------------------------------------------------------------------------------------------------------
Total loans 6,574,807 6,376,372 6,244,828 6,195,591 6,132,422
- --------------------------------------------------------------------------------------------------------------------------
Less reserve for loan losses 97,965 96,765 96,340 96,115 94,135
- -------------------------------------------------------------------------------------------------------------------------
Net loans $6,476,842 $6,279,607 $6,148,488 $6,099,476 $6,038,287
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Investment Securities
Table 3
September 30, 1999 September 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>
U. S. Government:
Within one year $1,269,604 $1,267,703 0/6 5.55 % $1,164,636 $1,172,482 0/7 5.96 %
One to five years 393,652 385,725 1/5 5.71 896,153 907,582 1/5 5.78
Five to ten years 188 191 7/11 8.21 129 135 7/6 8.38
Over ten years 10,264 10,268 26/10 7.37 3,522 3,629 19/0 7.46
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,673,708 1,663,887 0/8 5.59 2,064,440 2,083,828 1/0 5.88
State, county and municipal:
Within one year 250 252 0/7 7.91 1,161 1,165 0/3 6.47
One to five years 2,412 2,459 2/2 7.21 2,766 2,871 3/0 7.30
Over ten years 150 152 17/11 9.14 160 166 18/0 9.14
- ----------------------------------------------------------------------------------------------------------------------------------
Total 2,812 2,863 2/10 7.37 4,087 4,202 2/10 7.14
Other
Within one year - - - - 510 510 0/2 5.53
One to five years 55 55 2/5 5.47 55 55 3/5 5.47
Five to ten years 250 250 8/10 2.25 250 250 9/10 8.00
- ----------------------------------------------------------------------------------------------------------------------------------
Total 305 305 7/8 2.47 815 815 1/8 5.80
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 1,676,825 1,667,055 0/10 5.60 % $2,069,342 $2,088,845 0/11 5.89 %
Marketable equity securities 11,333 22,695 - - 31,021 46,001 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,688,158 $1,689,750 - - $2,100,363 $2,134,846 - -
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Third 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 $6,474,200 $129,948 7.96 % $6,024,822 $124,366 8.34 % $10,400 ($4,818) $5,582
Investment securities:
U. S. Government 1,871,805 26,497 5.62 2,212,912 32,615 5.85 (4,932) (1,186) (6,118)
State, county and municipal 2,820 54 7.60 4,276 76 7.05 (27) 5 (22)
Other 22,968 165 2.85 26,826 342 5.06 (38) (139) (177)
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,897,593 26,716 5.59 2,244,014 33,033 5.84 (4,997) (1,320) (6,317)
Overnight investments 317,353 4,091 5.11 36,646 513 5.55 3,773 (195) 3,578
====================================================================================================================================
Total interest-earning assets $8,689,146 $160,755 7.34 % $8,305,482 $157,912 7.65 % $9,176 ($6,333) $2,843
====================================================================================================================================
Liabilities
Deposits:
Checking With Interest $1,061,601 $1,559 0.58 % $1,031,261 $2,583 0.99 % $59 ($1,083) ($1,024)
Savings 690,637 2,711 1.56 701,009 3,324 1.88 (48) (565) (613)
Money market accounts 1,385,314 12,551 3.59 1,132,443 10,151 3.56 2,292 108 2,400
Time deposits 3,668,409 44,354 4.80 3,681,556 47,955 5.17 (169) (3,432) (3,601)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,805,961 61,175 3.57 6,546,269 64,013 3.88 2,134 (4,972) (2,838)
Federal funds purchased 46,000 588 5.07 56,467 795 5.59 (140) (67) (207)
Repurchase agreements 120,580 1,164 3.83 86,129 933 4.30 353 (122) 231
Master notes 332,574 3,609 4.31 332,568 4,000 4.77 (3) (388) (391)
Other short-term borrowings 56,903 764 5.33 65,163 988 6.02 (118) (106) (224)
Long-term obligations 156,856 3,197 8.09 158,353 3,195 8.00 (32) 34 2
====================================================================================================================================
Total interest-bearing liabilities $7,518,874 $70,497 3.72 % $7,244,949 $73,924 4.05 % $2,194 ($5,621) ($3,427)
====================================================================================================================================
Interest rate spread 3.62 % 3.60 %
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $90,258 4.12 % $83,988 4.01 % $6,982 ($712) $6,270
- ------------------------------------------------------------------------------------------------------------------------------------
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
Third Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Nine 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 $6,315,810 $377,772 8.00 % $5,739,010 $354,979 8.26 % $34,794 ($12,001) $22,793
Investment securities:
U. S. Government 1,990,566 84,663 5.69 2,349,471 103,452 5.89 (15,543) (3,246) (18,789)
State, county and municipal 2,921 165 7.55 4,586 249 7.26 (92) 8 (84)
Other 24,365 404 2.22 28,077 378 1.80 (56) 82 26
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,017,852 85,232 5.65 2,382,134 104,079 5.84 (15,691) (3,156) (18,847)
Overnight investments 308,759 11,326 4.90 93,759 3,882 5.54 8,401 (957) 7,444
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $8,642,421 $474,330 7.34 % $8,214,903 $462,940 7.53 % $27,504 ($16,114) $11,390
==================================================================================================================================
Liabilities
Deposits:
Checking with Interest $1,073,106 $5,265 0.66 % $1,025,916 $8,033 1.05 % $298 ($3,066) ($2,768)
Savings 693,574 8,107 1.56 700,488 9,875 1.88 (94) (1,674) (1,768)
Money market accounts 1,330,206 34,052 3.42 1,092,622 29,117 3.56 6,203 (1,268) 4,935
Time deposits 3,711,848 135,104 4.87 3,730,036 145,177 5.20 (787) (9,286) (10,073)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,808,734 182,528 3.58 6,549,062 192,202 3.92 5,620 (15,294) (9,674)
Federal funds purchased 55,147 1,970 4.78 54,326 2,244 5.52 30 (304) (274)
Repurchase agreements 112,865 3,065 3.63 72,605 2,331 4.29 1,192 (458) 734
Master notes 320,233 9,649 4.03 313,645 11,129 4.74 210 (1,690) (1,480)
Other short-term borrowings 57,497 2,280 5.30 80,068 3,583 5.98 (953) (350) (1,303)
Long-term obligations 157,533 9,539 8.10 125,422 7,525 8.02 1,933 81 2,014
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $7,512,009 $209,031 3.72 % $7,195,128 $219,014 4.07 % $8,032 ($18,015) ($9,983)
==================================================================================================================================
Interest rate spread 3.62 % 3.46 %
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income and net yield
on interest-earning assets $265,299 4.10 % $243,926 3.97 % $19,472 $1,901 $21,373
- ----------------------------------------------------------------------------------------------------------------------------------
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
Third Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Summary of Loan Loss Experience and Risk Elements
Table 6
1999 1998 Nine Months Ended
Third Second First Fourth Third September 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 $96,765 $96,340 $96,115 $94,135 $90,240 $96,115 $84,360
Provision for loan losses 3,329 2,178 2,662 4,893 5,324 8,169 14,986
Net charge-offs:
Charge-offs (3,150) (3,231) (3,465) (3,913) (2,815) (9,846) (10,154)
Recoveries 1,021 1,478 1,028 1,000 1,386 3,527 4,943
- ----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (2,129) (1,753) (2,437) (2,913) (1,429) (6,319) (5,211)
- ----------------------------------------------------------------------------------------------------------------------------------
==================================================================================================================================
Reserve balance at end of period $97,965 $96,765 $96,340 $96,115 $94,135 $97,965 $94,135
==================================================================================================================================
Historical Statistics
Balances
Average total loans $6,474,200 $6,289,714 $6,180,106 $6,169,556 $6,024,822 $6,315,810 $5,739,010
Total loans at period-end 6,574,807 6,376,372 6,244,828 6,195,591 6,132,422 6,574,807 6,132,422
- ----------------------------------------------------------------------------------------------------------------------------------
Risk Elements
Nonaccrual loans $10,580 $11,465 $12,322 $12,489 $11,492 $10,580 $11,492
Other real estate 1,614 2,030 3,062 1,529 1,202 1,614 1,202
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $12,194 $13,495 $15,384 $14,018 $12,694 $12,194 $12,694
- ----------------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days or more past due $7,350 $5,181 $5,541 $5,721 $4,761 $7,350 $4,761
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios
Net charge-offs (annualized) to average
total loans 0.13 % 0.11 % 0.16 % 0.19 % 0.09 % 0.13 % 0.12 %
Reserve for loan losses to total loans
at period-end 1.49 1.52 1.54 1.55 1.54 1.49 1.54
Nonperforming assets to total loans plus
other real estate at period-end 0.19 0.21 0.25 0.23 0.21 0.19 0.21
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
Third 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 third quarter of
1999 compared to the third quarter of 1998. Consolidated net income during the
third quarter of 1999 was $23.1 million, compared to $18.1 million earned during
the corresponding period of 1998. Net income per share during the third quarter
of 1999 totaled $2.18, compared to $1.70 during the third quarter of 1998.
Return on average assets was 0.95 percent for the third quarter of 1999 compared
to 0.78 percent during the same period of 1998.
For the first nine months of 1999, BancShares recorded net income of
$62.5 million, compared to $51.3 million earned during the first nine months of
1998. Net income per share for the first nine months of 1999 was $5.88, compared
to $4.77 during the same period of 1998. BancShares returned 0.87 percent on
average assets during the first nine months of 1999 compared to 0.75 percent
during the corresponding period of 1998. .
For both the quarter and year-to date ending September 30, 1999, net
interest income and noninterest income exceeded the amounts recorded during the
same period of 1998. Additionally, the provision for loan losses decreased in
both the quarter and nine-month period when compared to the same periods of
1998. However, noninterest expenses for the quarter and year-to-date were higher
than the respective periods of 1998.
During the third quarter of 1999, BancShares sold eight branch offices
in transactions that generated net gains after taxes of $2.8 million or $0.26
per share. Adjusting for the impact of these non-recurring gains, net income
during the third quarter was $20.3 million or $1.92 per share. For the nine
months ended September 30, 1999, removing the impact of the branch sales,
BancShares earned $59.7 million or $5.62 per share.
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 1999 and
1998.
INTEREST-EARNING ASSETS
Interest-earning assets for the third quarter of 1999 averaged $8.69
billion, an increase of $383.7 million or 4.62 percent from the third quarter of
1998. For the nine months ended September 30, 1999, earning assets averaged
$8.64 billion, an increase of $427.5 million or 5.20 percent over the same
period of 1998. These increases result from growth in the loan portfolio.
Loans. At September 30, 1999 and 1998, gross loans totaled $6.57
billion and $6.13 billion, respectively. As of December 31, 1998, gross loans
were $6.20 billion. The $442.4 million growth in loans from September 30, 1998
to September 30, 1999 results from growth within BancShares' commercial and
business loan products, and retail installment loans secured by real estate.
Table 2 details outstanding loans by type for the past five quarters.
During the third quarter of 1999, loans averaged $6.47 billion, an
increase of $449.4 million or 7.46 percent from the comparable period of 1998.
Loan growth resulted from strong demand for commercial and business loans.
Loans originated for commercial purposes averaged $2.39 billion during
the third quarter of 1999, compared to $2.09 billion during the third quarter of
1998, an increase of $301.1 million or 14.41 percent. Business loans averaged
$355.7 million during the third quarter of 1999, an increase of $223.9 million
or 62.94% from the same period in 1998. The strong growth in commercial and
business lending results from BancShares' continued focus on the needs of these
customers.
For the year-to-date, gross loans have averaged $6.32 billion for 1999
compared to $5.74 billion for the same period of 1998. This $576.8 million or
10.05 percent increase is likewise due to strong loan demand from commercial and
small business customers.
As of September 30, 1999, $39.6 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. The ongoing sale of residential
mortgage loans lessens the exposure to changes in interest rates while providing
liquidity to meet ongoing loan demand.
Despite the recent upward pressure on interest rates, management
anticipates continued demand from commercial and business customers. 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 September 30, 1999 and 1998, the investment
portfolio totaled $1.70 billion and $2.12 billion, respectively. At December 31,
1998, the investment portfolio was $2.16 billion. The 21.3 percent reduction in
the investment portfolio since December 31, 1998 resulted from maturities being
used to fund loan growth, which increased 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 $160.2
million during the third quarter of 1999, a 1.81 percent increase over the third
quarter of 1998. Loan growth contributed to higher interest income in the third
quarter of 1999 when compared to the same period of 1998.
The taxable-equivalent yield on interest-earning assets for the third
quarter of 1999 was 7.34 percent, compared to 7.65 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.
Loan interest income for the third quarter of 1999 was $129.4 million,
an increase of $5.6 million or 4.50 percent from the third quarter of 1998, due
to volume growth. The taxable-equivalent yield on the loan portfolio was 7.96
percent during the third quarter of 1999, compared to 8.34 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 nine months ended September 30, 1999, loan interest income was
$376.1 million, an increase of $22.6 million or 6.40 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 $26.7
million during the third quarter of 1999 and $33.0 million during the same
period of 1998, a decrease of $6.3 million or 19.11 percent. This decrease is
primarily the result of a $346.4 million or 15.44 percent decrease in the
average securities portfolio. The investment securities portfolio
taxable-equivalent yield fell to 5.59 percent for the quarter ended September
30, 1999, compared to 5.84 percent for the quarter ended September 30, 1998. The
decline in the taxable-equivalent yield resulted from market changes.
For the nine months ended September 30, 1999, interest income from
investment securities was $85.2 million, compared to $104.0 million during the
same period of 1998, a decrease of 18.09 percent. This decrease is primarily the
result of a $364.3 million reduction in the average securities portfolio.
INTEREST-BEARING LIABILITIES
At September 30, 1999 and 1998, interest-bearing liabilities totaled
$7.45 billion and $7.26 billion, respectively, compared to $7.54 billion as of
December 31, 1998. During the third quarter of 1999, interest-bearing
liabilities averaged $7.52 billion, an increase of $273.9 million or 3.78
percent from the third quarter of 1998. This increase primarily resulted from
growth in interest bearing checking and money market deposits.
Deposits. At September 30, 1999, total deposits were $8.06 billion, an
increase of $291.0 million or 3.74 percent over September 30, 1998. Compared to
the December 31, 1998 balance of $8.11 billion, total deposits have decreased
slightly.
Average interest-bearing deposits were $6.81 billion during the third
quarter of 1999 compared to $6.55 billion during the third quarter of 1998, an
increase of 3.97 percent. Much of the increase is due to average money market
accounts, which increased $252.9 million from the third quarter of 1998 to the
third quarter of 1999. Average Checking With Interest accounts increased $30.3
million between the two periods. Time deposits of $100,000 or more averaged 8.93
percent of total average deposits during the third quarter of 1999, compared to
8.85 percent during the same period of 1998.
Interest bearing deposits averaged $6.81 billion during the first nine
months of 1999, compared to $6.55 billion during the same period of 1998. The
$259.7 million increase resulted from growth among money market and interest
bearing checking deposits.
Borrowed Funds. At September 30, 1999, short-term borrowings totaled
$554.9 million compared to $568.1 million at December 31, 1998 and $534.9
million at September 30, 1998. For the quarters ended September 30, 1999 and
1998, short-term borrowings averaged $556.1 million and $540.3 million,
respectively. This increase resulted from growth among overnight repurchase
agreements. Long-term obligations averaged $156.9 million during the third
quarter of 1999, compared to $158.4 million during the third quarter of 1998.
Expense on Interest-Bearing Liabilities. BancShares' interest expense
amounted to $70.5 million during the third quarter of 1999, a $3.4 million or
4.6 percent reduction from the third 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
3.72 percent during the third quarter of 1999 compared to 4.05 percent during
the same period of 1998.
For the year-to-date, interest expense was $209.0 million, compared to
$219.0 million for the same period of 1998. The 4.56 percent decrease results
from lower interest rates.
NET INTEREST INCOME
Net interest income totaled $89.7 million during the third quarter of
1999, an increase of 7.51 percent from the third quarter of 1998. The
taxable-equivalent net yield on interest-earning assets was 4.12 percent for the
third quarter of 1999, an increase of 11 basis points from the 4.01 percent
reported for the third quarter of 1998. The taxable equivalent interest rate
spread for the third quarter of 1999 was 3.62 percent compared to 3.60 percent
for the same period of 1998. The improved interest rate spread and net yield on
interest-earning assets result from loan growth and a reduction in interest
expense on interest-bearing liabilities.
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, 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 September 30, 1999, the reserve for loan losses amounted to $98.0
million or 1.49 percent of loans outstanding. This compares to $96.1 million or
1.55 percent of loans outstanding at December 31, 1998, and $94.1 million or
1.54 percent of loans outstanding at September 30, 1998. At September 30, 1999,
the reserve for loan losses reflects management's estimate of the impact of the
credit-related losses that will be sustained as a result of Hurricane Floyd.
Management considers the established reserve adequate to absorb losses
that relate to loans outstanding at September 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 third
quarter of 1999 was $3.3 million, compared to $5.3 million during the third
quarter of 1998. For the nine month periods ended September 30, total provision
for loan losses was $8.2 million for 1999 and $15.0 million for 1998. The $6.8
million reduction in the year-to-date provision for loan losses primarily
results from the lower rate of growth in the loan portfolio during 1999. During
1998, BancShares experienced stronger loan growth, which resulted in higher
provision for loan losses during that period.
Net charge-offs for the three months ended September 30, 1998 totaled
$2.1 million, compared to net charge-offs of $1.4 million during the same period
of 1998. On an annualized basis, these net charge-offs represent 0.13 percent
and 0.09 percent of average loans outstanding during the respective periods. Net
charge-offs for the nine month period ended September 30, 1999 totaled $6.3
million, compared to $5.2 million during the same period of 1998. As a
percentage of average loans outstanding, these losses represent 0.13 percent for
the first nine months of 1999, compared to 0.12 percent for the same time period
in 1998. Gross charge-offs totaled $9.8 million and $10.2 million for the nine
month periods ended September 30, 1999 and 1998 respectively. Gross recoveries
were $3.5 million and $4.9 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 September 30, 1999, BancShares' nonperforming
assets amounted to $12.2 million or 0.19 percent of gross loans plus other real
estate, compared to $14.0 million at December 31, 1998, and $12.7 million at
September 30, 1998. Management continues to closely monitor nonperforming
assets, taking necessary actions to minimize potential exposure.
NONINTEREST INCOME
During the first nine months of 1999, noninterest income was $123.4
million, compared to $103.0 million during the same period of 1998. The $20.4
million or 19.8 percent increase was primarily due to growth in service charges
on deposit accounts, gains generated by the sale of branches, and improved
credit card income. During the first nine months of 1999, total service charges
on deposit accounts was $40.5 million, compared to $34.7 million earned during
the same period of 1998. This increase resulted from adjustments to service
charges made earlier in 1999. During the third quarter, FCB sold eight branches
to other banks. These sales generated gains of $4.4 million, which are included
in other income.
Noninterest income from the credit card operation contributed an
additional $3.8 million during the first nine 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 $2.6 million increase in
other service charges and fees during the first nine months of 1999, an 8.6
percent increase, primarily due to growth in fees generated by First Citizens
Investor Services and fees earned from other banks for processing services.
Results from the sale of residential mortgage loans, servicing income and
adjustments of loans held for sale to the lower of cost or fair value are
included in mortgage income. These activities generated $5.1 million during the
first nine months of 1999, unchanged from the same period of 1998.
NONINTEREST EXPENSE
Noninterest expense was $279.7 million for the first nine months of
1999, an 11.44 percent increase over the $251.0 million recorded during the same
period of 1998. Much of the $28.7 million increase in noninterest expense
relates to franchise expansion and the investments required to support that
growth. Salaries and wages increased $15.7 million during 1999 when compared to
the same period of 1998. This 15.0 percent increase reflects the growth in
employee population required to staff new branch offices throughout the
franchise. Employee benefits expense increased $2.4 million or 11.6 percent
during the first nine months of 1999, compared to the corresponding period of
1998 due to the larger employee population and increased pension costs.
Occupancy expense increased 6.3 percent during the first nine months of
1999, the result of higher depreciation expense for new and renovated branch
facilities. This increase reflects the growth in the branch network - from 376
offices at September 30, 1998, to 384 offices at September 30, 1999.
Other noninterest expenses totaled $86.6 million during the first six
months of 1999, compared to $78.0 million during the same period of 1998. The
$8.6 million or 11.0 percent increase resulted from higher costs related to
credit card processing, telecommunications, legal services, and advertising.
INCOME TAXES
Income tax expense amounted to $36.6 million during the first nine
months of 1999, compared to $28.1 million during the same period of 1998, a 30.4
percent increase resulting from higher pre-tax income. The effective tax rates
for these periods were 36.9 percent and 35.4 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 September 30, 1999 and 1998, the
leverage capital ratio of BancShares was 7.80 percent and 7.32 percent,
respectively, surpassing the minimum level of 3 percent. As a percentage of
risk-adjusted assets, BancShares' Tier 1 capital ratio was 10.02 percent at
September 30, 1999, and 9.91 percent as of September 30, 1998. The minimum ratio
allowed is 4 percent of risk-adjusted assets. The total risk-adjusted capital
ratio was 11.33 percent at September 30, 1999 and 11.15 percent as of September
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 non-mission critical applications. With respect to
non-information technology assets and services, management has identified those
that may be impacted by Y2K. All mission-critical assets and services have been
validated.
Business continuity planning efforts are proceeding according to plan,
with all plans having been developed and validated. BancShares continues to
stage the date changes to verify that all systems are operating and interacting
properly.
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 nine months of 1999,
BancShares has recognized expenses totaling $1.4 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 - 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 and test 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, as amended by SFAS No. 137,
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.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
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0
0
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</TABLE>
