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 March 31, 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
April 12, 1999)
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 1999, December 31, 1998,
and March 31, 1998
Consolidated Statements of Income for the three-month periods
ended March 31, 1999, and March 31, 1998
Consolidated Statements of Changes in Shareholders' Equity for the
three-month periods ended March 31, 1999, and March 31, 1998
Consolidated Statements of Cash Flows for the three-month periods
ended March 31, 1999, and March 31, 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 March 31, 1999,
Registrant filed no Current Reports
on Form 8-K.
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: April 12, 1999 By:/s/Kenneth A. Black
Kenneth A. Black
Vice President, Treasurer,
and Chief Financial Officer
First Citizens BancShares, Inc and Subsidiaries
First Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
First Citizens BancShares, Inc. and Subsidiaries
March 31* December 31# March 31*
(thousands,except share data) 1999 1998 1998
<S> <C> <C> <C>
Assets
Cash and due from banks $483,590 $502,955 $442,482
Investment securities held to maturity 2,075,213 2,135,372 2,498,079
Investment securities available for sale 24,669 24,957 28,287
Federal funds sold 350,000 232,725 235,000
Loans 6,244,828 6,195,591 5,562,831
Less reserve for loan losses 96,340 96,115 85,985
Net loans 6,148,488 6,099,476 5,476,846
Premises and equipment 374,110 367,076 330,070
Income earned not collected 59,824 61,652 62,347
Other assets 186,269 181,574 178,918
Total assets $9,702,163 $9,605,787 $9,252,029
Liabilities
Deposits:
Noninterest-bearing $1,301,195 $1,296,713 $1,193,282
Interest-bearing 6,877,903 6,815,695 6,680,202
Total deposits 8,179,098 8,112,408 7,873,484
Short-term borrowings 584,830 568,140 486,599
Long-term obligations 157,529 158,801 160,219
Other liabilities 104,453 105,689 116,691
Total liabilities 9,025,910 8,945,038 8,636,993
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; 1,720,360; and
1,722,254 shares issued, respectively) 1,720 1,720 1,722
Surplus 143,760 143,760 143,760
Retained earnings 513,709 497,316 449,911
Accumulated other comprehensive income 8,158 9,047 10,737
Total shareholders' equity 676,253 660,749 615,036
Total liabilities and shareholders' equity $9,702,163 $9,605,787 $9,252,029
* 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
First Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
First Citizens BancShares, Inc. and Subsidiaries
Three Months Ended
March 31
(thousands, except per share data, unaudited) 1999 1998
<S> <C> <C>
Interest income
Loans $122,655 $112,166
Investment securities:
U. S. Government 29,283 35,175
State, county and municipal 38 58
Other 120 18
Total investment securities interest income 29,441 35,251
Federal funds sold 3,360 2,053
Total interest income 155,456 149,470
Interest expense
Deposits 60,869 63,874
Short-term borrowings 5,659 6,468
Long-term obligations 3,185 1,105
Total interest expense 69,713 71,447
Net interest income 85,743 78,023
Provision for loan losses 2,662 4,395
Net interest income after provision for loan losses 83,081 73,628
Noninterest income
Trust income 3,507 3,031
Service charges on deposit accounts 11,600 10,760
Credit card income 6,322 5,323
Other service charges and fees 11,250 9,714
Net gain on loans held for sale 1,593 1,089
Securities gains 777 -
Other 3,146 1,841
Total noninterest income 38,195 31,758
Noninterest expense
Salaries and wages 39,097 33,658
Employee benefits 7,558 6,746
Occupancy expense 7,131 6,558
Equipment expense 9,231 8,780
Other 28,201 25,140
Total noninterest expense 91,218 80,882
Income before income taxes 30,058 24,504
Income taxes 11,010 8,844
Net income $19,048 $15,660
Per Share
Net income $1.79 $1.39
Cash dividends 0.25 0.25
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
First 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
Obligations to repurchase common stock (848) (848)
Net income 15,660 15,660
Unrealized securities gains,
net of $775 deferred taxes 1,279 1,279
Cash dividends (2,695) (2,695)
Balance at March 31, 1998 $8,906 $1,722 $143,760 $449,911 $10,737 $615,036
Balance at December 31, 1998 $8,906 $1,720 $143,760 $497,316 $9,047 $660,749
Net income 19,048 19,048
Unrealized securities losses, net of $585
deferred tax benefit (889) (889)
Cash dividends (2,655) (2,655)
Balance at March 31, 1999 $8,906 $1,720 $143,760 $513,709 $8,158 $676,253
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
First Citizens BancShares, Inc. and Subsidiaries
Three months ended March 31,
(thousands, unaudited) 1999 1998
<S> <C> <C>
Operating Activities
Net income $19,048 $15,660
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of intangibles 2,916 2,537
Provision for loan losses 2,662 4,395
Deferred tax expense (benefit) (2,227) 1,713
Change in current taxes payable 9,877 10,395
Depreciation 7,460 6,371
Change in accrued interest payable (7,813) (7,081)
Change in income earned not collected 1,828 4,284
Securities gains (777) -
Origination of loans held for sale (163,785) (136,288)
Proceeds from sale of loans held for sale 194,703 178,441
Gain on loans held for sale (1,593) (1,089)
Net amortization of premiums and discounts 3,275 2,434
Net change in other assets (4,799) 715
Net change in other liabilities (3,300) (53,611)
Net cash provided by operating activities 57,475 28,876
Investing Activities
Net increase in loans outstanding (80,999) (152,190)
Purchases of investment securities held to maturity (357,283) (449,156)
Proceeds from maturities of investment securities held to maturity 413,758 403,650
Net change in federal funds sold (117,275) (153,225)
Dispositions of premises and equipment 6,311 9
Additions to premises and equipment (20,805) (29,258)
Purchase of branches, net of cash received - 249,702
Net cash used by investing activities (156,293) (130,468)
Financing Activities
Net change in time deposits 6,280 (240,437)
Net change in demand and other interest-bearing deposits 60,410 238,297
Net change in short-term borrowings 15,418 (107,862)
Origination of long-term obligations - 150,000
Cash dividends paid (2,655) (2,695)
Net cash provided by financing activities 79,453 37,303
Change in cash and due from banks (19,365) (64,289)
Cash and due from banks at beginning of period 502,955 506,771
Cash and due from banks at end of period $483,590 $442,482
Cash payments for:
Interest $77,526 $79,323
Income taxes 3,423 115
Supplemental disclosure of noncash investing and financing activities:
Unrealized securities gains (losses) (1,474) 2,054
Change in obligation to repurchase common stock - 848
See accompanying Notes to Consolidated Financial Statements
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
First 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 March 31
1999 1998
(thousands)
<S> <C> <C>
Net income $19,048 $15,660
Other comprehensive income (loss) (889) 1,279
Comprehensive income $18,159 $16,939
</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 March 31:
<TABLE>
<CAPTION>
Three months ended March 31
1999 1998
<S> <C> <C>
Net income $19,048 $15,660
Less change in obligation to
purchase common shares - 848
Net income applicable to
common shares $19,048 $14,812
Weighted average common
shares outstanding 10,625,559 10,627,453
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Summary
Table 1
1999 1998
First Fourth Third Second First
(thousands, except per share data and ratios) Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $155,456 $158,101 $157,381 $154,535 $149,470
Interest expense 69,713 73,057 73,924 73,643 71,447
Net interest income 85,743 85,044 83,457 80,892 78,023
Provision for loan losses 2,662 4,893 5,324 5,267 4,395
Net interest income after provision
for loan losses 83,081 80,151 78,133 75,625 73,628
Noninterest income 38,195 42,439 36,000 35,220 31,758
Noninterest expense 91,218 91,226 86,114 83,991 80,882
Income before income taxes 30,058 31,364 28,019 26,854 24,504
Income taxes 11,010 11,648 9,931 9,309 8,844
Net income $19,048 $19,716 $18,088 $17,545 $15,660
Net interest income-taxable equivalent $86,338 $85,838 $83,988 $81,397 $78,541
Selected Quarterly Averages
Total assets $9,517,513 $9,315,347 $9,183,571 $9,142,981 $8,927,355
Investment securities 2,091,575 2,087,308 2,244,014 2,461,590 2,442,962
Loans 6,180,106 6,169,556 6,024,822 5,711,599 5,474,570
Interest-earning assets 8,558,123 8,413,435 8,305,482 8,269,008 8,067,590
Deposits 8,018,971 7,914,649 7,744,217 7,755,945 7,619,330
Interest-bearing liabilities 7,495,944 7,410,007 7,244,949 7,241,686 7,096,127
Long-term obligations 158,307 159,196 158,353 159,984 55,814
Shareholders' equity $668,087 $651,656 $635,521 $621,605 $607,608
Shares outstanding 10,625,559 10,625,559 10,625,559 10,626,702 10,627,453
Selected Quarter-End Balances
Total assets $9,702,163 $9,605,787 $9,194,842 $9,224,848 $9,252,029
Investment securities 2,099,882 2,160,329 2,115,343 2,348,771 2,526,366
Loans 6,244,828 6,195,591 6,132,422 5,886,315 5,562,831
Interest-earning assets 8,694,710 8,588,645 8,257,765 8,235,086 8,324,197
Deposits 8,179,098 8,112,408 7,771,093 7,798,918 7,873,484
Interest-bearing liabilities 7,620,262 7,542,636 7,260,204 7,291,813 7,327,020
Long-term obligations 157,529 158,801 158,801 159,456 160,219
Shareholders' equity $676,253 $660,749 $643,673 $628,702 $615,036
Shares outstanding 10,625,559 10,625,559 10,625,559 10,625,559 10,627,453
Profitability Ratios (averages)
Rate of return (annualized) on:
Total assets 0.81% 0.84% 0.78% 0.77% 0.71%
Shareholders' equity 11.56 12.00 11.29 11.32 10.45
Dividend payout ratio 13.97 13.51 14.71 15.15 17.01
Liquidity and Capital Ratios (averages)
Loans to deposits 77.07% 77.95% 77.80% 73.64% 71.85%
Shareholders' equity to total assets 7.02 7.00 6.92 6.80 6.81
Time certificates of $100,000 or more to total
deposits 9.04 8.88 8.85 9.15 9.77
Per Share of Stock
Net income $1.79 $1.85 $1.70 $1.68 $1.39
Cash dividends 0.25 0.25 0.25 0.25 0.25
Book value at period end 63.64 62.18 60.58 59.17 57.87
Tangible book value at period end 52.27 50.73 49.17 47.02 45.48
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Outstanding Loans by Type
Table 2
1999 1998
First Fourth Third Second First
(thousands) Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Real estate:
Construction and land development $166,123 $157,603 $156,892 $140,651 $127,260
Mortgage:
1-4 family residential 1,276,945 1,299,508 1,327,411 1,351,708 1,370,264
Commercial 1,594,076 1,495,214 1,378,086 1,257,465 1,147,844
Equity Line 613,510 617,062 641,746 647,117 626,931
Other 160,690 160,289 157,830 153,074 136,191
Commercial and industrial 889,962 845,068 802,653 756,371 675,136
Consumer 1,437,897 1,516,712 1,564,041 1,483,333 1,389,079
Lease financing 95,557 93,680 91,655 83,713 77,161
Other 10,068 10,455 12,108 12,883 12,965
Total loans 6,244,828 6,195,591 6,132,422 5,886,315 5,562,831
Less reserve for loan losses 96,340 96,115 94,135 90,240 85,985
Net loans $6,148,488 $6,099,476 $6,038,287 $5,796,075 $5,476,846
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Investment Securities
Table 3
March 31, 1999 March 31, 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>
Within one year $1,345,055 $1,351,757 0/7 5.90 % $967,621 $968,826 0/7 5.83 %
One to five years 721,630 719,754 1/6 5.23 1,519,594 1,524,174 1/8 5.90
Five to ten years 116 121 7/0 8.38 726 713 5/10 6.84
Over 10 years 4,948 5,059 22/10 7.11 4,248 4,366 19/7 7.49
Total 2,071,749 2,076,691 0/11 5.66 2,492,189 2,498,079 1/4 5.87
State, county and municipal:
Within one year 125 125 0/2 7.70 1,656 1,665 0/8 6.40
One to five years 2,664 2,754 2/6 7.27 2,893 2,988 3/4 7.32
Over ten years 160 165 18/5 9.14 175 175 19/5 9.14
Total 2,949 3,044 3/3 7.39 4,724 4,828 3/0 7.03
Other:
Within one year 210 210 0/2 5.24 901 899 0/6 14.10
One to five years 55 55 2/11 5.47 265 265 1/9 5.29
Five to ten years 250 250 9/4 2.25 - - - -
Total 515 515 0/8 3.81 1,166 1,164 0/8 13.23 %
Total securities held to maturity 2,075,213 2,080,250 0/11 5.67 % 2,498,079 2,504,071
Marketable equity securities 11,136 24,669 - 10,478 28,287 - -
Total investment securities $2,086,349 $2,104,919 - - $2,508,557 $2,532,358 - -
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - First 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 $6,180,106 $123,232 8.04% $5,474,570 $112,652 8.29% $14,676 ($4,096) $10,580
Investment securities:
U. S. Government 2,063,406 29,283 5.76 2,410,395 35,175 5.92 (5,003) (889) (5,892)
State, county and municipal 3,053 56 7.44 4,856 90 7.52 (33) (1) (34)
Other 25,116 120 1.94 27,711 18 0.26 (7) 109 102
Total investment securities 2,091,575 29,459 5.71 2,442,962 35,283 5.86 (5,043) (781) (5,824)
Federal funds sold 286,442 3,360 4.76 150,058 2,053 5.55 1,733 (426) 1,307
Total interest-earning assets $8,558,123 $156,051 7.36% $8,067,590 $149,988 7.51% $11,366 ($5,303) $6,063
Liabilities:
Deposits:
Checking with Interest $1,071,693 $1,924 0.73% $998,771 $2,638 1.07% $158 ($872) ($714)
Savings 690,834 2,679 1.57 691,931 3,208 1.88 (3) (526) (529)
Money market accounts 1,275,292 10,344 3.29 1,060,634 9,444 3.61 1,824 (924) 900
Time deposits 3,741,259 45,922 4.98 3,767,206 48,584 5.23 (337) (2,325) (2,662)
Total interest-bearing deposits 6,779,078 60,869 3.64 6,518,542 63,874 3.97 1,642 (4,647) (3,005)
Federal funds purchased 79,434 910 4.65 51,794 696 5.45 344 (130) 214
Repurchase agreements 106,935 923 3.50 59,884 638 4.32 454 (169) 285
Master notes 312,184 2,968 3.86 295,469 3,446 4.73 175 (653) (478)
Other short-term borrowings 60,006 858 5.80 114,621 1,688 5.97 (793) (37) (830)
Long-term obligations 158,307 3,185 8.16 55,817 1,105 8.03 2,046 34 2,080
Total interest-bearing liabilities $7,495,944 $69,713 3.77% $7,096,127 $71,447 4.08% $3,868 ($5,602) ($1,734)
Interest rate spread 3.59% 3.43%
Net interest income and net yield on
interest-earning assets $86,338 4.09% $78,541 3.95% $7,498 $299 $7,797
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% and 7.25% for 1999 and 1998, respectively.
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
First Quarter 1999
<PAGE>
<TABLE>
<CAPTION>
Summary of Loan Loss Expenience and Risk Elements Table 5
1999 1998
First Fourth Third Second First
(thousands, except ratios) Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Reserve balance at beginning of period $96,115 $94,135 $90,240 $85,985 $84,360
Provision for loan losses 2,662 4,893 5,324 5,267 4,395
Net charge-offs:
Charge-offs (3,465) (3,913) (2,815) (3,930) (3,409)
Recoveries 1,028 1,000 1,386 2,918 639
Net charge-offs (2,437) (2,913) (1,429) (1,012) (2,770)
Reserve balance at end of period $96,340 $96,115 $94,135 $90,240 $85,985
Historical Statistics
Balances
Average total loans $6,180,106 $6,169,556 $6,024,822 $5,711,599 $5,474,570
Total loans at period-end 6,244,828 6,195,591 6,132,422 5,886,315 5,562,831
Risk Elements
Nonaccrual loans $12,322 $12,489 $11,492 $12,335 $14,797
Other real estate acquired through foreclosure 3,062 1,529 1,202 1,170 1,502
Total nonperforming assets $15,384 $14,018 $12,694 $13,505 $16,299
Accruing loans 90 days or more past due $5,541 $5,721 $4,761 $4,168 $4,837
Ratios
Net charge-offs (annualized) to average total loans 0.16% 0.19% 0.09% 0.07% 0.21%
Reserve for loan losses to total loans at period-end 1.54 1.55 1.54 1.53 1.55
Nonperforming assets to total loans plus foreclosed
real estate at period-end 0.25 0.23 0.21 0.23 0.29
</TABLE>
First Citizens BancShares, Inc. and Subsidiaries
First 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, Virginia and West Virginia. Atlantic States Bank operates
offices in Georgia and Florida.
SUMMARY
BancShares realized improved earnings during the first quarter of 1999
compared to the first quarter of 1998. Consolidated net income during the first
quarter of 1999 was $19.0 million, compared to $15.7 million earned during the
corresponding period of 1998. Net income per share during the first quarter of
1999 totaled $1.79, compared to $1.39 during the first quarter of 1998.
Annualized return on average assets was 0.81 percent for the first quarter of
1999 compared to 0.71 percent during the same period of 1998. The higher net
income, net income per share, and return on average assets resulted from
improved net interest income and noninterest income. These improvements were
partially offset, however, by higher noninterest expense during the first
quarter of 1999.
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 first three months of 1999 and 1998.
INTEREST-EARNING ASSETS
Interest-earning assets for the first quarter of 1999 averaged $8.56
billion, an increase of $490.5 million or 6.1 percent from the first quarter of
1998. This increase results from growth in the loan portfolio.
Loans. At March 31, 1999 and 1998, gross loans totaled $6.24 billion and
$5.56 billion, respectively. As of December 31, 1998, gross loans were $6.20
billion. The $682.0 million growth in loans from March 31, 1998 to March 31,
1999 results from growth within BancShares' commercial loans and small business
loans. This growth has resulted from customer demand and BancShares'strong
focus on these products during 1998.
During the first quarter of 1999, loans averaged $6.18 billion, an increase
of $705.5 million or 12.9 percent from the comparable period of 1998. Commercial
loans, which averaged $2.29 billion during the first quarter of 1999, increased
$473.4 million or 26.1 percent over the first quarter of 1998. Business loans,
which averaged $446.2 million during the first quarter of 1999, increased $190.4
million over the first quarter of 1998. Strong demand among commercial and small
business customers and BancShares'ability to deliver desirable products through
accessible delivery networks allowed the strong growth in commercial purpose
loans. Retail loan growth was less robust during the first quarter of 1999,
although installment lending increased $231.5 million over the first quarter of
1998. Average EquityLine and other revolving products decreased from the first
quarter of 1998 to 1999. Average residential mortgage loan balances decreased
$202.1 million from the same period of 1998, the result of mortgage loan sales
that generated liquidity to fund commercial loan demand. As of March 31, 1999,
$55.0 million in residential mortgage loans are classified as held for sale. All
loans held for sale are carried at the lower of cost or fair value.
Management anticipates continued growth among commercial and small business
loans during 1999, although the rate of growth will likely be less than that in
1998. Retail loan growth is projected to remain modest. Growth projections are
dependent on interest rate movements, as interest rate changes will affect
retail and commercial loan growth.
Investment securities. At March 31, 1999 and 1998, the investment portfolio
totaled $2.10 billion and $2.53 billion, respectively. At December 31, 1998, the
investment portfolio was $2.16 billion. The 16.9 percent reduction in the
investment portfolio since March 31, 1998 resulted from proceeds from maturing
securities being used to fund loan demand. All securities that are classified as
held-to-maturity reflect BancShares'ability and positive intent to hold those
investments until maturity. Available-for-sale securities are reported at their
aggregate fair value. Table 3 presents detailed information relating to the
investment securities portfolio.
Income on Interest-Earning Assets. Interest income amounted to $155.5
million during the first quarter of 1999, a 4.0 percent increase over the first
quarter of 1998. Growth in the loan portfolio contributed to higher interest
income in the first quarter of 1999 when compared to the same period of 1998.
The taxable-equivalent yield on interest-earning assets for the first
quarter of 1999 was 7.36 percent, compared to 7.51 percent for the corresponding
period of 1998. The lower yield on earning assets during 1999 results from lower
market pricing for loans originated during 1998.
Loan interest income for the first quarter of 1999 was $122.7 million, an
increase of $10.5 million or 9.4 percent from the first quarter of 1998, the
result of volume growth. The taxable-equivalent yield on the loan portfolio was
8.04 percent during the first quarter of 1999, compared to 8.29 percent during
the same period of 1998, the decrease resulting from lower market rates and
competitive loan pricing.
Income earned on the investment securities portfolio amounted to $29.4
million during the first quarter of 1999 and $35.3 million during the same
period of 1998, a decrease of $5.8 million or 16.5 percent. This decrease is the
result of a $351.4 million reduction in the average securities portfolio and a
15 basis point yield reduction. The investment securities portfolio
taxable-equivalent yield decreased from 5.86 percent for the quarter ended March
31, 1998, to 5.71 percent for the quarter ended March 31, 1999, the result of
market conditions.
INTEREST-BEARING LIABILITIES.
At March 31, 1999 and 1998, interest-bearing liabilities totaled $7.62
billion and $7.33 billion, respectively, compared to $7.54 billion as of
December 31, 1998. During the first quarter of 1999, interest-bearing
liabilities averaged $7.50 billion, an increase of $399.8 million or 5.63
percent from the first quarter of 1998. This increase primarily resulted from
growth in interest-bearing deposits and long-term obligations.
Deposits. At March 31, 1999, total deposits were $8.18 billion, an increase
of $305.6 million or 3.9 percent over March 31, 1998. Compared to the December
31, 1998 balance of $8.11 billion, total deposits have increased $66.7 million.
Average interest-bearing deposits were $6.78 billion during the first
quarter of 1999 compared to $6.52 billion during the first quarter of 1998, an
increase of 4.0 percent. The increase is due to growth among money market and
Checking With Interest deposits. Average money market deposits increased $214.7
million from the first quarter of 1998 to the first quarter of 1999. Average
Checking With Interest accounts increased $72.9 million between the two periods.
Time deposits of $100,000 or more averaged 9.04 percent of total average
deposits during the first quarter of 1999, compared to 9.77 percent during the
same period of 1998. Deposit growth reflects the impact of the expanding branch
network, specifically in-store locations.
Borrowed Funds. At March 31, 1999, short-term borrowings totaled $584.8
million compared to $568.1 million at December 31, 1998 and $486.6 million at
March 31, 1998. For the quarters ended March 31, 1999 and 1998, short-term
borrowings averaged $558.6 million and $521.8 million, respectively. This
increase is the net result of growth among federal funds purchased and overnight
repurchase obligations. Long-term obligations averaged $158.3 million during the
first quarter of 1999, compared to $55.8 million during the first quarter of
1998. The increase in long-term obligations reflects the impact of the $150
million in trust preferred securities that were issued during the first quarter
of 1998. The trust preferred securities are thirty year obligations with
interest paid semi-annually at a rate of 8.05 percent. The trust preferred
securities qualify as Tier 1 capital for the holding company.
Expense on Interest-Bearing Liabilities. BancShares' interest expense
amounted to $69.7 million during the first quarter of 1999, a $1.7 million or
2.4 percent reduction from the first quarter of 1998. The lower interest expense
was the result of a 31 basis point reduction in the aggregate blended rate on
interest-bearing liabilities. The rate on these liabilities was 3.77 percent
during the first quarter of 1999, compared to 4.08 percent during the first
quarter of 1998. The rate reduction more than offset the impact of a $399.8
million increase in average interest-bearing liabilities.
NET INTEREST INCOME
Net interest income totaled $85.7 million during the first quarter of 1999,
an increase of 9.9 percent from the first quarter of 1998. The
taxable-equivalent net yield on interest-earning assets was 4.09 percent for the
first quarter of 1999, compared to the 3.95 percent achieved for the first
quarter of 1998. The taxable equivalent interest rate spread for the first
quarter of 1999 was 3.59 percent compared to 3.43 percent for the same period of
1998.
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 March 31,
1999, BancShares' market risk profile has not changed significantly from
December 31, 1998. Changes in fair value that result from movement in market
rates can not be predicted with any degree of certainty. Therefore, the impact
that future changes in market rates will have on the fair values of financial
instruments is uncertain.
ASSET QUALITY
Reserve for loan losses. Management continuously analyzes the growth and
risk characteristics of the total loan portfolio under current economic
conditions in order to evaluate the adequacy of the reserve for loan losses.
Such factors as the financial condition of the borrower, fair market value of
collateral and other considerations are recognized in estimating probable credit
losses. At March 31, 1999, the reserve for loan losses amounted to $96.3 million
or 1.54 percent of loans outstanding. This compares to $96.1 million or 1.55
percent at December 31, 1998, and $86.0 million or 1.55 percent at March 31,
1998.
Management considers the established reserve adequate to absorb estimated
probable losses that relate to loans outstanding at March 31, 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 first
quarter of 1999 was $2.7 million, compared to $4.4 million during the first
quarter of 1998. Net charge-offs for the three months ended March 31, 1999
totaled $2.4 million, compared to net charge-offs of $2.8 million during the
same period of 1998. On an annualized basis, these net charge-offs represent
0.16 percent and 0.21 percent of average loans outstanding during the respective
periods. The reduction in total provision for loan losses during the first
quarter of 1999 results from a smaller rate of loan growth during 1999, when
compared to loan growth during the same period of 1998. Management remains
committed to maintaining high levels of credit quality. Table 5 provides details
concerning the reserve and provision for loan losses over the past five
quarters.
Nonperforming assets. At March 31, 1999, BancShares' nonperforming assets
amounted to $15.4 million or 0.25 percent of gross loans plus foreclosed
properties, compared to $14.0 million at December 31, 1998, and $16.3 million at
March 31, 1998. While BancShares views these levels of nonperforming assets as
further evidence of strong asset quality, management continues to closely
monitor nonperforming assets, taking necessary actions to minimize potential
exposure. There has been no significant change in the carrying value of impaired
loans.
NONINTEREST INCOME
During the first three months of 1999, noninterest income was $38.2
million, compared to $31.8 million during the same period of 1998. The $6.4
million or 20.3 percent increase was primarily due to growth in other service
charge and fee income and credit card income. During the first three months of
1999, total other service charges and fees was $11.3 million, compared to $9.7
million earned during the same period of 1998. Significant to this increase was
growth in fees earned by First Citizens Investor Services and mortgage servicing
income.
Credit card income during the first quarter of 1999 was $6.3 million,
compared to $5.3 million earned during the same period of 1998. The $1.0 million
or 18.8 percent increase resulted from higher interchange income and merchant
fee income. Securities gains recognized during the first quarter of 1999 totaled
$777,000. These gains resulted from the repurchase of various available for sale
securities by acquiring companies. No such gains were recorded during 1998.
Results from the sale of residential mortgage loans and adjustments of
loans held for sale to the lower of cost or fair value are included in other
noninterest income. BancShares recorded net gains of $1.6 million for the first
three months of 1999, compared to net gains of $1.1 million during the same
period of 1998. During the first quarter of 1999, BancShares recognized gains of
$630,000 on the sale of deposit liabilities. No such gains were recognized
during the first quarter of 1998.
NONINTEREST EXPENSE
Noninterest expense was $91.2 million for the first three months of 1999, a
12.8 percent increase over the $80.9 million recorded during the same period of
1998. Much of the $10.3 million increase in total noninterest expense relates to
franchise expansion and the investments required to support that growth.
Salaries and wages increased $5.4 million during 1999 when compared to the same
period of 1998. This 16.2 percent increase reflects the growth in employee
population required to staff the new branch offices and in-store locations in
North Carolina, Virginia and Georgia. Employee benefits expense increased 12.0
percent during 1999, the result of increased pension expense and employment
taxes.
Equipment expense was $9.2 million during the first three months of 1999,
compared to $8.8 million during the same period of 1998. Much of the 5.1 percent
increase was a result of higher depreciation resulting from recent hardware and
software purchases, and the expansion of the ATM network. Occupancy expense was
$7.1 million for the first three months of 1999, an 8.7 percent increase over
the $6.6 million recorded during the same period of 1998. Much of the increase
was the result of higher rent and depreciation expense for new and renovated
branch facilities.
The $3.1 million increase in other expenses resulted from higher consulting
expense and expenses related to credit card processing. During the first three
months of 1999, BancShares incurred $1.4 million in consulting expenses, which
includes costs related to preparation for the year 2000 ("2K"). The increase in
credit card processing costs relates to the growth in the number of accounts
outstanding.
INCOME TAXES
Income tax expense amounted to $11.0 million during the three months ended
March 31, 1999, compared to $8.8 million during the same period of 1998, a 24.5
percent increase resulting from higher pre-tax income. The effective tax rates
for these periods were 36.6 percent and 36.1 percent, respectively.
LIQUIDITY
Management relies on the investment portfolio as a source of liquidity,
with maturities designed to provide needed cash flows. Further, retail deposits
generated throughout the branch network have enabled management to fund asset
growth and maintain liquidity. In the event additional liquidity is needed,
BancShares maintains readily available sources to borrow funds through its
correspondent network. Loan growth during the first quarter was funded by growth
in deposits and by liquidity granted from maturity of investment securities.
Deposits are expected to display seasonal patterns through the remainder of
1999, providing funds for projected loan growth.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. At March 31, 1999 and 1998, the leverage
capital ratio of BancShares was 7.42 percent and 6.95 percent, respectively,
surpassing the minimum level of 3 percent. As a percentage of risk-adjusted
assets, BancShares' Tier 1 capital ratio was 10.08 percent at March 31, 1999,
and 10.20 percent as of March 31, 1998. The minimum ratio allowed is 4 percent
of risk-adjusted assets. The total risk-adjusted capital ratio was 11.41 percent
at March 31, 1999 and 11.44 percent as of March 31, 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 substantially all of the mission-critical and non-mission-critical
applications. A small number of applications will not complete remediation and
testing until second quarter 1999. 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 substantially all mission-critical assets and services having been
validated. The validation process is expected to be completed by the end of the
second quarter of 1999.
Business continuity planning efforts have been initiated. The two initial
phases, project initiation and risk assessment, have been completed. The third
phase, continuity plan development, will be completed by the end of the second
quarter of 1999. Business continuity testing will be completed by September 30,
1999. Costs - BancShares estimates that the total cost of the Y2K project will
be approximately $8.5 million. Currently, BancShares projects the cost of Y2K
efforts will be $1.5 million during 1999. For the first three months of 1999,
BancShares has recognized expenses totaling $525,000 for Y2K compliance. All
costs related to the Y2K project are expensed as incurred.
Risks - The implications of the Y2K problem, whether the result of
BancShares' own failure to achieve readiness or the failure of a material
customer or vendor to achieve readiness, could have a material adverse impact on
BancShares' operations and its results of operations. However, management
believes the efforts underway will minimize the likelihood of such a crisis.
BancShares believes its most reasonably likely worst case scenario will be
a failure by certain customers and vendors to achieve Y2K readiness. With
respect to its customers, BancShares has identified its material borrowers and
has requested disclosures from those borrowers as to their readiness and their
risks. Based on these findings, management has identified customers who, in
management's opinion, may experience some distress as a result of Y2K. The
assessments have been completed on 88 percent of the customers who exceeded the
established parameters.
For key vendors who provide goods and services, BancShares has requested
status reports that describe their efforts to achieve Y2K readiness. Most of the
requests have been honored, and, based on these responses, except for exposures
related to public utilities, there are no known risks among the identified
vendors.
Regulatory agencies that have authority over BancShares and its
subsidiaries have determined that Y2K testing and certification are key safety
and soundness issues in conjunction with regulatory exams. Therefore, failure to
address the Y2K issue in an appropriate manner could result in supervisory
action, including the reduction of the supervisory rating, the denial of
applications for approval of mergers or acquisitions or the imposition of
penalties. Contingency Plans - Throughout the project, BancShares has developed
contingency plans whenever it is apparent that specific applications will not
achieve Y2K compliance. Based on the respective situation, the inclination to
replace the application or to assess the impact of the non-compliant asset or
service will determine how the matter will be resolved.
For BancShares' most reasonably likely worst case scenario, contingency
plans are already active. As previously described, BancShares has actively
evaluated the status of readiness efforts of key customers and vendors and made
necessary modifications, including downgrading of exposure to customers who are
believed to be at risk of Y2K non-compliance.
Management will continue to evaluate deficiencies that become apparent and
to establish contingency plans to protect BancShares and to minimize its
exposure to Y2K uncertainties.
CURRENT ACCOUNTING AND REGULATORY ISSUES
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
2000.
Management is not aware of any current recommendations by regulatory
authorities that, if implemented, would have or would be reasonably likely to
have a material effect on liquidity, capital ratios or results of operations.
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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