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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-16471
First Citizens BancShares, Inc.
(Exact name of Registrant as specified in the charter)
<TABLE>
<S> <C>
Delaware 56-1528994
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
239 Fayetteville Street Mall
Raleigh, North Carolina 27601
(Address of Principal Executive Offices, Zip Code)
(919) 716-7000
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to:
<TABLE>
<S> <C>
Section 12(b) of the Act: None
Section 12(g) of the Act: Class A Common Stock, Par Value $1
Class B Common Stock, Par Value $1
</TABLE>
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on last reported sales prices on March 6, 2000, the aggregate market
value of the Registrant's voting stock held by nonaffiliates of the Registrant
as of such date was $384,798,000.
On March 6, 2000, there were 8,862,849 outstanding shares of the
Registrant's Class A Common Stock and 1,720,460 outstanding shares of the
Registrant's Class B Common Stock.
Portions of the Registrant's definitive Proxy Statement dated March 17,
2000 are incorporated in Part III of this report.
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<PAGE>
CROSS REFERENCE INDEX
<TABLE>
<S> <C> <C> <C>
PART I Item 1 Description of Business ............................................................... 3
Item 2 Properties ............................................................................ 3
Item 3 Legal Proceedings ..................................................................... 24
Item 4 Submission of Matters to a Vote of Shareholders ....................................... None
PART II Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters .............. 3, 23
Item 6 Selected Financial Data ............................................................... 5
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................ 4-25
Item 7A Quantitative and Qualitative Disclosures about Market Risk ............................ 14-15
Item 8 Financial Statements and Supplementary Data
Quarterly Financial Summary for 1999 and 1998 ......................................... 23
Independent Auditor's Report .......................................................... 26
Consolidated Balance Sheets at December 31, 1999 and 1998 ............................. 27
Consolidated Statements of Income for each of the years in the three-year period
ended December 31, 1999 ............................................................... 28
Consolidated Statements of Changes in Shareholders' Equity for each of the years in
the three-year period ended December 31, 1999 ......................................... 29
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 1999 ........................................................ 30
Notes to Consolidated Financial Statements ............................................ 31-47
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures ........................................................................... None
PART III Item 10 Directors and Executive Officers of Registrant ........................................ *
Item 11 Executive Compensation ................................................................ *
Item 12 Security Ownership of Certain Beneficial Owners and Management ........................ *
Item 13 Certain Relationships and Related Transactions ........................................ *
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements (see Item 8 for reference)
(2) Financial Statement Schedules normally required on Form 10-K are omitted since
they are not applicable, except as referred to in Item 8.
(3) Exhibits have been filed separately with the Commission and are available upon
written request. ...................................................................... 50
(b) During the quarter ended December 31, 1999, no reports on Form 8-K were filed.
</TABLE>
- ---------
* Information required by Item 10 is incorporated herein by reference to the
information that appears under the headings "Proposal 1: Election of
Directors", "Section 16(a) Beneficial Ownership Reporting Compliance" and
"Executive Officers" in the Registrant's Proxy Statement for the 2000 Annual
Meeting of Shareholders.
Information required by Item 11 is incorporated herein by reference to the
information that appears under the headings "Director Compensation",
"Executive Compensation", "Pension Plan" and "Employment Contracts,
Termination of Employment, and Change-in-Control Agreements" in the
Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders.
Information required by Item 12 is incorporated herein by reference to the
information that appears under the heading "Beneficial Ownership of Voting
Securities" in the Registrant's Proxy Statement for the 2000 Annual Meeting
of Shareholders.
Information required by Item 13 is incorporated herein by reference to the
information that appears under the headings "Proposal 1: Election of
Directors" and "Transactions with Management" in the Registrant's Proxy
Statement for the 2000 Annual Meeting of Shareholders.
2
<PAGE>
DESCRIPTION OF BUSINESS
First Citizens BancShares, Inc. ("BancShares") was incorporated under the
laws of Delaware on August 7, 1986, to become the successor to First Citizens
Corporation ("FCC"), a North Carolina corporation that was the bank holding
company of First-Citizens Bank & Trust Company (the "Bank"), its banking
subsidiary. On October 21, 1986, FCC was merged into BancShares, and BancShares
became the sole shareholder of the Bank. The Bank was chartered on March 4,
1893, as the Bank of Smithfield, Smithfield, North Carolina and through a
series of mergers and name changes, it later became First-Citizens Bank & Trust
Company. As of December 31, 1999, the Bank operated 354 offices in North
Carolina, Virginia and West Virginia.
On April 28, 1997, BancShares opened Atlantic States Bank ("ASB"), a
federally-chartered thrift institution, which has continued to open new
branches in the suburban Atlanta, Georgia area. During 1999, ASB expanded into
southwestern Florida, specifically in the Fort Myers area. At December 31,
1999, ASB had 31 offices with total assets of $469.0 million.
BancShares' executive offices are located at 239 Fayetteville Street,
Raleigh, North Carolina, 27601, and its telephone number is (919) 716-7000. At
December 31, 1999, BancShares and its subsidiaries employed a full-time staff
of 4,193 and a part-time staff of 875 for a total of 5,068 employees.
BancShares' principal assets are its investment in and receivables from
its banking subsidiaries and its investment securities portfolio. Its primary
sources of income are dividends from the Bank and interest income on its
investment securities portfolio. Certain legal restrictions exist regarding the
ability of the Bank to transfer funds to BancShares in the form of cash
dividends or loans. For information regarding these restrictions, see Note P of
BancShares' consolidated financial statements, contained in this report.
The subsidiary banks seek to meet the needs of both consumers and
commercial entities in their respective market areas. These services, offered
at most offices, include normal taking of deposits, cashing of checks, and
providing for individual and commercial cash needs; numerous checking and
savings plans; commercial, small business and consumer lending; a full-service
trust department; and other activities incidental to commercial banking. Bank
subsidiaries American Guaranty Insurance Company and Triangle Life Insurance
Company underwrite and sell various forms of credit-related insurance products.
First Citizens Investor Services, Inc., provides various investment products,
including annuities, discount brokerage services and third-party mutual funds
to customers. First-Citizens Bank, A Virginia Corporation is the issuing and
processing bank for BancShares' retail credit cards. Various other subsidiaries
are either inactive or not material to BancShares' consolidated financial
position or to consolidated net income.
As a registered bank holding company, BancShares is subject to the
jurisdiction of the Board of Governors of the Federal Reserve System.
BancShares also is registered as a bank holding company with the North Carolina
Commissioner of Banks and is subject to the regulations promulgated by the
Commissioner. The internal affairs of BancShares, including the rights of its
shareholders, are governed by Delaware law and by its Certificate of
Incorporation and Bylaws. BancShares files periodic reports under the
Securities Exchange Act of 1934 and is subject to the jurisdiction of the
Securities and Exchange Commission.
The Bank is also regulated by the North Carolina Commissioner of Banks as
well as the Federal Deposit Insurance Corporation. ASB is regulated by the
Office of Thrift Supervision.
PROPERTIES
Through its subsidiary financial institutions, as of December 31, 1999,
BancShares operated branch offices at 392 locations in North Carolina,
Virginia, West Virginia, Florida and Georgia. BancShares owns many of the
buildings and leases other facilities from third parties.
Additional information relating to premises, equipment and lease
commitments is set forth in Note E of BancShares' consolidated financial
statements.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
BancShares' Class A and Class B common stock is traded in the
over-the-counter market, and the Class A common stock is listed on the National
Association of Securities Dealers Automated Quotation National Market System
under the symbol FCNCA.
The per share cash dividends paid by BancShares during each quarterly
period during 1999 and 1998 and the quarterly high and low prices for its Class
A and Class B common stock are set forth in Table 18 of this report. A cash
dividend of 25 cents per share was declared by the Board of Directors on
January 24, 2000, payable April 3, 2000, to holders of record as of March 20,
2000. Payment of dividends is made at the discretion of the Board of Directors
and is contingent upon satisfactory earnings as well as projected future
capital needs. Subject to the foregoing, it is currently management's
expectation that comparable cash dividends will continue to be paid in the
future.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. ("BancShares"), for
the years 1999, 1998 and 1997. BancShares is a bank holding company with two
wholly owned banking subsidiaries -- First-Citizens Bank & Trust Company
("FCB"), a North Carolina-chartered bank, and Atlantic States Bank ("ASB"), a
federally chartered thrift institution.
This discussion and related financial data should be read in conjunction
with the audited consolidated financial statements and related footnotes
presented on pages 26 through 47 of this report.
SUMMARY
BancShares experienced a 15.2 percent increase in net income during 1999,
compared to 1998. The increase was the result of higher net interest income and
noninterest income and a reduction in provision for loan losses. These were
partially offset by higher noninterest expense. Consolidated net income
amounted to $81.8 million during 1999, compared to $71.0 million during 1998
and $70.6 million during 1997. The improvement in net income during 1998 over
1997 resulted from growth in net interest income and noninterest income at
levels that exceeded the growth in noninterest expense. Net income per share
for the year ended December 31, 1999 totaled $7.70, compared to $6.62 and $6.22
for 1998 and 1997, respectively. Return on average assets totaled 0.85 percent
during 1999, 0.77 percent during 1998 and 0.85 percent during 1997.
An analysis of BancShares' financial condition and growth can be made by
examining the changes and trends in interest-earning assets and
interest-bearing liabilities. Such an analysis also requires an evaluation of
noninterest income and noninterest expenses. In recent years, increasing
noninterest income has been a significant focus for BancShares. The
introduction of new revenue sources and modifications to existing products and
services has allowed this component of net income to grow. Franchise expansion
has also contributed to the growth in noninterest income, but has also resulted
in large increases in noninterest expense, especially personnel-related costs,
occupancy and equipment expenses.
4
<PAGE>
Table 1
FINANCIAL SUMMARY AND SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
(thousands, except share data
and ratios)
<S> <C> <C>
SUMMARY OF OPERATIONS
Interest income ............................................ $ 633,891 $ 619,487
Interest expense ........................................... 281,542 292,071
------------ ------------
Net interest income ........................................ 352,349 327,416
Provision for loan losses .................................. 11,672 19,879
------------ ------------
Net interest income after provision for loan losses ........ 340,677 307,537
Noninterest income ......................................... 165,339 145,417
Noninterest expense ........................................ 375,620 342,213
------------ ------------
Income before income taxes ................................. 130,396 110,741
Income taxes ............................................... 48,596 39,732
------------ ------------
Net income ................................................. $ 81,800 $ 71,009
============ ============
Net interest income, taxable equivalent .................... $ 354,566 $ 329,764
============ ============
SELECTED AVERAGE BALANCES
Total assets ............................................... $ 9,622,774 $ 9,173,020
Investment securities ...................................... 1,908,300 2,305,395
Loans ...................................................... 6,399,114 5,847,531
Interest-earning assets .................................... 8,638,698 8,281,072
Deposits ................................................... 8,105,443 7,759,315
Interest-bearing liabilities ............................... 7,517,483 7,249,290
Long-term obligations ...................................... 157,897 133,935
Shareholders' equity ....................................... $ 693,559 $ 629,089
Shares outstanding ......................................... 10,625,457 10,626,311
============ ============
SELECTED PERIOD-END BALANCES
Total assets ............................................... $ 9,717,099 $ 9,605,787
Investment securities ...................................... 1,371,894 2,160,329
Loans ...................................................... 6,751,039 6,195,591
Interest-earning assets .................................... 8,596,326 8,588,645
Deposits ................................................... 8,173,598 8,112,408
Interest-bearing liabilities ............................... 7,554,229 7,542,636
Long-term obligations ...................................... 155,683 158,801
Shareholders' equity ....................................... $ 728,757 $ 660,749
Shares outstanding ......................................... 10,610,399 10,625,559
============ ============
PROFITABILITY RATIOS (AVERAGES)
Rate of return on:
Total assets .............................................. 0.85% 0.77%
Shareholders' equity ...................................... 11.79 11.29
Dividend payout ratio ...................................... 12.99 15.11
============ ============
LIQUIDITY AND CAPITAL RATIOS (AVERAGES)
Loans to deposits .......................................... 78.95% 75.36%
Shareholders' equity to total assets ....................... 7.21 6.86
Time certificates of $100,000 or more to total deposits..... 9.02 9.21
============ ============
PER SHARE OF STOCK
Net income ................................................. $ 7.70 $ 6.62
Cash dividends ............................................. 1.00 1.00
Market price at December 31 (Class A) ...................... 69.75 90.00
Book value at December 31 .................................. 68.68 62.18
Tangible book value at December 31 ......................... 58.13 50.73
============ ============
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
(thousands, except share data and ratios)
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income ............................................ $ 572,276 $ 534,195 $ 471,109
Interest expense ........................................... 268,013 248,250 224,664
------------ ------------ ------------
Net interest income ........................................ 304,263 285,945 246,445
Provision for loan losses .................................. 8,726 8,907 5,364
------------ ------------ ------------
Net interest income after provision for loan losses ........ 295,537 277,038 241,081
Noninterest income ......................................... 114,914 103,058 91,778
Noninterest expense ........................................ 300,401 278,422 245,530
------------ ------------ ------------
Income before income taxes ................................. 110,050 101,674 87,329
Income taxes ............................................... 39,492 36,207 30,423
------------ ------------ ------------
Net income ................................................. $ 70,558 $ 65,467 $ 56,906
============ ============ ============
Net interest income, taxable equivalent .................... $ 306,726 $ 288,251 $ 248,707
============ ============ ============
SELECTED AVERAGE BALANCES
Total assets ............................................... $ 8,304,412 $ 7,681,019 $ 6,846,959
Investment securities ...................................... 2,300,706 1,998,059 1,611,549
Loans ...................................................... 5,086,723 4,842,266 4,433,517
Interest-earning assets .................................... 7,569,075 6,987,659 6,191,422
Deposits ................................................... 7,088,018 6,653,302 5,952,090
Interest-bearing liabilities ............................... 6,521,818 6,044,553 5,410,495
Long-term obligations ...................................... 10,472 13,483 26,307
Shareholders' equity ....................................... $ 638,825 $ 576,988 $ 487,895
Shares outstanding ......................................... 11,341,153 11,340,982 10,597,066
============ ============ ============
SELECTED PERIOD-END BALANCES
Total assets ............................................... $ 8,951,109 $ 8,055,572 $ 7,383,950
Investment securities ...................................... 2,483,294 2,161,236 1,983,148
Loans ...................................................... 5,445,772 4,930,508 4,580,719
Interest-earning assets .................................... 8,010,841 7,247,744 6,604,312
Deposits ................................................... 7,579,567 6,954,028 6,388,082
Interest-bearing liabilities ............................... 7,052,749 6,265,482 5,844,125
Long-term obligations ...................................... 10,856 6,922 22,957
Shareholders' equity ....................................... $ 601,640 $ 615,507 $ 520,837
Shares outstanding ......................................... 10,627,453 11,410,880 10,716,167
============ ============ ============
PROFITABILITY RATIOS (AVERAGES)
Rate of return on:
Total assets .............................................. 0.85% 0.85% 0.83%
Shareholders' equity ...................................... 11.04 11.35 11.66
Dividend payout ratio ...................................... 16.08 16.03 15.36
============ ============ ============
LIQUIDITY AND CAPITAL RATIOS (AVERAGES)
Loans to deposits .......................................... 71.77% 72.78% 74.49%
Shareholders' equity to total assets ....................... 7.69 7.51 7.13
Time certificates of $100,000 or more to total deposits..... 9.62 8.99 8.33
============ ============ ============
PER SHARE OF STOCK
Net income ................................................. $ 6.22 $ 5.77 $ 5.37
Cash dividends ............................................. 1.00 0.925 0.825
Market price at December 31 (Class A) ...................... 104.03 77.00 55.13
Book value at December 31 .................................. 56.61 53.94 48.60
Tangible book value at December 31 ......................... 47.11 45.42 41.75
============ ============ ============
</TABLE>
ACQUISITIONS AND DIVESTITURES
Table 2 details acquisitions and divestitures during 1997 through 1999.
All of the acquisitions were accounted for as purchases, with the results of
operations included with BancShares' Statements of Income since the respective
acquisition dates. During 1999, branch sales generated noninterest income of
$5.1 million compared to $3.1 million during 1998. No such gains were recorded
during 1997.
5
<PAGE>
Table 2
SIGNIFICANT ACQUISITIONS AND DIVESTITURES
<TABLE>
<CAPTION>
Total Total
Date Institution and Location Assets Deposits
- ------------------ ----------------------------------------------------- ------------- --------------
(thousands)
<S> <C> <C> <C>
1999 Various branch sales $ (41,523) $ (123,048)
March 1999 Five branches of Colonial Bank in Southwest Florida 1,342 27,506
1998 Various branch purchases 23,472 23,556
1998 Various branch sales (132,138) (138,390)
February 1998 Fifteen Signet Bank branches 262,020 296,852
September 1997 First Savings Financial Corp. 45,431 36,025
Reidsville, North Carolina
May 1997 Four Wachovia Bank branches 80,613 86,460
Western North Carolina
April 1997 Three First Union National Bank branches 42,171 45,179
Western North Carolina
</TABLE>
INTEREST-EARNING ASSETS
Interest-earning assets averaged $8.64 billion during 1999, an increase of
$357.6 million or 4.3 percent over 1998 levels, compared to a $712.0 million or
9.4 percent increase in 1998 over 1997 levels. Growth among interest-earning
assets during 1999 and 1998 was due to increases in loan balances.
Loans. As of December 31, 1999, gross loans outstanding were $6.75
billion, a 9.0 percent increase over the December 31, 1998 balance of $6.20
billion, which was a 13.8 percent increase over the December 31, 1997 balance
of $5.45 billion. Loan growth during 1999 and 1998 resulted from internal
growth, as the impact of acquisitions during both periods was not material.
Loan balances for the last five years are provided in Table 3.
Table 3
LOANS
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(thousands)
<S> <C> <C> <C> <C> <C>
Real estate:
Construction and land development ..... $ 186,119 $ 157,603 $ 113,735 $ 109,806 $ 104,540
Mortgage:
1-4 family residential .............. 1,326,642 1,299,508 1,411,279 1,542,836 1,438,655
Commercial .......................... 1,810,904 1,495,214 1,055,529 882,067 770,246
Equity Line ......................... 755,342 617,062 603,714 411,856 397,225
Other ............................... 161,652 160,289 136,639 132,954 129,292
---------- ---------- ---------- ---------- ----------
Total real estate loans ............. 4,240,659 3,729,676 3,320,896 3,079,519 2,839,958
Commercial and industrial .............. 985,738 845,068 633,580 514,535 466,462
Consumer ............................... 1,393,227 1,516,712 1,402,093 1,251,704 1,199,400
Lease financing ........................ 123,908 93,680 74,589 68,694 59,899
Other .................................. 7,507 10,455 14,614 16,056 15,000
---------- ---------- ---------- ---------- ----------
Total gross loans ................... 6,751,039 6,195,591 5,445,772 4,930,508 4,580,719
Less reserve for loan losses ........... 98,690 96,115 84,360 81,439 78,495
---------- ---------- ---------- ---------- ----------
Net loans ........................... $6,652,349 $6,099,476 $5,361,412 $4,849,069 $4,502,224
========== ========== ========== ========== ==========
</TABLE>
- ---------
All information presented in this table relates to domestic loans as BancShares
makes no foreign loans.
Loans secured by real estate averaged $3.97 billion during 1999, compared
to $3.55 billion during 1998, an increase of 11.6 percent. Much of the $411.9
million increase in real estate secured loans during 1999 was among commercial
real estate loans and retail home equity loans. Average commercial and
industrial loans also experienced strong growth during 1999, increasing $110.6
million during 1999. Commercial and industrial loans averaged $832.9 million
during 1999 compared to
6
<PAGE>
$722.3 million during 1998, an increase of 15.3 percent. Commercial and
industrial loan growth during 1999 resulted from BancShares' continued focus on
small and mid-size commercial customers.
Consumer loans averaged $1.43 billion during 1999 compared to $1.47
billion during 1998. The $47.1 million decrease during 1999 was primarily due
to reductions in indirect automobile lending. Demand for direct installment
lending was sluggish during 1999, as customers who have traditionally favored
closed-end installment lending continue to migrate to revolving lines of credit
secured by home equity.
During 2000, management anticipates continued loan growth among loans to
commercial borrowers. Loan demand among small and mid-size businesses remains
strong due to continuing economic growth in BancShares' market areas. However,
recent upward trends in interest rates will likely prevent growth at rates
experienced during 1999 and 1998. Demand among retail customers continues to
shift to open-end credit products such as EquityLine and credit cards. Growth
in these areas is expected during 2000, while indirect automobile outstandings
will likely decrease.
To minimize the potential adverse impact of interest rate fluctuations,
management monitors the maturity and repricing distribution of the loan
portfolio. BancShares offers variable rate loan products and fixed rate
callable loans to reduce interest rate risk. Table 4 details the maturity and
repricing distribution as of December 31, 1999. Of the gross loans outstanding
on December 31, 1999, 27.1 percent will mature or reprice within one year, 46.6
percent will mature or reprice between one and five years, while the remaining
26.3 percent have scheduled maturities or repricing dates that extend beyond
five years.
Table 4
LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
Within One to Five After
One Year Years Five Years Total
------------- ------------- ------------ -------------
(thousands)
<S> <C> <C> <C> <C>
Real estate:
Construction and land development ....... $ 63,568 $ 88,059 $ 34,492 $ 186,119
Mortgage:
1-4 family residential ................ 216,225 477,228 633,189 1,326,642
Commercial ............................ 555,413 923,276 332,215 1,810,904
Equity Line ........................... 52,873 188,836 513,633 755,342
Other ................................. 55,137 76,531 29,984 161,652
Commercial and industrial ................ 264,260 471,344 250,134 985,738
Consumer ................................. 320,850 984,220 88,157 1,393,227
Lease financing .......................... 30,977 92,931 -- 123,908
Other .................................... 2,399 3,966 1,142 7,507
---------- ---------- ---------- ----------
Total ................................. $1,561,702 $3,306,391 $1,882,946 $6,751,039
========== ========== ========== ==========
Loans maturing after one year with:
Fixed interest rates .................... $2,836,808 $1,542,487 $4,379,295
Floating or adjustable rates ............ 469,583 340,459 810,042
---------- ---------- ----------
Total ................................. $3,306,391 $1,882,946 $5,189,337
========== ========== ==========
</TABLE>
Investment Securities. At December 31, 1999, and 1998, the investment
portfolio totaled $1.37 billion and $2.16 billion, respectively, a decrease of
$788.4 million or 36.5 percent. Investment securities averaged $1.91 billion
during 1999, $2.31 billion during 1998 and $2.30 billion during 1997. In each
period, U.S. Treasury and government agency securities represented
substantially all of the portfolio. The reduction in the average securities
portfolio during 1999 and the decrease in the investment securities portfolio
at December 31, 1999, compared to December 31, 1998, results from strong loan
growth. During 1998 and 1999, deposit growth was not sufficient to fund loan
demand, and, as a result, proceeds from maturing securities were not reinvested
in the investment securities portfolio.
The weighted-average maturity of the investment securities portfolio was
11 months at December 31, 1999 and December 31, 1998. Management continues to
maintain a portfolio of securities with short maturities and call dates,
consistent with BancShares' focus on liquidity. Investment securities available
for sale include marketable equity securities that are recorded at their fair
value, with the unrealized gain included as a component of shareholders'
equity, net of deferred taxes. Table 5 presents detailed information relating
to the investment securities portfolio.
7
<PAGE>
Table 5
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
December 31
------------------------------------------------------
1999
------------------------------------------------------
Average Taxable
Fair Maturity Equivalent
Cost Value (Yrs./Mos.) Yield
------------- ------------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities held
to maturity:
U. S. Government:
Within one year ............ $1,077,354 $1,067,979 0/6 5.36%
One to five years .......... 263,009 255,805 1/8 6.20
Five to ten years .......... 176 178 7/7 8.21
Over ten years ............. 9,665 9,552 26/7 7.35
---------- ---------- ---- ----
Total ..................... 1,350,204 1,333,514 0/9 5.53
---------- ---------- ---- ----
State, county and
municipal:
Within one year ............ 699 703 0/9 7.11
One to five years .......... 1,963 1,990 2/1 7.33
Over ten years ............. 150 152 17/8 9.14
---------- ---------- ---- ----
Total ..................... 2,812 2,845 2/7 7.37
---------- ---------- ---- ----
Other
Within one year ............ -- -- -- --
One to five years .......... 55 55 2/2 5.47
Five to ten years .......... 250 250 8/7 4.50
---------- ---------- ---- ----
Total ..................... 305 305 7/5 4.67
---------- ---------- ---- ----
Total investment
securities held to
maturity ................... 1,353,321 1,336,664 0/11 5.54
Investment securities
available for sale ......... 7,751 18,573 -- --
---------- ---------- ---- ----
Total investment
securities ................. $1,361,072 $1,355,237 0/11 5.54%
========== ========== ==== ====
<CAPTION>
December 31
-------------------------------------------------------
1998 1997
--------------------------- ---------------------------
Fair Fair
Cost Value Cost Value
------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities held
to maturity:
U. S. Government:
Within one year ............ $1,337,371 $1,345,775 $1,055,289 $1,055,725
One to five years .......... 791,026 794,805 1,388,079 1,392,567
Five to ten years .......... 122 127 2,747 2,792
Over ten years ............. 3,288 3,396 4,519 4,629
---------- ---------- ---------- ----------
Total ..................... 2,131,807 2,144,103 2,450,634 2,455,713
---------- ---------- ---------- ----------
State, county and
municipal:
Within one year ............ 425 427 1,549 1,761
One to five years .......... 2,665 2,765 3,197 3,298
Over ten years ............. 160 166 175 175
---------- ---------- ---------- ----------
Total ..................... 3,250 3,358 4,921 5,234
---------- ---------- ---------- ----------
Other
Within one year ............ 10 10 1,102 1,099
One to five years .......... 55 55 55 55
Five to ten years .......... 250 250 10 10
---------- ---------- ---------- ----------
Total ..................... 315 315 1,167 1,164
---------- ---------- ---------- ----------
Total investment
securities held to
maturity ................... 2,135,372 2,147,776 2,456,722 2,462,111
Investment securities
available for sale ......... 10,264 24,957 10,817 26,572
---------- ---------- ---------- ----------
Total investment
securities ................. $2,145,636 $2,172,733 $2,467,539 $2,488,683
========== ========== ========== ==========
</TABLE>
- ---------
Yields are based on amortized cost; yields related to securities that are
exempt from federal and/or state income taxes are stated on a
taxable-equivalent basis assuming statutory rates of 35% for federal taxes for
all periods and 7.00%, 7.25% and 7.50% for state income taxes for 1999, 1998
and 1997, respectively.
Income on Interest-Earning Assets. Table 6 analyzes the interest-earning
assets and interest-bearing liabilities for the five years ending December 31,
1999. Table 9 identifies the causes for changes in interest income and interest
expense for 1999 and 1998. Interest income amounted to $633.9 million during
1999, a $14.4 million increase from 1998 levels, compared to a $47.2 million
increase from 1997 to 1998. Interest income growth during 1999 resulted from a
higher volume of earning assets, as the blended yield on earning assets
declined during 1999. During 1998, loan growth was the primary factor for the
increase in interest income over 1997.
Total interest-earning assets yielded 7.36 percent during 1999, a 15 basis
point reduction from the 7.51 percent reported in 1998. The average
taxable-equivalent yield on the loan portfolio fell from 8.22 percent in 1998
to 8.01 percent in 1999. The lower loan yield during 1999 reflects general
market conditions and the competitive loan pricing that exists in BancShares'
market areas. However, upward pressures on interest rates during late 1999
caused the yield on total loans to increase in the final months of 1999, and
that trend is expected to continue into 2000. Loan interest income increased
$31.8 million or 6.6 percent from 1998. This followed an increase of 11.5
percent in loan interest income in 1998 over 1997. During 1999 and 1998, the
increases in loan interest income was the result of loan growth that more than
offset the impact of the lower loan yields when compared to the respective
preceding periods.
8
<PAGE>
Interest income earned on the investment portfolio amounted to $107.1
million, $134.2 million and $133.4 million during the years ended December 31,
1999, 1998 and 1997, respectively. The average taxable-equivalent yield on the
portfolio for these years was 5.62 percent, 5.83 percent, and 5.82 percent,
respectively. The $27.1 million decrease in investment interest income during
1999 results from the smaller portfolio and the reduced taxable-equivalent
yield on securities. The $867,000 increase in investment interest income from
1997 to 1998 was the result of the growth in the investment securities
portfolio during 1998 and a slight increase in the portfolio's
taxable-equivalent yield.
INTEREST-BEARING LIABILITIES
At December 31, 1999, and 1998 interest-bearing liabilities totaled $7.55
billion and $7.54 billion, respectively. Interest-bearing liabilities averaged
$7.52 billion during 1999, an increase of $268.2 million or 3.7 percent over
1998 levels. Interest-bearing deposits contributed $226.3 million to the
increase in interest-bearing liabilities, while long-term obligations increased
$24.0 million. During 1998, interest-bearing liabilities averaged $7.25
billion, an increase of $727.5 million or 11.2 percent over 1997. The growth
during 1998 resulted from a $534.8 million increase in average interest-bearing
deposits and a $123.5 million increase in average long-term obligations.
Deposits. Total deposits averaged $8.11 billion in 1999, an increase of
$346.1 million or 4.5 percent over 1998. Average interest-bearing deposits were
$6.80 billion during 1999, an increase of $226.3 million or 3.4 percent
compared to 1998. Money market accounts averaged $1.36 billion during 1999,
compared to $1.12 billion during 1998, an increase of $242.1 million or 21.7
percent. Average Checking With Interest balances were $1.07 billion during
1999, an increase of $39.1 million or 3.8 percent over 1998. Time deposits
averaged $3.68 billion during 1999, a decrease of $45.0 million or 1.2 percent
from 1998. The growth in transaction account balances during 1999 reflects a
reluctance by customers to invest in time deposit accounts. The growth is also
the result of a competitively-priced money market account that was introduced
during 1999. Deposit growth during 1999 was especially strong in Virginia,
Georgia, and Florida due to growth in new markets.
Despite the growth in average deposits during 1999, the year-end balances
do not reflect that growth. At December 31, 1999, deposits totaled $8.17
billion, an increase of $61.2 million or 0.8 percent from the $8.11 billion in
deposits recorded as of December 31, 1998. Management believes that the more
modest increase reflected in the year-end balances results from customer
withdrawals relating to Year 2000 preparations and customers in North Carolina
withdrawing funds to help with Hurricane Floyd recovery. The storm, which
struck eastern North Carolina in September 1999, caused extensive flooding.
During 1998, total deposits averaged $7.76 billion, an increase of $671.3
million or 9.5 percent over 1997. Average interest-bearing deposits were $6.58
billion during 1998, an increase of $534.8 million or 8.9 percent. Time
deposits averaged $3.73 billion during 1998, an increase of $236.2 million or
6.8 percent over 1997. The growth in deposits during 1998 resulted from
expansion in new markets in Georgia and Virginia.
BancShares has historically avoided excessive reliance on high-dollar
deposits. During 1999, these funds averaged 9.02 percent of total average
deposits, compared to 9.21 percent in 1998. Table 7 provides a maturity
distribution for these deposits, which totaled $725.6 million as of December
31, 1999.
9
<PAGE>
Table 6
AVERAGE BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
----------------------------------- ------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------- ---------- ---------- ------------- ----------- ----------
(thousands, taxable equivalent)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans ................................................... $6,399,114 $512,419 8.01% $5,847,531 $480,741 8.22%
Investment securities:
U. S. Government ....................................... 1,881,591 106,435 5.66 2,273,579 133,535 5.87
State, county and municipal ............................ 2,893 217 7.50 4,340 318 7.33
Other .................................................. 23,816 548 2.30 27,476 507 1.85
---------- -------- ---- ---------- -------- ----
Total investment securities .......................... 1,908,300 107,200 5.62 2,305,395 134,360 5.83
Overnight investments ................................... 331,284 16,489 4.98 128,146 6,734 5.25
---------- -------- ---- ---------- -------- ----
Total interest-earning assets ........................ 8,638,698 $636,108 7.36% 8,281,072 $621,835 7.51%
Cash and due from banks ................................. 459,202 400,896
Premises and equipment .................................. 382,092 343,307
Other assets ............................................ 239,833 237,564
Reserve for loan losses ................................. (97,051) (89,819)
---------- ----------
Total assets ......................................... $9,622,774 $9,173,020
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Checking With Interest ................................. $1,074,885 $ 6,858 0.64% $1,035,761 $ 10,255 0.99%
Savings ................................................ 687,191 10,730 1.56 697,227 12,954 1.86
Money market accounts .................................. 1,359,433 47,881 3.52 1,117,286 39,135 3.50
Time deposits .......................................... 3,680,867 179,452 4.88 3,725,818 193,173 5.18
---------- -------- ---- ---------- -------- ----
Total interest-bearing deposits ...................... 6,802,376 244,921 3.60 6,576,092 255,517 3.89
Short-term borrowings ................................... 557,210 23,921 4.29 539,263 25,850 4.79
Long-term obligations ................................... 157,897 12,700 8.04 133,935 10,704 7.99
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities ................... 7,517,483 $281,542 3.75% 7,249,290 $292,071 4.03%
Demand deposits ......................................... 1,303,067 1,183,223
Other liabilities ....................................... 108,665 111,418
Shareholders' equity .................................... 693,559 629,089
---------- ----------
Total liabilities and shareholders' equity ........... $9,622,774 $9,173,020
========== ==========
Interest rate spread .................................... 3.61% 3.48%
==== ====
Net interest income and net yield on interest-earning
assets ................................................. $354,566 4.10% $329,764 3.98%
======== ==== ======== ====
</TABLE>
- ---------
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 all periods, and
state income tax rates of 7.00%, 7.25% and 7.50%, for 1999, 1998 and 1997,
respectively.
10
<PAGE>
Table 6
AVERAGE BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------- --------------------------------------- ----------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- -------------- ---------- ---------- ------------- ---------- ---------- ------------- ----------- ----------
(thousands, taxable equivalent)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,086,723 $430,933 8.47% $4,842,266 $412,832 8.53% $4,433,517 $382,721 8.63%
2,267,652 133,007 5.87 1,988,518 114,831 5.77 1,600,713 81,219 5.07
5,560 421 7.57 6,607 507 7.67 8,016 622 7.76
27,494 481 1.75 2,934 172 5.86 2,820 184 6.52
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
2,300,706 133,909 5.82 1,998,059 115,510 5.78 1,611,549 82,025 5.09
181,646 9,897 5.45 147,334 8,159 5.54 146,356 8,625 5.89
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
7,569,075 $574,739 7.59% 6,987,659 $536,501 7.68% 6,191,422 $473,371 7.65%
345,578 324,353 349,998
251,163 218,434 200,674
220,828 231,140 180,675
(82,232) (80,567) (75,810)
---------- ---------- ----------
$8,304,412 $7,681,019 $6,846,959
========== ========== ==========
$ 928,122 $ 9,909 1.07% $ 878,878 $ 10,791 1.23% $ 816,391 $ 13,555 1.66%
704,531 14,121 2.00 719,962 15,059 2.09 693,187 15,728 2.27
919,049 34,062 3.71 825,139 29,217 3.54 742,537 25,167 3.39
3,489,614 185,657 5.32 3,258,713 175,838 5.40 2,824,074 152,784 5.41
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
6,041,316 243,749 4.03 5,682,692 230,905 4.06 5,076,189 207,234 4.08
470,030 23,420 4.98 348,378 16,388 4.70 307,999 15,773 5.12
10,472 844 8.06 13,483 957 7.10 26,307 1,657 6.30
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
6,521,818 $268,013 4.11% 6,044,553 $248,250 4.11% 5,410,495 $224,664 4.15%
1,046,703 970,610 875,901
97,066 88,868 72,668
638,825 576,988 487,895
---------- ---------- ----------
$8,304,412 $7,681,019 $6,846,959
========== ========== ==========
3.48% 3.57% 3.50%
==== ==== ====
$306,726 4.05% $288,251 4.13% $248,707 4.02%
======== ==== ======== ==== ======== ====
</TABLE>
11
<PAGE>
Table 7
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31, 1999
------------------
(thousands)
<S> <C>
Less than three months ......... $288,580
Three to six months ............ 167,576
Six to 12 months ............... 204,589
More than 12 months ............ 64,901
--------
Total ................................ $725,646
========
</TABLE>
Short-Term Borrowings. BancShares has access to various short-term
borrowings, including the purchase of federal funds, overnight repurchase
obligations and credit lines with various correspondent banks. At December 31,
1999, short-term borrowings totaled $568.3 million, compared to $568.1 million
one year earlier. For the year ended December 31, 1999, short-term borrowings
averaged $557.2 million, compared to $539.3 million during 1998 and $470.0
million during 1997. The increase from 1998 to 1999 resulted from growth in
overnight repurchase obligations. The increase from 1997 to 1998 resulted from
higher levels of federal funds purchased and by growth in overnight repurchase
obligations. Table 8 provides additional information regarding short-term
borrowed funds.
Table 8
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Amount Rate Amount Rate Amount Rate
----------- ---------- ----------- ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Master notes
At December 31 ....................... $326,984 4.14% $326,603 3.63% $315,529 4.40%
Average during year .................. 322,154 4.16 320,480 4.60 301,558 4.63
Maximum month-end balance during year 355,795 -- 354,442 -- 332,055 --
Repurchase agreements
At December 31 ....................... 125,832 3.89 95,863 3.38 54,796 4.15
Average during year .................. 117,681 3.76 79,676 4.13 34,848 4.32
Maximum month-end balance during year 132,540 -- 106,620 -- 56,942 --
Federal funds purchased
At December 31 ....................... 53,195 4.06 84,345 4.68 45,380 5.72
Average during year .................. 60,077 4.92 62,758 5.24 28,752 5.30
Maximum month-end balance during year 88,460 -- 104,675 -- 45,420 --
U. S. Treasury tax and loan accounts
At December 31 ....................... 19,847 4.54 12,662 4.51 19,989 5.95
Average during year .................. 16,365 4.56 16,690 5.13 12,374 7.56
Maximum month-end balance during year 24,168 -- 20,824 -- 54,583 --
Other
At December 31 ....................... 42,443 5.78 48,667 5.87 158,130 4.87
Average during year .................. 40,933 5.81 59,659 6.15 92,498 5.93
Maximum month-end balance during year 43,702 -- 158,130 -- 158,764 --
</TABLE>
Long-Term Obligations. At December 31, 1999 and 1998, long-term
obligations totaled $155.7 million and $158.8 million, respectively. During
1999, long-term obligations averaged $157.9 million, compared to $133.9 million
during 1998 and $10.5 million during 1997. The increase from 1997 to 1998
results from the issuance of $150 million in trust preferred capital securities
in March 1998. The trust preferred capital securities are thirty year
obligations with interest paid semi-annually at a rate of 8.05%. BancShares
issued these obligations to provide capital to support its continued growth.
Management views these securities as an effective way to provide capital
resources without diluting current ownership. The increase from 1998 to 1999
results from the trust preferred capital securities, which were outstanding
during all of 1999.
Expense of Interest-Bearing Liabilities. Interest expense amounted to
$281.5 million in 1999, a $10.5 million or 3.6 percent decrease from 1998. This
followed a 9.0 percent increase in interest expense during 1998 compared to
1997. The decreased interest expense during 1999 was the result of lower
interest rates, although market rates increased during late 1999. The increase
in interest expense from 1997 to 1998 was the result of the growth in
interest-bearing liabilities.
12
<PAGE>
As a result of market changes and the shift toward transaction accounts
and money market products, the blended cost of interest-bearing deposits fell
to 3.60 percent during 1999, compared to 3.89 percent in 1998 and 4.03 percent
in 1997. Despite the increase in interest-bearing deposits, interest expense on
total interest-bearing deposits amounted to $244.9 million during 1999, a
decrease from the $255.5 million recorded during 1998. During 1997, interest
expense on deposits was $243.7 million. The decline in interest expense between
1998 and 1999 resulted from lower interest rates while the increase between
1997 and 1998 was the result of deposit growth. The average rate on time
deposits decreased from 5.32 percent in 1997 to 5.18 percent in 1998 and 4.88
percent in 1999.
Interest expense on short-term borrowings amounted to $23.9 million in
1999, a decrease of $1.9 million or 7.5 percent from 1998. Interest expense
increased $2.4 million or 10.4 percent from 1997 to 1998. Interest expense
related to short-term borrowings totaled $25.9 million and $23.4 million,
respectively, in 1998 and 1997. The decrease during 1999 was attributable to
the 50 basis point reduction in the rate on short-term borrowings. During 1998,
the growth in interest expense resulted from growth in average short-term
borrowings when compared to 1997.
Interest expense associated with long-term obligations increased $2.0
million during 1999 from $10.7 million recorded during 1998 to $12.7 million in
1999. During 1999, BancShares recognized a full year of interest cost on the
trust preferred capital securities. The 1998 increase resulted from the
issuance of the trust preferred capital securities during March 1998.
Table 9
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- --------------------------------------
Change from previous Change from previous
year due to: year due to:
--------------------------------------- --------------------------------------
Yield/ Total Yield/ Total
Volume Rate Change Volume Rate Change
------------ ------------- ------------ ------------- ------------- ----------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans ..................................... $ 46,859 $ (15,181) $ 31,678 $64,026 $ (14,218) $ 49,808
Investment securities:
U. S. Government ......................... (22,668) (4,432) (27,100) 438 90 528
State, county and municipal .............. (107) 6 (101) (91) (12) (103)
Other .................................... (75) 116 41 (1) 27 26
--------- --------- --------- ---------- --------- --------
Total investment securities ............ (22,850) (4,310) (27,160) 346 105 451
Federal funds sold ........................ 10,383 (628) 9,755 (2,858) (305) (3,163)
--------- --------- --------- --------- --------- --------
Total interest-earning assets .......... $ 34,392 $ (20,119) $ 14,273 $61,514 $ (14,418) $ 47,096
========= ========= ========= ========= ========= ========
LIABILITIES:
Deposits:
Checking With Interest ................... $ 308 $ (3,705) $ (3,397) $ 1,120 $ (774) $ 346
Savings .................................. (159) (2,065) (2,224) (163) (1,004) (1,167)
Money market accounts .................... 8,388 358 8,746 7,144 (2,071) 5,073
Time ..................................... (2,436) (11,285) (13,721) 12,484 (4,968) 7,516
--------- --------- --------- --------- --------- --------
Total interest-bearing deposits ........ 6,101 (16,697) (10,596) 20,585 (8,817) 11,768
Short-term borrowings ..................... 360 (2,289) (1,929) 2,847 (417) 2,430
Long-term obligations ..................... 1,922 74 1,996 9,909 (49) 9,860
--------- --------- --------- --------- --------- --------
Total interest-bearing liabilities ..... $ 8,383 $ (18,912) $ (10,529) $33,341 $ (9,283) $ 24,058
========= ========= ========= ========= ========= ========
Change in net interest income .......... $ 26,009 $ (1,207) $ 24,802 $28,173 $ (5,135) $ 23,038
========= ========= ========= ========= ========= ========
</TABLE>
- ---------
Changes in income relating to certain loans and investment securities are
stated on a fully tax-equivalent basis at a rate that approximates BancShares'
marginal tax rate. The taxable equivalent adjustment was $2,217, $2,347, and
$2,463 for the years 1999, 1998 and 1997, respectively. Table 6 provides
detailed information on average balances, income/expense and yield/rate by
category. The rate/volume variance is allocated equally between the changes in
volume and rate.
13
<PAGE>
NET INTEREST INCOME
Net interest income totaled $352.3 million during 1999, an increase of
$24.9 million or 7.6 percent over 1998, when net interest income was $327.4
million. During 1998, net interest income grew $23.2 million or 7.6 percent
over the $304.3 million recorded during 1997. Table 9 presents the annual
changes in net interest income by components due to changes in volume, yields
and rates. This table is presented on a taxable-equivalent basis to adjust for
the tax-exempt status of income earned on certain loans, leases and municipal
securities.
The net yield on interest-earning assets was 4.10 percent in 1999, 3.98
percent during 1998, and 4.05 percent during 1997. The higher net yield in 1999
was the result of loan growth and the reduced rate on interest-bearing
liabilities. The combined increase in loans and reduction in investment
securities created a higher-yielding asset mix despite the downward trend in
market rates during early 1999. The lower net yields realized in 1998 compared
to 1997 result from growth in net interest income at lower rates than the
growth in interest-earning assets during the respective periods.
Rate Sensitivity. A principal objective of BancShares' asset/liability
function is to manage interest rate risk or the exposure to changes in interest
rates. Management maintains portfolios of interest-earning assets and
interest-bearing liabilities with maturities or repricing opportunities that
will protect against wide interest rate fluctuations, thereby limiting, to the
extent possible, the ultimate interest rate exposure. Table 10 provides
BancShares' interest-sensitivity position as of December 31, 1999, which
reflected a one year negative interest-sensitivity gap of $2.21 billion. As a
result of this one year negative gap, increases in interest rates could have an
unfavorable impact on net interest income.
Table 10
INTEREST-SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------
1-30 31-90 91-180
Days Days Days
Sensitive Sensitive Sensitive
---------------- -------------- --------------
(thousands)
<S> <C> <C> <C>
ASSETS:
Loans .................... $ 1,542,236 $ 182,298 $ 265,776
Investment securities .... 133,036 218,245 280,785
Overnight investments .... 473,393 -- --
------------ ---------- ----------
Total interest-
earning assets ....... $ 2,148,665 $ 400,543 $ 546,561
============ ========== ==========
LIABILITIES:
Interest-bearing deposits $ 3,129,640 $ 764,923 $ 905,952
Short-term borrowings .... 541,046 25,564 564
Long-term obligations .... -- -- --
------------ ---------- ----------
Total interest-
bearing liabilities .. $ 3,670,686 $ 790,487 $ 906,516
============ ========== ==========
Interest-sensitivity gap . $ (1,522,021) $ (389,944) $ (359,955)
============ ========== ==========
<CAPTION>
December 31, 1999
---------------------------------------------------------
181-365 Total
Days One Year Total
Sensitive Sensitive Nonsensitive Total
----------- ---------------- -------------- -------------
(thousands)
<S> <C> <C> <C> <C>
ASSETS:
Loans .................... $509,274 $ 2,499,584 $4,251,455 $6,751,039
Investment securities .... 446,087 1,078,153 293,741 1,371,894
Overnight investments .... -- 473,393 -- 473,393
-------- ------------ ---------- ----------
Total interest-
earning assets ....... $955,361 $ 4,051,130 $4,545,196 $8,596,326
======== ============ ========== ==========
LIABILITIES:
Interest-bearing deposits $888,830 $ 5,689,345 $1,140,900 $6,830,245
Short-term borrowings .... 1,127 568,301 -- 568,301
Long-term obligations .... -- -- 155,683 155,683
-------- ------------ ---------- ----------
Total interest-
bearing liabilities .. $889,957 $ 6,257,646 $1,296,583 $7,554,229
======== ============ ========== ==========
Interest-sensitivity gap . $ 65,404 $ (2,206,516) $3,248,613 $1,042,097
======== ============ ========== ==========
</TABLE>
- ---------
Assets and liabilities with maturities of one year or less and those that may
be adjusted within this period are considered interest-sensitive. The
interest-sensitivity position has meaning only as of the date for which it was
prepared.
In addition to other asset/liability management strategies, BancShares
generally underwrites certain residential mortgage loans to secondary market
standards and sells such loans as they are originated. As of December 31, 1999,
BancShares had $42.9 million in residential mortgage loans available for sale
that were reported at the lower of aggregate cost or market. Additionally,
BancShares attempts to avoid exposure resulting from changes in market rates by
entering into forward commitments to sell portions of its current production of
residential mortgage loans.
Table 11 provides information regarding the market risk profile of
BancShares at December 31, 1999. 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.
14
<PAGE>
Table 11
MARKET RISK
<TABLE>
<CAPTION>
Maturing in Years ended December 31,
-------------------------------------------------------
2000 2001 2002 2003
------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Loans:
Fixed rate ................ $ 957,070 $ 756,858 $ 609,961 $ 639,154
Average rate (%) .......... 7.84% 7.82% 7.83% 7.80%
Variable rate ............. 604,632 243,531 181,137 156,395
Average rate (%) .......... 8.39% 8.74% 8.71% 8.59%
Investment securities
held to maturity:
Fixed rate ................ 1,078,053 210,721 51,910 421
Average rate (%) .......... 5.36% 6.16% 6.32% 6.67%
Investment securities
available for sale:
Marketable equity
securities ............... -- -- -- --
LIABILITIES
Savings and interest-
bearing checking:
Fixed rate ................ 3,248,976 -- -- --
Average rate (%) .......... 2.27%
Certificates of deposit:
Fixed rate ................ 3,088,498 190,613 89,282 76,901
Average rate (%) .......... 5.00% 5.13% 5.23% 5.23%
Variable rate ............. 50,814 12,812 -- --
Average rate (%) .......... 4.13% 4.76%
Long-term obligations:
Fixed rate ................ 333 1,617 340 345
Average rate (%) .......... 7.02% 7.20% 7.02% 7.03%
Variable rate ............. -- 564 -- --
Average rate (%) .......... 6.51%
<CAPTION>
Maturing in Years ended December 31,
-----------------------------------------------------------
2004 Thereafter Total Fair value
------------- --------------- --------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Loans:
Fixed rate ................ $ 583,121 $ 1,154,266 $ 4,694,631 $4,834,245
Average rate (%) .......... 7.87% 7.74% 7.82%
Variable rate ............. 142,033 728,680 2,056,408 2,056,408
Average rate (%) .......... 8.67% 8.08% 8.38%
Investment securities
held to maturity:
Fixed rate ................ 1,975 10,241 1,353,321 1,336,664
Average rate (%) .......... 5.91% 7.23% 5.54%
Investment securities
available for sale:
Marketable equity
securities ............... -- 18,573 18,573 18,573
LIABILITIES
Savings and interest-
bearing checking:
Fixed rate ................ -- -- 3,248,976 3,248,976
Average rate (%) .......... 2.27%
Certificates of deposit:
Fixed rate ................ 72,095 254 3,517,643 3,525,679
Average rate (%) .......... 5.24% 5.24% 5.02%
Variable rate ............. -- -- 63,626 63,626
Average rate (%) .......... 4.26%
Long-term obligations:
Fixed rate ................ 65 152,419 155,119 134,658
Average rate (%) .......... 8.00% 8.04% 8.02%
Variable rate ............. -- -- 564 564
Average rate (%) .......... 6.51%
</TABLE>
ASSET QUALITY
Nonperforming Assets. Nonperforming asset balances for the past five years
are presented in Table 12. BancShares' nonperforming assets at December 31,
1999 included nonaccrual loans totaling $10.7 million and $1.6 million in
foreclosed property. Nonperforming assets as of December 31, 1999 represent
0.18 percent of loans outstanding. Nonperforming assets totaled $14.0 million
and $14.1 million as of December 31, 1998 and 1997, respectively. Of the $10.7
million in nonaccrual loans at December 31, 1999, $5.7 million were classified
as impaired. At December 31, 1998, BancShares reported $12.5 million in
nonaccrual loans, of which $8.1 million were impaired.
15
<PAGE>
Table 12
RISK ELEMENTS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
--------------- ---------------
(thousands, except ratios)
<S> <C> <C>
Nonaccrual loans .................................... $ 10,720 $ 12,489
Other real estate ................................... 1,600 1,529
----------- -----------
Total nonperforming assets ........................ $ 12,320 $ 14,018
=========== ===========
Accruing loans 90 days or more past due ............. $ 3,576 $ 5,721
Loans at December 31 ................................ $ 6,751,039 $ 6,195,591
Ratio of nonperforming assets to total loans plus
other real estate ................................. 0.18% 0.23%
----------- -----------
Interest income that would have been earned on
nonperforming loans had they been performing ...... $ 894 $ 1,108
Interest income earned on nonperforming loans ....... 287 409
=========== ===========
<CAPTION>
December 31,
-----------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(thousands, except ratios)
<S> <C> <C> <C>
Nonaccrual loans .................................... $ 12,681 $ 12,810 $ 13,208
Other real estate ................................... 1,462 1,160 2,154
----------- ----------- -----------
Total nonperforming assets ........................ $ 14,143 $ 13,970 $ 15,362
=========== =========== ===========
Accruing loans 90 days or more past due ............. $ 3,953 $ 4,983 $ 4,230
Loans at December 31 ................................ $ 5,445,772 $ 4,930,508 $ 4,580,719
Ratio of nonperforming assets to total loans plus
other real estate ................................. 0.26% 0.28% 0.34%
----------- ----------- -----------
Interest income that would have been earned on
nonperforming loans had they been performing ...... $ 1,156 $ 1,162 $ 1,556
Interest income earned on nonperforming loans ....... 349 259 595
=========== =========== ===========
</TABLE>
- ---------
There are no loan concentrations to any multiple number of borrowers engaged in
similar activities or industries in excess of 10 percent of total loans at
December 31, 1999. There were no foreign loans outstanding in any period.
Accrual of interest on loans is discontinued when management deems that
collection of additional interest is doubtful. Loans are returned to an accrual
status when both principal and interest are current, and the loan is determined
to be performing in accordance with the applicable loan terms.
Management continually monitors the loan portfolio to ensure that problem
loans have been classified as nonperforming. Should economic conditions
deteriorate, the inability of distressed customers to service their existing
debt could cause higher levels of nonperforming assets.
Reserve for Loan Losses. Management evaluates the risk characteristics of
the loan portfolio under current economic conditions and considers such factors
as the financial condition of the borrower, fair market value of collateral and
other items that, in management's opinion, deserve current recognition in
estimating credit losses.
At December 31, 1999, BancShares' reserve for loan losses was $98.7
million or 1.46 percent of loans outstanding. This compares to $96.1 million or
1.55 percent at December 31, 1998 and $84.4 million or 1.55 percent at December
31, 1997. The reduction in the reserve-to-loan ratio during 1999 reflects the
growth in real estate-secured and commercial and industrial lending. In
management's opinion, the migration from traditional retail installment lending
has had a favorable impact on the risk profile of the aggregate loan portfolio.
16
<PAGE>
Table 13
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
(thousands, except ratios)
<S> <C> <C>
Balance at beginning of year ............................. $ 96,115 $ 84,360
Reserve of acquired institutions ......................... -- --
Provision for loan losses ................................ 11,672 19,879
Charge-offs:
Real estate:
Construction and land development ..................... (7) (2)
Mortgage:
1-4 family residential ............................... (966) (826)
Commercial ........................................... (111) (112)
Equity Line .......................................... (23) (134)
Other ................................................ -- --
Commercial and industrial .............................. (1,800) (2,001)
Consumer ............................................... (10,748) (10,789)
Lease financing ........................................ (32) (203)
----------- -----------
Total charge-offs ..................................... (13,687) (14,067)
----------- -----------
Recoveries:
Real estate:
Construction and land development ..................... 42 93
Mortgage:
1-4 family residential ............................... 368 689
Commercial ........................................... 1,262 2,877
Equity Line .......................................... 13 10
Commercial and industrial .............................. 835 512
Consumer ............................................... 2,070 1,762
Lease financing ........................................ -- --
----------- -----------
Total recoveries ...................................... 4,590 5,943
----------- -----------
Net charge-offs ....................................... (9,097) (8,124)
----------- -----------
Balance at end of year ................................... $ 98,690 $ 96,115
=========== ===========
HISTORICAL STATISTICS
Balances:
Average total loans .................................... $6,399,114 $5,847,531
Total loans at year-end ................................ 6,751,039 6,195,591
Ratios:
Net charge-offs to average total loans ................. 0.14% 0.14%
Reserve for loan losses to total loans at year-end ..... 1.46 1.55
<CAPTION>
1997 1996 1995
---------------- -------------- --------------
(thousands, except ratios)
<S> <C> <C> <C>
Balance at beginning of year ............................. $ 81,439 $ 78,495 $ 72,017
Reserve of acquired institutions ......................... 481 1,387 3,231
Provision for loan losses ................................ 8,726 8,907 5,364
Charge-offs:
Real estate:
Construction and land development ..................... (7) (40) (118)
Mortgage:
1-4 family residential ............................... (1,350) (1,604) (994)
Commercial ........................................... (245) (248) (255)
Equity Line .......................................... (90) (58) (47)
Other ................................................ -- (52) (34)
Commercial and industrial .............................. (1,061) (1,076) (826)
Consumer ............................................... (11,540) (8,515) (4,988)
Lease financing ........................................ (38) (60) --
----------- ---------- ----------
Total charge-offs ..................................... (14,331) (11,653) (7,262)
----------- ---------- ----------
Recoveries:
Real estate:
Construction and land development ..................... 1,723 307 440
Mortgage:
1-4 family residential ............................... 2,505 1,534 1,160
Commercial ........................................... 1,502 530 1,476
Equity Line .......................................... 3 19 28
Commercial and industrial .............................. 698 493 761
Consumer ............................................... 1,614 1,420 1,233
Lease financing ........................................ -- -- 47
----------- ---------- ----------
Total recoveries ...................................... 8,045 4,303 5,145
----------- ---------- ----------
Net charge-offs ....................................... (6,286) (7,350) (2,117)
----------- ---------- ----------
Balance at end of year ................................... $ 84,360 $ 81,439 $ 78,495
=========== ========== ==========
HISTORICAL STATISTICS
Balances:
Average total loans .................................... $5,086,723 $4,842,266 $4,433,517
Total loans at year-end ................................ 5,445,772 4,930,508 4,580,719
Ratios:
Net charge-offs to average total loans ................. 0.12% 0.15% 0.05%
Reserve for loan losses to total loans at year-end ..... 1.55 1.65 1.71
</TABLE>
- ---------
All information presented in this table relates to domestic loans as BancShares
makes no foreign loans.
The provision for loan losses charged to operations was $11.7 million
during 1999 compared to $19.9 million during 1998 and $8.7 million during 1997.
The primary reason for the reduction in provision expense during 1999 is the
slower rate of loan growth. Average loans outstanding during 1999 were 9.4
percent higher than average loans during 1998, which were 15.0 percent higher
than average loans during 1997. Assuming no significant changes in risk
factors, the larger growth rate during 1998, when compared to 1999, required a
larger increase to the loan loss reserve. Accordingly, the provision for loan
losses during 1998 was higher than 1999.
Net charge-offs increased by $973,000 in 1999. Net charge-offs for 1999
totaled $9.1 million, compared to $8.1 million during 1998 and $6.3 million
during 1997. During 1999, the increase in net charge-offs resulted from lower
recoveries of amounts previously charged off, as gross charge-offs actually
declined moderately from 1998. Charge-offs for 1999 were $13.7 million,
compared to $14.1 million in 1998 and $14.3 million in 1997. The reduction in
1999 was due to lower commercial charge-offs. The lower gross charge-offs in
1998 was primarily due to lower consumer charge-offs, largely the result of
lower direct installment charge-offs.
17
<PAGE>
During 1999, total recoveries were $4.6 million, compared to $5.9 million
during 1998 and $8.0 million during 1997. The decrease in recoveries during
1999 primarily resulted from lower recoveries for commercial real estate loans.
However, BancShares benefited from higher recoveries of consumer loans during
1999.
The ratio of net charge-offs to average loans outstanding equaled 0.14
percent during 1999 and 1998 and 0.12 percent during 1997. These loss ratios
reflect the quality of BancShares' balance sheet, as these ratios remain low by
industry standards. Table 13 provides details concerning the reserve and
provision for loan losses for the past five years.
Management considers the established reserve adequate to absorb losses
that relate to loans outstanding at December 31, 1999, although future
additions to the reserve may be necessary based on changes in economic
conditions and other factors. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the reserve for
loan losses. Such agencies may require the recognition of additions to the
reserve based on their judgments of information available to them at the time
of their examination.
Table 14 details management's allocation of the reserve among the various
loan types. The process used to allocate the loan loss reserve considers, among
other factors, whether the borrower is a retail or commercial customer, whether
the loan is secured or unsecured, and whether the loan is an open or closed-end
agreement. Generally, loans to commercial customers are evaluated individually
and assigned a credit grade, while loans to retail customers are evaluated
among groups of loans with similar characteristics. Loans evaluated
individually are assigned a credit grade using such factors as the borrower's
cash flow, the value of any underlying collateral and the value of any
guarantee. The rating becomes the basis for the reserve allocation for that
individual loan. Groups of loans are aggregated over their remaining lives and
probable loss projections for each period become the basis for the reserve
allocation. The loss estimates are based on prior experience and current
economic conditions. The unallocated reserve primarily represents the impact of
certain conditions that were not considered in allocating the reserve to the
specific components of the loan portfolio.
Table 14
ALLOCATION OF RESERVE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
Percent Percent Percent
of Loans of Loans of Loans
to Total to Total to Total
Reserve Loans Reserve Loans Reserve Loans
--------- ---------- --------- ---------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Construction and land
development .............. $ 4,653 2.76% $ 3,027 2.54% $ 3,235 2.09%
Mortgage:
1-4 family residential ... 5,721 19.65 11,182 20.97 14,779 25.92
Commercial ............... 32,198 26.82 26,835 24.13 16,388 19.38
Equity Line .............. 4,098 11.19 3,338 9.96 4,257 11.09
Other .................... 3,232 2.39 3,075 2.59 1,712 2.51
Commercial and industrial .. 20,084 14.60 13,591 13.64 9,533 11.63
Consumer ................... 26,279 20.64 32,099 24.49 31,025 25.74
Lease financing ............ 1,572 1.84 1,123 1.51 992 1.37
Other ...................... 190 0.11 180 0.17 324 0.27
Unallocated ................ 663 -- 1,665 -- 2,115 --
------- ------ ------- ------ ------- ------
Total .................... $98,690 100.00% $96,115 100.00% $84,360 100.00%
======= ====== ======= ====== ======= ======
<CAPTION>
December 31
------------------------------------------
1996 1995
-------------------- ---------------------
Percent Percent
of Loans of Loans
to Total to Total
Reserve Loans Reserve Loans
--------- ---------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Construction and land
development .............. $ 3,234 2.23% $ 3,090 2.28%
Mortgage:
1-4 family residential ... 13,127 31.29 13,125 31.41
Commercial ............... 16,514 17.89 15,305 16.81
Equity Line .............. 2,898 8.35 2,788 8.67
Other .................... 1,798 2.70 1,318 2.82
Commercial and industrial .. 9,243 10.44 8,384 10.18
Consumer ................... 24,890 25.38 21,587 26.18
Lease financing ............ 985 1.39 639 1.31
Other ...................... 324 0.33 -- 0.33
Unallocated ................ 8,426 -- 12,259 --
------- ------ ------- ------
Total .................... $81,439 100.00% $78,495 100.00%
======= ====== ======= ======
</TABLE>
At December 31, 1999, BancShares had no foreign loans or any loans to
finance highly leveraged transactions. Further, management does not contemplate
originating or participating in such transactions in the future.
18
<PAGE>
NONINTEREST INCOME
Total noninterest income was $165.3 million during 1999, an increase of
$19.9 million or 13.7 percent. This compares to $145.4 million during 1998 and
$114.9 million during 1997. Table 15 presents the major components of
noninterest income for the past five years. In recent years, as with other
financial service providers, BancShares has searched for various opportunities
to enhance its noninterest income. As a percentage of net interest income,
noninterest income has increased from 37.2 percent during 1995 to 46.9 percent
during 1999. This growth has resulted from new products and services, such as
fees generated from investment services, and changes made to existing products,
such as the relocation of the credit card operation during 1997 to enhance its
fee potential.
Income from service charges on deposit accounts was $55.2 million during
1999, an increase of 17.2 percent. Individual service charge income experienced
strong growth during 1999, the result of modifications to the service charge
structure. Commercial service charge income improved during 1999 due to higher
volume and lower interest rates, which resulted in a smaller earnings credit
for commercial transaction accounts. Service charge income amounted to $47.1
million and $41.7 million for the years ended December 31, 1998 and 1997,
respectively.
Table 15
NONINTEREST INCOME
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts ..... $ 55,169 $ 47,055 $ 41,748 $ 40,710 $39,909
Credit card income ...................... 30,820 25,558 20,053 16,147 13,561
Trust income ............................ 13,848 12,710 11,284 10,008 8,886
Fees from processing services ........... 12,987 11,652 10,511 9,733 8,954
Commission income ....................... 10,700 9,034 6,407 4,505 2,801
ATM income .............................. 8,674 8,565 7,245 5,289 2,729
Mortgage income ......................... 6,440 8,797 2,106 256 459
Income from sale of branches ............ 5,063 3,067 -- -- --
Other service charges and fees .......... 11,916 12,008 8,590 4,351 9,472
Securities gains ........................ 1,706 -- -- -- --
Other ................................... 8,016 6,971 6,970 12,059 5,007
-------- -------- -------- -------- -------
Total ................................. $165,339 $145,417 $114,914 $103,058 $91,778
======== ======== ======== ======== =======
</TABLE>
Credit card income was $30.8 million during 1999, a $5.3 million or 20.6
percent increase over 1998. The $25.6 million earned by the credit card
operation during 1998 represented an increase of $5.5 million or 27.5 percent
over 1997. During 1999, income from merchant services increased 16.6 percent,
the result of a large increase in the number of merchant accounts. Growth
during 1998 was primarily due to higher fee income realized from the earlier
relocation of the credit card operation to Virginia.
Trust income was $13.8 million in 1999, up 9.0 percent from the $12.7
million recorded during 1998, principally due to growth in retirement plan
services. Growth in this area also contributed to the 12.6 percent increase
from 1997 to 1998.
In an effort to leverage on its significant technology investment,
BancShares provides data processing and other banking services to client
financial institutions, some of which are deemed to be related parties. These
services generated $13.0 million in revenues during 1999, $11.7 million during
1998 and $10.5 million during 1997.
Commission income generated by First Citizens Investor Services
contributed $10.7 million during 1999, compared to $9.0 million during 1998 and
$6.4 million during 1997. The growth rate during 1999 was 18.4 percent,
compared to 41.0 percent during 1998. These fees primarily result from the sale
of third-party mutual fund and annuity products. This continues to be an area
of strong growth, and management expects continued growth during 2000.
During 1999, BancShares collected $8.7 million in ATM income, primarily
from ATM convenience fees paid by non-customers who access their accounts at
other banks through BancShares' ATM network. During 1998 and 1997, ATM income
totaled $8.6 million and $7.2 million. Various legislative efforts to limit or
disallow the convenience fee may have a significant impact on this revenue
source in future periods.
Mortgage loans generated noninterest income of $6.4 million during 1999,
$8.8 million during 1998 and $2.1 million during 1997. Fees for servicing
mortgage loans for others increased in each period, as the loan servicing
portfolio continues
19
<PAGE>
to grow. During 1999, BancShares realized gains of $2.5 million on the sale of
$529.2 million in mortgage loans. During 1998, sales of $728.1 million
generated net gains of $6.2 million, while 1997 sales of $334.5 million in
loans generated net gains of $219,000. The variability of these gains results
from interest rate movements that affect the ultimate price realized on the
sales. The decrease in the volume sold during 1999 primarily resulted from a
reduction in loan originations, which also resulted from rate increases during
1999.
Sales of branch offices generated gains of $5.1 million during 1999.
Income from branch sales in 1998 was $3.1 million. No such gains were
recognized during 1997. This nonrecurring component of noninterest income
resulted from management's decision to exit certain markets. Gains of $4.4
million during 1999 and $3.1 million during 1998 related to sales of branch
offices to related parties.
Gains resulting from sales of available for sale equity securities during
1999 amounted to $1.7 million. No such gains were recorded during 1998 or 1997.
NONINTEREST EXPENSE
Total noninterest expense for 1999 amounted to $375.6 million. This was a
9.8 percent increase over 1998, following a 13.9 percent increase in 1998
noninterest expenses over 1997. Table 16 presents the major components of
noninterest expense for the past five years.
Salary expense was $160.4 million during 1999, compared to $142.0 million
during 1998, an increase of $18.4 million or 13.0 percent, following a $15.5
million or 12.3 percent increase in 1998 over 1997. Increases during each
period resulted from growth in the employee base needed to support franchise
expansion, merit increases and growth in incentive-based compensation.
BancShares had 4,652 full time equivalent employees at December 31, 1999,
compared to 4,486 at December 31, 1998 and 4,129 at December 31, 1997. The
growth during 1999 was primarily due to the opening of new offices in Florida,
Georgia and Virginia and the in-store facilities opened by FCB in North
Carolina. The growth in headcount during 1998 resulted primarily from the
expansion of ASB in Georgia.
Employee benefits expense was $30.5 million during 1999, an increase of
$3.0 million or 11.0 percent from 1998. The $27.4 million in benefits expense
recorded during 1998 represented an increase of $3.7 million or 15.7 percent
over 1997. During 1999 and 1998, higher pension, FICA and employee health care
expenses contributed to the increase in total employee benefits expense. The
calculation of pension expense for 1999 was based on a lower discount rate,
which yielded a higher current cost. The growth in salaries and incentive
compensation also increased the pension cost calculated for 1999. The growth in
FICA expense similarly resulted from the growth in salaries and incentive
compensation.
Table 16
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(thousands)
<S> <C> <C> <C> <C> <C>
Salaries and wages .................. $160,440 $142,020 $126,474 $115,461 $106,607
Employee benefits ................... 30,455 27,434 23,718 20,425 17,080
Equipment expense ................... 37,745 36,545 32,035 27,068 24,504
Occupancy expense ................... 30,041 28,112 23,338 22,023 20,446
Credit card expense ................. 14,712 12,658 11,722 10,097 9,106
Amortization of intangibles ......... 10,963 10,652 8,641 7,951 5,527
Telecommunication expense ........... 10,052 9,046 8,032 7,711 6,790
Advertising expense ................. 7,313 5,836 6,522 4,352 4,425
Postage expense ..................... 7,096 6,826 6,623 6,383 5,701
Consultant expense .................. 5,840 7,134 5,626 3,408 2,591
Other ............................... 60,963 55,950 47,670 53,543 42,753
-------- -------- -------- -------- --------
Total ............................. $375,620 $342,213 $300,401 $278,422 $245,530
======== ======== ======== ======== ========
</TABLE>
Equipment expense for 1999 was $37.7 million, an increase of $1.2 million
or 3.3 percent over 1998, when total equipment expenses were $36.5 million. The
increase during 1999 resulted from higher maintenance costs and software
depreciation related to mainframe applications. During 1998, equipment expense
was $4.5 million or 14.1 percent above the amount recorded during 1997.
20
<PAGE>
BancShares recorded occupancy expense of $30.0 million during 1999, an
increase of $1.9 million or 6.9 percent during 1999 due to higher depreciation
expense on newly constructed and recently renovated facilities. Occupancy
expense during 1998 was $28.1 million, an increase of $4.8 million or 20.5
percent over 1997. During both periods, franchise expansion in Georgia, Florida
and Virginia and in-store growth in North Carolina represent much of the
growing occupancy cost.
Costs related to credit card processing were $14.7 million, up $2.0
million from 1998 levels of $12.7 million, or 16.2 percent. Increased credit
card expense resulted from higher volumes of credit card transactions, which
were up 14.3 percent. Credit card processing expenses were $11.7 million in
1997.
Telecommunications expense was $10.1 million during 1999, an increase of
$1.0 million or 11.1 percent due to new branches and expanded alternative
delivery systems, including the retail Internet banking product introduced
during 1999. Telecommunications expense was $9.0 million during 1998 and $8.0
million during 1997.
Partly due to the promotion of the new retail Internet banking function,
advertising expense increased $1.5 million during 1999, increasing from $5.8
million during 1998 to $7.3 million during 1999, an increase of 25.3 percent.
The increase in advertising expenses also resulted from the opening of various
new offices and the comprehensive communications that were provided to
customers regarding BancShares' Year 2000 preparedness.
Consultant expenses decreased $1.3 million during 1999, a reduction of
18.1 percent from the $7.1 million recorded during 1998. The $5.8 million
recorded during 1999 included $1.4 million in Year 2000-related costs, compared
to $2.9 million in Year 2000-related costs included in consultant expense
during 1998.
INCOME TAXES
During 1999, BancShares recorded total income tax expense of $48.6
million, compared to $39.7 million in income tax expense during 1998 and $39.5
million in 1997. BancShares' effective tax rate was 37.3 percent and 35.9
percent in 1999 and 1998, respectively, and 35.9 percent in 1997. The growth in
the effective tax rate during 1999 primarily resulted from growth in FCB's
taxable income obligation to the State of North Carolina.
LIQUIDITY
Management places great importance on the maintenance of a highly liquid
investment portfolio with varying maturities to provide needed cash flows to
meet liquidity requirements. At December 31, 1999, the investment portfolio
totaled $1.37 billion or 14.1 percent of total assets. This compares to $2.16
billion or 22.5 percent at December 31, 1998. Despite the reduction in the
investment securities portfolio, the liquidity available by maturing
securities, coupled with other traditional sources, should meet liquidity
needs.
The ability to generate retail deposits is an additional source of
liquidity. The rate of growth in average deposits was 4.5 percent during 1999,
9.5 percent during 1998 and 6.5 percent during 1997. The deposit growth results
from the branch network as well as deposit liability assumptions associated
with various business combinations.
These liquidity sources have enabled BancShares to place little dependence
on borrowed funds for its liquidity needs. However, there are readily available
sources for borrowed funds through the correspondent bank network.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares, FCB and ASB maintain adequate capital balances and exceed all
minimum regulatory capital requirements. Table 17 provides detail of various
measures of regulatory capital adequacy for BancShares. Failure to meet certain
capital requirements may result in certain actions by regulatory agencies that
could have a direct material effect on the financial statements.
21
<PAGE>
Table 17
ANALYSIS OF BANCSHARES' CAPITAL ADEQUACY
<TABLE>
<CAPTION>
December 31
----------------------------------------------- Regulatory
1999 1998 1997 Minimum
--------------- --------------- --------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 capital ................ $ 760,195 $ 679,987 $ 526,411
Tier 2 capital ................ 99,443 92,184 72,165
----------- ----------- -----------
Total capital ................. $ 859,638 $ 772,171 $ 598,576
=========== =========== ===========
Risk-adjusted assets .......... $ 7,616,890 $ 6,878,932 $ 5,762,939
Risk-based capital ratios
Tier 1 capital ............... 9.98% 9.89% 9.13% 4.00%
Total capital ................ 11.29% 11.23% 10.39% 8.00%
Tier 1 leverage ratio ......... 7.91% 7.31% 6.35% 3.00%
</TABLE>
The improved capital ratios during 1999 reflect the impact of earnings
retention. For 1998, the increases reflect the net impact of large share
repurchases and the issuance of $150 million in trust preferred capital
securities during March 1998. As of December 31, 1997, BancShares recorded a
reduction in capital of $73.7 million for two stock purchases that were funded
during 1998. In response to the reduction in shareholder's equity, management
elected to issue the trust preferred capital securities, which qualify as
capital for regulatory purposes.
The rate of return on average shareholders' equity during 1999, 1998 and
1997 amounted to 11.8 percent, 11.3 percent and 11.0 percent, respectively. The
improved return recorded during 1999 results from higher net income when
compared to 1998. The increased return for 1998 when compared to 1997 results
from a reduction in average shareholders' equity during 1998.
During the fourth quarter of 1999 the Board of Directors of BancShares
reauthorized the purchase of up to 300,000 shares of its Class A common stock
and up to 100,000 shares of its Class B common stock. Management will continue
to consider the repurchase of outstanding shares when market conditions are
favorable for such transactions and excess capital exists to fund those
purchases.
FOURTH QUARTER ANALYSIS
BancShares' net income for the fourth quarter of 1999 totaled $19.3
million, compared to $19.7 million during the same period of 1998, a decrease
of $399,000 million or 2.0 percent. During the fourth quarter of 1999 no gains
were recognized on the sale of branch offices. During the fourth quarter of
1998, BancShares recognized $3.1 million in gains on the sale of branch office.
Adjusting for this nonrecurring item, net income for the fourth quarter of 1998
would have been $16.6 million. Comparing results from the fourth quarter of
1999 to the adjusted balance for the same period of 1998, net income increased
16.0 percent. As indicated in Table 18, interest-earning assets averaged $8.63
billion during the fourth quarter of 1999, an increase of 2.6 percent over the
same period of 1998. Average loans outstanding during the fourth quarter of
1999 were $6.65 billion, an increase of $476.8 million over the same period of
1998. Loan growth was strongest among commercial loans secured by real estate
and commercial and industrial loans. Investment securities averaged $1.58
billion during the fourth quarter of 1999, a $504.1 million reduction from the
same period of 1998, the result of maturing securities being used to fund
current loan demand.
22
<PAGE>
Table 18
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
Fourth Third Second First
--------------- --------------- --------------- ---------------
(thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income ......................................... $ 161,251 $ 160,224 $ 156,960 $ 155,456
Interest expense ........................................ 72,511 70,497 68,821 69,713
------------ ------------ ------------ ------------
Net interest income ..................................... 88,740 89,727 88,139 85,743
Provision for loan losses ............................... 3,503 3,329 2,178 2,662
------------ ------------ ------------ ------------
Net interest income after provision for loan losses ..... 85,237 86,398 85,961 83,081
Noninterest income ...................................... 41,975 45,898 39,271 38,195
Noninterest expense ..................................... 95,911 95,104 93,387 91,218
------------ ------------ ------------ ------------
Income before income taxes .............................. 31,301 37,192 31,845 30,058
Income taxes ............................................ 11,984 14,060 11,542 11,010
------------ ------------ ------------ ------------
Net income .............................................. $ 19,317 $ 23,132 $ 20,303 $ 19,048
============ ============ ============ ============
Net interest income -- taxable equivalent ............... $ 89,267 $ 90,258 $ 88,703 $ 86,338
============ ============ ============ ============
SELECTED QUARTERLY AVERAGES
Total assets ............................................ $ 9,721,360 $ 9,644,135 $ 9,605,512 $ 9,517,513
Investment securities ................................... 1,583,216 1,897,593 2,066,519 2,091,575
Loans ................................................... 6,646,312 6,474,200 6,289,714 6,180,106
Interest-earning assets ................................. 8,627,990 8,689,146 8,659,199 8,558,123
Deposits ................................................ 8,140,962 8,121,209 8,139,147 8,018,971
Interest-bearing liabilities ............................ 7,533,726 7,518,874 7,490,958 7,495,944
Long-term obligations ................................... 158,975 156,856 157,453 158,307
Shareholders' equity .................................... $ 720,617 $ 702,065 $ 683,771 $ 668,087
Shares outstanding ...................................... 10,625,208 10,625,559 10,625,559 10,625,559
============ ============ ============ ============
SELECTED QUARTER-END BALANCES
Total assets ............................................ $ 9,717,099 $ 9,577,715 $ 9,628,477 $ 9,702,163
Investment securities ................................... 1,371,894 1,699,520 1,975,476 2,099,882
Loans ................................................... 6,751,039 6,574,807 6,376,372 6,244,828
Interest-earning assets ................................. 8,596,326 8,590,485 8,647,045 8,694,710
Deposits ................................................ 8,173,598 8,062,091 8,170,433 8,179,098
Interest-bearing liabilities ............................ 7,554,229 7,454,172 7,522,636 7,620,262
Long-term obligations ................................... 155,683 156,840 156,870 157,529
Shareholders' equity .................................... $ 728,757 $ 713,069 $ 692,570 $ 676,253
Shares outstanding ...................................... 10,610,399 10,625,559 10,625,559 10,625,559
============ ============ ============ ============
PROFITABILITY RATIOS (averages)
Rate of return (annualized) on:
Total assets ........................................... 0.79% 0.95% 0.85% 0.81%
Shareholders' equity ................................... 10.64 13.07 11.91 11.56
Dividend payout ratio ................................... 13.74 11.47 13.09 13.97
============ ============ ============ ============
LIQUIDITY AND CAPITAL RATIOS (averages)
Loans to deposits ....................................... 81.64% 79.72% 77.28% 77.07%
Shareholders' equity to total assets .................... 7.41 7.28 7.12 7.02
Time certificates of $100,000 or more to total
deposits ............................................... 8.96 9.06 9.01 9.04
============ ============ ============ ============
PER SHARE OF STOCK
Net income .............................................. $ 1.82 $ 2.18 $ 1.91 $ 1.79
Cash dividends .......................................... 0.25 0.25 0.25 0.25
Class A sales price .....................................
High ................................................... 78.00 82.00 97.50 92.00
Low .................................................... 69.06 76.25 78.00 68.00
Class B sales price .....................................
High ................................................... 78.50 80.63 80.81 88.00
Low .................................................... 70.00 76.50 76.00 76.00
============ ============ ============ ============
<CAPTION>
1998
---------------------------------------------------------------
Fourth Third Second First
--------------- --------------- --------------- ---------------
(thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income ......................................... $ 158,101 $ 157,381 $ 154,535 $ 149,470
Interest expense ........................................ 73,057 73,924 73,643 71,447
------------ ------------ ------------ ------------
Net interest income ..................................... 85,044 83,457 80,892 78,023
Provision for loan losses ............................... 4,893 5,324 5,267 4,395
------------ ------------ ------------ ------------
Net interest income after provision for loan losses ..... 80,151 78,133 75,625 73,628
Noninterest income ...................................... 42,439 36,000 35,220 31,758
Noninterest expense ..................................... 91,226 86,114 83,991 80,882
------------ ------------ ------------ ------------
Income before income taxes .............................. 31,364 28,019 26,854 24,504
Income taxes ............................................ 11,648 9,931 9,309 8,844
------------ ------------ ------------ ------------
Net income .............................................. $ 19,716 $ 18,088 $ 17,545 $ 15,660
============ ============ ============ ============
Net interest income -- taxable equivalent ............... $ 85,838 $ 83,988 $ 81,397 $ 78,541
============ ============ ============ ============
SELECTED QUARTERLY AVERAGES
Total assets ............................................ $ 9,315,347 $ 9,183,571 $ 9,142,981 $ 8,927,355
Investment securities ................................... 2,087,308 2,244,014 2,461,590 2,442,962
Loans ................................................... 6,169,556 6,024,822 5,711,599 5,474,570
Interest-earning assets ................................. 8,413,435 8,305,482 8,269,008 8,067,590
Deposits ................................................ 7,914,649 7,744,217 7,755,945 7,619,330
Interest-bearing liabilities ............................ 7,410,007 7,244,949 7,241,686 7,096,124
Long-term obligations ................................... 159,196 158,353 159,984 55,814
Shareholders' equity .................................... $ 651,656 $ 635,521 $ 621,605 $ 607,608
Shares outstanding ...................................... 10,625,559 10,625,559 10,626,702 10,627,453
============ ============ ============ ============
SELECTED QUARTER-END BALANCES
Total assets ............................................ $ 9,605,787 $ 9,194,842 $ 9,224,848 $ 9,252,029
Investment securities ................................... 2,160,329 2,115,343 2,348,771 2,526,366
Loans ................................................... 6,195,591 6,132,422 5,886,315 5,562,831
Interest-earning assets ................................. 8,588,645 8,257,765 8,235,086 8,324,197
Deposits ................................................ 8,112,408 7,771,093 7,798,918 7,873,484
Interest-bearing liabilities ............................ 7,542,636 7,260,204 7,291,813 7,327,020
Long-term obligations ................................... 158,801 158,801 159,456 160,219
Shareholders' equity .................................... $ 660,749 $ 643,673 $ 628,702 $ 615,036
Shares outstanding ...................................... 10,625,559 10,625,559 10,625,559 10,627,453
============ ============ ============ ============
PROFITABILITY RATIOS (averages)
Rate of return (annualized) on:
Total assets ........................................... 0.84% 0.78% 0.77% 0.71
Shareholders' equity ................................... 12.00 11.29 11.32 10.45
Dividend payout ratio ................................... 13.51 14.71 14.88 17.99
============ ============ ============ =============
LIQUIDITY AND CAPITAL RATIOS (averages)
Loans to deposits ....................................... 77.95% 77.80% 73.64% 71.85
Shareholders' equity to total assets .................... 7.00 6.92 6.80 6.81
Time certificates of $100,000 or more to total
deposits ............................................... 8.88 8.85 9.15 9.77
============ ============ ============ =============
PER SHARE OF STOCK
Net income .............................................. $ 1.85 $ 1.70 $ 1.68 $ 1.39
Cash dividends .......................................... 0.25 0.25 0.25 0.25
Class A sales price .....................................
High ................................................... 92.94 102.00 118.00 122.00
Low .................................................... 78.00 79.50 99.13 103.00
Class B sales price .....................................
High ................................................... 87.00 101.60 114.00 118.50
Low .................................................... 83.00 84.00 100.00 100.00
============ ============ ============ =============
</TABLE>
- ---------
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 all periods, and
state income tax rates of 7.00%, 7.25% and 7.50% for 1999, 1998, and 1997,
respectively.
Stock information related to Class A common stock reflects the sales price, as
reported on the Nasdaq National Market System. Stock information for Class B
was obtained from a broker-dealer, reflecting the bid prices, prior to any
mark-ups, mark-downs or commissions. As of December 31, 1999, there were 3,404
holders of record of the Class A common stock and 620 holders of record of the
Class B common stock.
Interest income increased $3.2 million or 2.0 percent in the fourth
quarter of 1999 when compared to the same period of 1998. The increase in
interest income during 1999 resulted from growth in average loans, which more
than offset the impact of a reduction in the average securities portfolio and a
reduction in loan and investment yields. Interest-earning assets yielded 7.44
percent during the fourth quarter of 1999, an decrease from the 7.58 percent
yield recorded during the fourth quarter of 1998.
23
<PAGE>
Average interest-bearing liabilities experienced a $123.7 million increase
from the fourth quarter of 1998 to the same period of 1999, the result of
increases in average interest-bearing deposits. The growth in average deposits
was strongest among money market accounts, which increased $255.7 million from
the fourth quarter of 1998 to the same period of 1999. The rate on total
interest-bearing liabilities decreased from 3.91 percent to 3.82 percent
between the two periods.
Net interest income increased $3.7 million or 4.3 percent from the fourth
quarter of 1998 to the fourth quarter of 1999, the increase resulting from loan
growth. In an effort to have adequate liquidity in the event of problems with
the Year 2000 date change, management allowed cash and federal funds balances
to increase during the fourth quarter of 1999, resulting in diminished net
interest income. After concerns about the date change abated in early 2000, the
level of liquid assets were decreased to more normal levels.
Noninterest income for the fourth quarter of 1999 was $42.0 million, a
decrease of $464,000 or 1.1 percent. Lower noninterest income primarily
resulted from the absence of a $3.1 million gain recognized on the sale of six
branch offices in the fourth quarter of 1998. No such gain was recognized in
the fourth quarter of 1999. Partially offsetting this were increases in service
charge income, other service charges and fees and credit card income.
Table 19
CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS -- FOURTH QUARTER
<TABLE>
<CAPTION>
1999 1998
----------------------------------- ------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------- ---------- ---------- ------------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Total loans .............................. $6,646,312 $134,647 8.04% $6,169,556 $125,762 8.20%
Investment securities:
U. S. Government ........................ 1,558,215 21,772 5.54 2,057,259 30,083 5.80
State, county and municipal ............. 2,812 52 7.34 3,858 69 7.10
Other ................................... 22,189 144 2.57 26,191 129 1.95
---------- -------- ---- ---------- -------- ----
Total investment securities ............ 1,583,216 21,968 5.50 2,087,308 30,281 5.76
Overnight investments ................... 398,462 5,163 5.14 156,571 2,852 7.23
---------- -------- ---- ---------- -------- ----
Total interest-earning assets .......... $8,627,990 $161,778 7.44% $8,413,435 $158,895 7.58%
========== ======== ==== ========== ======== ====
LIABILITIES
Deposits:
Checking With Interest .................. $1,080,164 $ 1,593 0.59% $1,064,972 $ 2,222 0.83%
Savings ................................. 668,251 2,623 1.56 687,551 3,079 1.78
Money market accounts ................... 1,446,161 13,829 3.79 1,190,474 10,018 3.34
Time deposits ........................... 3,588,935 44,348 4.90 3,713,302 47,996 5.13
---------- -------- ---- ---------- -------- ----
Total interest-bearing deposits ........ 6,783,511 62,393 3.65 6,656,299 63,315 3.77
Short-term borrowings .................... 591,241 6,957 4.67 594,512 6,563 4.38
Long-term obligations .................... 158,975 3,161 7.89 159,196 3,179 7.92
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities ..... $7,533,727 $ 72,511 3.82% $7,410,007 $ 73,057 3.91%
========== ======== ==== ========== ======== ====
Interest rate spread ..................... 3.62% 3.67%
==== ====
Net interest income and net yield on
interest-earning assets ................. $ 89,267 4.10% $ 85,838 4.05%
======== ==== ======== ====
<CAPTION>
Increase (decrease) due to:
--------------------------------------
Yield/ Total
Volume Rate Change
------------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Total loans .............................. $10,613 ($ 1,728) $ 8,885
Investment securities:
U. S. Government ........................ (7,129) (1,182) (8,311)
State, county and municipal ............. (19) 2 (17)
Other ................................... (23) 38 15
------- ------- --------
Total investment securities ............ (7,171) (1,142) (8,313)
Overnight investments ................... 3,772 (1,461) 2,311
------- ------- --------
Total interest-earning assets .......... $ 7,214 ($ 4,331) $ 2,883
======= ======= ========
LIABILITIES
Deposits:
Checking With Interest .................. $ 24 ($ 653) ($ 629)
Savings ................................. (81) (375) (456)
Money market accounts ................... 2,307 1,504 3,811
Time deposits ........................... (1,552) (2,096) (3,648)
------- ------- --------
Total interest-bearing deposits ........ 698 (1,620) (922)
Short-term borrowings .................... (38) 432 394
Long-term obligations .................... (5) (13) (18)
---------- ------- --------
Total interest-bearing liabilities ..... $ 655 ($ 1,201) ($ 546)
========= ======= ========
Interest rate spread .....................
Net interest income and net yield on
interest-earning assets ................. $ 6,559 ($ 3,130) $ 3,429
========= ======= ========
</TABLE>
- ---------
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.
Noninterest expense amounted to $95.9 million for the quarter ended
December 31, 1999, compared to $91.2 million for the quarter ended December 31,
1998. Most of the 5.1 percent increase was in salary expense, occupancy
expense, legal expense and consulting expense. Tables 18 and 19 are useful when
making quarterly comparisons.
LEGAL PROCEEDINGS
BancShares and various subsidiaries have been named as defendants in
various legal actions arising from their normal business activities in which
damages in various amounts are claimed. Although the amount of any ultimate
liability with respect to such matters cannot be determined, in the opinion of
management, any such liability will not have a material effect on BancShares'
consolidated financial position.
24
<PAGE>
YEAR 2000 PREPARATIONS
BancShares has not experienced any significant impact on its operations
due to Year 2000 problems. The date change has resulted in no major
interruptions in service. BancShares will continue to reevaluate its Year 2000
operations and monitor its progress. Management does not expect Year 2000
issues to have a material adverse effect on operations or financial results
during 2000.
CURRENT ACCOUNTING AND REGULATORY ISSUES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. As a result of BancShares' limited use
of derivative instruments, the adoption of SFAS No. 133 should not have a
material impact on its consolidated financial statements. SFAS No. 133 becomes
effective during 2001 for BancShares.
Management is not aware of any current recommendations by regulatory
authorities that, if implemented, would have or would be reasonably likely to
have a material effect on liquidity, capital ratios or results of operations.
FORWARD-LOOKING STATEMENTS
This discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations
or beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," "anticipate," or other statements concerning
opinions or judgment of BancShares and its management about future events.
Factors that could influence the accuracy of such forward-looking statements
include, but are not limited to, the financial success or changing strategies
of BancShares' customers, actions of government regulators, the level of market
interest rates, and general economic conditions.
25
<PAGE>
INDEPENDENT AUDITOR'S REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
FIRST CITIZENS BANCSHARES, INC.
We have audited the accompanying consolidated balance sheets of First
Citizens BancShares, Inc. and Subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also involves assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Citizens BancShares, Inc. and Subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Raleigh, North Carolina
January 24, 2000
26
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------------
1999 1998
------------- -------------
(thousands, except
share data)
<S> <C> <C>
ASSETS
Cash and due from banks ................................................................. $ 591,605 $ 502,955
Overnight investments ................................................................... 473,393 232,725
Investment securities held to maturity (fair value of $1,336,664 in 1999
and $2,147,776 in 1998)................................................................. 1,353,321 2,135,372
Investment securities available for sale (cost of $7,751 in 1999 and $10,264 in 1998).... 18,573 24,957
Loans ................................................................................... 6,751,039 6,195,591
Less reserve for loan losses ............................................................ 98,690 96,115
---------- ----------
Net loans ............................................................................. 6,652,349 6,099,476
Premises and equipment .................................................................. 397,397 367,076
Income earned not collected ............................................................. 52,621 61,652
Other assets ............................................................................ 177,840 181,574
---------- ----------
Total assets .......................................................................... $9,717,099 $9,605,787
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing .................................................................... $1,343,353 $1,296,713
Interest-bearing ....................................................................... 6,830,245 6,815,695
---------- ----------
Total deposits ........................................................................ 8,173,598 8,112,408
Short-term borrowings ................................................................... 568,301 568,140
Long-term obligations ................................................................... 155,683 158,801
Other liabilities ....................................................................... 90,760 105,689
---------- ----------
Total liabilities ..................................................................... 8,988,342 8,945,038
SHAREHOLDERS' EQUITY
Common stock:
Class A -- $1 par value (11,000,000 shares authorized; 8,890,039 shares issued for 1999;
8,905,199 shares issued for 1998) ..................................................... 8,890 8,906
Class B -- $1 par value (2,000,000 shares authorized; 1,720,360 shares issued for 1999
and 1998) ............................................................................. 1,720 1,720
Surplus ................................................................................. 143,766 143,760
Retained earnings ....................................................................... 567,801 497,316
Accumulated other comprehensive income .................................................. 6,580 9,047
---------- ----------
Total shareholders' equity ............................................................ 728,757 660,749
---------- ----------
Total liabilities and shareholders' equity ............................................ $9,717,099 $9,605,787
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
27
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1999 1998 1997
-------------- -------------- -------------
(thousands, except share
and per share data)
<S> <C> <C> <C>
INTEREST INCOME
Loans ................................................................ $ 510,272 $ 478,504 $ 428,997
Investment securities:
U. S. Government .................................................... 106,435 133,535 133,007
State, county and municipal ......................................... 147 207 273
Other ............................................................... 548 507 102
----------- ----------- -----------
Total investment securities interest income ....................... 107,130 134,249 133,382
Overnight investments ................................................ 16,489 6,734 9,897
----------- ----------- -----------
Total interest income ............................................. 633,891 619,487 572,276
INTEREST EXPENSE
Deposits ............................................................. 244,921 255,517 243,749
Short-term borrowings ................................................ 23,921 25,850 23,420
Long-term obligations ................................................ 12,700 10,704 844
----------- ----------- -----------
Total interest expense ............................................ 281,542 292,071 268,013
----------- ----------- -----------
Net interest income ............................................... 352,349 327,416 304,263
Provision for loan losses ............................................ 11,672 19,879 8,726
----------- ----------- -----------
Net interest income after provision for loan losses ............... 340,677 307,537 295,537
NONINTEREST INCOME
Service charges on deposit accounts .................................. 55,169 47,055 41,748
Credit card income ................................................... 30,820 25,558 20,053
Trust income ......................................................... 13,848 12,710 11,284
Fees from processing services ........................................ 12,987 11,652 10,511
Commission income .................................................... 10,700 9,034 6,407
ATM income ........................................................... 8,674 8,565 7,245
Mortgage income ...................................................... 6,440 8,797 2,106
Gain on sale of branches ............................................. 5,063 3,067 --
Other service charges and fees ....................................... 11,916 12,008 8,590
Securities gains ..................................................... 1,706 -- --
Other ................................................................ 8,016 6,971 6,970
----------- ----------- -----------
Total noninterest income .......................................... 165,339 145,417 114,914
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and wages ................................................... 160,440 142,020 126,474
Employee benefits .................................................... 30,455 27,434 23,718
Occupancy expense .................................................... 30,041 28,112 23,338
Equipment expense .................................................... 37,745 36,545 32,035
Other ................................................................ 116,939 108,102 94,836
----------- ----------- -----------
Total noninterest expense ......................................... 375,620 342,213 300,401
----------- ----------- -----------
Income before income taxes ........................................... 130,396 110,741 110,050
Income taxes ......................................................... 48,596 39,732 39,492
----------- ----------- -----------
Net income ........................................................ 81,800 71,009 70,558
----------- ----------- -----------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES
Unrealized securities (losses) gains arising during period ........... (1,384) (411) 2,762
Less: reclassification adjustment for gains included in net income ... 1,083 -- --
----------- ----------- -----------
Other comprehensive (loss) income ................................. (2,467) (411) 2,762
----------- ----------- -----------
Comprehensive income .............................................. $ 79,333 $ 70,598 $ 73,320
=========== =========== ===========
PER SHARE INFORMATION
Net income .......................................................... $ 7.70 $ 6.62 $ 6.22
Cash dividends ...................................................... 1.00 1.00 1.00
Weighted average shares outstanding .................................. 10,625,457 10,626,311 11,341,153
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class B
Common Common
Stock Stock Surplus
------------ ------------- -----------
(thousands, except share data)
<S> <C> <C> <C>
Balance at December 31, 1996 .................... $9,652 $1,759 $143,760
Redemption of 20,301 shares of Class A
common stock and 5,126 shares of
Class B common stock ........................... (20) (5)
Obligation to repurchase common stock ........... (726) (32)
Net income ......................................
Unrealized securities gains, net of $1,826
tax expense ....................................
Cash dividends ..................................
-------- ------- --------
Balance at December 31, 1997 .................... 8,906 1,722 143,760
Redemption of 1,894 shares of Class B
common stock ................................... (2)
Obligation to repurchase common stock ...........
Net income ......................................
Unrealized securities losses, net of $651 tax
benefit ........................................
Cash dividends ..................................
-------- ------- --------
Balance at December 31, 1998 .................... 8,906 1,720 143,760
Redemption of 10,075 shares of Class A
common stock ................................... (10)
Net income ......................................
Unrealized securities losses, net of $1,404
tax benefit ....................................
Cash dividends ..................................
Other ........................................... (6) 6
-------- ------- --------
Balance at December 31, 1999 .................... $8,890 $1,720 $143,766
======= ======= ========
<CAPTION>
Accumulated
Other Total
Retained Comprehensive Shareholders'
Earnings Income Equity
------------ --------------- --------------
(thousands, except share data)
<S> <C> <C> <C>
Balance at December 31, 1996 .................... $ 453,640 $ 6,696 $ 615,507
Redemption of 20,301 shares of Class A
common stock and 5,126 shares of
Class B common stock ........................... (2,086) (2,111)
Obligation to repurchase common stock ........... (72,934) (73,692)
Net income ...................................... 70,558 70,558
Unrealized securities gains, net of $1,826
tax expense .................................... 2,762 2,762
Cash dividends .................................. (11,384) (11,384)
--------- --------- ---------
Balance at December 31, 1997 .................... 437,794 9,458 601,640
Redemption of 1,894 shares of Class B
common stock ................................... (202) (204)
Obligation to repurchase common stock ........... (624) (624)
Net income ...................................... 71,009 71,009
Unrealized securities losses, net of $651 tax
benefit ........................................ (411) (411)
Cash dividends .................................. (10,661) (10,661)
--------- --------- ---------
Balance at December 31, 1998 .................... 497,316 9,047 660,749
Redemption of 10,075 shares of Class A
common stock ................................... (696) (706)
Net income ...................................... 81,800 81,800
Unrealized securities losses, net of $1,404
tax benefit .................................... (2,467) (2,467)
Cash dividends .................................. (10,619) (10,619)
Other ........................................... --
--------- --------- ---------
Balance at December 31, 1999 .................... $ 567,801 $ 6,580 $ 728,757
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
29
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1999 1998 1997
------------- ------------- -------------
(thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ...................................................................... $ 81,800 $ 71,009 $ 70,558
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles ................................................... 12,236 11,373 9,034
Provision for loan losses ..................................................... 11,672 19,879 8,726
Deferred tax expense (benefit) ................................................ (3,478) (6,271) 1,475
Change in current taxes payable ............................................... (6,697) 1,118 (71)
Depreciation .................................................................. 30,849 27,205 19,273
Change in accrued interest payable ............................................ (4,462) (1,731) 4,805
Change in income earned not collected ......................................... 9,031 4,979 (6,573)
Securities gains .............................................................. (1,706) -- --
Gain on sale of branches ...................................................... (5,063) (3,067) --
Origination of loans held for sale ............................................ (468,109) (684,715) (434,471)
Proceeds from sale of loans held for sale ..................................... 531,640 734,249 334,762
Gain on loans held for sale ................................................... (2,485) (6,183) (219)
Net amortization of premiums and discounts .................................... 12,176 10,157 8,277
Net change in other assets .................................................... (4,832) (17,418) 19,102
Net change in other liabilities ............................................... (4,267) 24,741 (3,100)
---------- ---------- ----------
Net cash provided by operating activities ..................................... 188,305 185,325 31,578
---------- ---------- ----------
INVESTING ACTIVITIES
Net increase in loans outstanding ............................................. (664,314) (827,353) (383,839)
Purchases of investment securities held to maturity ........................... (463,313) (740,404) (817,725)
Purchases of investment securities available for sale ......................... (2,170) -- --
Proceeds from maturities of investment securities held to maturity ............ 1,233,188 1,052,463 476,114
Proceeds from sales of investment securities available for sale ............... 7,624 -- --
Net change in overnight investments ........................................... (240,668) (150,950) 74,225
Dispositions of premises and equipment ........................................ 6,447 4,056 2,051
Additions to premises and equipment ........................................... (68,869) (92,837) (69,011)
Purchase and sale of branches, net of cash transferred ........................ (104,903) 177,688 106,016
---------- ---------- ----------
Net cash used by investing activities ......................................... (296,978) (577,337) (612,169)
---------- ---------- ----------
FINANCING ACTIVITIES
Net change in time deposits ................................................... (61,568) (95,954) 299,926
Net change in demand and other interest-bearing deposits ...................... 273,173 447,070 158,150
Net change in short-term borrowings ........................................... (2,957) (28,745) 205,752
Origination of long-term obligations .......................................... -- 151,006 --
Repurchases of common stock ................................................... (706) (74,520) (2,111)
Proceeds from issuance of common stock ........................................ --
Cash dividends paid ........................................................... (10,619) (10,661) (11,384)
---------- ---------- ----------
Net cash provided by financing activities ..................................... 197,323 388,196 650,333
---------- ---------- ----------
Change in cash and due from banks ............................................. 88,650 (3,816) 69,742
Cash and due from banks at beginning of period ................................ 502,955 506,771 437,029
---------- ---------- ----------
Cash and due from banks at end of period ...................................... $ 591,605 $ 502,955 $ 506,771
========== ========== ==========
CASH PAYMENTS FOR:
Interest ...................................................................... $ 285,507 $ 294,095 $ 263,722
Income taxes .................................................................. 56,754 42,802 37,984
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized securities gains (losses) .......................................... $ (3,871) $ (1,062) $ 4,588
Change in obligation to repurchase common stock ............................... -- 624 73,692
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
First Citizens BancShares, Inc. ("BancShares") is a bank holding company
with two banking subsidiaries -- First-Citizens Bank & Trust Company,
headquartered in Raleigh, North Carolina ("FCB"), which operates branches in
North Carolina, Virginia and West Virginia; and Atlantic States Bank ("ASB"), a
federally-chartered thrift institution headquartered in Fort Myers, Florida
with branch offices in the metropolitan Atlanta, Georgia area and Southwest
Florida.
FCB and ASB offer full-service banking services designed to meet the needs
of both retail and commercial customers in the markets in which they serve. The
services offered include transaction and savings deposits, commercial and
consumer lending, a full service trust department, a full service securities
broker-dealer, insurance services and other activities incidental to commercial
banking.
FCB has eight subsidiaries. First Citizens Investor Services is a
registered broker-dealer in securities that provides investment services,
including sales of annuities and third party mutual funds. First-Citizens Bank,
A Virginia Corporation, is the issuing and processing bank for BancShares'
retail credit cards and merchant accounts. American Guaranty Insurance Company
is engaged in writing fire and casualty insurance. Triangle Life Insurance
Company writes credit life and credit accident and health insurance. Other
subsidiaries are either inactive or are not material to the consolidated
financial statements. Nontraditional banking segments within BancShares'
operations are not material to the consolidated financial statements.
The accounting and reporting policies of BancShares and its subsidiaries
are in accordance with generally accepted accounting principles and, with
regard to the banking subsidiaries, conform to general industry practices. The
preparation of consolidated 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
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates made by BancShares in the preparation of its consolidated
financial statements are the determination of the reserve for loan losses, the
valuation allowance for deferred tax assets, and fair value estimates.
Intercompany accounts and transactions have been eliminated. Certain
amounts for prior years 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.
Investment Securities
For investment securities classified as held to maturity, BancShares has
the ability and the positive intent to hold those investments until maturity.
These securities are stated at cost adjusted for amortization of premium and
accretion of discount. Accreted discounts and amortized premiums are included
in interest income on an effective yield basis. Marketable equity securities
classified as available for sale are carried at their fair value, and the
difference between the cost basis and the fair value, net of deferred income
taxes, is recorded as a component of comprehensive income within shareholders'
equity. At December 31, 1999 and 1998, BancShares had no investment securities
classified as held for trading purposes.
Overnight Investments
Overnight investments include federal funds sold and interest-bearing
demand deposit balances in other banks.
Loans
Loans that are held for investment purposes are carried at the principal
amount outstanding. Loans that are classified as available for sale are carried
at the lower of aggregate cost or fair value. Interest on substantially all
loans is accrued and credited to interest income on a constant yield basis
based upon the daily principal amount outstanding.
31
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Loan Fees
Fees collected and certain costs incurred related to loan originations are
deferred and amortized as an adjustment to interest income over the life of the
related loans. The deferred fees and costs are recorded as an adjustment to
loans outstanding using a method that approximates a constant yield.
Mortgage Servicing Rights
The estimated value of the right to service mortgage loans for others
("MSRs") is included in other assets on BancShares' consolidated balance sheet.
Capitalization of MSRs occurs when the underlying loans are sold. Capitalized
MSRs are amortized over the projected life of the serviced loans. Capitalized
MSRs are periodically reviewed for impairment.
Reserve for Loan Losses
The reserve for loan losses is established by charges to operating
expense. To determine the reserve needed, management evaluates the risk
characteristics of the loan portfolio under current economic conditions and
considers such factors as the financial condition of the borrower, fair value
of collateral and other items that, in management's opinion, deserve current
recognition in estimating credit losses.
Management considers the established reserve adequate to absorb probable
losses that relate to loans outstanding as of December 31, 1999, although
future additions to the reserve may be necessary based on changes in economic
and other conditions. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review BancShares' reserve for
loan losses. Such agencies may require the recognition of additions to the
reserve based on their judgments of information available to them at the time
of their examination.
Nonaccrual Loans, Impaired Loans and Other Real Estate
Accrual of interest on loans is discontinued when management deems that
collection of additional interest is doubtful. Loans are returned to an accrual
status when both principal and interest are current and the loan is determined
to be performing in accordance with the applicable loan terms. Management
considers a loan to be impaired when based on current information and events,
it is probable that a borrower will be unable to pay all amounts due according
to contractual terms of the loan agreement. Impaired loans are valued using
either the discounted expected cash flow method using the loan's original
effective interest rate or the collateral value. When the ultimate
collectibility of an impaired loan's principal is doubtful, all cash receipts
are applied to principal. Once the recorded principal balance has been reduced
to zero, future cash receipts are applied to interest income, to the extent
that any interest has been foregone. Additional cash receipts are recorded as
recoveries of any amounts previously charged off.
Other real estate is valued at the lower of the loan balance at the time
of foreclosure or estimated fair value net of selling costs and is included in
other assets. Once acquired, other real estate is periodically reviewed to
ensure that the fair value of the property supports the carrying value, with
writedowns recorded when necessary. Gains and losses resulting from the sale or
writedown of other real estate and income and expenses related to the operation
of other real estate are recorded in other expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. For financial reporting purposes, depreciation and
amortization are computed by the straight-line method and are charged to
operations over the estimated useful lives of the assets, which range from 25
to 40 years for premises and three to 10 years for furniture and equipment.
Leasehold improvements are amortized over the terms of the respective leases or
the useful lives of the improvements, whichever is shorter. Gains and losses on
dispositions are recorded in other expense. Maintenance and repairs are charged
to occupancy expense or equipment expense as incurred.
32
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Intangible Assets
Goodwill arising from acquisitions in which the purchase price exceeds the
fair value of net assets acquired is amortized using the straight-line method
over a 15 year period. Deposit-related intangibles are amortized using the
straight-line method over a 15 year period. Intangible assets are subject to
periodic review and are adjusted for any impairment of value.
Income Taxes
Income tax expense is based on consolidated income before income taxes and
generally differs from income taxes paid due to deferred income taxes and
benefits arising from income and expenses being recognized in different periods
for financial and income tax reporting purposes. BancShares uses the asset and
liability method to account for deferred income taxes. The objective of the
asset and liability method is to establish deferred tax assets and liabilities
for the temporary differences between the financial reporting basis and the
income tax basis of BancShares' assets and liabilities at enacted rates
expected to be in effect when such amounts are realized or settled. BancShares
and its subsidiaries file a consolidated federal income tax return. BancShares
and its subsidiaries each file separate state income tax returns.
Per Share Data
Net income per share has been computed by dividing net income by the
weighted average number of both classes of common shares outstanding during
each period. The weighted average number of shares outstanding for 1999, 1998
and 1997 was 10,625,457; 10,626,311; and 11,341,153, respectively.
During 1998, the calculation of net income per share reflected the impact
of changes in the value of BancShares' obligation to repurchase shares of its
common stock that were previously owned by a company-sponsored pension plan.
The obligation to repurchase those shares was recorded at fair value as of
December 31, 1997. Increases in the fair value of that obligation, which
totaled $624 during 1998, were deducted from net income in calculating net
income per share during 1998.
Cash dividends per share apply to both Class A and Class B common stock.
Class A common stock carries one vote per share, while shares of Class B common
stock carry 16 votes per share.
Comprehensive Income
Accumulated other comprehensive income consists entirely of unrealized
gains (losses) on investment securities available for sale.
The tax effects of the components of other comprehensive income included
in the consolidated statements of income are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ---------
<S> <C> <C> <C>
Unrealized (losses) gains arising during the period $ (781) $ (651) $1,826
Less: reclassification adjustments for gains
included in net income ............................ 623 -- --
-------- ------ ------
Total tax effect ................................... $ (1,404) $ (651) $1,826
======== ====== ======
</TABLE>
33
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE B -- INVESTMENT SECURITIES
The aggregate values of investment securities at December 31 along with
gains and losses determined on an individual security basis are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Investment securities held to maturity at December 31
1999
U. S. Government .................................... $1,350,204 $ 241 $(16,931) $1,333,514
State, county and municipal ......................... 2,812 35 (2) 2,845
Other ............................................... 305 -- -- 305
---------- ------- ---------- ----------
Total investment securities held to maturity ....... $1,353,321 $ 276 $(16,933) $1,336,664
========== ======= ========== ==========
1998
U. S. Government .................................... $2,131,807 $12,970 $ (674) $2,144,103
State, county and municipal ......................... 3,250 108 (6) 3,352
Other ............................................... 315 6 -- 321
---------- ------- ---------- ----------
Total investment securities held to maturity ....... $2,135,372 $13,084 $ (680) $2,147,776
========== ======= ========== ==========
Investment securities available for sale at December 31
1999
Marketable equity securities ........................ $ 7,751 $10,974 $ (152) $ 18,573
========== ======= ========== ==========
1998
Marketable equity securities ........................ $ 10,264 $14,741 $ (48) $ 24,957
========== ======= ========== ==========
</TABLE>
The maturities of investment securities held to maturity at December 31
are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Fair Fair
Cost Value Cost Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Within one year .............................. $1,078,053 $1,068,682 $1,337,806 $1,346,212
One through five years ....................... 265,027 257,850 793,746 797,625
Five to 10 years ............................. 426 428 372 377
Over 10 years ................................ 9,815 9,704 3,448 3,562
---------- ---------- ---------- ----------
Total investment securities held to maturity $1,353,321 $1,336,664 $2,135,372 $2,147,776
========== ========== ========== ==========
</TABLE>
During 1999, proceeds from sales of investment securities available for
sale totaled $7,624, resulting in gross realized gains of $1,706.
Investment securities having an aggregate carrying value of $1,183,749 at
December 31, 1999 and $1,025,972 at December 31, 1998, were pledged as
collateral to secure public funds on deposit, to secure certain short-term
borrowings and for other purposes as required by law.
34
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE C -- LOANS
Loans outstanding at December 31 include the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Loans secured by real estate:
Construction and land development ... $ 186,119 $ 157,603
Residential mortgage ................ 1,326,642 1,299,508
Other real estate mortgage loans .... 2,727,898 2,272,565
---------- ----------
Total loans secured by real estate ... 4,240,659 3,729,676
Commercial and industrial ............ 985,738 845,068
Consumer ............................. 1,393,227 1,516,712
Lease financing ...................... 123,908 93,680
All other loans ...................... 7,507 10,455
---------- ----------
Total loans ......................... $6,751,039 $6,195,591
========== ==========
</TABLE>
There were no foreign loans outstanding during either period, nor were
there any loans to finance highly leveraged transactions. There are no loan
concentrations exceeding ten percent of loans outstanding involving multiple
borrowers in similar activities or industries at December 31, 1999.
Substantially all loans are to customers domiciled within BancShares' principal
market areas.
At December 31, 1999 and 1998 nonperforming loans consisted of nonaccrual
loans and amounted to $10,720 and $12,489, respectively. Gross interest income
on nonperforming loans that would have been recorded had these loans been
performing was $894, $1,108, and $1,156, respectively, during 1999, 1998 and
1997. Interest income recognized on nonperforming loans was $287, $409 and $349
during the respective periods. As of December 31, 1999 and 1998, the balance of
other real estate acquired through foreclosure was $1,600 and $1,529. Loans and
premises transferred to other real estate totaled $4,500, $2,051 and $1,683
during 1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Loans held for sale at December 31 .......... $ 42,892 $ 84,299 $127,650
For the year ended December 31:
Loans sold ................................. 529,155 728,066 334,543
Net gain on sale of loans .................. 2,485 6,183 219
</TABLE>
Loans with a carrying value of $14,182 at December 31, 1999 were pledged
to secure certain short-term borrowings. No loans were pledged at December 31,
1998.
FCB services mortgage loans for itself and others. The carrying value of
loans serviced for others as of December 31, 1999, 1998 and 1997 was
$1,646,876, $1,366,416 and $970,842, respectively.
The changes in the carrying values of mortgage servicing rights for 1999,
1998 and 1997 is summarized in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year .......... $4,405 $2,527 $1,430
Amounts capitalized during year ....... 3,700 2,599 1,490
Amounts amortized during year ......... 1,273 721 393
------ ------ ------
Balance at end of year ................ $6,832 $4,405 $2,527
====== ====== ======
</TABLE>
35
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE D -- RESERVE FOR LOAN LOSSES
Activity in the reserve for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance at the beginning of year ........... $ 96,115 $ 84,360 $ 81,439
Reserves of acquired institutions .......... -- -- 481
Provision for loan losses .................. 11,672 19,879 8,726
Loans charged off .......................... (13,687) (14,067) (14,331)
Loans recovered ............................ 4,590 5,943 8,045
--------- --------- ---------
Net charge-offs ............................ (9,097) (8,124) (6,286)
--------- --------- ---------
Balance at the end of year ................. $ 98,690 $ 96,115 $ 84,360
========= ========= =========
</TABLE>
At December 31, 1999 and 1998, impaired loans totaled $5,696 and $8,069,
respectively, all of which were classified as nonaccrual. Total reserves of
$1,107 and $1,155 have been established for impaired loans outstanding as
December 31, 1999 and 1998, respectively. The average recorded investment in
impaired loans during the years ended December 31, 1999, 1998 and 1997, was
$6,229, $7,580 and $6,779, respectively. For the years ended December 31, 1999,
1998 and 1997, BancShares recognized cash basis interest income on those
impaired loans of $143, $194 and $212, respectively.
NOTE E -- PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land .......................................... $ 93,954 $ 83,637
Premises and leasehold improvements ........... 251,904 245,805
Furniture and equipment ....................... 218,094 186,226
-------- --------
Total ........................................ 563,952 515,668
Less accumulated depreciation and amortization 166,555 148,592
-------- --------
Net book value ............................... $397,397 $367,076
======== ========
</TABLE>
Premises with at book value of $922 at December 31, 1999, and $1,443 at
December 31, 1998, were pledged to secure mortgage notes payable.
BancShares leases certain premises and equipment under various lease
agreements that provide for payment of property taxes, insurance and
maintenance costs. Generally, operating leases provide for one or more renewal
options on the same basis as current rental terms. However, certain leases
require increased rentals under cost of living escalation clauses. Certain of
the leases also provide purchase options.
Future minimum rental commitments for noncancellable operating leases with
initial or remaining terms of one or more years consisted of the following at
December 31, 1999:
<TABLE>
<CAPTION>
Year Ending December 31: Amount
- ------------------------------------------- ----------
<S> <C>
2000 ............................. $11,335
2001 ............................. 8,640
2002 ............................. 6,912
2003 ............................. 5,432
2004 ............................. 4,501
Thereafter ....................... 51,134
-------
Total minimum payments .................. $87,954
=======
</TABLE>
Total rent expense for all operating leases amounted to $13,946 in 1999,
$13,687 in 1998 and $15,709 in 1997.
36
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE F -- DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Demand .......................... $1,343,353 $1,296,713
Checking With Interest .......... 1,103,298 1,151,961
Money market accounts ........... 1,495,007 1,242,672
Savings ......................... 650,671 687,192
Time ............................ 3,581,269 3,733,870
---------- ----------
Total deposits ............... $8,173,598 $8,112,408
========== ==========
</TABLE>
Total time deposits with a minimum denomination of $100 were $725,646 and
$716,740 at December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of time deposits were:
<TABLE>
<S> <C>
2000 ......................... $3,139,312
2001 ......................... 203,425
2002 ......................... 89,282
2003 ......................... 76,901
2004 ......................... 72,095
Thereafter ................... 254
----------
Total time deposits ....... $3,581,269
==========
</TABLE>
NOTE G -- SHORT-TERM BORROWINGS
Short-term borrowings at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Master notes ............................. $326,984 $326,603
Repurchase agreements .................... 125,832 95,863
Federal funds purchased .................. 53,195 84,345
Notes payable ............................ 42,443 48,667
U. S. Treasury tax and loan accounts ..... 19,847 12,662
-------- --------
Total short-term borrowings ............ $568,301 $568,140
======== ========
</TABLE>
At December 31, 1999, BancShares and its subsidiaries had unused credit
lines allowing access of up to $530,000 on an unsecured basis. These include
overnight borrowings and short-term borrowings under a credit facility that
expires December 1, 2000. Additionally, under various borrowing arrangements
with the Federal Reserve and the Federal Home Loan Bank of Atlanta, BancShares
and its subsidiaries have access, on a secured basis, to additional borrowings
as needed.
37
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE G -- SHORT-TERM BORROWINGS -- Continued
Information related to these borrowings during 1999, 1998 and 1997
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Amount Rate Amount Rate Amount Rate
----------- ---------- ----------- ---------- ----------- ----------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
Master notes
At December 31 ....................... $326,984 4.14% $326,603 3.63% $315,529 4.40%
Average during year .................. 322,154 4.16 320,480 4.60 301,558 4.63
Maximum month-end balance during year 355,795 -- 354,442 -- 332,055 --
Repurchase agreements
At December 31 ....................... 125,832 3.89 95,863 3.38 54,796 4.15
Average during year .................. 117,681 3.76 79,676 4.13 34,848 4.32
Maximum month-end balance during year 132,540 -- 106,620 -- 56,942 --
Federal funds purchased
At December 31 ....................... 53,195 4.06 84,345 4.68 45,380 5.72
Average during year .................. 60,077 4.92 62,758 5.24 28,752 5.30
Maximum month-end balance during year 88,460 -- 104,675 -- 45,420 --
U. S. Treasury tax and loan accounts
At December 31 ....................... 19,847 4.54 12,662 4.51 19,989 5.95
Average during year .................. 16,365 4.56 16,690 5.13 12,374 7.56
Maximum month-end balance during year 24,168 -- 20,824 -- 54,583 --
Other
At December 31 ....................... 42,443 5.78 48,667 5.87 158,130 4.87
Average during year .................. 40,933 5.81 59,659 6.15 92,498 5.93
Maximum month-end balance during year 43,702 -- 158,130 -- 158,764 --
</TABLE>
NOTE H -- LONG-TERM OBLIGATIONS
Long-term obligations at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Trust preferred capital securities at 8.05 percent maturing March 5, 2028 .... $150,000 $150,000
Unsecured fixed rate notes payable:
7.50 percent maturing February 23, 2000 .................................... -- 163
7.25 percent maturing February 23, 2001 .................................... 1,284 1,284
8.00 percent maturing February 23, 2005 .................................... 2,178 2,178
6.75 percent note due in annual installments maturing September 1, 2003 .... 1,006 1,006
Unsecured variable rate note at 6.51 percent payable in quarterly installments 564 2,819
Mortgage notes payable at 8.00 percent through 2004, secured by premises ..... 410 1,051
Other ........................................................................ 241 300
-------- --------
Total long-term obligations ................................................ $155,683 $158,801
======== ========
</TABLE>
The trust preferred capital securities were issued by a wholly-owned
subsidiary of BancShares, and BancShares has guaranteed the repayment of those
securities. The proceeds from the issuance of the trust preferred capital
securities were invested in BancShares and that investment became the sole
asset of the trust. BancShares then made a capital infusion into FCB. After
March 1, 2008, BancShares may redeem the trust preferred capital securities.
The trust preferred capital securities qualify as Tier 1 capital for regulatory
capital adequacy requirements for BancShares and FCB.
38
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE H -- LONG-TERM OBLIGATIONS -- Continued
Long-term obligations maturing in each of the five years subsequent to
December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 ............... $ 333
2001 ............... 2,181
2002 ............... 340
2003 ............... 345
2004 ............... 65
Thereafter ......... 152,419
--------
$155,683
========
</TABLE>
NOTE I -- COMMON STOCK
On October 25, 1999 the Board of Directors of BancShares authorized the
purchase in the open market or in private transactions up to 300,000 shares of
its outstanding Class A common stock and up to 100,000 shares of its
outstanding Class B common stock. The authorization is effective for a period
of 12 months. During 1998 and 1997, the Board of Directors of BancShares had
made similar authorizations to repurchase shares of BancShares stock.
On December 2, 1997, the Board of Directors of BancShares authorized the
purchase of 600,000 shares of BancShares Class A common stock from a related
party. The purchase price was established based on an independent valuation of
the shares. The shares were repurchased by BancShares and retired on January
27, 1998. In connection with this commitment, BancShares recorded a reduction
in shareholders' equity and an obligation of $58,077 in the consolidated
balance sheet as of December 31, 1997. The obligation was included in other
liabilities.
On December 31, 1997, BancShares adjusted its equity balances to
reclassify 126,400 shares of Class A common stock and 31,600 shares of Class B
common stock that were owned by a related defined benefit pension plan. The
plan's interests for all purposes with respect to the shares were represented
by an independent investment manager, in accordance with an agreement with the
Department of Labor. BancShares had executed an agreement to purchase any or
all of the shares held by the plan if the investment manager determines that is
in the best interests of the plan. The estimated value of those shares at
December 31, 1997 was $15,615, and an obligation for that amount was recorded
in other liabilities. During April 1998, BancShares repurchased and retired the
shares previously owned by the pension plan. The purchase price, which was
determined by an independent appraisal, was $16,239.
The following table sets forth information related to shares purchased
pursuant to authorizations for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Class A
Number of shares purchased ........ 10,075 726,400 20,301
Cash disbursed .................... $ 706 $ 71,068 $ 1,642
Class B
Number of shares purchased ........ -- 33,494 5,126
Cash disbursed .................... $ -- $ 3,452 $ 469
</TABLE>
Stock purchases are retired by a charge to common stock for the par value
of the shares retired and to retained earnings for the cost in excess of par
value.
39
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE J -- ESTIMATED FAIR VALUES
Fair value estimates are made at a specific point in time based on
relevant market information and information about each financial instrument.
Where information regarding the fair value of a financial instrument is
available, those values are used, as is the case with investment securities and
residential mortgage loans. In these cases, an open market exists in which
those financial instruments are actively traded.
Because no market exists for many financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. For these financial instruments with a fixed interest rate, an
analysis of the related cash flows was the basis for estimating fair values.
The expected cash flows were then discounted to the valuation date using an
appropriate discount rate. The discount rates used represent the rates under
which similar transactions would be currently negotiated. Generally, the fair
value of variable rate financial instruments equals the book value.
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and due from banks ................. $ 591,605 $ 591,605 $ 502,955 $ 502,955
Investment securities held to maturity .. 1,353,321 1,336,664 2,135,372 2,147,776
Investment securities available for sale 18,573 18,573 24,957 24,957
Overnight investments ................... 473,393 473,393 232,725 232,725
Loans, net of reserve for loan losses ... 6,652,349 6,890,653 6,099,476 6,162,947
Income earned not collected ............. 52,621 52,621 61,652 61,652
Deposits ................................ 8,173,598 8,181,634 8,112,408 8,133,055
Short-term borrowings ................... 568,301 568,301 568,140 568,140
Long-term obligations ................... 155,683 135,222 158,801 166,856
Accrued interest payable ................ 47,830 47,830 51,795 51,795
</TABLE>
Forward commitments to sell loans as of December 31, 1999, and 1998 had no
carrying value and unrealized losses of $268 and $1,037, respectively. For
other off-balance sheet commitments and contingencies, carrying amounts are
reasonable estimates of the fair values for such financial instruments.
Carrying amounts include unamortized fee income and, in some cases, reserves
for any projected credit loss from those financial instruments. These amounts
are not material to BancShares' financial position.
NOTE K -- EMPLOYEE BENEFIT PLANS
Employees who qualify under length of service and other requirements
participate in a noncontributory defined benefit pension plan. Under the plan,
retirement benefits are based on years of service and average earnings. The
policy is to fund the maximum amount that is deductible for federal income tax
purposes. No contributions were made during the three-year period ending
December 31, 1999. The plan's assets consist primarily of investments in FCB's
common trust funds, which include listed common stocks and fixed income
securities.
40
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE K -- EMPLOYEE BENEFIT PLANS -- Continued
The following table sets forth the plan's funded status at December 31:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Change in Benefit Obligation
Net benefit obligation at beginning of year .................. $ 145,797 $ 125,293
Service cost ................................................. 6,131 4,940
Interest cost ................................................ 10,075 9,334
Actuarial (gain) loss ........................................ (15,811) 11,502
Gross benefits paid .......................................... (6,190) (5,272)
--------- ---------
Net benefit obligation at end of year ......................... $ 140,002 $ 145,797
========= =========
Change in Plan Assets
Fair value of plan assets at beginning of year ............... $ 177,601 $ 159,197
Actual return on plan assets ................................. 12,171 23,676
Gross benefits paid .......................................... (6,190) (5,272)
--------- ---------
Fair value of plan assets at end of year ..................... $ 183,582 $ 177,601
========= =========
Funded status at end of year ................................. $ 43,580 $ 31,804
Unrecognized net actuarial gain .............................. (49,833) (32,563)
Unrecognized prior service cost .............................. 891 1,044
Unrecognized net transition asset ............................ (3,620) (4,848)
--------- ---------
Net amount recognized in other liabilities at end of year ..... $ (8,982) $ (4,563)
========= =========
</TABLE>
The net periodic pension cost for the years ended December 31 included the
following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost ............................ $ 6,131 $ 4,940 $ 3,975
Interest cost ........................... 10,075 9,334 8,131
Expected return on assets ............... (10,712) (9,807) (9,209)
Amortization of:
Transition asset ....................... (1,228) (1,228) (1,228)
Prior service cost ..................... 154 154 154
--------- -------- --------
Total net periodic benefit cost ......... $ 4,420 $ 3,393 $ 1,823
========= ======== ========
</TABLE>
Prior service cost is being amortized on a straight-line basis over the
estimated average remaining service period of employees. In determining the
projected benefit obligation at December 31, 1999, 1998 and 1997, the following
assumptions were used:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average discount rate .............. 7.50% 6.75% 7.25%
Rate of future compensation increases ....... 4.75 4.50 4.50
Long-term rate of return on plan assets ..... 8.50 8.25 8.25
</TABLE>
Employees are also eligible to participate in a 401(k) plan after 31 days
of service. The 401(k) plan allows associates to defer portions of their
salary. Based on the employee's contribution, BancShares will match up to 75%
of the employee contribution. During 1999 BancShares made participating
contributions to this plan of $4,654 compared to $4,134 in 1998 and $3,758
during 1997.
41
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE L -- OTHER NONINTEREST EXPENSE
Other noninterest expense for the years ended December 31 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Credit card expense ....................... $ 14,712 $ 12,658 $11,722
Amortization of intangibles ............... 10,963 10,652 8,641
Telecommunications expense ................ 10,052 9,046 8,032
Advertising expense ....................... 7,313 5,836 6,522
Postage expense ........................... 7,096 6,826 6,623
Consultant expense ........................ 5,840 7,134 5,626
Other ..................................... 60,963 55,950 47,670
-------- -------- -------
Total other noninterest expense .......... $116,939 $108,102 $94,836
======== ======== =======
</TABLE>
NOTE M -- INCOME TAXES
At December 31, income tax expense consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current tax expense
Federal ....................................... $ 48,261 $ 44,442 $37,937
State ......................................... 3,813 1,561 80
-------- -------- -------
Total current tax expense .................... 52,074 46,003 38,017
-------- -------- -------
Deferred tax expense (benefit)
Federal ....................................... (2,754) (5,252) 1,179
State ......................................... (724) (1,019) 296
-------- -------- -------
Total deferred tax expense (benefit) ......... (3,478) (6,271) 1,475
-------- -------- -------
Total tax expense ............................ $ 48,596 $ 39,732 $39,492
======== ======== =======
</TABLE>
Income tax expense differed from the amounts computed by applying the
federal income tax rate of 35 percent in each period to pretax income as a
result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income at statutory rates ............................................................. $ 45,639 $ 38,759 $ 38,518
Increase (reduction) in income taxes resulting from:
Amortization of goodwill ............................................................ 2,096 2,082 2,099
Nontaxable income on loans and investments, net of nondeductible expenses ........... (1,276) (1,346) (1,295)
State and local income taxes, including change in valuation allowance, net of federal
income tax benefit ................................................................. 2,008 352 244
Other, net .......................................................................... 129 (115) (74)
-------- -------- --------
Total tax expense .................................................................. $ 48,596 $ 39,732 $ 39,492
======== ======== ========
</TABLE>
42
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE M -- INCOME TAXES -- Continued
The net deferred tax asset included the following components at December
31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Reserve for loan losses .................................. $38,757 $38,015
Deferred compensation .................................... 5,333 5,307
Net periodic pension accrual ............................. 3,550 1,812
Other .................................................... 2,973 3,131
------- -------
Gross deferred tax asset ................................ 50,613 48,265
Less valuation allowance ................................. 2,606 2,628
------- -------
Deferred tax asset ...................................... 48,007 45,637
------- -------
Accelerated depreciation ................................. 5,200 3,440
Lease financing activities ............................... 5,777 4,913
Unrealized gain on marketable equity securities .......... 4,242 5,959
Net deferred loan fees and costs ......................... 2,295 2,342
Other .................................................... 1,500 3,461
------- -------
Deferred tax liability .................................. 19,014 20,115
------- -------
Net deferred tax asset .................................. $28,993 $25,522
======= =======
</TABLE>
BancShares has historically incurred immaterial amounts of state income
tax expense. The valuation allowance of $2,606 and $2,628 at December 31, 1999
and 1998, respectively, is the amount necessary to reduce BancShares' gross
state deferred tax asset to the amount which is more likely than not to be
realized.
NOTE N -- RELATED PARTY TRANSACTIONS
BancShares, FCB and ASB have had, and expect to have in the future,
banking transactions in the ordinary course of business with several directors,
officers and their associates ("Related Parties"), on substantially the same
terms, including interest rates and collateral , as those prevailing at the
time for comparable transactions with others. Those transactions neither
involve more than the normal risk of collectibility nor present any unfavorable
features.
An analysis of changes in the aggregate amounts of loans to Related
Parties for the year ended December 31, 1999 is as follows:
<TABLE>
<S> <C>
Balance at beginning of year ......... $24,130
New loans ............................ 13,522
Repayments ........................... 8,847
-------
Balance at end of year ............... $28,805
=======
</TABLE>
BancShares provides certain processing and operational services to other
financial institutions. Certain of these institutions are deemed to be Related
Parties since significant shareholders of BancShares are also deemed to be
significant shareholders of the other banks. During 1999, 1998 and 1997,
BancShares received $12,723, $12,012 and $10,558, respectively, for services
rendered to these Related Parties, substantially all of which is included in
fees from processing services and relates to data processing services.
During 1999 and 1998, BancShares sold several of its branch offices to
Related Parties. Income from sale of branches includes gains of $4,432 and
$3,067 earned on the sale of these branches. No such gains were recognized
during 1997.
Investment securities available for sale includes investments in certain
Related Parties. For 1999, these investments had a carrying value of $10,624
and a cost of $680. For 1998, these investments had a carrying value of $13,709
and a cost of $680.
43
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE O -- ACQUISITIONS AND DIVESTITURES
BancShares and its subsidiaries have consummated numerous acquisitions in
recent years. All of the acquisitions have been accounted for as purchases,
with the results of operations not included in BancShares' Consolidated
Statements of Income until after the transaction date. The pro forma impact of
the acquisitions as though they had been made at the beginning of the periods
presented is not material to BancShares' consolidated financial statements.
As of December 31, 1999 and 1998, BancShares had goodwill of $55,774 and
$61,946 respectively. Deposit intangibles totaled $56,208 and $59,784,
respectively.
The following table provides information regarding the acquisitions and
divestitures that have been consummated during the three-year period ended
December 31, 1999:
<TABLE>
<CAPTION>
Date Institution and Location Assets Deposits Intangible
- ---------------- ------------------------------------------------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
March 1999 Purchase of five offices of Colonial Bank $ 1,342 $ 27,506 $ 981
Southwest Florida
1999 Various branch sales(1) (41,523) (123,048) (1,004)
February 1998 Purchase of fifteen Signet Bank branches 262,020 296,852 32,577
Virginia
1998 Various other branch purchases 23,472 23,556 2,320
1998 Various branch sales(1) (132,138) (138,390) (6,276)
September 1997 Purchase of First Savings Financial Corp. 45,431 36,025 1,826
Reidsville, North Carolina
May 1997 Purchase of four Wachovia Bank branches 80,613 86,460 7,250
Western North Carolina
April 1997 Purchase of three First Union National Bank branches 42,171 45,179 3,010
Western North Carolina
</TABLE>
- ---------
(1) For 1999 and 1998, certain branch sales were made to Related Parties. See
Note N.
NOTE P -- REGULATORY REQUIREMENTS
BancShares and its banking subsidiaries are subject to certain
requirements imposed by state and federal banking statutes and regulations.
These regulations require the maintenance of noninterest-bearing reserve
balances at the Federal Reserve Bank. Banks are allowed to reduce the required
balances by the amount of its vault cash. For 1999, the average requirement for
FCB was $155,829. This amount was fully satisfied by vault cash balances.
Various regulatory agencies have implemented guidelines that evaluate
capital based on risk adjusted assets. An additional capital computation
evaluates tangible capital based on tangible assets. Minimum capital
requirements set forth by the regulators require a Tier 1 capital ratio of no
less than 4 percent of risk adjusted assets, a total capital ratio of no less
than 8 percent of risk adjusted assets, and a leverage capital ratio of no less
than 4 percent of tangible assets. To meet the FDIC's well capitalized
standards, the Tier 1 and total capital ratios must be at least 6 percent and
10 percent, respectively. Failure to meet minimum capital requirements may
result in certain actions by regulators that could have a direct material
effect on the consolidated financial statements.
Based on the most recent notification from its regulators, FCB is well
capitalized under the regulatory framework for prompt corrective action.
Management believes that as of December 31, 1999, BancShares, FCB and ASB met
all capital adequacy requirements to which they are subject and was not aware
of any conditions or events that would affect its well capitalized status.
44
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE P -- REGULATORY REQUIREMENTS -- Continued
Following is an analysis of FCB capital ratios as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Minimum Ratio
to Maintain Well-
FCB Capitalized Status
----------------------------- ---------------------
1999 1998 1999 1998
-------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Risk-based capital:
Tier 1 capital ............................ $ 733,212 $ 679,983
Total capital ............................. 813,424 764,492
Risk-adjusted assets ...................... 7,265,921 6,691,729
Quarterly average tangible assets ......... 9,046,638 8,827,652
Tier 1 capital ratio ...................... 10.09% 10.16% 6.00% 6.00%
Total capital ratio ....................... 11.20 11.42 10.00 10.00
Leverage capital ratio .................... 8.10 7.70 5.00 5.00
</TABLE>
The Board of Directors of FCB may declare a dividend of a portion of its
undivided profits as it may deem appropriate, subject to the requirements of
the FDIC and the General Statutes of North Carolina, without prior regulatory
approval. As of December 31, 1999, this amount was $489,444. Dividends declared
by FCB amounted to $48,485 in 1999, $68,606 in 1998 and $24,727 in 1997.
NOTE Q -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, BancShares and its subsidiaries have
financial instruments with off-balance sheet risk in order to meet the
financing needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments include commitments to extend
credit, standby letters of credit and forward commitments to sell loans. These
instruments involve, to varying degrees, elements of credit, interest rate or
liquidity risk.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
Established credit standards control the credit-risk exposure associated with
these commitments. In some cases, BancShares requires that collateral be
pledged to secure the commitment. At December 31, 1999 and 1998, BancShares had
unused commitments totaling $2,820,530 and $2,282,490 respectively.
Standby letters of credit are commitments guaranteeing performance of a
customer to a third party. Those guarantees are issued primarily to support
public and private borrowing arrangements. In order to minimize its exposure,
BancShares' credit policies also govern the issuance of standby letters of
credit. At December 31, 1999 and 1998, BancShares had standby letters of credit
amounting to $27,129 and $15,327, respectively.
Management has elected to enter into forward commitments to sell loans as
a hedge against fluctuations in market rates for the commitments to originate
residential mortgage loans. These forward commitments, which totaled $23,000
and $160,000 at December 31, 1999 and 1998, respectively, were at fixed prices
and were scheduled to settle within 60 days of that date. At December 31, 1999
and 1998, these forward commitments had no carrying value and unrealized losses
of $268 and $1,037 respectively. These amounts are included with the carrying
value of loans held for sale and commitments to originate mortgage loans when
determining whether a valuation allowance is required to reduce the loans and
commitments to originate mortgage loans to the lower of cost or market.
BancShares and various subsidiaries have been named as defendants in
various legal actions arising from their normal business activities in which
damages in various amounts are claimed. Although the amount of any ultimate
liability with respect to such matters cannot be determined, in the opinion of
management, any such liability will not have a material effect on BancShares'
consolidated financial statements.
45
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE R -- FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY)
First Citizens BancShares, Inc.'s principal assets are its investments in
and receivables from its subsidiaries. Its sources of income are dividends and
interest income on funds borrowed by the Bank. The Parent Company's condensed
balance sheets as of December 31, 1999 and 1998, and the related condensed
statements of income and cash flows for the years ended December 31, 1999, 1998
and 1997 are as follows:
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
---------------------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash ................................................ $ 2,906 $ 2,550
Investment securities held to maturity .............. 50,000 211,967
Investment securities available for sale ............ 15,751 24,080
Investment in bank subsidiaries ..................... 846,529 785,384
Due from subsidiaries ............................... 275,841 124,033
Other assets ........................................ 56,362 64,087
---------- ----------
Total assets ....................................... $1,247,389 $1,212,101
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings ............................... $ 356,984 $ 372,603
Long-term obligations ............................... 154,640 154,640
Other liabilities ................................... 7,008 24,109
Common stock:
Class A ............................................ 8,890 8,906
Class B ............................................ 1,720 1,720
Surplus ............................................. 143,766 143,760
Retained earnings ................................... 567,801 497,316
Accumulated other comprehensive income .............. 6,580 9,047
---------- ----------
Total liabilities and shareholders' equity ......... $1,247,389 $1,212,101
========== ==========
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Interest income .......................................................... $ 17,137 $ 18,015 $15,276
Interest expense ......................................................... 28,035 27,521 14,484
--------- -------- -------
Net interest income (loss) ............................................... (10,898) (9,506) 792
Dividends from subsidiaries .............................................. 48,485 68,606 32,814
Other income ............................................................. 1,814 95 437
Other operating expense .................................................. 7,346 7,288 6,531
--------- -------- -------
Income before income tax benefit and equity in undistributed net income of
subsidiaries ............................................................. 32,055 51,907 27,512
Income tax benefit ....................................................... (3,600) (3,774) (37)
--------- -------- -------
Income before equity in undistributed income of subsidiaries ............. 35,655 55,681 27,549
Equity in undistributed net income of subsidiaries ....................... 46,145 15,328 43,009
--------- -------- -------
Net income .............................................................. $ 81,800 $ 71,009 $70,558
========= ======== =======
</TABLE>
46
<PAGE>
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE R -- FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY) -- Continued
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................... $ 81,800 $ 71,009 $ 70,558
Adjustments ..............................................................
Undistributed net income of subsidiaries ............................... (46,145) (15,328) (43,009)
Net amortization of premiums and discounts ............................. 1,742 2,159 585
Securities gains ....................................................... (1,706) -- --
Change in other assets ................................................. 7,895 4,005 (9,284)
Change in other liabilities ............................................ (17,102) 14,447 751
---------- ---------- ----------
Net cash provided by operating activities ................................ 26,484 76,292 19,601
---------- ---------- ----------
INVESTING ACTIVITIES
Net change in due from subsidiaries .................................... (151,808) (12,925) 202,407
Purchase of investment securities held to maturity ..................... (40,000) (10,000) (204,126)
Maturities of investment securities held to maturity ................... 200,000 -- --
Proceeds from sales of investment securities available for sale ........ 7,624 -- --
Investment in subsidiaries ............................................. (15,000) (154,640) (51,200)
---------- ---------- ----------
Net cash provided (used) by investing activities ......................... 816 (177,565) (52,919)
---------- ---------- ----------
FINANCING ACTIVITIES
Net change in short-term borrowings .................................... (15,619) 27,074 50,101
Originations of long-term obligations .................................. -- 154,640 --
Repurchase of common stock ............................................. (706) (74,520) (2,111)
Cash dividends paid .................................................... (10,619) (10,661) (11,384)
---------- ---------- ----------
Net cash (used) provided by financing activities ......................... (26,944) 96,533 36,606
---------- ---------- ----------
Net change in cash ....................................................... 356 (4,740) 3,288
Cash balance at beginning of year ........................................ 2,550 7,290 4,002
---------- ---------- ----------
Cash balance at end of year .............................................. $ 2,906 $ 2,550 $ 7,290
---------- ---------- ----------
Cash payments for
Interest ............................................................... $ 29,159 $ 22,768 $ 14,484
Income taxes ........................................................... 56,754 42,802 37,984
---------- ---------- ----------
Supplemental disclosure of noncash investing and financing activities:
Unrealized (loss) gain on marketable equity securities ................. (3,871) (1,062) 4,588
Change in obligation to repurchase common stock ........................ -- 624 73,692
</TABLE>
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 10, 2000 FIRST CITIZENS BANCSHARES, INC. (Registrant)
/S/ JAMES B. HYLER, JR.
-----------------------------------------
James B. Hyler, Jr.
Vice Chairman and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant and in the capacities indicated on March 10, 2000.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------------------- --------------------------------------- ---------------
<S> <C> <C>
/s/ LEWIS R. HOLDING Chairman and Chief Executive Officer March 10, 2000
---------------------------------- (principal executive officer)
Lewis R. Holding
/s/FRANK B. HOLDING Executive Vice Chairman March 10, 2000
----------------------------------
Frank B. Holding
/s/ JAMES B. HYLER, JR. Vice Chairman March 10, 2000
----------------------------------
James B. Hyler, Jr.
/s/ FRANK B. HOLDING, JR. President March 10, 2000
----------------------------------
Frank B. Holding, Jr.
/s/ KENNETH A. BLACK Vice President, Treasurer, and Chief March 10, 2000
---------------------------------- Financial Officer (principal financial
Kenneth A. Black and accounting officer)
/s/ JOHN M. ALEXANDER, JR. Director March 10, 2000
----------------------------------
John M. Alexander, Jr.
/s/ TED L. BISSETT Director March 10, 2000
----------------------------------
Ted L. Bissett
/s/ B. IRVIN BOYLE Director March 10, 2000
----------------------------------
B. Irvin Boyle
/s/ GEORGE H. BROADRICK Director March 10, 2000
----------------------------------
George H. Broadrick
/s/ BETTY M. FARNSWORTH Director March 10, 2000
----------------------------------
Betty M. Farnsworth
/s/ LEWIS M. FETTERMAN Director March 10, 2000
----------------------------------
Lewis M. Fetterman
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------------------- ---------- ---------------
<S> <C> <C>
/s/ CARMEN P. HOLDING Director March 10, 2000
----------------------------------
Carmen P. Holding
/s/ CHARLES B.C. HOLT Director March 10, 2000
----------------------------------
Charles B.C. Holt
Director March 10, 2000
----------------------------------
Edwin A. Hubbard
/s/ GALE D. JOHNSON Director March 10, 2000
----------------------------------
Gale D. Johnson
/s/ FREEMAN R. JONES Director March 10, 2000
----------------------------------
Freeman R. Jones
/s/ LUCIUS S. JONES Director March 10, 2000
----------------------------------
Lucius S. Jones
/s/ JOSEPH T. MALONEY, JR. Director March 10, 2000
----------------------------------
Joseph T. Maloney, Jr.
/s/ J. CLAUDE MAYO, JR. Director March 10, 2000
----------------------------------
J. Claude Mayo, Jr.
/s/ WILLIAM MCKAY Director March 10, 2000
----------------------------------
William McKay
/s/ BRENT D. NASH Director March 10, 2000
----------------------------------
Brent D. Nash
/s/ LEWIS T. NUNNELEE, II Director March 10, 2000
----------------------------------
Lewis T. Nunnelee, II
/s/ TALBERT O. SHAW Director March 10, 2000
----------------------------------
Talbert O. Shaw
/s/ R. C. SOLES, JR. Director March 10, 2000
----------------------------------
R. C. Soles, Jr.
/s/ DAVID L. WARD, JR. Director March 10, 2000
----------------------------------
David L. Ward, Jr.
</TABLE>
49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Exhibit Page Number
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated herein by reference to Exhibit 3.1 of the 1992
Annual Report to the SEC on Form 10-K) -
3.2 Bylaws of the Registrant, as amended (incorporated herein by reference
to Exhibit 3.2 of the September 30, 1997 Report to the SEC on Form 10-Q) -
4.1 Specimen of Registrant's Class A Common Stock certificate (incorporated
herein by reference to Exhibit 4.1 of the 1993 Annual Report to the SEC
on Form 10-K) -
4.2 Specimen of Registrant's Class B Common Stock certificate (incorporated
herein by reference to Exhibit 4.2 of the 1993 Annual Report to the SEC
on Form 10-K) -
10.1 Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement, dated January 1, 1986 (incorporated herein by
reference to Exhibit 10.1 of the 1987 Annual Report to the SEC on Form
10-K), as amended by the Fourth Amendment of Employee Death Benefit
and Post-Retirement Non-Competition and Consultation Agreement, dated
October 26, 1998, between Registrant's subsidiary, First-Citizens Bank &
Trust Company, and Lewis R. Holding (incorporated herein by reference
to Exhibit 10.1 of the 1998 Annual Report to the SEC on Form 10-K) -
10.2 Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement, dated January 1, 1986 (incorporated herein
by reference to Exhibit 10.2 of the 1987 Annual Report to the SEC
on Form 10-K), as amended by the Fourth Amendment of Employee
Death Benefit and Post-Retirement Non-Competition and Consultation
Agreement, dated October 26, 1998, between Registrant's subsidiary,
First-Citizens Bank & Trust Company, and Frank B. Holding (incorporated
herein by reference to Exhibit 10.2 of the 1998 Annual Report to the
SEC on Form 10-K) -
10.3 Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement, dated January 1, 1986 (incorporated herein by
reference to Exhibit 10.3 of the 1988 Annual Report to the SEC on Form
10-K), as amended by the Fourth Amendment of Employee Death Benefit
and Post-Retirement Non-Competition and Consultation Agreement, dated
October 26, 1998, between Registrant's subsidiary, First-Citizens Bank &
Trust Company, and James B. Hyler, Jr. (incorporated herein by reference
to Exhibit 10.3 of the 1998 Annual Report to the SEC on Form 10-K) -
10.4 Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement, dated January 23, 1995 (incorporated herein by
by reference to Exhibit 10.4 of the 1994 Annual Report to the SEC on Form
10-K), as amended by the First Amendment of Employee Death Benefit
and Post-Retirement Non-Competition and Consultation Agreement, dated
October 26, 1998, between Registrant's subsidiary, First-Citizens Bank &
Trust Company, and Frank B. Holding, Jr. (incorporated herein by reference
to Exhibit 10.4 of the 1998 Annual Report to the SEC on Form 10-K) -
50
<PAGE>
<CAPTION>
EXHIBIT INDEX (CONTINUED)
Exhibit Sequential
Number Description of Exhibit Page Number
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.5 Employee Death Benefit and Post-Retirement Non-Competition and
Consultation Agreement, dated January 22, 1996, as amended by the
First Amendment of Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement, dated October 26, 1998,
between Registrant's subsidiary, First-Citizens Bank & Trust
Company, and Joseph A. Cooper, Jr. (filed herewith) 53
10.6 Second Death Benefit and Post-Retirement Noncompetition and
Consultation Agreement dated April 28, 1997, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and George H.
Broadrick (incorporated herein by reference to Exhibit 10.6 of the 1997
Annual Report to the SEC on Form 10-K) -
10.7 Consulting Agreement dated February 17, 1988, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and George H.
Broadrick (incorporated herein by reference to Exhibit 10.7 of the
1987 Annual Report to the SEC on Form 10-K) -
10.9 Retirement Payment Agreement dated May 1, 1985, between First Federal
Savings and Loan Association, Hendersonville, North Carolina ("Frist
Federal") and William McKay, which agreement was ratified by Registrant
upon its acquisition of First Federal (incorporated herein by reference
to Exhibit 10.9 of the 1991 Annual Report to the SEC on Form 10-K) -
10.10 Retirement Payment Agreement dated August 1, 1987, between First
Federal and William McKay, which agreement was ratified by Registrant
upon its acquisition of First Federal (incorporated herein by reference to
Exhibit 10.10 of the 1991 Annual Report to the SEC on Form 10-K) -
10.11 Employment Agreement dated August 4, 1995, between Registrant's
subsidiary, First-Citizens Bank & Trust Company, and Brent D. Nash
(incorporated herein by reference to Exhibit 10.10 of the 1994
Annual Report to the SEC on Form 10-K) -
10.12 Retirement Payment Agreement dated August 8, 1991, between Edgecombe
Homestead Savings Bank, Inc., SSB ("Edgecombe"), and Brent D. Nash, which
agreement was ratified by Registrant upon its acquisition of Edgecombe
(incorporated herein by reference to Exhibit 10.10 of the 1994 Annual
Report to the SEC on Form 10-K) -
10.13 Article IV Section 4.1.d of the Agreement and Plan of Reorganization and
Merger by and among First Investors Savings Bank, Inc., SSB, First-Citizens
Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1994,
located at page II-38 of Registrant's S-4 Registration Statement filed with
the SEC on December 19, 1994 (Registration No. 33-84514) -
51
<PAGE>
<CAPTION>
EXHIBIT INDEX (CONTINUED)
Exhibit Sequential
Number Description of Exhibit Page Number
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.14 Article IV Section 4.1.e of the Agreement and Plan of
Reorganization nd Merger by and among State Bank and
First-Citizens Bank & Trust Company and First Citizens BancShares,
Inc., dated October 25, 1994, located at page I-36 of Registrant's
S-4 Registration Statement filed with the SEC on November 16, 1994
(Registration No. 33-86286) -
10.15 Article V Section 5.4.a of the Agreement and Plan of Reorganization
and Merger By and Between Allied Bank Capital, Inc. and First Citizens
BancShares, Inc., dated August 7, 1995, located at page I-47 of
Registrant's S-4 Registration Statement filed with the SEC on September
28, 1995 (Registration No. 33-63009) -
10.16 Amended and Restated Agreement of FCB/NC Capital Trust I
(incorporated herein by reference to Exhibit 4.1 of Registrant's
Registration Statement No. 333-59039 filed with the SEC on July 14, 1998) -
10.17 Form of Guarantee Agreement (incorporated herein by reference to
Exhibit 4.2 of Registrant's Registration Statement No. 333-59039
filed with the SEC on July 14, 1998) -
10.18 Junior Subordinated Indenture between Registrant and Bankers
Trust Company, as Debenture Trustee (incorporated herein by
reference to Exhibit 4.3 of Registrant's Registration Statement
No. 333-59039 filed with the SEC on July 14, 1998) -
13 Registrant's 1998 Annual Report for the year ended December 31, 1998
(filed herewith)
22 Subsidiaries of the Registrant (filed herewith) 67
27 Financial Data Schedule (filed herewith) 68
99 Registrant's definitive Proxy Statement dated March 17, 2000
(filed pursuant to Rule 14a-6(c)) -
</TABLE>
52
EMPLOYEE DEATH BENEFIT AND POST-RETIREMENT NONCOMPETITION
AND CONSULTATION AGREEMENT
THIS AGREEMENT, made and entered into and effective as of the 22nd
day of January, 1996, by and between FIRST-CITIZENS BANK & TRUST COMPANY, a
North Carolina banking corporation with its principal office in Raleigh, Wake
County, North Carolina (hereinafter referred to as "Employer"); and JOSEPH A.
COOPER, JR., an employee of Employer, who is currently serving as a Group Vice
President (hereinafter referred to as "Employee");
W I T N E S S E T H:
WHEREAS, Employee has provided guidance, leadership and
direction in the growth, management and development of Employer, during which
time Employee has learned trade secrets, confidential procedures and
information, and technical and sensitive plans of Employer; and,
WHEREAS, Employer values the efforts, abilities and accomplishments
of Employee as an important member of management and desires to continue to have
Employee's experience and knowledge available to it following Employee's
retirement from employment with Employer; and,
WHEREAS, Employer desires to limit Employee's availability to other
employers or entities which are in competition with Employer following
Employee's retirement from employment with Employer; and,
WHEREAS, Employer, as part of a plan adopted for a class of
employees of Employer, has offered to Employee a noncompetition arrangement
together with a limited, when-called, independent contractor consultation
service arrangement and a death benefit arrangement for Employee's designated
beneficiary or Estate, as applicable, and the parties hereto have reached an
agreement concerning the independent contractor consulting relationship, the
noncompetition arrangement, the death benefit arrangement and other
53
<PAGE>
matters contained herein and desire to set forth the terms and conditions
thereof.
NOW, THEREFORE, for and in consideration of the mutual promises and
undertakings herein set forth, the parties hereto do agree as follows:
1. RETIREMENT DATE. The term "Retirement Date," as used herein,
shall be defined for purposes of this Agreement as the last day of the calendar
month in which Employee attains the age of sixty-five (65) or as such date prior
or subsequent thereto as shall be agreed upon between Employer and Employee.
Employer and Employee hereby acknowledge that compulsory
retirement is not enforceable except as provided by law. Employer and Employee
further agree that no provision herein shall be construed as requiring
Employee's retirement except as may now or hereafter be permitted by law;
however, Employee acknowledges Employer's continuing policy, in an effort to
provide opportunities and continuity, to encourage retirement at age sixty-five
(65) and to require retirement at age sixty-five (65) where permissible by law.
2. DEATH BENEFITS. In the event Employee dies while employed by
Employer prior to Employee's Retirement Date, Employer will pay the sum of
Fifty-Seven Thousand Three Hundred Forty-Eight and 72/100 Dollars ($57,348.72)
per year, payable in monthly installments of Four Thousand Seven Hundred
Seventy-Nine and 06/100 Dollars ($4,779.06), for a period of ten (10) years, to
such individual or individuals as Employee shall have designated in writing
filed with Employer or, in the absence of such designation, to the Estate of
Employee. The first payment shall be made not later than two (2) months
following Employee's death. Payments hereunder shall be payable each month
without deductions and the recipient shall be solely responsible for the payment
of all income and other taxes and assessments applicable on said payments.
54
<PAGE>
3. CONSULTATION PAYMENTS. In the event Employee retires from
employment on Employee's Retirement Date, Employee shall be paid by Employer the
sum of One Thousand One Hundred Ninety-Four and 76/100 Dollars ($1,194.76) per
month, beginning not later than two (2) months after Employee's Retirement Date,
for a period of ten (10) years following Employee's Retirement Date or until
death, whichever first occurs. Such monthly payments shall be paid for and in
consideration of Employee's Consultation Services, as provided herein; such sum
to be payable to Employee whether or not Employee's Consultation Services have
been utilized by Employer. Consultation Payments hereunder shall be payable each
month without deductions and Employee agrees to be solely responsible for the
payment of all income and other taxes out of said funds and all Social Security,
self-employment and any other taxes or assessments, if any, applicable on said
compensation.
For and in consideration of said monthly Consultation Payments
to Employee, Employee will provide support, sponsorship, advisory and
Consultation Services as an independent contractor to Employer, as and when
Employer may request, which services may be provided with respect to all phases
of Employer's business and particularly those phases in which Employee has
particular expertise and knowledge. Employee's services shall be limited to
those of an independent consultant, shall not be on a day-to-day regularly
scheduled operational basis and shall be provided only when Employee is
reasonably available and willing. Employer shall make available to Employee such
office space and equipment as are reasonably necessary for Employee to carry out
the obligations under this Agreement and shall reimburse Employee for any
extraordinary expenses incurred in carrying out the obligations hereunder.
Effective as of Employee's Retirement Date, Employee and
Employer agree that Employee shall be, under the terms of this
55
<PAGE>
Agreement, an independent contractor, and Employee agrees that his rights and
privileges and his obligations are as provided in this Agreement as to matters
covered herein.
If Employee should die during said ten (10) year period,
payments under this Paragraph shall terminate. Future payments, if any, to
Employee's designated beneficiary or Employee's Estate shall be made in
accordance with the provisions of Paragraph 5 of this Agreement.
4. NONCOMPETITION PAYMENTS. In the event Employee retires from
employment on Employee's Retirement Date, Employee shall be paid by Employer the
sum of Three Thousand Five Hundred Eighty-Four and 30/100 Dollars ($3,584.30)
per month, beginning not later than two (2) months after Employee's Retirement
Date, for a period of ten (10) years following Employee's Retirement Date or
until death, whichever first occurs. Such monthly payments shall be paid for and
in consideration of Employee's Covenant Not To Compete as provided herein.
Noncompetition Payments hereunder shall be payable each month without deductions
and Employee agrees to be solely responsible for the payment of all income or
other taxes or assessments, if any, applicable on said payments.
For and in consideration of said monthly Noncompetition
Payments to Employee, Employee agrees that he will not become an officer or
employee of, provide any consultation to nor participate in any manner with any
other entity of any type or description involved in any major element of
business which Employer is performing at Employee's Retirement Date nor will
Employee perform or seek to perform any consultation or other type of work or
service with any other firm, person or entity, directly or indirectly, in any
such business which competes with Employer, whether done directly or indirectly,
in ownership, consultation, employment or otherwise. Employee agrees not to
reveal to outside sources, without the consent of Employer, any matters, the
56
<PAGE>
revealing of which could, in any manner, adversely affect or disclose Employer's
business or any part thereof, unless required by law to do so. This Covenant Not
To Compete by Employee is limited to the geographic area of North Carolina,
shall exist for and during the term of all payments to be made under this
Covenant Not To Compete, whether made directly by Employer or as otherwise
provided herein, and shall not prevent Employee from purchasing or acquiring, as
an investor only, a financial interest of less than five percent (5%) in a
business or other entity which is in competition with Employer.
Employee acknowledges that the remedy at law for breach of
Employee's Covenant Not To Compete will be inadequate and that Employer shall be
entitled to injunctive relief as to any violation thereof; however, nothing
herein shall be construed as prohibiting Employer from pursuing any other
remedies available to it, in addition to injunctive relief, whether at law or in
equity, including the recovery of damages. In the event Employee shall breach
any condition of Employee's Covenant Not To Compete, then Employee's right to
any of the payments becoming due under Paragraphs 3 and 4 of this Agreement
after the date of such breach shall be forever forfeited and the right of
Employee's designated beneficiary or Employee's Estate to any payments under
this Agreement shall likewise be forever forfeited. This forfeiture is in
addition to and not in lieu of any of the above-described remedies of Employer
and shall be in addition to any injunctive or other relief as described herein.
Employee further acknowledges that any breach of Employee's Covenant Not To
Compete shall be deemed a material breach of this Agreement.
If Employee should die during said ten (10) year period,
payments under this Paragraph shall terminate. Future payments, if any, to
Employee's designated beneficiary or
57
<PAGE>
Employee's Estate shall be made in accordance with the provisions of Paragraph 5
of this Agreement.
5. CONTINUATION OF PAYMENTS. Upon Employee's death during said ten
(10) year period of payments hereunder, the sum of Four Thousand Seven Hundred
Seventy-Nine and 06/100 Dollars ($4,779.06) per month shall be paid to
Employee's designated beneficiary or Employee's Estate, as applicable, beginning
the first calendar month following the date of Employee's death and continuing
thereafter until the expiration of said ten (10) year period. Once the
Consultation and/or Noncompetition Payments are begun, whether paid by Employer
or as otherwise provided herein, the maximum payment period under this Agreement
is ten (10) years. Payments hereunder shall be payable each month without
deductions and the recipient shall be solely responsible for all income and
other taxes and assessments applicable on said payments.
6. FORFEITURE OF BENEFITS. This Agreement is subject to termination
by Employer at any time and without stated cause. ln the event Employer shall
terminate this Agreement, Employee shall forfeit all rights to receive any
payment provided for herein. Likewise, in the event Employee does not retire
from employment on Employee's Retirement Date or Employee's employment is
terminated, either voluntarily or involuntarily, for reasons other than death or
retirement, Employee shall forfeit all rights to receive any payment provided
for herein. Employee acknowledges and agrees that any benefit provided for
herein is merely a contractual benefit and that nothing contained herein shall
be construed as conferring upon Employee any vested benefits or any vested
rights to receive any payment provided for herein and that any and all payments
provided for herein shall be subject to a substantial risk of forfeiture until
such time as said payments are actually made by Employer. Employee also
acknowledges that the contractual benefit provided for herein is specifically
conditioned
58
<PAGE>
upon Employee's retirement from employment on Employee's Retirement Date.
7. CLAIMS PROCEDURE. If any benefits become payable under this
Agreement, Employee (or Employee's beneficiary in the case of Employee's death)
shall file a claim for benefits by notifying Employer orally or in writing. If
the claim is wholly or partially denied, Employer shall provide a written notice
within ninety (90) days specifying the reasons for the denial, any additional
material or information necessary to receive benefits, and the steps to be taken
if a review of the denial is desired.
If a claim is denied and a review is desired, Employee (or
Employee's beneficiary in the case of Employee's death) shall notify Employer in
writing within sixty (60) days. In requesting a review, Employee or Employee's
beneficiary may submit any written issues and comments he or she feels are
appropriate. Employer shall then review the claim and provide a written decision
within sixty (60) days. This decision shall state the specific reasons for the
decision and shall include references to specific provisions on which the
decision is based.
8. ASSIGNMENT OF RIGHTS. Neither Employee nor any designated
beneficiary shall have any right to sell, assign, transfer or otherwise convey
the right to receive any payment hereunder.
9. PAYMENTS AND FUNDING. Any payments under this Agreement shall be
independent of, and in addition to, those under any other Plan, program or
agreement which may be in effect between the parties hereto, or any other
compensation payable to Employee or Employee's designee by Employer. This
Agreement shall not be construed as a contract of employment nor does it
restrict the right of Employer to discharge Employee at will or the right of
Employee to terminate employment at will.
59
<PAGE>
Employer may, in its sole discretion, purchase an insurance
policy on the life of Employee to fund or assist in the funding of this
Agreement. Employee agrees to promptly supply to Employer and its selected or
prospective insurance carrier, upon request, any and all information requested,
in order to enable the insurance carrier to evaluate the risks involved in
providing the insurance requested by Employer. Any and all rights to any and all
benefits under such insurance policy on the life of Employee shall be solely the
property of Employer and all proceeds of such policy shall be payable by the
insurer solely to Employer, as owner of such policy. Employee specifically
waives any rights in any insurance policy on Employee's life owned by Employer
pursuant to this Agreement. Such policy shall not serve in any way as security
to Employee for Employer's performance under this Agreement. The rights accruing
to Employee or any designee hereunder shall be solely those of an unsecured
creditor of Employer and shall be subordinate to the rights of the depositors of
Employer.
Employer may, in its sole discretion, discharge its
liabilities under this Agreement to Employee, Employee's designated beneficiary
or Employee's Estate at any time by the purchase of an annuity from a reputable
insurance or similar company authorized to do, and doing, business in North
Carolina and the assignment of the rights under said annuity to the benefit of
Employee, Employee's designated beneficiary or Employee's Estate. If this option
is exercised by Employer, all rights accruing to Employee, Employee's designated
beneficiary or Employee's Estate hereunder shall be governed solely by the
annuity contract and any election made under said annuity contract; and Employer
shall be fully discharged from any further liabilities to Employee, Employee's
designated beneficiary or Employee's Estate under this Agreement.
Employer may, in its sole discretion, discharge its
liabilities under this Agreement to Employee, Employee's designated
60
<PAGE>
beneficiary or Employee's Estate at any time by determining the present value of
the payments due hereunder, said amount to be determined by the use of the U.S.
Government bond rate for the nearest year applicable to the time of the payments
due hereunder for the present value computation and once determined, by payment
of said amount in a lump sum to Employee, Employee's designated beneficiary or
Employee's Estate, as applicable.
10. SUICIDE. In the event Employee commits suicide within two (2)
years of the execution of this Agreement, all payments provided for herein to be
paid to Employee's designated beneficiary or Employee's Estate shall be
forfeited.
11. BINDING EFFECT. This Agreement shall be binding upon Employee,
his heirs, personal representatives and assigns and upon Employer, its
successors and assigns.
12. AMENDMENT OF AGREEMENT. This Agreement may not be altered,
amended or revoked except by a written agreement signed by Employer and
Employee.
13. INTERPRETATION. Where appropriate in this Agreement, words used
in the singular shall include the plural and words used in the masculine shall
include the feminine.
14. INVALID PROVISION. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provision were not contained herein.
15. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of North Carolina.
IN TESTIMONY WHEREOF, Employer has caused this Agreement to be
executed in its corporate name by its Group Vice President, attested by its
Secretary/Assistant Secretary and its corporate seal to be hereto affixed, all
by the authority of its Board of
61
<PAGE>
Directors duly given, and Employee has hereunto set his hand and adopted as his
seal the typewritten word "SEAL" appearing beside his name, as of the day and
year first above written.
FIRST-CITIZENS BANK & TRUST COMPANY
/s/ JAMES D. BUCCI
By: ------------------------------------
James D. Bucci, Group Vice President
ATTEST:
/s/ DELORES T. TEEL
- ------------------------------
Assistant Secretary
/s/ JOSEPH A. COOPER, JR.
--------------------------------------(SEAL)
Joseph A. Cooper, Jr.
62
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF WAKE
FIRST AMENDMENT OF EMPLOYEE DEATH
BENEFIT AND POST-RETIREMENT
NONCOMPETITION AND CONSULTATION AGREEMENT
THIS FIRST AMENDMENT OF EMPLOYEE DEATH BENEFIT AND
POST-RETIREMENT NONCOMPETITION AND CONSULTATION AGREEMENT ("First Amendment"),
made and entered into and effective as of the 26th day of October, 1998, by and
between FIRST-CITIZENS BANK & TRUST COMPANY, a North Carolina banking
corporation with its principal place of business in Raleigh, Wake County, North
Carolina (hereinafter referred to as "Employer"); and JOSEPH A. COOPER, JR.
(hereinafter referred to as "Employee");
W I T N E S S E T H:
WHEREAS, in recognition of Employee's contribution to the
growth, management and development of Employer and in order to limit Employee's
availability to other employers or entities in competition with Employer
following Employee's retirement from employment with Employer, Employer and
Employee entered into that certain Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement, dated as of January 22, 1996, which
is incorporated herein by reference (hereinafter referred to as the
"Agreement"), which Agreement was executed pursuant to a benefit plan adopted by
Employer as of January 1, 1986, for a class of senior management employees of
Employer; and,
WHEREAS, Employer now desires to enter into Phase V of such
benefit plan, as part of which Employer desires to increase the benefits payable
to Employee as set forth in the Agreement by amending said Agreement pursuant to
Paragraph 12 thereof, such increased benefits to be effective as of the date of
this First Amendment.
NOW, THEREFORE, for and in consideration of the mutual
promises and undertakings herein set forth, the parties hereto do agree as
follows:
63
<PAGE>
1. Paragraph 2 of the Agreement hereby is deleted in its
entirety and the following replacement Paragraph 2 is inserted in lieu thereof:
"2. DEATH BENEFITS. In the event Employee dies while employed
by Employer prior to Employee's Retirement Date, Employer will
pay the sum of Sixty-Four Thousand Two Hundred Forty-Nine and
No/100 Dollars ($64,249.00) per year, payable in monthly
installments of Five Thousand Three Hundred Fifty-Four and
09/100 Dollars ($5,354.09) for a period of ten (10) years, to
such individual or individuals as Employee shall have
designated in writing filed with Employer or, in the absence
of such designation, to the Estate of Employee. The first
payment shall be made not later than two (2) months following
Employee's death. Payments hereunder shall be payable each
month without deductions and the recipient shall be solely
responsible for the payment of all income and other taxes and
assessments applicable on said payments."
2. The first paragraph of Paragraph 3 of the Agreement hereby
is deleted in its entirety and the following replacement first paragraph of
Paragraph 3 is inserted in lieu thereof:
"3. CONSULTATION PAYMENTS. In the event Employee retires from
employment on Employee's Retirement Date, Employee shall be
paid by Employer the sum of One Thousand Three Hundred
Thirty-Eight and 52/100 Dollars ($1,338.52) per month,
beginning not later than two (2) months after Employee's
Retirement Date, for a period of ten (10) years following
Employee's Retirement Date or until death, whichever first
occurs. Such monthly payments shall be paid for and in
consideration of Employee's Consultation Services, as provided
herein; such sum to be payable to Employee whether or not
Employee's Consultation Services have been utilized by
Employer. Consultation Payments hereunder shall be payable
each month without deductions and Employee agrees to be solely
responsible for the payment of all income and other taxes out
of said funds and all Social Security, self-employment and any
other taxes or assessments, if any, applicable on said
compensation."
64
<PAGE>
3. The first paragraph of Paragraph 4 of the Agreement hereby
is deleted in its entirety and the following replacement first paragraph of
Paragraph 4 is inserted in lieu thereof:
"4. NONCOMPETITION PAYMENTS. In the event Employee retires
from employment on Employee's Retirement Date, Employee shall
be paid by Employer the sum of Four Thousand Fifteen and
57/100 Dollars ($4,015.57) per month, beginning not later than
two (2) months after Employee's Retirement Date, for a period
of ten (10) years following Employee's Retirement Date or
until death, whichever first occurs. Such monthly payments
shall be paid for and in consideration of Employee's Covenant
Not To Compete as provided herein. Noncompetition Payments
hereunder shall be payable each month without deductions and
Employee agrees to be solely responsible for the payment of
all income or other taxes or assessments, if any, applicable
on said payments."
4. Paragraph 5 of the Agreement hereby is deleted in its
entirety and the following replacement Paragraph 5 is inserted in lieu thereof:
"5. CONTINUATION OF PAYMENTS. Upon Employee's death during
said ten (10) year period of payments hereunder, the sum of
Five Thousand Three Hundred Fifty-Four and 09/100 Dollars
($5,354.09) per month shall be paid to Employee's designated
beneficiary or Employee's Estate, as applicable, beginning the
first calendar month following the date of Employee's death
and continuing thereafter until the expiration of said ten
(10) year period. Once the Consultation and/or Noncompetition
Payments are begun, whether paid by Employer or as otherwise
provided herein, the maximum payment period under this
Agreement is ten (10) years. Payments hereunder shall be
payable each month without deductions and the recipient shall
be solely responsible for all income and other taxes and
assessments applicable on said payments."
5. All of the remaining terms and conditions of the Agreement
which are not expressly amended by this First Amendment shall remain in full
force and effect.
65
<PAGE>
IN TESTIMONY WHEREOF, Employer has caused this First Amendment
to be executed in its corporate name by its Vice Chairman, attested by its
Secretary/Assistant Secretary and its corporate seal to be affixed hereto, all
within the authority duly given by its Board of Directors, and Employee has
hereunto set his hand and adopted as his seal the typewritten word "SEAL"
appearing beside his name, as of the day and year first above written.
FIRST-CITIZENS BANK & TRUST COMPANY
By: /s/ JAMES B. HYLER, JR.
------------------------------------
James B. Hyler, Jr., Vice Chairman
Attest:
/s/ ALEXANDER G. MACFADYEN, JR.
- -------------------------------
Secretary
/s/ JOSEPH A. COOPER, JR. (SEAL)
--------------------------
Joseph A. Cooper, Jr.
66
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
Name State
- --------------------------------------------------------------------------------
First-Citizens Bank & Trust Company Chartered in North Carolina
with branches is North Carolina,
Virginia and West Virginia
Atlantic States Bank Chartered under the laws of the
United States of America with
branches in Georgia and Florida
FCB/NC Capital Trust I Statutory business trust created
under the laws of the State of
Delaware
67
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