UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the year ended December 31, 1999
COMMISSION FILE NUMBER: 001-15089
Fidelity BancShares (N.C.), Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 56-1586543
(state or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
100 South Main Street, Fuquay-Varina, North Carolina 27526
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(Address of principal executive offices) (zip code)
(919) 552-2242
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
8.50% Capital Securities issued by FIDBANK Capital Trust I and
8.50% Junior Subordinated Debentures issued by Registrant
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant as of March 29, 2000: The Registrant's voting stock has no
readily ascertainable market value as of any date within the last sixty days or
otherwise for the reason that such stock is not regularly traded and has no
quoted prices. Therefore, the aggregate market value of the voting stock held by
non-affiliates is not determinable.
Common Stock - $25 Par Value, - 28,170 shares
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(Number of shares outstanding, by class, as of March 29, 2000)
<PAGE>
PART I
ITEM 1 - BUSINESS
GENERAL. Fidelity BancShares (N.C.), Inc. ("BancShares"), headquartered in
Fuquay-Varina, North Carolina, was organized under the laws of Delaware on
November 13, 1987 as a registered bank holding company for The Fidelity Bank
(the "Bank"). BancShares operates through the Bank, which provides a variety of
retail and commercial banking products and services to individuals and small- to
medium-sized businesses in the communities it serves. BancShares currently is
engaged in an expansion program, which involves acquisitions of other financial
institutions, or offices and/or deposits of other institutions, and the opening
of de novo branches. Certain statistical information with respect to BancShares'
business required by Guide 3 is contained in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Item 8.
Financial Statements and Supplementary Data" which appears elsewhere in this
filing.
BancShares has a second wholly-owned subsidiary, FIDBANK Capital Trust I (the
"Trust"), a statutory business trust created under the laws of the State of
Delaware, that issued $23.0 million of 8.50% Capital Securities (the "Capital
Securities") in June 1999 maturing in 2029.
Members of the Holding family, including Lewis R. Holding, have been actively
involved in the management of BancShares. As a result, BancShares has been
managed from a long-term perspective with primary emphasis being placed on
balance sheet liquidity, loan quality, and earnings stability. Consistent with
its management philosophy, BancShares has emphasized a low-risk loan portfolio
derived from its local markets. (See "Item 12. Security Ownership of Certain
Beneficial Owners and Management" and "Item 13. Certain Relationships and
Related Transactions.")
All significant activities of BancShares and its subsidiaries are banking
related so that BancShares operates within one industry. Neither BancShares nor
its subsidiary has any foreign operations.
The Bank is a state-chartered commercial bank. Its predecessor bank, Bank of
Fuquay, was organized during 1909 and merged with Bank of Biscoe during 1970, at
which time the continuing bank's name was changed to The Fidelity Bank. The Bank
currently operates 59 banking offices in 41 separate central North Carolina
communities, 20 of which have been opened or acquired from other institutions
within the past five fiscal years. Most recently, during 1998 the Bank purchased
an aggregate of $35.7 million in assets and assumed an aggregate of $75.1
million in deposit liabilities, associated with five branch offices of a related
financial institution, First-Citizens Bank & Trust Company, Raleigh, North
Carolina ("FCB"), and during 1999, it purchased an aggregate of $29.1 million in
assets and assumed an aggregate of $99.6 million in deposit liabilities,
associated with seven additional branch offices of FCB. (See "Item 13. Certain
Relationships and Related Transactions" and note 15 to BancShares' consolidated
financial statements.) Additionally, during 1998 and 1999, the Bank opened 12 de
novo branch offices.
The Bank has two wholly-owned subsidiaries, Fidelity Properties, Inc. and TFB
Financial Services. TFB Financial Services, Inc. ("TFB Financial Services"),
formerly Servco Service Corporation, was acquired on September 1, 1996 in the
acquisition of Perpetual State Bank and provides non-deposit investment
products, including mutual funds, annuities, stocks, and bonds. Fidelity
Properties currently is inactive.
BancShares' principal executive offices are located at 100 South Main Street,
Fuquay-Varina, North Carolina 27526 and its telephone number is (919) 552-2242.
DESCRIPTION OF BUSINESS. The Bank is a community-oriented bank which is engaged
in a general commercial and consumer banking business. Its operations are
primarily retail oriented and directed towards individuals and small- to
medium-sized businesses in its market area. While the Bank provides most
traditional commercial and consumer banking services, its principal activities
are the taking of demand and time deposits and the making of secured and
unsecured loans. The Bank's deposits are insured by the FDIC to the maximum
amount permitted by law.
<PAGE>
The Bank is focused on community-oriented banking via (i) localized lending,
(ii) core deposit funding, (iii) conservative balance sheet management, and (iv)
stable growth. The Bank's franchise is well diversified, serving both large
cities and small rural towns in North Carolina. By outsourcing its core data
processing requirements to FCB (see "Item 13. Certain Relationships and Related
Transactions"), the Bank can offer a complete array of financial services while
maintaining its community banking orientation. The Bank's focus on diverse
markets and its emphasis on customer service provide it with a stable source of
core funding.
The Bank's primary source of revenue is interest income from its lending
activities. Since it commenced business, the Bank has pursued a strategy of
growth through internal expansion by establishing branch offices in communities
in its geographic market and by acquiring smaller institutions or offices of
other institutions in its existing markets or in new markets.
COMPETITION. Commercial banking in North Carolina is highly competitive. In its
market areas, the Bank competes directly with a number of local, regional and
superregional banking organizations. Competition among financial institutions
for loans and deposits is based, to a large extent, on interest rates charged or
paid. Fees and charges for other services, office location, the quality of
customer services, community reputation and continuity of personnel, and, in the
case of loans to large commercial borrowers, relative lending limits, also are
important competitive factors. Many of the Bank's competitors have greater
resources, broader geographic markets and higher lending limits and offer more
services than the Bank, and they can better afford and make more effective use
of media advertising, support services and electronic technology than can the
Bank. The Bank depends on its reputation in its local community, direct customer
contact, its ability to make credit and other business decisions locally, and
personalized service to counter these competitive disadvantages.
In recent years, federal and state legislation has heightened the competitive
environment in which all financial institutions must conduct their business, and
the potential for competition among financial institutions of all types has
increased significantly. Additionally, with the elimination of restrictions on
interstate banking, a North Carolina commercial bank may be required to compete
not only with other North Carolina financial institutions, but also with
out-of-state financial institutions which may acquire North Carolina
institutions and are able to provide certain financial services across state
lines, thereby adding to the competitive atmosphere of the industry in general.
EMPLOYEES. At December 31, 1999, the Bank employed 349 full-time employees and
35 part-time employees. The Bank is not a party to any collective bargaining
agreements and considers relations with its employees to be good. BancShares
does not have any separate employees.
SUPERVISION AND REGULATION. BancShares is a bank holding company registered with
the Federal Reserve Board (the "FRB") under the Bank Holding Company Act of
1956, as amended (the "Act"), and is subject to supervision and examination by,
and the regulations and reporting requirements of, the FRB.
The Bank is a North Carolina-chartered commercial bank, and its deposits are
insured by the FDIC. It is subject to supervision and examination by, and the
regulations and reporting requirements of, the North Carolina Commissioner of
Banks (the "Commissioner") and the FDIC. As a result of its ownership of the
Bank, BancShares also is registered with and subject to regulation by the
Commissioner under the state's bank holding company laws.
As an insured bank, the Bank is prohibited from engaging as a principal in
activities that are not permitted for national banks unless (i) the FDIC
determines that the activity would pose no significant risk to the appropriate
deposit insurance fund, and (ii) the Bank is, and continues to be, in compliance
with all applicable capital standards. Insured institutions also are prohibited
from acquiring or retaining any equity investment of a type or in an amount not
permitted with for national banks. The Bank is not a member of the Federal
Reserve System, but is subject to reserve requirements applicable to non-member
banks.
The FRB, FDIC and Commissioner all have broad powers to enforce laws and
regulations applicable to BancShares and the Bank and to require corrective
action of conditions affecting the safety and soundness of the Bank. Among
other, these powers include cease and desist orders, the imposition of civil
penalties and the removal of officers and directors.
<PAGE>
ITEM 2 - PROPERTIES
At December 31, 1999 the Bank maintained 59 banking offices in 41 central North
Carolina communities. BancShares does not own or lease any real property. Except
for six branch offices which are leased, and one tract of land that is leased
and upon which the Bank has constructed a branch office, the Bank owns all of
the real property utilized in its operations. Statistical information with
respect to BancShares' property and equipment is contained in this filing under
"Item 8. Financial Statements and Supplementary Data."
ITEM 3 - LEGAL PROCEEDINGS
The Bank is a party to various legal proceedings in the ordinary course of its
business. However, based on information presently available, and after
consultation with legal counsel, BancShares' management believes that the
ultimate outcome in such proceedings, in the aggregate, will not have any
material adverse effect on BancShares' financial condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR BANCSHARES' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
BancShares' common stock is not traded in an established public trading market.
On March 15, 2000, there were 115 record holders of Bancshares' common stock.
The per share cash dividends paid by BancShares during each quarterly period
during 1999 and 1998 are set forth in Table XI, under Management's Discussion
and Analysis of Financial Condition and Results of Operations in Item 7 of this
report. A cash dividend of $8.00 per share was declared by the Board of
Directors on January 31, 2000, payable March 30, 2000, to holders of record as
of March 1, 2000. BancShares' sole source of funds for the payment of dividends
to its shareholders is dividends it receives from the Bank. Payments of
dividends by BancShares and the Bank are made at the discretion of their Boards
of Directors and are 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.
ITEM 6 - SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information for BancShares as of and for the years ended December 31, 1999,
1998, 1997, 1996, and 1995. The data has been derived from BancShares' audited
consolidated financial statements. The consolidated financial statements as of
December 31, 1999 and 1998 and for each of the years in the three year period
ended December 31, 1999, and the independent auditors' report thereon, are
included elsewhere in this filing. The following should also be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
As of and for the year ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
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(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income .................................... $ 55,379 $ 46,570 $ 43,249 $ 37,238 $ 30,607
Interest expense ................................... 23,213 19,892 19,016 16,245 12,616
--------- --------- --------- --------- ---------
Net interest income ................................ 32,166 26,678 24,233 20,993 17,991
Provision for loan losses .......................... 1,200 630 360 360 360
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 30,966 26,048 23,873 20,633 17,631
Noninterest income ................................. 5,183 5,476 3,974 3,348 2,628
Noninterest expense ................................ 24,044 19,418 15,878 14,191 10,998
--------- --------- --------- --------- ---------
Net income before income taxes ..................... 12,105 12,106 11,969 9,790 9,261
Income taxes ....................................... 4,468 4,457 4,581 3,487 3,254
--------- --------- --------- --------- ---------
Net income ......................................... $ 7,637 $ 7,649 $ 7,388 $ 6,303 $ 6,007
========= ========= ========= ========= =========
Selected Period-End Balances
Total assets ....................................... $839,088 $694,134 $582,995 $542,138 $406,304
Investment securities and federal funds sold ....... 165,356 186,804 177,240 161,429 107,341
Loans, gross ....................................... 551,148 439,208 358,250 334,880 268,931
Interest earning assets ............................ 759,311 627,874 537,293 497,963 377,449
Deposits ........................................... 716,014 609,646 505,237 479,140 352,566
Interest bearing liabilities ....................... 658,212 533,380 448,832 429,649 313,409
Shareholders' equity ............................... 69,895 64,808 59,117 51,242 44,351
Common shares outstanding .......................... 28,170 28,410 28,410 28,410 28,582
--------- --------- --------- --------- ---------
Selected Average Balances
Total assets ....................................... $753,286 $610,306 $558,119 $476,559 $371,036
Investment securities and federal funds sold ....... 174,824 167,337 163,113 139,262 84,748
Loans, gross ....................................... 493,023 390,162 349,526 297,229 260,103
Interest earning assets ............................ 686,557 559,348 514,410 437,880 345,604
Deposits ........................................... 647,566 528,672 487,985 414,829 323,352
Interest bearing liabilities ....................... 584,675 465,999 433,979 370,876 286,412
Shareholders' equity ............................... 66,804 61,870 54,840 46,824 39,255
Common shares outstanding .......................... 28,279 28,410 28,410 28,570 28,582
--------- --------- --------- --------- ---------
Profitability Ratios
Return on average total assets ..................... 1.01% 1.25% 1.32% 1.32% 1.62%
Return on average shareholders' equity ............. 11.43 12.36 13.47 13.46 15.30
Dividend payout ratio (1) .......................... 11.85 11.88 12.31 14.51 11.42
--------- --------- --------- --------- ---------
Liquidity and Capital Ratios
Average loans to average deposits .................. 76.13% 73.80% 71.63% 71.65% 80.44%
Average shareholders' equity to average total assets 8.87 10.14 9.83 9.83 10.58
Tier 1 capital ratio (2) ........................... 13.34 10.30 12.96 13.24 15.57
Total capital ratio (2) ............................ 12.06 11.87 14.09 14.49 16.82
Leverage capital ratio (2) ......................... 9.12 7.65 8.28 8.63 10.74
--------- --------- --------- --------- ---------
Per Share of Common Stock
Net income (3) ..................................... $ 270.05 $ 269.25 $ 260.04 $ 220.63 $ 210.18
Cash dividends ..................................... 32.00 32.00 32.00 32.00 24.00
Book value (4) ..................................... 2,481.17 2,281.17 2,080.86 1,803.66 1,551.70
--------- --------- --------- --------- ---------
Asset Quality Ratios
Nonperforming assets to total gross loans and other
real estate owned ............................. 0.02% 0.03% 0.02% 0.02% 0.00%
Net charge-offs to average loans ................... 0.19 0.04 0.10 0.14 0.03
Total allowance for loan losses to total loans ..... 0.93 1.05 1.16 1.24 1.52
--------- --------- --------- --------- ---------
</TABLE>
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(1) For each indicated period, total common dividends declared divided by
net income.
(2) See "Supervision and Regulation - Capital Adequacy" for a more detailed
description of these ratios.
(3) For each indicated period, net income divided by the average number of
common shares outstanding. BancShares' adoption of Statement 128,
"Earnings Per Share," had no effect on its earnings per share
disclosure since BancShares has no potentially dilutive securities.
(4) At the end of each indicated period, shareholders' equity divided by
the number of common shares outstanding.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Fidelity BancShares (N.C.), Inc. and Subsidiaries
("BancShares"), for the years 1999, 1998 and 1997. This discussion and analysis
should be read in conjunction with the audited Consolidated Financial Statements
and related notes presented under "Item 8. Financial Statements and
Supplementary Data." BancShares is a bank holding company with two wholly-owned
subsidiaries - The Fidelity Bank (the "Bank"), a North Carolina-chartered bank,
and FIDBANK Capital Trust I (the "Trust") - a statutory business trust created
under the laws of the State of Delaware.
<PAGE>
ACQUISITIONS.
1999 ACQUISITIONS. In August 1999, BancShares acquired the deposits of
seven North Carolina branches of First-Citizens Bank & Trust Company ("FCB")
(see note 2 and 15 to BancShares' consolidated financial statements). These
acquisitions were accounted for as a purchase and, therefore, the results of
operations prior to the purchase are not included in BancShares' consolidated
financial statements. These acquisitions were as follows:
Transaction Loans Deposits
Date Acquired Acquired
----------- -------- ---------
(Dollars in thousands)
Gibsonville branch ......... August 1999 $ 4,496 $11,465
Kings Mountain branch ...... August 1999 6,021 22,910
Polkville branch ........... August 1999 1,811 8,749
Shelby branch .............. August 1999 7,094 20,649
Stokesdale branch .......... August 1999 2,467 6,040
Stoneville branch .......... August 1999 2,366 19,475
Wentworth branch ........... August 1999 3,783 10,285
-------- ---------
1999 acquisition totals $28,038 $99,573
======== =========
1998 ACQUISITIONS. In October 1998, BancShares acquired the deposits of
five North Carolina branches of FCB. These acquisitions were accounted for as a
purchase and, therefore, the results of operations prior to the purchase are not
included in BancShares' consolidated financial statements. These acquisitions
were as follows:
Transaction Loans Deposits
Date Acquired Acquired
------------ -------- --------
(Dollars in thousands)
Siler City branch .......... October 1998 $ 6,754 $14,202
Salisbury branch ........... October 1998 11,754 20,310
Gastonia Main branch ....... October 1998 5,933 33,544
Gastonia Union Road branch . October 1998 3,419 3,518
Gastonia Cox Road branch ... October 1998 5,834 3,519
------- -------
1998 acquisition totals $33,694 $75,093
======= =======
BancShares made no acquisitions in 1997.
RESULTS OF OPERATIONS.
NET INCOME. For 1999, net income of $7.6 million represented a 0.17%
decrease from 1998 net income of $7.6 million. While BancShares' experienced a
strong increase in net interest income during 1999, this growth was
<PAGE>
hampered by an increase in provision for loan losses due to strong loan growth
and an increase in operating expenses due to the acquisition of seven branches
during the third quarter. BancShares also experienced a decrease in noninterest
income due to a one time gain recorded in the prior year on the sale of rights
to service mortgage loans which is not present in 1999.
For 1998, net income of $7.6 million represented a 3.54% increase from
1997 net income of $7.4 million. The increase in 1998 net income was principally
the result of an increase in net interest income resulting primarily from growth
within the existing branch network and the fourth quarter acquisition of five
branches. Noninterest income also increased primarily due to the sale of the
Bank's right to service mortgage loans, a gain on the contribution of a building
at fair value to a non-profit agency, and increases in fee income due to growth
within the existing branch network. These increases were partially offset by
increased operating expense associated with the opening of six de novo branches
and the expense associated with the contribution described above.
Net income per share for 1999 was $270.05, a slight increase of $0.80
from $269.25 in 1998. Net income per share for 1997 was $260.04. The increase in
net income per share during 1999 was attributable to a decrease in shares
outstanding with BancShares' repurchase of 240 shares of common stock during
second quarter 1999. Net income per share increased in 1998 over 1997 due to
increased earnings.
NET INTEREST INCOME. The greatest portion of BancShares' earnings is
from net interest income, which is the difference between interest income on
earning assets and interest paid on deposits and other interest bearing
liabilities. The primary factors affecting net interest income are changes in
the volume and yields/rates on earning assets and interest bearing liabilities
and the ability to respond to changes in interest rates through asset/liability
management. Table I sets forth the average balances on interest earning assets
and interest bearing liabilities, as well as the average yields earned and
average rates paid for 1999, 1998 and 1997.
In 1999, net interest income was $32.2 million as compared to $26.7
million in 1998, an increase of $5.5 million or 20.57%. In 1998, net interest
income was $26.7 million as compared to $24.2 million in 1997, an increase of
$2.4 million or 10.09%. The increase in net interest income in 1999 and 1998 was
primarily attributable to increased interest income from strong growth in
average loan balances outstanding during both years. Interest income grew $8.8
million or 18.92% in 1999 and $3.3 million or 7.68% in 1998 over the previous
year. Interest income totaled $55.4 million in 1999, $46.6 million in 1998 and
$43.2 million in 1997. Interest expense increased $3.3 million, or 16.70%, in
1999 to $23.2 million from $19.9 million in 1998. This increase was due to
higher volumes of interest bearing deposits in 1999 and 1998 and long-term
borrowings during 1999. The rates paid on interest bearing liabilities decreased
from 4.27% in 1998 to 3.97% in 1999. Interest expense for 1998 increased by
$900,000, or 4.60%, from $19.0 million in 1997 to $19.9 million in 1998. This
increase was due to higher volumes of interest bearing deposits, while rates
paid on interest bearing liabilities decreased from 4.38% in 1997 to 4.27% in
1998.
Loans produced the largest component of interest income, amounting to
$45.3 million in 1999, $37.6 million in 1998, and $34.1 million in 1997. This
represented an increase of $7.6 million or 20.34% in 1999 and $3.5 million or
10.26% in 1998. During 1999 and 1998, average loans outstanding increased $102.9
million or 26.36% and $40.6 million or 11.63% due to loan growth from acquired
branches, de novo branch openings and loan growth within the existing branch
network. Average yields on loans during 1999, 1998 and 1997 were 9.20%, 9.66%
and 9.76%, respectively. The decline in the 1999 average yield on loans was due
to the decline in the average prime rate during 1999 compared to 1998. The
decline in the average yield on loans was due to overall lower market interest
rates during the first half of 1999 and most of 1998.
Earnings from investments and federal funds sold provided the balance
of interest income, contributing $10.1 million in 1999, $9.0 million in 1998,
and $9.1 million in 1997. Average balances and yields on these securities are
shown in Table I. Included in the $10.1 million earned on investments and
federal funds sold is $1.0 million earned on interest bearing cash balances
attributable to the deposit of proceeds from the $23.0 million Capital Trust
Securities issuance during 1999 (see note 8 to BancShares' consolidated
financial statements). The average interest bearing cash balance during 1999 was
$17.0 million, which earned an average rate of 5.22%. There were no interest
bearing cash balances during 1998 or 1997.
<PAGE>
Total 1999 interest expense was $23.2 million, an increase of $3.3
million or 16.70% over total 1998 interest expense of $19.9 million. Total 1998
interest expense was $19.9 million, an increase of $875,000 or 4.60% over 1997
interest expense of $19.0 million. The principal component of BancShares'
interest expense is interest paid on deposits, which totaled $21.5 million in
1999, $19.5 million in 1998, and $18.7 million in 1997. Average interest bearing
deposit balances for 1999, 1998 and 1997 were $553.9 million, $456.1 million and
$416.6 million, respectively. This represents an increase of 21.44% in 1999 and
9.48% in 1998 over the prior years due to acquired branches, de novo branch
openings and growth within the existing branch network. Included in the $23.2
million interest expense in 1999, is interest expense of $1.1 million resulting
from the $23.0 million Capital Trust Securities issued by the Trust during 1999
(see note 8 to BancShares' consolidated financial statements). These long-term
obligations, which qualify as Tier 1 Capital for BancShares, bear interest at
8.50%, are callable in 2002, and mature in 2029. The average balance and rate
paid on the long-term obligations during 1999 was $12.6 million and 8.44%. There
were no long-term obligations outstanding in 1998 or 1997. See Table I and Table
II.
BancShares' interest rate spread was 4.11%, 4.08% and 4.03% on a tax
equivalent basis in 1999, 1998 and 1997, respectively. BancShares' ability to
maintain a favorable spread between interest income and interest expense is a
major factor in generating earnings. Therefore, it is necessary for BancShares
to effectively manage earning assets and interest bearing liabilities.
PROVISION FOR LOAN LOSSES. BancShares' provision for loan losses
charged against earnings was $1,200,000, $630,000, and $360,000 in 1999, 1998
and 1997, respectively. The provision for loan losses increased primarily due to
increased loan balances from acquired branches, de novo branch openings and
growth within the existing branch network. Average loans grew by $102.9 million
or 26.36% in 1999 compared to $40.6 million or 11.63% in 1998. Loans acquired
during 1999 and 1998 amounted to $28.0 million and $33.7 million, respectively
(see note 2 to BancShares' consolidated financial statements). BancShares' also
experienced an increase in net charge-offs during 1999, as discussed herein
under 'Asset Quality'.
NONINTEREST INCOME. Noninterest income, which consists primarily of
service charges, commissions and fees, decreased $293,000 in 1999 over 1998 and
increased $1.5 million in 1998 over 1997. Total noninterest income was $5.2
million in 1999, $5.5 million in 1998, and $4.0 million in 1997. The 1999
decrease and 1998 increase in noninterest income is attributable to the sale of
the Bank's rights to service $51 million in mortgage loans to Southern Bank and
Trust Company for $522,000, resulting in a gain of $507,456 in 1998 (see notes 4
and 15 to BancShares' consolidated financial statements). Also affecting the
1999 decrease and 1998 increase in noninterest income was BancShares'
contribution of one of the Bank's banking facilities to the North Carolina
Community Foundation in 1998. BancShares recorded the market value of the land
and building, $448,000, as a contribution expense and, after writing off the
value of the land of $40,000, recognized a gain of $408,000 in 1998. The
remaining components of other income, service charges on deposit accounts and
other service charges and fees, increased during 1999 by $441,000 and $233,000,
respectively, over 1998. For 1998, service charges on deposit accounts and other
service charges and fees increased $247,000 and $292,000, respectively, over
1997. These increases in 1999 and 1998 were attributable to acquired branches,
de novo branch openings and deposit growth within the existing branch network.
NONINTEREST EXPENSE. Noninterest expense includes expenses attributable
to personnel, occupancy, furniture and equipment, data processing, FDIC
assessments, printing, supplies, legal and professional fees, postage,
amortization of intangibles, and other miscellaneous operating expenses.
Noninterest expense was $24.0 million in 1999, $19.4 million in 1998, and $15.9
million in 1997. Control of noninterest expense is an important aspect in
managing net income. Acquisition of branches during 1999 and 1998 should enhance
future operating results of BancShares; however, for the following fifteen
years, earnings will be reduced as BancShares amortizes intangibles resulting
from the acquisitions.
The most significant element of BancShares' noninterest expense is
personnel costs. Salaries and benefits represented 52.22%, 48.78% and 51.85% of
total noninterest expense during 1999, 1998 and 1997, respectively. Salaries and
benefits increased by $3.1 million or 32.57% in 1999 over 1998 and $1.2 million
or 15.05% in 1998 over 1997. The primary cause of this increase is the
acquisition of seven branches in 1999 and five branches in 1998 and the opening
of six de novo branches in 1999 and six in 1998.
<PAGE>
Occupancy and equipment expenses increased from $3.2 million in 1997 to
$3.7 million in 1998 to $4.4 million in 1999. These increases of $706,000 in
1999 and $535,000 in 1998 were attributable to acquired branches and de novo
branch openings during both years.
Data processing costs represent charges by vendors that perform data
processing services for the Bank. The Bank has contracts with three such
companies. Data processing fees are primarily based upon per item or per account
charges. Data processing costs were $1.9 million, $1.4 million and $1.2 million
in 1999, 1998 and 1997, respectively. These increases were due to the addition
of acquired and de novo branches as well as growth in the loan and deposit base
in the existing branch network.
Amortization of intangibles during 1999 increased $326,000 during 1999
to $924,000 as compared to $599,000 in 1998. Amortization of intangibles during
1997 was $599,000. The increase in amortization of intangibles during 1999 was
attributable to the acquisition of five branches during fourth quarter 1998 and
seven branches in third quarter 1999. Intangibles from these acquisitions
amounted to $4.1 million for both 1999 and 1998 (see note 2 and 15 to
BancShares' consolidated financial statements). These intangibles are amortized
over 15 years (see note 1 to BancShares' consolidated financial statements).
Other miscellaneous operating expenses were $4.2 million, $4.2 million,
and $2.7 million in 1999, 1998 and 1997, respectively. Other miscellaneous
operating expense during 1998 included BancShares' contribution expense of a
building at fair market value to a non-profit agency and the recognition of
$448,000 in contribution expense on this donation. Without the contribution
expense in 1998, 1999 and 1998 other miscellaneous operating expenses increased
$452,000 and $1.1 million over 1998 and 1997, respectively. These increases were
the result of increases in costs realized across all categories of other
operating expenses due to increased customer base and account activity resulting
from acquired branches, de novo branch openings and growth within the existing
branch network during 1999 and 1998.
INCOME TAXES. In 1999, 1998 and 1997, BancShares had taxable income for
book purposes that resulted in income tax expense of $4.5 million, $4.5 million
and $4.6 million, respectively. The resulting effective income tax rates for the
years ended December 31, 1999, 1998 and 1997 were 36.91%, 36.82%, and 38.28%,
respectively.
FINANCIAL CONDITION.
EARNINGS AND NONINTEREST EARNING ASSETS. Earning assets consist of
loans, investment securities, and short-term investments that earn interest.
Average earning assets during 1999 were $686.6 million, an increase of $127.2
million or 22.74% from the 1998 average of $559.3 million. For 1998, average
earning assets were $559.3 million, an increase of $44.9 million or 8.74% from
the 1997 average of $514.4 million. Increases during both years resulted from
the acquisition of branches, de novo branch openings and growth within the
existing branch network. Cash received from the $23.0 million Capital Trust
Securities issuance and acquisition of branches in 1999 and 1998 was invested in
loans and short-term investments, including federal funds and, in 1999, interest
bearing cash deposits.
Average noninterest earning assets during 1999 were $66.7 million, an
increase of $15.8 million or 30.95% from the 1998 average of $51.0 million.
Average noninterest earning assets during 1998 were $51.0 million, an increase
of $16.58% from the 1997 average of $43.7 million. These increases were
primarily due to increases in cash, fixed assets and intangible assets resulting
from the 1999 and 1998 acquired branches and de novo branch openings. The
average balances of noninterest earning assets are shown in Table I.
Return on average total assets for 1999 was 1.01% compared to 1.25% and
1.32% in 1998 and 1997, respectively. The decline in return on average total
assets for 1999 and 1998 was caused by increases in average total assets
primarily attributable to the acquired branches and de novo branch openings
during 1999 and 1998. Changes in the composition of average balances are shown
in Table I and Table II.
Return on average equity for 1999 was 11.43% compared to 12.36% and
13.47% in 1998 and 1997, respectively. The decline in the 1999 return on average
equity was due to a slight decline in net income and an increase in average
equity driven by earnings. The decline in 1998 return on average equity was due
to increases in net income that were outpaced by the increase in average equity.
<PAGE>
INTEREST BEARING AND NONINTEREST BEARING LIABILITIES. Interest bearing
liabilities consist of deposits, short-term borrowed funds and long-term
borrowed funds. Average interest bearing liabilities during 1999 were $584.7
million, an increase of 25.47% from the 1998 average of $466.0 million. Average
interest bearing liabilities during 1998 were $466.0 million, an increase of
7.38% from the 1997 average of $434.0 million. BancShares' principal interest
bearing liabilities are interest bearing deposits. Interest bearing deposits
represented $553.9 million, $456.1 million and $416.6 million of average
interest bearing liabilities in 1999, 1998 and 1997, respectively. Short-term
borrowings and long-term borrowings represent the remaining balances. The 1999
increase in long-term borrowings is due to the $23.0 million Capital Trust
Securities issuance (see note 8 to BancShares' consolidated financial
statements). The cost of total interest bearing liabilities was 3.97%, 4.27% and
4.38% in 1999, 1998 and 1997, respectively.
Average noninterest bearing liabilities during 1999 were $101.8
million, an increase of $19.4 million or 23.50% over the 1998 average of $82.4
million. Average noninterest bearing liabilities during 1998 were $82.4 million,
an increase of $13.1 million or 18.96% over the 1997 average of $69.3 million.
Noninterest bearing demand deposits are the principal noninterest bearing
liability. Increases in noninterest bearing demand deposit balances are
attributable to acquired branches, de novo branch openings and expansion within
the existing branch network. See Table I.
LOANS. As of December 31, 1999, loans, net of the allowance for loan
losses totaled $546.0 million compared to $434.6 million at year-end 1998. The
increase was attributable to normal loan growth, from the existing branch
network and de novo branch openings, as well as acquired loans of $28.0 million
from the acquisition of seven branches in third quarter 1999. The composition of
the loan portfolio for each of the years in the five year period ended December
31, 1999 is listed in Table IV. BancShares experienced strong growth in
construction and land development loans and commercial and industrial loans.
This growth was generally consistent with the prior year.
Rate sensitivity and liquidity in the loan portfolio are achieved by
making loans with adjustable interest rates and shorter maturities. This allows
the Bank to adjust its pricing structure with changes in interest rates. At the
end of 1999, 36.13% of the loan portfolio was due to mature or would be
available for interest rate repricing in 1999. See Table IV.
INVESTMENTS. Management's asset/liability strategies include
maintaining an investment securities portfolio with appropriate maturities to
preclude the necessity of selling investment securities for purposes of
liquidity. Traditionally, BancShares has maintained a larger investment
portfolio than its peers.
BancShares accounts for investment securities under the provisions of
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities," which
requires that investments in debt and equity securities be classified in three
categories and accounted for as follows: debt securities that BancShares has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; debt and equity securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings; and debt and equity securities not
classified as either held-to-maturity securities or trading securities are
classified as available for sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. Securities available for sale consist of
securities which may be sold in response to changes in interest rates,
prepayment risk, regulatory capital requirements and liquidity needs.
At December 31, 1999, the fair value of available for sale securities
exceeded the carrying value by $5.1 million, deferred taxes related to these
available for sale securities were $2.1 million, and shareholders' equity
included $3.0 million for the net unrealized gain related to these available for
sale securities. At December 31, 1998, the fair value of available for sale
securities exceeded the carrying value by $7.0 million, deferred taxes related
to these available for sale securities were $2.8 million, and shareholders'
equity included $4.2 million for the net unrealized gain related to these
available for sale securities. BancShares does not maintain a trading account.
<PAGE>
ASSET QUALITY.
PROVISION AND ALLOWANCE FOR LOAN LOSSES. Because BancShares' loan
portfolio represents its largest earning asset, BancShares continually monitors
the quality of its loan portfolio. The Bank operates in a diversified economic
environment and, in the opinion of management, is not unduly exposed to any one
particular industry. In 1999, BancShares charged-off loans net of recoveries of
$940,000. This represents an increase of $766,000 from 1998 net charge-offs of
$174,000. This increase is primarily the result of reduced recoveries in 1999.
In 1998, BancShares charged-off loans net of recoveries of $174,000. This
represents a decrease of $180,000 from 1997 net charge-offs of $354,000. This
decrease is primarily the result of increased recoveries in 1998. The percentage
of charge-offs (net of recoveries) to average outstanding loans was 0.19% in
1999, 0.04% in 1998 and 0.10% in 1997. See Table V.
The ratio of total non-performing assets to total loans plus other real
estate was 0.02% and 0.03% at December 31, 1999 and 1998, respectively. Assets
classified as other real estate were $117,000 and $111,000 at December 31, 1999
and 1998, respectively. See Table V.
Accrual of interest is discontinued on a loan when management believes
the borrower's financial condition is such that the collection of principal or
interest is doubtful. Loans are returned to accrual status when the factors
indicating doubtful collectibility cease to exist.
Management considers a loan to be impaired when, based on current
information or events, it is probable that a borrower will be unable to pay all
amounts due according to the contractual terms of the loan agreement. Impaired
loans are valued using either the discounted expected cash flow method or the
value of the collateral. 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 income has been
foregone. Future cash receipts are recorded as recoveries of any amounts
previously charged-off.
At December 31, 1999 and 1998, the Bank did not have any nonaccrual
loans, nor did the Bank have any restructured or impaired loans. At December 31,
1999 and 1998, the Bank did not have any accruing loans 90 days or more past
due.
The allowance for loan losses represented 0.93% and 1.05% of loans
outstanding at year-end 1999 and 1998, respectively. The Bank's provision for
loan losses charged against earnings was $1,200,000, $630,000, and $360,000 in
1999, 1998 and 1997, respectively. The increase in the provision for loan losses
in 1999 and 1998 was primarily attributable to loan growth from acquired
branches, de novo branch openings and expansion in the existing branch network,
in both years as well as increased net charge-offs during 1999 as discussed
above.
Management considers the December 31, 1999 allowance for loan losses
adequate to cover probable losses inherent in the loan portfolio. Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's experience, the estimated value of any
underlying collateral, current economic conditions, analysis of peer bank
trends, and other risk factors. Management believes it has established the
allowance in accordance with generally accepted accounting principles and in
consideration of the current economic environment. While management uses the
best information available to make evaluations, future adjustments may be
necessary if economic or other conditions differ substantially from the
assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and losses on other real estate owned. Such agencies may require the Bank to
recognize adjustments to the allowances based on the examiners' judgements about
information available to them at the time of their examinations.
LIQUIDITY, MARKET RISK AND INTEREST SENSITIVITY.
LIQUIDITY. Liquidity refers to the ability of BancShares to generate
sufficient funds to meet its financial obligations and commitments at a
reasonable cost. Maintaining liquidity ensures that funds will be available for
reserve requirements, customer demand for loans, withdrawal of deposit balances
and maturities of other deposits
<PAGE>
and liabilities. Past experience helps management anticipate cyclical demands
and amounts of cash required. These obligations can be met by existing cash
reserves or funds from maturing loans and investments, but in the normal course
of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentration, competition and BancShares' overall financial condition.
BancShares' liquid assets include all investment securities, federal funds sold,
and cash and due from banks. These assets represented 33.19% of deposits at
December 31, 1999, a decrease from 35.75% at December 31, 1998.
BancShares' liquidity ratio, which is defined as cash plus short-term
and marketable securities divided by deposits and short-term liabilities, was
31.95% at December 31, 1999, compared to 34.85% at year-end 1998. In addition,
the Bank has a $40 million line of credit with the Federal Home Loan Bank to
meet liquidity needs.
BancShares has traditionally maintained a high level of liquidity,
characteristic of the high ratio of investment securities to total assets that
it maintains. Although loans have increased in each of the recent fiscal
periods, BancShares' ability to manage its liquidity is enhanced by the mortgage
loan department's ability to sell mortgage loans originated for liquidity or
other asset/liability management requirements.
Funds received from any maturing investments that are not immediately
necessary to sustain BancShares' liquidity are invested in similar instruments
or used to fund any increased loan demand. Investments scheduled to mature
within the one year time frame, without consideration of marketable equity
securities, represented 23.70% and 66.71% of the total investment securities
portfolio at December 31, 1999 and 1998, respectively.
In addition, BancShares held marketable equity securities with fair
values of $7.7 million and $9.6 million at December 31, 1999 and 1998,
respectively. These investments are classified as available for sale and could
be sold at management's discretion.
BancShares' consolidated statements of cash flows disclose the
principal sources and uses of cash from operating, investing, and financing
activities for 1999, 1998, and 1997. In 1999, BancShares' operating activities
provided cash flows of $9.8 million. Net income of $7.6 million, adjusted for
non-cash operating activities, provided the majority of cash generated from
operations. Investing activities, including lending, used $72.9 million of
BancShares' cash flow. Loans originated, net, of principal collected, used $84.8
million. Cash received in connection with the acquisition of branches provided
$66.3 million of BancShares' cash flow. Securities purchases, net of maturities,
used $45.0 million, and expenditures for premises and equipment utilized $9.2
million of BancShares' cash flow. Net additional cash inflows of $39.8 million
resulted from financing activities, principally from short-term and long-term
borrowing inflows of $11.3 million and $23.0 million, respectively.
In 1998, BancShares' operating activities provided cash flows of $12.6
million. Net income of $7.6 million, adjusted for non-cash operating activities,
provided the majority of cash generated from operations. Investing activities,
including lending, provided $26.2 million of BancShares' cash flow. Loans
originated, net, of principal collected, used $47.4 million. Cash received in
connection with the acquisition of branches provided $35.4 million of BancShares
cash flow. Securities maturities, net of purchases, provided $42.0 million, and
expenditures for premises and equipment utilized $4.1 million of BancShares'
cash flow. Net additional cash inflows of $28.9 million resulted from financing
activities, principally from deposit inflows of $29.3 million.
In 1997, BancShares' operating activities provided cash flows of $10.0
million. Net income of $7.4 million, adjusted for non-cash operating activities,
provided the majority of cash generated from operations. Investing activities,
including lending, utilized $30.0 million of BancShares' cash flow. Loans
originated, net of principal collected, used $23.7 million. Securities
purchases, net of maturities, utilized $3.3 million, and expenditures for
premises and equipment utilized $3.8 million, largely for de novo branching
during 1997. Net additional cash inflows of $30.3 million resulted from
financing activities, principally from deposit inflows of $26.1 million and
short-term borrowings of $5.1 million.
<PAGE>
The Bank has no brokered funds. Jumbo certificates of deposit ("CD's")
are considered to include all CD's of $100,000 or more. The Bank does not and
has never aggressively bid on these deposits, and it does not seek nor does it
accept deposits from outside of its general trade area. Almost all of the Bank's
jumbo CD customers have other relationships with the Bank, including savings,
demand and other time deposits and, in some cases, loans. At December 31, 1999
and 1998, jumbo CD's represented 9.26% and 9.63% of total deposits,
respectively.
In the opinion of management, BancShares has the ability to generate
sufficient amounts of cash to cover normal funding requirements and any
additional needs which may arise, within realistic limitations, during the next
twelve months, and management is not aware of any known demands, commitments or
uncertainties that will affect liquidity in a material way.
MARKET RISK. Market risk reflects the risk of economic loss resulting
from adverse changes in market price and interest rates. The risk of loss can be
reflected in either diminished current market values or reduced potential net
interest income in future periods.
BancShares' market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. Management seeks to
manage this risk through the use of shorter term maturities. The composition and
size of the investment portfolio is managed so as to reduce the interest rate
risk in the deposit and loan portfolios while at the same time maximizing the
yield generated by the portfolio.
The table below presents in tabular form the contractual balances and
the estimated fair value of financial instruments at their expected maturity
dates as of December 31, 1999. The expected maturity categories take into
consideration historical prepayment experience as well as management's
expectations based on the interest rate environment as of December 31, 1999. For
core deposits without contractual maturity (i.e., interest bearing checking,
savings and money market accounts), the table presents principal cash flows as
maturing in 2000 since they are subject to immediate repricing.
<TABLE>
<CAPTION>
Maturing in year ended December 31,
-----------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
--------- --------- --------- -------- -------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans:
Fixed rate ......................... $ 83,636 $ 62,300 $ 77,172 $ 24,899 $ 34,286 $ 29,700 $311,993 $ 312,185
Average rate (%) ................... 9.28% 8.71% 8.50% 8.34% 8.00% 7.81% 8.62%
Variable rate ...................... $115,486 $ 16,809 $ 12,892 $ 4,855 $ 4,202 $ 84,911 $239,155 $ 239,155
Average rate (%) ................... 9.29% 9.14% 9.35% 9.22% 9.16% 8.73% 9.08%
Investment securities (1):
Fixed rate ......................... $ 32,000 $102,997 -- -- -- $ 9 $135,006 $ 132,844
Average rate (%) ................... 5.39% 5.51% -- -- -- 10.86% 5.48%
Liabilities
Savings and interest bearing checking:
Fixed rate ......................... $266,549 -- -- -- -- -- $266,549 $ 266,549
Average rate (%) ................... 2.13% -- -- -- -- -- 2.13%
Certificates of deposit:
Fixed rate ......................... $281,665 $ 37,733 $ 17,036 $ 9,256 -- -- $345,690 $ 346,052
Average rate (%) ................... 4.97% 5.27% 5.66% 5.34% -- -- 5.05%
Short-term obligations:
Variable rate ...................... $ 22,973 -- -- -- -- -- $ 22,973 $ 22,973
Average rate (%) ................... 3.78% -- -- -- -- -- 3.78%
Long-term obligations:
Fixed rate ......................... -- -- -- -- -- $ 23,000 $ 23,000 $ 19,550
Average rate (%) ................... -- -- -- -- -- 8.50% 8.50%
</TABLE>
- ----------
(1) Marketable equity securities with a book value of approximately $2,645,000
and a fair value of approximately $7,749,000 have been excluded from this
table.
INTEREST SENSITIVITY. Deregulation of interest rates and short-term,
interest earning deposits which are more volatile, has created a need for
shorter maturities of interest earning assets. As a result, an increasing
percentage of commercial, installment, and mortgage loans are being made with
variable rates or shorter maturities to increase liquidity and interest rate
sensitivity.
The difference between interest sensitive asset and interest sensitive
liability repricing within time periods is referred to as the interest rate
sensitivity gap. Gaps are identified as either positive (interest sensitive
assets in excess of interest sensitive liabilities) or negative (interest
sensitive liabilities in excess of interest sensitive assets).
As of December 31, 1999, BancShares had a negative one year cumulative
gap position of 1.47% and a positive total cumulative gap position of 13.31%.
BancShares has interest earning assets of $386.9 million maturing or repricing
within one year and interest bearing liabilities of $398.0 million repricing
within one year. This is primarily the result of a maturing investment
portfolio, subsequently reinvested in securities with maturities greater than
one year. BancShares experienced growth in loans with maturities of one year or
less which were outpaced by the growth in deposits and short-term borrowings
which also had maturities of one year or less. A positive gap position implies
that interest earning assets (loans and investments) will reprice at a faster
rate than interest bearing liabilities (deposits). In a falling rate
environment, this position will generally have a negative effect on earnings,
while in a rising rate environment this position will generally have a positive
effect on earnings.
<PAGE>
INFLATION. The effect of inflation on financial institutions differs
from the impact on other types of businesses. Since assets and liabilities of
banks are primarily monetary in nature, they are more affected by changes in
interest rates than by the rate of inflation.
Inflation generates increased credit demands and fluctuations in
interest rates. Although credit demand and interest rates are not directly tied
to inflation, each can significantly impact net interest income. As in any
business and industry, expenses such as salaries, equipment, occupancy, and
other operating expenses are also subject to upward pressures created by
inflation.
Since the rate of inflation has been relatively stable during the last
several years, the impact of inflation of the earnings presented in this report
is insignificant.
CAPITAL RESOURCES.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY. Sufficient levels of capital
are necessary to sustain growth and absorb losses. To this end, the Federal
Reserve, which regulates BancShares, and the FDIC, which regulates the Bank,
have established risk based capital ("RBC") adequacy guidelines.
As of December 31, 1999, BancShares' Leverage Capital Ratio (as defined
herein) was 9.12%, as compared to 7.65% and 8.28%, respectively, at year-end
1998 and 1997. For regulatory purposes, a 5.00% Leverage Capital Ratio
represents a well capitalized financial institution.
Within RBC calculations, BancShares' assets, including commitments to
lend and other off-balance sheet items, are weighted according to Federal
regulatory guidelines for the risk considered inherent in the assets.
BancShares' Tier 1 Capital Ratio (as defined herein) as of December 31, 1999 was
12.06% which is, along with the ratios of 10.30% and 12.96% for 1998 and 1997,
respectively, representative of a well capitalized institution (one whose ratio
exceeds 6.00%). The increase in the Tier 1 Capital ratio in 1999 is attributed
to the issuance of the $23.0 million of Capital Trust Securities which qualify
as Tier 1 Capital. The calculation of Total Capital Ratio (as defined herein)
allows, in BancShares' circumstances, the inclusion of BancShares' allowance for
loan losses in capital, but only to a maximum of 1.25% of risk weighted assets.
As of December 31, 1999, BancShares' Total Capital Ratio was 13.34%, which is
representative of a well capitalized institution (one whose ratio exceeds
10.00%). The Total Capital Ratios for 1998 and 1997 were 11.87% and 14.09%,
respectively. The increase in the Total Capital ratio in 1999 is attributable to
the issuance of the $23.0 million of Capital Trust Securities. The decline in
ratios between 1997 and 1998 is due to the significant balance sheet growth from
acquisitions creating intangible assets, de novo branch openings, and normal
growth in the existing branch network.
These ratios will improve if BancShares' capital increases at a rate
proportionately faster than liabilities. Management is aware that growth must be
controlled. BancShares' recent expansion plans discussed elsewhere herein may
appear to be contrary to this policy but management is also aware that the
process of expanding market share by normal business processes can be very
difficult and expensive. Management believes that improvement in its overall
market share within an existing trade area is valuable in the long run and
should be pursued by BancShares, when it can be done prudently.
BancShares' primary source of new capital is earnings. In 1999, equity
capital increased through retention of earnings by $6.7 million, compared to
$6.7 million in 1998 and $6.5 million in 1997. BancShares' internal capital
generation rate was 10.08% in 1999, 10.89% in 1998 and 11.81% in 1997. At
December 31, 1999, shareholders' equity totaled $69.9 million compared to $64.8
million in 1998. Shareholders' equity for 1999 and 1998 included, as discussed
above, $3.0 million and $4.2 million, respectively, of net unrealized securities
gains on available for sale securities.
The ratio of average shareholders' equity to average total assets was
8.87% in 1999, 10.14% in 1998 and 9.83% in 1997.
Retention of sufficient earnings to maintain an adequate capital
position that provides BancShares with expansion capabilities is an important
factor in determining dividends. During 1999, BancShares paid $905,000 in
dividends, versus $909,000 in both 1997 and 1996. As a percentage of net income,
dividends were 11.85% in 1999,
<PAGE>
11.88% in 1998 and 12.31% in 1997. The decrease in dividends paid in 1999
compared to 1998 and 1997 is attributable to a decrease in the number of shares
outstanding during 1999.
ACCOUNTING AND OTHER MATTERS.
In June, 1998, the Financial Accounting Standard Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This statement, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Adoption of this pronouncement is not expected to
have a material effect on BancShares' consolidated financial statements.
In October 1998, FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement allows
mortgage-banking firms to account for certain securities and other interests
retained after securitizing mortgage loans that were held for sale based on the
intent and ability to hold or sell such investments. This statement is effective
for the first fiscal quarter beginning after December 15, 1998. Adoption of this
pronouncement did not have a material effect on BancShares' consolidated
financial statements.
Management is not aware of any other trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on BancShares' liquidity, capital
resources or other operations.
STATISTICAL INFORMATION.
The following tables contain certain additional information regarding
BancShares' business operations.
TABLE I.
AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
------------------------------- ----------------------------- ----------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance(1) Expense Rate Balance(1) Expense Rate Balance(1) Expense Rate
--------- ---------- -------- --------- --------- ----- ---------- -------- -----
(Dollars in thousands, taxable-equivalent)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans ..................... $ 493,023 $ 45,380 9.20% $ 390,162 $ 37,706 9.66% $ 349,526 $ 34,119 9.76%
Taxable investment
securities .............. 131,509 7,168 5.45 105,157 6,009 5.71 144,218 8,440 5.85
Non taxable investment
securities (2) .......... 137 8 5.84 570 33 5.79 88 5 5.68
Federal funds sold ........ 35,189 1,764 5.01 50,527 2,664 5.27 8,519 461 5.41
Other investments ......... 10,003 306 3.06 12,932 260 2.01 12,059 229 1.90
Cash and due from banks ... 16,696 872 5.22 -- -- -- -- -- --
--------- ---------- ------- --------- --------- ----- ---------- -------- ----
Total interest earning assets .. 686,557 $ 55,498 8.08% 559,348 $ 46,672 8.34% 514,410 $ 43,254 8.41%
--------- ---------- ------- --------- --------- ----- ---------- -------- -----
Noninterest earning assets:
Cash and due from banks ... 24,948 19,602 15,811
Premises and equipment .... 28,454 22,860 19,974
Other assets .............. 18,266 12,502 12,175
Reserve for loan losses ... (4,939) (4,006) (4,251)
--------- --------- ----------
Total assets ................... $ 753,286 $ 610,306 $ 558,119
========= ========= ==========
Liabilities & Equity
Interest bearing liabilities:
Demand deposits ........... $ 180,744 $ 4,540 2.51% $ 138,573 $ 3,866 2.79% $ 118,582 $ 3,321 2.80%
Savings deposits .......... 54,519 985 1.81 46,444 1,136 2.45 46,008 1,142 2.48
Time deposits ............. 318,608 15,960 5.01 271,068 14,477 5.34 262,000 14,230 5.43
Short-term borrowings (3).. 18,201 664 3.65 9,914 413 4.17 7,389 324 4.38
Long-term borrowings ...... 12,603 1,064 8.44 -- -- -- -- -- --
--------- ---------- ------- --------- --------- ----- ---------- -------- -----
Total interest bearing
liabilities ............... 584,675 $ 23,213 3.97% 465,999 $ 19,892 4.27% 433,979 $ 19,017 4.38%
--------- ---------- ------- --------- --------- ----- ---------- -------- -----
Noninterest bearing
liabilities:
Demand deposits ........... 93,695 72,587 61,395
Other ..................... 8,112 9,850 7,905
Shareholders' equity ........... 66,804 61,870 54,840
--------- --------- ----------
Total liabilities and equity.... $ 753,286 $ 610,306 $ 558,119
========= ========= ==========
Interest rate spread (4) ....... 4.11% 4.08% 4.03%
======= ===== =====
Net interest income and net
interest margin (5) ....... $ 32,285 4.70% $ 26,780 4.79% $ 24,237 4.71%
========== ======== ========= ===== ======== =====
</TABLE>
- ----------
(1) Average balances include non-accrual loans.
(2) The average rate on nontaxable loans and investment securities has been
adjusted to a tax equivalent yield using a 34% tax rate.
(3) See Table X.
(4) Interest rate spread is the difference between earning asset yield and
interest bearing liability rate.
(5) Net interest margin is net interest income divided by average earning
assets.
<PAGE>
TABLE II.
AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
<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
---------- ---------- ---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans ................................. $ 590,560 $(582,886) $ 7,674 $ 217,135 $(213,548) $ 3,587
Taxable investment securities ......... 89,738 (88,579) 1,159 (105,566) 103,135 (2,431)
Non taxable investment securities ..... (1,280) 1,255 (25) 1,379 (1,351) 28
Federal funds sold .................... (34,328) 33,428 (900) 115,355 (113,152) 2,203
Other investments ..................... (9,701) 9,747 46 172 (141) 31
Cash and due from banks ............... 436 436 872 -- -- --
---------- ---------- ---------- --------- ---------- ---------
Total interest earning assets .............. $ 635,425 $(626,599) $ 8,826 $ 228,475 $(225,057) $ 3,418
---------- ---------- ---------- --------- ---------- ---------
Liabilities & Equity
Interest bearing liabilities:
Demand deposits ....................... $ 78,426 $ (77,752) $ 674 $ 28,902 $ (28,357) $ 545
Savings deposits ...................... 24,645 (24,796) (151) 1,371 (1,377) (6)
Time deposits ......................... 172,611 (171,128) 1,483 36,614 (36,367) 247
Short-term borrowings ................. 19,953 (19,702) 251 6,390 (6,301) 89
Long-term borrowings .................. 532 532 1,064 -- -- --
---------- ---------- ---------- --------- ---------- ---------
Total interest bearing liabilities 296,167 (292,846) 3,321 73,277 (72,402) 875
---------- ---------- ---------- --------- ---------- ---------
Change in net interest income ......... $ 339,258 $(333,753) $ 5,505 $ 155,198 $(152,655) $ 2,543
========== ========== ========== ========= ========== =========
</TABLE>
- ----------
Average loan balances include nonaccrual loans. BancShares earns
tax-exempt interest on certain loans and investment securities due to the
borrower or issuer being either a governmental agency or a quasi-governmental
agency. 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 34% for all periods. The taxable equivalent adjustment was immaterial
for the years 1999, 1998 and 1997, respectively. The rate/volume variance is
allocated equally between the changes in volume and rate.
TABLE III. INVESTMENT PORTFOLIO.
The following table sets for the carrying amount of investment
securities:
December 31,
-----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
U.S. Treasury and U.S. Government agencies $133,006 $ 90,146 $130,131
States and political subdivisions ........ 2,000 -- 2,000
Marketable equity securities ............. 7,749 9,608 11,809
-------- -------- --------
Total ................................ $142,755 $ 99,754 $143,940
======== ======== ========
The following table sets forth the maturities of investment securities
at December 31, 1999 and the weighted average yields of such securities. (Note
that nontaxable investment securities have not been adjusted to a tax equivalent
basis and unrealized gain (loss) on available for sale securities is not
included.)
<TABLE>
<CAPTION>
Maturing After One
Within One Year But Within Five Years After Ten Years
------------------- --------------------- ---------------
Amount Yield Amount Yield Amount Yield
-------- ------ --------- ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies (1) $30,000 5.50% $102,997 5.51% $ 9 10.86%
States and political subdivisions .................. 2,000 3.81 -- -- -- --
Other (2) .......................................... 2,645 5.80 -- -- -- --
------- ---- -------- ---- ----- -----
Total ........................................... $34,645 5.43% $102,997 5.51% $ 9 10.86%
======= ==== ======== ==== ===== =====
</TABLE>
- ----------
(1) Mortgage-backed securities are included in the obligations of U.S.
Government agencies and spread within the columns according to their
anticipated repayment schedules.
(2) The "Within One Year" column of the "Other" category includes
marketable equity securities held by BancShares. Accordingly, the yield
on these securities represents anticipated dividend income rather than
interest income.
TABLE IV. LOAN PORTFOLIO
ANALYSIS OF LOANS BY TYPE AND MATURITY
The table below classifies loans by major category:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- ---------- --------- ----------
(Dollars in thousands)
Real estate:
<S> <C> <C> <C> <C> <C>
Construction and land development $ 79,576 $ 51,499 $ 33,851 $ 28,787 $ 24,728
Mortgage:
One to four family residential 141,937 134,681 141,301 144,331 99,228
Commercial ................... 74,320 65,339 57,222 51,629 48,736
Equity lines of credit ....... 75,015 62,205 44,915 35,971 29,011
Other ........................ 5,502 4,983 4,579 5,839 4,757
Commercial and industrial ............. 124,858 79,724 41,851 36,330 30,080
Consumer .............................. 37,675 33,849 28,630 26,934 24,870
Agricultural .......................... 3,957 4,523 3,335 2,669 2,368
Other ................................. 8,308 2,405 2,566 2,390 5,153
---------- --------- ---------- ---------- ----------
Total ........................ 551,148 439,208 358,250 334,880 268,931
Less allowance for loan losses ........ (5,142) (4,601) (4,145) (4,139) (4,078)
---------- --------- ---------- ---------- ----------
Net loans .................... $ 546,006 $ 434,607 $ 354,105 $ 330,741 $ 264,853
========== ========= ========== ========== ==========
</TABLE>
The following table identifies the maturities of all loans as of
December 31, 1999 and addresses the sensitivity of these loans to changes in
interest rates.
LOAN SENSITIVITY
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------
Within One to Five After Five
One Year Years Years Total
-------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate - construction and land development $ 79,576 $ -- $ -- $ 79,576
Commercial and industrial ..................... 45,101 53,774 25,983 124,858
Other ......................................... 74,445 183,640 88,629 346,714
-------- --------- -------- ---------
Total ................................ $199,122 $237,414 $114,612 $551,148
======== ========= ======== =========
Loans maturing after one year with:
Fixed interest rates ..................... $198,656 $ 29,701 $228,357
Floating or adjustable rates ............. 38,758 84,911 123,669
--------- -------- ---------
Total ................................ $237,414 $114,612 $352,026
========= ======== =========
</TABLE>
NONPERFORMING ASSETS
The following analysis identifies other real estate owned and loans
that were either non-accruing, past-due or restructured:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- --------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ............................ $ -- $ -- $ -- $ -- $ --
Restructured loans .......................... -- -- -- -- --
-------- -------- --------- ------- --------
Total nonperforming loans .............. -- -- -- -- --
Other real estate ........................... 117 111 57 57 --
-------- -------- --------- ------- --------
Total nonperforming assets ............. $ 117 $ 111 $ 57 $ 57 $ --
======== ======== ========= ======= ========
Accruing loans 90 days or more past due ..... $ -- $ -- $ -- $ 85 $ 10
Loans at December 31 ........................ $551,148 $439,208 $358,250 $334,880 $268,931
Ratio of nonperforming assets to total loans
plus other real estate ................. 0.02% 0.03% 0.02% 0.02% --
Interest income that would have been earned
on nonperforming loans had they been
performing ............................. $ -- $ -- $ -- $ -- $ --
Interest income earned on nonperforming loans $ -- $ -- $ -- $ -- $ --
</TABLE>
Loans are placed on a non-accrual basis when they become 90 days past due and
the ability of the borrower to comply with the present terms is doubtful.
TABLE V. SUMMARY OF LOAN LOSS EXPERIENCE
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The table presented below summarizes activity in the allowance for loan
losses for each of the years in the five year period ended December 31, 1999:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses - beginning of year ..... $ 4,601 $ 4,145 $ 4,139 $ 4,078 $ 3,786
Charge-offs:
Commercial, financial, and agricultural ....... 430 96 196 32 --
Real estate:
Construction ................................ -- -- -- -- --
Mortgage:
One to four family ........................ 994 1,192 273 283 --
Commercial ................................ -- -- -- -- --
Equity lines of credit .................... -- -- -- 19 --
Other ..................................... 4 -- -- -- --
Consumer .................................... 206 253 379 262 153
--------- -------- -------- -------- --------
Total charge-offs ................................. 1,634 1,541 848 596 153
--------- -------- -------- -------- --------
Recoveries:
Commercial, financial, and agricultural ....... 208 36 63 3 9
Real estate:
Construction ................................ -- -- -- -- --
Mortgage:
One to four family ........................ 291 1,193 308 90 --
Commercial ................................ -- -- -- -- --
Equity lines of credit .................... -- -- -- 19 --
Other ..................................... 4 -- -- -- --
Consumer .................................... 192 138 123 68 76
--------- -------- -------- -------- --------
Total recoveries .................................. 695 1,367 494 180 85
--------- -------- -------- -------- --------
Net charge-offs ................................... 939 174 354 416 68
Provision for loan losses ......................... 1,200 630 360 360 360
Addition due to acquired branches ................. 280 -- -- -- --
Addition from acquisition of Perpetual Savings Bank -- -- -- 117 --
--------- -------- -------- -------- --------
Allowance for loan losses - end of year ........... $ 5,142 $ 4,601 $ 4,145 $ 4,139 $ 4,078
========= ======== ======== ======== ========
Average loans outstanding during the year ......... $493,023 $390,162 $349,526 $297,229 $260,103
========= ======== ======== ======== ========
Ratio of net charge-offs to average loans
outstanding ................................... 0.19% 0.04% 0.10% 0.14% 0.03%
========= ======== ======== ======== ========
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The composition of the allowance by loan category shown in the table
below is based upon management's evaluation of the loan portfolio, past history,
and prevailing economic conditions:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- -------------------- ------------------ ----------------- -----------
% of loan % of loans % of loans % of loans % of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------- --------- ------ ------- ------ ----- ------ -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Construction and land
development ............. 159 14% $ 154 12% $ 102 10% $ 86 9% $ 74 9%
Mortgage:
One to four family
residential ........... 286 26 456 31 617 39 659 43 560 37
Commercial .............. 166 14 328 15 620 16 681 15 750 18
Equity lines of
credit ................ 150 14 187 14 135 13 108 11 87 11
Commercial, industrial
and agricultural........... 2,712 23 2,132 19 1,227 12 1,088 11 942 11
Consumer ...................... 851 7 911 8 958 8 956 8 950 9
Other ......................... 228 2 72 1 77 2 72 3 155 5
Unallocated ................... 590 -- 361 -- 409 -- 489 -- 560 --
------- --------- ------ ------- ------ ----- ------ -------- ------- --------
Total ..................... $5,142 100% $4,601 100% $4,145 100% $4,139 100% $4,078 100%
======= ========= ======= ======= ======= ===== ====== ======== ======= ========
</TABLE>
TABLE VI. DEPOSITS
The average monthly volume of deposits, which is considered
representative of BancShares' operations, and the average rates paid on such
deposits are presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------- ---------------------
Average Average Average Average Average Average
Balance Rates Balance Rates Balance Rates
--------- -------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 93,695 -% $ 72,587 -% $ 61,395 -%
Interest bearing demand ... 180,744 2.51 138,573 2.79 118,582 2.80
Savings ................... 54,519 1.81 46,444 2.45 46,008 2.48
Time deposits ............. 318,608 5.01 271,068 5.34 262,000 5.43
------- ------- -------
Total deposits ........ $647,566 $528,672 $487,985
======= ======= =======
</TABLE>
Maturities of time certificates of deposit of $100,000 or more at
December 31, 1999 are summarized as follows (dollars in thousands):
Maturity category:
Three months or less ................ $23,397
Over three through six months ....... 13,201
Over six months through twelve months 17,298
Over one year ....................... 12,401
-------
$66,297
=======
<PAGE>
TABLE VII. RETURN ON EQUITY AND ASSETS
The following table presents certain ratios of BancShares:
Year ended December 31,
------------------------
1999 1998 1997
------ ------ ------
Return on average assets.. 1.01% 1.25% 1.32%
Return on average equity.. 11.43 12.36 13.47
Dividend payout ratio .... 11.85 11.88 12.31
Equity to assets ratio ... 8.87 10.14 9.83
TABLE VIII. CAPITAL ADEQUACY
The following table presents certain calculations of BancShares'
capital and related ratios:
December 31,
---------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
Total shareholders' equity $69,895 $64,808 $59,117
Leverage capital ......... 75,601 50,656 47,477
Tier I capital ........... 75,601 50,656 47,477
Total capital ............ 83,665 58,381 51,622
Leverage capital ratio (1) 9.12% 7.65% 8.28%
Tier I capital ratio ..... 12.06 10.30 12.96
Total capital ratio (2) .. 13.34 11.87 14.09
- ----------
(1) Bank holding companies operating at the 3% minimum are expected to have
well diversified risk profiles, including no undue interest rate risk,
excellent asset quality, high liquidity and strong earnings. Bank holding
companies not meeting these requirements are expected to maintain a
leverage ratio somewhat higher than the 3% minimum applicable to the
highest rated companies.
(2) The minimum ratio of qualifying total capital to risk weighted assets is
8%, of which 4% must be Tier 1 capital, which is common equity, retained
earnings, and a limited amount of perpetual preferred stock, less certain
intangibles.
TABLE IX. INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------------------------------
1-30 31-90 91-180 181-365 Total
Days Days Days Days One-Year Total
Sensitive Sensitive Sensitive Sensitive Sensitive Nonsensitive Total
--------- ---------- ----------- ---------- ----------- ------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans ................................. $ 226,991 $ 25,221 $ 13,098 $ 26,197 $ 291,507 $ 259,641 $ 551,148
Investment securities ................. -- 30,000 -- 2,000 32,000 110,756 142,756
Federal funds sold .................... 22,600 -- -- -- 22,600 -- 22,600
Other ................................. -- -- -- -- -- 2,059 2,059
Interest bearing deposits in
other banks ....................... 40,748 -- -- -- 40,748 -- 40,748
--------- ---------- ----------- ---------- ----------- ---------- ---------
Total interest earning
assets .......................... $ 290,339 $ 55,221 $ 13,098 $ 28,197 $ 386,855 $ 372,456 $ 759,311
========= ========== =========== ========== =========== ========== =========
Liabilities:
Savings and checking with interest .... $ -- $ -- $ -- $ -- $ -- $ 173,180 $ 173,180
Money market savings .................. 93,369 -- -- -- 93,369 -- 93,369
Time deposits ......................... 47,725 72,951 78,069 82,920 281,665 64,025 345,690
Short-term borrowings ................. 22,973 -- -- -- 22,973 -- 22,973
Long-term borrowings .................. -- -- -- -- -- 23,000 23,000
--------- ---------- ----------- ---------- ----------- ---------- ---------
Total interest bearing
liabilities ..................... $ 164,067 $ 72,951 $ 78,069 $ 82,920 $ 398,007 $ 260,205 $ 658,212
========= ========== =========== ========== =========== ========== =========
Interest sensitivity gap............... $ 126,272 $ (17,730) $ (64,971) $ (54,723) $ (11,152) $ 112,251 $ 101,099
========= ========== =========== ========== =========== ========== =========
Cumulative interest sensitivity gap.... $ 126,272 $ 108,542 $ 43,571 $ (11,152) $ (11,152) $ 101,099 $ 101,099
Cumulative interest sensitivity gap
to total interest earning assets... 16.63% 14.29% 5.74% (1.47)% (1.47)% 13.31% 13.31%
</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.
TABLE X. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1999 1998 1997
------------------- --------------------- -----------------
Amount Rate Amount Rate Amount Rate
-------- ------- ----------- ------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal funds purchased:
At December 31 ...................... $ -- -% $ -- -% $ -- --%
Average during year ................. 45 5.28 -- -- 896 5.53
Maximum month end balance during year -- -- 48
Repurchase agreements:
At December 31 ...................... $19,753 4.52% $ 11,467 3.21% $ 7,632 4.12%
Average during year ................. 16,079 3.50 8,251 3.87 4,741 3.86
Maximum month end balance during year 23,145 11,467 7,632
US Treasury tax and loan accounts:
At December 31 ...................... $ 3,220 3.66% $ 150 4.11% $ 3,419 5.25%
Average during year ................. 2,078 4.79 1,661 5.55 1,752 5.20
Maximum month end balance during year 4,396 3,591 3,594
</TABLE>
TABLE XI. SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- --------------------------------------
Fourth Third Second First Fourth Third Second First
------- -------- --------- -------- -------- -------- -------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income............................. $15,586 $14,348 $13,059 $12,386 $12,420 $11,716 $11,329 $11,105
Interest Expense ........................... 6,729 6,126 5,220 5,138 5,237 4,968 4,866 4,821
------- -------- --------- -------- -------- -------- -------- -------
Net interest income......................... 8,857 8,222 7,839 7,248 7,183 6,748 6,463 6,284
Provision for loan losses................... 300 300 300 300 300 150 90 90
------- -------- --------- -------- -------- -------- -------- -------
Net interest income after
provision for loan losses............... 8,557 7,922 7,539 6,948 6,883 6,598 6,373 6,194
Noninterest income.......................... 1,420 1,251 1,251 1,261 1,697 1,154 1,098 1,527
Noninterest expense......................... 6,694 6,258 5,563 5,529 6,230 4,791 4,294 4,103
------- -------- --------- -------- -------- -------- -------- -------
Net income before income taxes.............. 3,283 2,915 3,227 2,680 2,350 2,961 3,177 3,618
Income taxes ............................... 1,087 962 1,358 1,061 820 1,051 1,245 1,341
------- -------- --------- -------- -------- -------- -------- -------
Net income ................................. $ 2,196 $ 1,953 $ 1,869 $ 1,619 $ 1,530 $ 1,910 $ 1,932 $ 2,277
======= ======== ========= ======== ======== ======== ======== =======
PER SHARE OF STOCK
Net income per common share................. $ 77.89 $ 69.28 $ 65.90 $ 56.98 $ 53.85 $ 67.23 $ 68.01 $ 80.16
Cash dividends - common .................... 8.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00
</TABLE>
YEAR 2000 ISSUE
BancShares' year 2000 ("Y2K") plan was detailed in previous Form 10-Q
filings with the Securities and Exchange Commission during 1999 as well as in
BancShares' S-1 filing during June 1999. BancShares experienced no significant
issues or interruptions in business as a result of the Y2K date change. No
changes occurred to the Y2K plan or contingency plans as a result of the date
change. BancShares expects no further activities or additional costs necessary
for the Y2K issue.
<PAGE>
FORWARD-LOOKING STATEMENTS
This discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of the
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," "anticipate," or other statements concerning
opinions or judgements 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.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is included in Item 7 in the text of BancShares' Management's
Discussion and Analysis of Financial Condition and Results of Operations (under
the caption "Liquidity, Market Risk and Interest Sensitivity") and is
incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fidelity BancShares (N.C.), Inc.:
We have audited the accompanying consolidated balance sheets of
Fidelity BancShares (N.C.), Inc. and subsidiaries (the "Company") 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 includes
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 Fidelity
BancShares (N.C.), 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.
/s/ KPMG LLP
- ---------------
Raleigh, North Carolina
February 18, 2000
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Assets
Cash and due from banks ........................................................... $ 31,510,348 $ 31,137,382
Interest bearing deposits in other banks .......................................... 40,747,611 --
Federal funds sold ................................................................ 22,600,000 87,050,000
------------- -------------
Total cash and cash equivalents ............................................ 94,857,959 118,187,382
------------- -------------
Investment securities:
Held to maturity (estimated fair value of $132,844,174 in 1999 and
$90,567,934 in 1998) ....................................................... 135,006,444 90,146,476
Available for sale (cost of $2,644,600 in 1999 and 1998) ...................... 7,749,252 9,608,000
------------- -------------
Total investment securities ................................................ 142,755,696 99,754,476
------------- -------------
Loans ............................................................................. 551,148,143 439,207,586
Allowance for loan losses ......................................................... (5,141,647) (4,601,000)
------------- -------------
Loans, net ................................................................. 546,006,496 434,606,586
------------- -------------
Federal Home Loan Bank of Atlanta stock, at cost .................................. 2,059,300 1,862,402
Premises and equipment, net ....................................................... 32,834,942 24,877,879
Accrued interest receivable ....................................................... 4,824,267 3,651,655
Intangible assets ................................................................. 13,898,119 10,395,185
Other assets ...................................................................... 1,850,852 798,698
------------- -------------
Total assets ............................................................... $ 839,087,631 $ 694,134,263
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits ........................................... $ 103,774,405 $ 87,883,295
Savings and interest-bearing demand deposits .................................. 266,549,100 218,615,950
Time deposits ................................................................. 345,690,121 303,147,090
------------- -------------
Total deposits ............................................................. 716,013,626 609,646,335
Short-term borrowings ............................................................. 22,972,551 11,617,344
Long-term borrowings .............................................................. 23,000,000 --
Accrued interest payable .......................................................... 4,729,785 4,123,464
Other liabilities ................................................................. 2,476,970 3,938,944
------------- -------------
Total liabilities .......................................................... 769,192,932 629,326,087
------------- -------------
Shareholders' equity:
Common stock ($25 par value; 29,200 shares authorized; 28,170 and 28,410 shares
issued and outstanding in 1999 and 1998, respectively) ..................... 704,250 710,250
Surplus ....................................................................... 6,198,366 6,251,174
Accumulated other comprehensive income ........................................ 3,021,971 4,186,818
Retained earnings ............................................................. 59,970,112 53,659,934
------------- -------------
Total shareholders' equity ................................................. 69,894,699 64,808,176
------------- -------------
Total liabilities and shareholders' equity ................................. $ 839,087,631 $ 694,134,263
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans ..................... $45,264,188 $37,614,925 $34,116,250
Interest and dividends on investment securities:
Non taxable interest income ................. 5,080 21,840 3,150
Taxable interest income ..................... 8,039,638 6,008,666 8,439,973
Dividend income ............................. 305,726 259,928 228,370
Interest on federal funds sold ................. 1,764,036 2,664,161 461,434
---------- ---------- ----------
Total interest income .................... 55,378,668 46,569,520 43,249,177
---------- ---------- ----------
Interest expense:
Deposits ....................................... 21,484,771 19,478,840 18,692,963
Short-term borrowings .......................... 664,136 412,516 323,548
Long-term borrowings ........................... 1,064,389 -- --
---------- ---------- ----------
Total interest expense ................... 23,213,296 19,891,356 19,016,511
---------- ---------- ----------
Net interest income ...................... 32,165,372 26,678,164 24,232,666
Provision for loan losses .......................... 1,200,000 630,000 360,000
---------- ---------- ----------
Net interest income after provision for
loan losses ........................... 30,965,372 26,048,164 23,872,666
---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts ............ 2,999,046 2,557,659 2,310,203
Other service charges and fees ................. 2,091,139 1,857,945 1,565,952
Gain on sale of mortgage servicing rights ...... -- 507,456 --
Other income ................................... 92,966 553,561 98,241
---------- ---------- ----------
Total noninterest income ................. 5,183,151 5,476,621 3,974,396
---------- ---------- ----------
Noninterest expenses:
Salaries and employee benefits ................. 12,556,789 9,471,641 8,232,811
Occupancy and equipment ........................ 4,405,599 3,699,708 3,164,555
Data processing ................................ 1,924,771 1,420,359 1,213,034
Amortization of intangibles .................... 924,312 598,709 588,683
Other expense .................................. 4,232,231 4,227,997 2,678,520
---------- ---------- ----------
Total noninterest expense ................ 24,043,702 19,418,414 15,877,603
---------- ---------- ----------
Net income before income taxes ........... 12,104,821 12,106,371 11,969,459
Income tax expense ................................. 4,468,172 4,457,000 4,581,823
---------- ---------- ----------
Net income ............................... $ 7,636,649 $ 7,649,371 $ 7,387,636
=========== =========== ===========
Per share information:
Net income ..................................... $ 270.05 $ 269.25 $ 260.04
Cash dividends declared ........................ $ 32.00 $ 32.00 $ 32.00
Weighted average shares outstanding ............ 28,279 28,410 28,410
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
---------------- COMPREHENSIVE RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT SURPLUS INCOME EARNINGS INCOME EQUITY
-------- -------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 ............. 28,410 $710,250 $6,251,174 $ 3,839,402 $40,441,167 $ 51,241,993
Net income for 1997 ............... -- -- -- -- 7,387,636 $ 7,387,636 7,387,636
Cash dividends ($32.00
per share) ..................... -- -- -- -- (909,120) -- (909,120)
Unrealized gain on securities
available for sale, net of
deferred taxes of $1,152,886 ... -- -- -- 1,396,594 -- 1,396,594 1,396,594
------ -------- ---------- ----------- ----------- ----------- ------------
Comprehensive income .............. $ 8,784,230
===========
Balance December 31, 1997 ............. 28,410 710,250 6,251,174 5,235,996 46,919,683 59,117,103
------ -------- ---------- ----------- ----------- ------------
Net income for 1998 ............... -- -- -- -- 7,649,371 $ 7,649,371 7,649,371
Cash dividends ($32.00 per share) . -- -- -- -- (909,120) -- (909,120)
Unrealized loss on securities
available for sale, net of
deferred taxes of $695,947 ..... -- -- -- (1,049,178) -- (1,049,178) (1,049,178)
------ -------- ---------- ----------- ----------- ----------- ------------
Comprehensive income .............. $ 6,600,193
===========
Balance December 31, 1998 ............. 28,410 710,250 6,251,174 4,186,818 53,659,934 64,808,176
------ -------- ---------- ----------- ----------- ------------
Net income for 1999 ............... -- -- -- -- 7,636,649 $ 7,636,649 7,636,649
Cash dividends ($32.00 per share) . -- -- -- -- (905,280) -- (905,280)
Purchase and retirement of
common stock ................... (240) (6,000) (52,808) -- (421,191) -- (479,999)
Unrealized loss on securities
available for sale, net of
deferred taxes of $693,901 ..... -- -- -- (1,164,847) -- (1,164,847) (1,164,847)
------ -------- ---------- ----------- ----------- ----------- ------------
Comprehensive income .............. $ 6,471,802
===========
Balance December 31, 1999 ............. 28,170 $704,250 $6,198,366 $ 3,021,971 $59,970,112 $ 69,894,699
====== ======== ========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 7,636,649 $ 7,649,371 $ 7,387,636
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................................ 3,216,484 2,560,884 2,192,046
Amortization (accretion) on investment securities ........................ 132,266 23,475 (16,999)
Loss (gain) on disposition of premises and equipment ..................... 1,637 97,994 (4,569)
Provision for loan losses ................................................ 1,200,000 630,000 360,000
Origination of loans held for sale ....................................... (12,818,050) (18,860,150) (6,811,425)
Proceeds from sales of loans held for sale ............................... 12,860,521 18,920,919 6,845,794
Gain on sales of loans held for sale ..................................... (42,471) (60,769) (34,369)
Deferred income taxes .................................................... (581,537) (523,835) (163,177)
Decrease (increase) in accrued interest receivable ....................... (1,172,612) 417,389 (321,228)
Decrease (increase) in other assets, net ................................. (1,052,154) 516,341 258,732
Increase (decrease) in other liabilities, net ............................ (186,536) 399,183 126,118
Increase in accrued interest payable ..................................... 606,321 820,017 167,167
------------ ----------- -----------
Net cash provided by operating activities ............................. 9,800,518 12,590,819 9,985,726
------------ ----------- -----------
Cash flows from investing activities:
Purchase of securities held to maturity ..................................... (104,996,900) (75,256,467) (46,854,606)
Return of capital on securities available for sale .......................... -- 456,000 --
Proceeds from maturities and issuer calls of securities held to maturity..... 60,004,666 117,217,555 43,551,896
Purchase of FHLB of Atlanta stock ........................................... (196,898) (59,102) (149,400)
Net increase in loans ....................................................... (84,841,466) (47,437,432) (23,724,169)
Purchases of premises and equipment ......................................... (9,171,037) (4,077,361) (3,840,387)
Proceeds from sales of premises and equipment ............................... 2,000 18,671 975,581
Net cash received on purchases of branches .................................. 66,305,756 35,375,611 --
------------ ----------- -----------
Net cash provided (used) in investing activities ...................... (72,893,879) 26,237,475 (30,041,085)
------------ ----------- -----------
Cash flows from financing activities:
Net increase in deposits .................................................... 6,794,010 29,276,749 26,097,049
Net increase in short-term borrowings ....................................... 11,355,207 566,029 5,076,673
Net increase in long-term borrowings ........................................ 23,000,000 -- --
Cash dividends paid ......................................................... (905,280) (909,120) (909,120)
Purchase and retirement of common stock ..................................... (479,999) -- --
------------ ----------- -----------
Net cash provided by financing activities ............................. 39,763,938 28,933,658 30,264,602
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents................... (23,329,423) 67,761,952 10,209,243
Cash and cash equivalents at beginning of year .................................. 118,187,382 50,425,430 40,216,187
------------ ----------- -----------
Cash and cash equivalents at end of year ........................................ $ 94,857,959 $ 118,187,382 $ 50,425,430
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest .................................... $ 22,606,975 $ 19,071,339 $ 18,849,344
============= ============= =============
Cash paid during the period for income taxes ................................ $ 4,524,559 $ 4,959,400 $ 4,437,300
============= ============= =============
Supplemental disclosure of noncash financing and investing activities:
Unrealized gains (losses) on available-for-sale securities, net of
deferred tax effects of $693,901, $695,947 and $1,152,886,
respectively ............................................................. $ (1,164,847) $ (1,049,178) $ 1,396,594
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(a) NATURE OF OPERATIONS
Fidelity BancShares (N.C.), Inc. (the "Company") is a bank holding
company incorporated under the General Corporation Law of the State of Delaware.
The principal activity of the Company is ownership of The Fidelity Bank (the
"Bank"), which operates fifty-nine offices primarily in central North Carolina,
and FIDBANK Capital Trust I (the "Trust"), a statutory business trust created
under the laws of the State of Delaware that issued $23.0 million of 8.50%
Capital Securities (the "Capital Securities") in June 1999 maturing in 2029.
The Bank's primary source of revenue is derived from interest income on
loans to customers and from its investment securities portfolio. The loan
portfolio is comprised mainly of real estate, commercial, consumer, and equity
line of credit loans. These loans are primarily collateralized by residential
and commercial properties, commercial equipment, and personal property.
(b) CONSOLIDATION
The accompanying consolidated financial statements of the Company
include the accounts of the Bank and the Trust, the Company's wholly-owned
subsidiaries. The Bank also has two wholly-owned subsidiaries, Fidelity
Properties, Inc. and TFB Financial Services. Fidelity Properties, Inc. was
incorporated on November 2, 1995 under the laws of the State of North Carolina.
There have been no transactions by Fidelity Properties, Inc. other than the
initial capitalization of 100,000 shares of no par value common stock. TFB
Financial Services, Inc., provides depositors alternative non-deposit investment
products. All significant intercompany transactions have been eliminated in
consolidation.
(c) BASIS OF FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the reporting date and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(d) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks,
and federal funds sold. Generally, federal funds are purchased and sold for
one-day periods.
(e) INVESTMENT SECURITIES
The Company accounts for investment securities under Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". This statement addresses
<PAGE>
the accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
These investments are to be classified into three categories and accounted for
as follows: (1) debt securities that the entity has the positive intent and the
ability to hold to maturity are classified as held-to-maturity and reported at
amortized cost; (2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings; and (3) debt and equity securities not classified as
either securities held to maturity or trading securities are classified as
available for sale and consist of securities which may be sold in response to
changes in interest rates, prepayment risk, regulatory capital requirements and
liquidity needs. Such securities are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity. The classification of securities is determined by
management at the date of purchase.
Amortization of premiums and accretion of discounts are recognized as
adjustments to interest income using the interest method. Gains and losses on
sales of securities, computed based on specific identification of the amortized
cost of each security, are included in other income at the time of the sale.
(f) LOANS
Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest on loans is recorded as earned on an accrual
basis.
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are current or past due less than 90 days may
also be classified as nonaccrual if repayment in full of principal and/or
interest is in doubt. Loans may be returned to accrual status when all principal
and interest amounts contractually due (including arrearages) are reasonably
assured of repayment within an acceptable period of time, and there is a
sustained period of repayment performance (generally a minimum of six months) by
the borrower, in accordance with the contractual terms.
While a loan (including an impaired loan) is classified as nonaccrual
and the future collectibility of the recorded loan balance is doubtful,
collections of interest and principal are generally applied as a reduction to
the principal outstanding. When the future collectibility of the recorded loan
balance is not in doubt, interest income may be recognized on a cash basis. In
the case where a nonaccrual loan had been partially charged-off, recognition of
interest on a cash basis is limited to that which would have been recognized on
the recorded loan balance at the contractual interest rate. Receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
(g) ALLOWANCE AND PROVISION FOR LOAN LOSSES
The Company provides for loan losses on the allowance method. Additions
to the allowance for loan losses are provided by charges to operations based on
various factors which, in management's judgment, deserve current recognition in
estimating probable losses inherent in the loan portfolio. Such factors
considered by management include the market value of the underlying collateral,
growth and composition of the loan portfolio, the relationship of the allowance
for loan losses to outstanding loans, delinquency trends, and economic
conditions.
Management evaluates the carrying value of loans periodically and the
allowance is adjusted accordingly. While management uses the best information
available to make evaluations, future adjustments to the allowance may be
necessary if conditions differ substantially from the assumptions used in making
the evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
Allowances for loan losses related to loans that are identified as
impaired are based on discounted cash flows using the loan's initial interest
rate or the fair value of the collateral if the loan is collateral dependent.
Larger
<PAGE>
groups of smaller balance homogeneous loans that are collectively evaluated for
impairment (such as credit card, residential mortgage and consumer installment
loans) are excluded from this impairment evaluation and their allowance for loan
losses is calculated in accordance with the allowance for loan losses policy
discussed above.
(h) ASSETS ACQUIRED IN SETTLEMENT OF LOANS
Assets acquired in settlement of loans consist of property acquired
through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure.
Assets acquired in settlement of loans are recorded initially at the lower of
the loan balance plus unpaid accrued interest or estimated fair value of the
property less estimated selling costs at the date of foreclosure. The initial
recorded value may be subsequently reduced by additional allowances, which are
charged to earnings, if the estimated fair value of the property, less estimated
selling costs, declines below the initial recorded value. Costs related to the
improvement of the property are capitalized, whereas those related to holding
the property are expensed.
(i) MEMBERSHIP/INVESTMENT IN FEDERAL HOME LOAN BANK OF ATLANTA STOCK
The Company is a member of the Federal Home Loan Bank of Atlanta
("FHLB"). Membership provides the Company with the ability to draw $40 million
of advances from the FHLB, subject to a signed blanket collateral agreement. No
advances were drawn by the Company in 1999 or 1998.
As a requirement for membership, the Company invests in stock of the
FHLB in the amount of 1% of its outstanding residential loans or 5% of its
outstanding advances from the FHLB, whichever is greater. Such stock is pledged
as collateral for any FHLB advances drawn by the Company. At December 31, 1999
and 1998, the Company owned 20,593 and 18,624 shares of the FHLB's $100 par
value capital stock, respectively. No ready market exists for such stock, which
is carried at cost.
(j) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using an accelerated method based on the
estimated useful lives of assets. Useful lives range from 10 to 31.5 years for
premises and from 5 to 10 years for equipment and fixtures. Expenditures for
repairs and maintenance are charged to expense as incurred. Upon retirement or
other disposition of the assets, the cost and the related accumulated
depreciation are removed from the accounts and any gains or losses are included
in income.
(k) INTANGIBLE ASSETS
Intangible assets are composed primarily of goodwill and core deposit
premiums. Amortization of goodwill and core deposit premiums is computed using
the straight-line method based on the estimated useful lives of the assets
(current useful lives range from 8 - 15 years). The lives of the assets are
estimated by management at the time the assets are acquired using information
available at that time and are subject to re-evaluation as new information
becomes available.
(l) INCOME TAXES
Income tax expense is based on consolidated net income 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. The Company 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 the Company's
assets and liabilities at enacted rates expected to be in effect when such
amounts are recovered or settled. The Bank and its subsidiaries are included in
the consolidated federal return filed by the Company. Each subsidiary pays its
allocation of federal income taxes or receives a payment to the extent that tax
benefits are realized. The Company and its subsidiaries each file separate state
income tax returns.
(m) NET INCOME PER SHARE
<PAGE>
Net income per share is computed based on the weighted average number
of common shares outstanding during the year. The Company adopted SFAS No. 128,
"Earnings Per Share," in 1997, which requires net income per share to be
calculated on both a basic and diluted basis. Because the Company has no
potentially dilutive securities, the adoption of SFAS No. 128 has had no impact
on the Company's consolidated financial statements.
(n) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. It does not address
issues of recognition or measurement for comprehensive income and its
components. The provisions of SFAS No. 130 are effective for fiscal years
beginning after December 15, 1997. The Company adopted this statement in the
first quarter of fiscal 1998. Comparative financial statements for earlier
periods have been presented to reflect application of this statement. The
Company's only component of accumulated other comprehensive income is unrealized
gain/loss on securities available for sale.
(o) SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires that public
business enterprises report certain information about operating segments in a
complete set of financial statements issued to shareholders. It also requires
that public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The provisions of SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. Adoption of this pronouncement by the Company
in 1998 had no effect on the Company's consolidated financial statements as the
Company has no operating segments as defined by SFAS No. 131.
(p) DISCLOSURES ABOUT PENSIONS
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and other Postretirement Benefits." This statement standardizes
the disclosure requirements of pensions and other postretirement benefits.
Adoption of SFAS No. 132 by the Company did not result in changes to any
measurement or recognition provisions, but has resulted in altered disclosures
relating to pension obligations.
(q) RECLASSIFICATIONS AND RESTATEMENT
Certain amounts in the 1998 and 1997 consolidated financial statements
of the Company have been reclassified to conform with the 1999 presentation.
(2) AQUISITION OF BRANCHES
On August 22, 1999, the Company purchased seven branches from
First-Citizens Bank & Trust Company, a related party (see note 15). Assets and
deposits acquired were $29,120,000 and $99,573,000, respectively. An intangible
asset of approximately $4,147,000 resulted from this purchase.
On October 23, 1998 the Company purchased five branches from
First-Citizens Bank & Trust Company, a related party (see note 15). Loans and
deposits acquired were approximately $33,694,000 and $75,093,000, respectively.
An intangible asset of approximately $4,090,000 resulted from this purchase.
(3) INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities
at December 31, 1999 and 1998 are as follows:
<PAGE>
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Available for sale:
Marketable equity securities ......................................... $ 2,644,600 $ 5,104,652 $ -- $ 7,749,252
============ =========== =========== ============
Held to maturity:
U.S. Agency .......................................................... $ 78,042,300 $ 1,038 $(1,833,538) $ 76,209,800
U.S. Treasury ........................................................ 54,964,144 9,375 (339,145) 54,634,374
Obligations of state and political
political subdivisions ............................................. 2,000,000 -- -- 2,000,000
------------ ----------- ----------- ------------
$135,006,444 $ 10,413 $(2,172,683) $132,844,174
============ =========== =========== ============
1998
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
Available for sale:
Marketable equity securities ......................................... $ 2,644,600 $ 6,963,400 $ -- $ 9,608,000
============ =========== =========== ============
Held to maturity:
U.S. Agency .......................................................... $ 14,052 $ 2,319 $ -- $ 16,371
U.S. Treasury ........................................................ 90,132,424 419,139 -- 90,551,563
------------ ----------- ----------- ------------
$ 90,146,476 $ 421,458 $ -- $ 90,567,934
============ =========== =========== ============
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999 by contractual maturities are as follows:
ESTIMATED
COST FAIR VALUE
------------- ------------
Due in one year or less:
U.S. Treasury ................................. $ 30,000,000 $ 30,009,375
Obligations of state and political subdivisions 2,000,000 2,000,000
Due after one year through five years:
U.S. Treasury ................................. 24,964,145 24,625,000
U.S. Agency ................................... 78,032,912 76,199,374
Due after ten years:
U.S. Agency ................................... 9,387 10,425
------------- ------------
$135,006,444 $132,844,174
============= ============
There were no sales of investment securities during 1999, 1998 or 1997.
Investment securities with an amortized cost of approximately
$120,950,000 and $35,850,000 were pledged to secure public deposits at December
31, 1999 and 1998, respectively.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans as of December 31, 1999 and 1998 are
summarized as follows:
1999 1998
-------------- --------------
Loans secured by real estate:
Construction .............. $ 79,576,126 $ 51,498,973
Single-family residential . 216,951,839 196,886,357
Farmland .................. 5,502,464 4,982,701
Commercial ................ 74,320,018 65,338,524
Commercial .................... 124,858,443 79,723,684
Consumer ...................... 37,674,743 33,848,515
Agricultural .................. 3,956,957 4,523,374
Other ......................... 8,307,553 2,405,458
-------------- --------------
Total ..................... 551,148,143 439,207,586
Allowance for loan losses (5,141,647) (4,601,000)
-------------- --------------
Net Loans ................. $ 546,006,496 $ 434,606,586
============== ===============
There were no loans designated as held for sale at December 31, 1999
and 1998.
The Company offers loans to its officers, directors, and employees for
the financing of their personal residences and for other personal purposes.
These loans are made in the ordinary course of business and are made on
substantially the same terms prevailing at the time as comparable transactions
with other persons. Management does not believe these loans involve more than
the normal risk of collectibility or present other unfavorable features.
The following is a reconciliation of aggregate loans outstanding to
executive officers, directors, and their immediate families for the year ended
December 31, 1999:
1999 1998
------------- ------------
Balance at beginning of year $ 494,383 $ 862,784
New loans .................. 5,504,778 --
Principal repayments ....... (494,383) (368,401)
------------- ------------
Balance at end of year ..... $ 5,504,778 $ 494,383
============= ============
A summary of the allowance for loan losses for the years ended December
31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year ............... $ 4,601,000 $ 4,144,752 $ 4,138,816
Provision for loan losses .................. 1,200,000 630,000 360,000
Charge-offs ................................ (1,633,754) (1,540,681) (848,275)
Recoveries ................................. 694,401 1,366,929 494,211
Allowance for loan losses on purchased loans 280,000 -- --
----------- ----------- -----------
Balance at end of year ..................... $ 5,141,647 $ 4,601,000 $ 4,144,752
=========== =========== ===========
</TABLE>
At December 31, 1999 and 1998, the Company had no nonaccrual loans and
no accruing loans ninety days or more past due. In addition, at and during the
years ended December 31, 1999 and 1998, the Company had no impaired loans. As of
December 31, 1999 and 1998, the balance of other real estate acquired through
foreclosure was $117,000 and $111,000, respectively.
At December 31, 1997 the Company was servicing loans for others
amounting to $47,936,000. Servicing loans for others generally consisted of
collecting mortgage payments, maintaining escrow accounts, disbursing
<PAGE>
payments to investors and foreclosure processing. Loan servicing income was
recorded on the accrual basis and included service fees from investors and
certain charges collected from borrowers, such as late fees.
During January 1998, the Company sold rights to service $51 million in
mortgage loans to Southern Bank and Trust Company ("SBT"), Mount Olive, North
Carolina, for $522,000 (including accrued interest), resulting in a gain of
$507,456. The two significant shareholders of the Company also are significant
shareholders of Southern BancShares (N.C.), Inc., the parent holding company for
SBT (see note 15). The Company no longer services loans for others.
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998 are as follows:
1999 1998
------------- -------------
Land ........................ $ 10,202,696 $ 7,393,822
Building and improvements ... 25,511,153 19,665,711
Furniture and equipment ..... 8,380,341 6,866,054
------------- -------------
44,094,190 33,925,587
Less accumulated depreciation (11,259,248) (9,047,708)
------------- -------------
Premises and equipment, net . $ 32,834,942 $ 24,877,879
============= =============
(6) DEPOSITS
At December 31, 1999 and 1998, time deposits of $100,000 or more
amounted to approximately $66,297,000 and $58,693,000, respectively. For the
years ended December 31, 1999, 1998 and 1997, interest expense on time deposits
of $100,000 or more amounted to approximately $3,401,000, $2,750,000 and
$2,596,000, respectively.
Time deposit accounts as of December 31, 1999, mature in the following
years and approximate amounts: 2000 - $281,665,000; 2001 - $37,733,000; 2002 -
$17,036,000; and thereafter - $9,256,000.
(7) SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1999 and 1998 consist of the
following:
1999 1998
----------- -----------
Securities sold under agreements to repurchase $19,753,000 $11,467,000
Treasury tax and loan deposits - note option . 3,219,551 150,344
----------- -----------
$22,972,551 $11,617,344
=========== ===========
Information concerning securities sold under agreements to repurchase
is summarized as follows:
1999 1998
----------- ------------
Average rate during year ............ 3.50% 3.87%
Average balance during year ......... $16,079,058 $ 8,250,667
Maximum month-end balance during year 23,145,000 11,467,000
These borrowings have maturities of less than 90 days. Securities sold
under agreements to repurchase represent transactions whereby the Bank sells
investment securities to certain of its commercial customers on an overnight
basis and repurchases such securities the next day. At December 31, 1999,
$27,995,000 of investment securities was pledged for repurchase agreements. The
securities collateralizing the repurchase agreements have been delivered to a
third party custodian for safekeeping.
(8) LONG-TERM BORROWINGS
The $23.0 million long-term obligations at December 31, 1999 are
Capital Trust Securities of the Trust which were issued during 1999. These
long-term obligations, which qualify as Tier 1 Capital for BancShares, bear
interest at 8.50% and mature in 2029. BancShares may redeem the long-term
obligations in whole or in part on or
<PAGE>
after June 30, 2004. The sole asset of the Trust is $23.0 million of 8.50%
Junior Subordinated Debentures of BancShares due 2029. Considered together, the
undertakings constitute a full and unconditional guarantee by BancShares of the
Trust's obligations under the Capital Securities.
(9) INCOME TAXES
The components of income taxes for the years ended December 31, 1999,
1998 and 1997 are as follows:
1999 1998 1997
----------- ------------ -----------
Current:
Federal.. $ 4,531,557 $ 4,440,197 $ 4,399,708
State.... 518,152 540,638 345,292
----------- ------------ -----------
5,049,709 4,980,835 4,745,000
----------- ------------ -----------
Deferred:
Federal.. (489,703) (442,637) (139,382)
State.... (91,834) (81,198) (23,795)
----------- ------------ -----------
(581,537) (523,835) (163,177)
----------- ------------ -----------
$ 4,468,172 $ 4,457,000 $ 4,581,823
=========== ============ ===========
The reconciliation of expected income tax expense at the statutory
federal rate with income tax expense for the years ended December 31, 1999, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Expected income tax expense at statutory
rate (35%) ........................ $ 4,236,687 $ 4,237,230 $ 4,189,311
Increase (decrease) in income tax expense
resulting from:
State taxes, net .................. 277,107 298,636 208,973
Tax exempt income ................. (1,494) (6,320) (25,389)
Other, net ........................ (44,128) (72,546) 208,928
----------- ----------- ------------
$ 4,468,172 $ 4,457,000 $ 4,581,823
=========== =========== ============
</TABLE>
The deferred tax components at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ....................... $ 1,944,267 $ 1,616,629
Amortization of intangibles ..................... -- 93,773
Deferred compensation ........................... 367,683 211,606
Depreciation .................................... 360,948 157,341
Pension costs ................................... 85,880 8,929
Other ........................................... 74,449 132,622
----------- -----------
Total gross deferred tax assets ............... 2,833,227 2,220,900
----------- -----------
Deferred tax liabilities:
Premises and equipment .......................... (196,154) (196,960)
Bond accretion .................................. (38,810) (32,698)
Pension costs ................................... (25,484) --
Unrealized gains on available for sale securities (2,082,681) (2,776,582)
----------- -----------
Total gross deferred tax liabilities .......... (2,343,129) (3,006,240)
----------- -----------
Net deferred tax asset (liability) ............ $ 490,098 $ (785,340)
=========== ===========
</TABLE>
No valuation allowance for deferred tax assets was required at December
31, 1999 or 1998 as management has determined that it is more likely than not
that the net deferred tax asset can be realized.
(10) EMPLOYEE BENEFIT PLANS
CAPITAL ACCUMULATION PLAN
The Company has a profit sharing 401(k) plan (the "Plan") for all full
time employees with at least one year of service, which covers substantially all
employees. Under the Plan, employees may contribute up to an annual maximum as
determined under the Internal Revenue Code, not to exceed 16% of the
participant's compensation. The Company matches 100% of such contributions for
the first three percent of the participant's contributions and 50% of the next
three percent. Further, the Company may make additional contributions on a
discretionary basis. The Plan provides that employees' contributions are 100%
vested at all times and the Company's contributions are 100% vested after five
years of service. The Company incurred $282,848, $245,166 and $227,427 of
expense related to the Plan for the years ended December 31, 1999, 1998 and
1997, respectively. The majority of the Plan's assets are invested with a
related party who serves as trustee. See note 15 for additional information.
PENSION PLAN
The Company has a noncontributory, defined benefit pension plan
("Retirement Plan") which covers substantially all full-time employees. The
Company's funding policy is based on actuarially calculated amounts to fund
normal pension cost and any unfunded accrued liability. The Retirement Plan
utilizes the projected unit credit actuarial cost method.
The following table reconciles the beginning and ending balance of the
Retirement Plan's benefit obligation, as computed by the Company's independent
actuarial consultants as of December 31, 1999, 1998 and 1997:
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net benefit obligation at beginning of year ...... $ 6,655,456 $ 5,338,120 $ 4,587,062
Service cost ..................................... 264,659 221,431 167,609
Interest cost .................................... 459,402 423,837 343,859
Actuarial loss (gain) ............................ (642,010) 844,420 367,027
Gross benefits paid .............................. (218,229) (172,352) (127,437)
----------- ----------- -----------
Net benefit obligation at end of year ............ $ 6,519,278 $ 6,655,456 $ 5,338,120
=========== =========== ===========
</TABLE>
The following table reconciles the beginning of the Retirement Plan's
plan assets as of December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Fair value of plan assets at beginning of year ... $ 8,415,415 $ 7,296,169 $ 6,178,798
Actual return on plan assets ..................... 521,361 1,291,598 1,244,808
Benefits paid .................................... (218,229) (172,352) (127,437)
----------- ----------- -----------
Fair value of plan assets at end of year ......... $ 8,718,547 $ 8,415,415 $ 7,296,169
=========== =========== ===========
</TABLE>
The following table presents information regarding the funded status of
the Retirement Plan as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Funded status at the end of year ...................... $ 2,199,269 $ 1,759,959
Unrecognized net actuarial gain ....................... (2,158,294) (1,478,712)
Unrecognized prior service cost ....................... 57,468 67,028
Unrecognized transition obligation .................... (147,145) (202,318)
----------- -----------
Net asset (liability) recognized at end of year ....... $ (48,702) $ 145,957
=========== ===========
</TABLE>
The following table presents the components of net periodic benefit
cost for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Service cost ...................... $ 264,659 $ 221,431 $ 167,609
Interest cost ..................... 459,402 423,837 343,859
Expected return on assets ......... (495,008) (441,093) (404,021)
Amortization of:
Transition obligation ....... (55,173) (55,173) (55,173)
Prior service cost .......... 9,560 9,560 9,560
Actuarial loss .............. 11,219 14,754 --
--------- --------- ---------
Net periodic benefit cost ......... $ 194,659 $ 173,316 $ 61,834
========= ========= =========
</TABLE>
Actuarial assumptions used to determine the Retirement Plan's funded
status were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Discount rate .................................... 7.50% 6.75% 7.25%
Rate of increase in compensation levels .......... 4.75% 4.50% 4.50%
Expected long-term rate of return on assets ...... 8.50% 8.00% 8.25%
</TABLE>
The Retirement Plan's investment portfolio consists of approximately
51% equity securities, and 49% fixed income and other investments at December
31, 1999. The majority of the Retirement Plan's assets are invested with a
related party who serves as trustee. See note 15 for additional information.
EMPLOYEE DEATH BENEFIT AND POST-RETIREMENT NON-COMPETITION AND
CONSULTATION AGREEMENTS
The Company has in place Employee Death Benefit and Post-Retirement
Non-Competition and Consultation Agreements (the "Agreements") covering two of
its executive officers. The Agreements provide for certain benefits to be paid
to the executive officers upon either their retirement (as defined in the
Agreements) or their death. The Company's accrual (included in other
liabilities) for these future benefits was approximately $930,000 and $533,000
at December 31, 1999 and 1998, respectively.
(11) REGULATORY RESTRICTIONS
The Company is regulated by the Board of Governors of the Federal
Reserve System ("FRB"). The Bank is regulated by the Federal Deposit Insurance
Corporation ("FDIC") and the State of North Carolina Office of the Commissioner
of Banks.
Subject to applicable law, the Boards of Directors of the Company and
the Bank may each provide for the payment of dividends. Future declarations of
cash dividends, if any, by the Company may depend upon dividend payments by the
Bank to the Company. The Bank, as a North Carolina banking corporation, may pay
dividends only out of undivided profits as determined pursuant to North Carolina
General Statutes Section 53-87. However,
<PAGE>
regulatory authorities may limit payment of dividends by any bank when it is
determined that such a limitation is in the public interest and is necessary to
ensure the financial soundness of the bank.
Under regulations of the Federal Reserve, banking affiliates are
required to maintain certain average reserve balances which include both cash on
hand and deposits with the Federal Reserve. These deposits are included in cash
and cash equivalents in the accompanying balance sheets. At December 31, 1999
and 1998 the Bank was required to maintain such balances at $12,896,000 and
$9,314,000, respectively.
The Company and the Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios, as set
forth in the table below. Management believes, as of December 31, 1999, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1999, the Company and the Bank were considered to be
"well capitalized" under FDIC standards. To be categorized as well capitalized
the Company and the Bank must maintain minimum amounts and ratios, as set forth
in the tables below. There are no conditions or events since that notification
that management believes have changed the category of the Company or the Bank.
The actual capital amounts and ratios for the Company are presented in
the table below (dollars in thousands):
<TABLE>
<CAPTION>
FOR TO BE WELL
CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
AS OF DECEMBER 31, 1999: AMOUNT RATIO PURPOSES ACTION PROVISIONS
- ------------------------ ------ ----- --------- -----------------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)......... $83,665 13.34% >/=8.00% >/=10.00%
Tier 1 Capital (to Risk Weighted Assets)......... 75,601 12.06% >/=4.00% >/= 6.00
Tier 1 Capital (to Average Assets) .............. 75,601 9.12% >/=4.00% >/= 5.00
AS OF DECEMBER 31, 1998:
- ------------------------
Total Capital (to Risk Weighted Assets)......... $58,381 11.87% >/=8.00% >/=10.00%
Tier 1 Capital (to Risk Weighted Assets)......... 50,656 10.30% >/=4.00% >/= 6.00
Tier 1 Capital (to Average Assets) .............. 50,656 7.65% >/=4.00% >/= 5.00
</TABLE>
The actual capital amounts and ratios for the Bank are presented in the
table below (dollars in thousands):
<TABLE>
<CAPTION>
FOR TO BE WELL
CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
AS OF DECEMBER 31, 1999: AMOUNT RATIO PURPOSES ACTION PROVISIONS
- ------------------------ ------ ----- --------- -----------------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets) ......... $76,386 13.17% >/=8.00% >/=10.00%
Tier 1 Capital (to Risk Weighted Assets) ......... 71,244 12.28% >/=4.00% >/= 6.00
Tier 1 Capital (to Average Assets) ............... 71,244 8.67% >/=4.00% >/= 5.00
AS OF DECEMBER 31, 1998:
Total Capital (to Risk Weighted Assets) ......... $52,142 10.59% >/=8.00% >/=10.00%
Tier 1 Capital (to Risk Weighted Assets) ......... 47,541 9.65% >/=4.00% >/= 6.00
Tier 1 Capital (to Average Assets) ............... 47,541 7.93% >/=4.00% >/= 5.00
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
lines of credit and standby letters of credit. These instruments involve
elements of credit risk in excess of amounts recognized in the accompanying
consolidated financial statements.
The Company's risk of loss in the event of nonperformance by the other
party to the commitment to extend credit, line of credit or standby letter of
credit is represented by the contractual amount of these instruments. The
Company uses the same credit policies on the borrower in making commitments
under such instruments as it does for on-balance sheet instruments. The amount
of collateral obtained, if any, is based on management's credit evaluation of
the borrower. Collateral held varies, but may include accounts receivable,
inventory, real estate and time deposits with financial institutions. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
As of December 31, 1999 and 1998, outstanding financial instruments
whose contract amounts represent credit risk were as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Outstanding commitments to lend, unfunded loans
and lines of credit............................ $196,480,149 $167,918,107
============ ============
Standby and commercial letters of credit............ $ 2,887,793 $ 3,649,816
============ ============
</TABLE>
<PAGE>
The Company's lending is concentrated primarily in central North
Carolina and the surrounding communities in which it operates. Credit has been
extended to certain of the Company's customers through multiple lending
transactions; however, there is no concentration to any single customer or
industry.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
(SFAS No. 107), requires the disclosure of estimated fair values for financial
instruments. Quoted market prices, if available, are utilized as an estimate of
the fair value of financial instruments. Because no quoted market prices exist
for a significant part of the Company's financial instruments, the fair value of
such instruments has been derived based on management's assumptions with respect
to future economic conditions, the amount and timing of future cash flows and
estimated discount rates. Different assumptions could significantly affect these
estimates. Accordingly, the net realizable value could be materially different
from the estimates presented below. In addition, the estimates are only
indicative of individual financial instruments' values and should not be
considered an indication of the fair value of the Company taken as a whole. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS IN OTHER BANKS, AND
FEDERAL FUNDS SOLD
The carrying amounts of cash and due from banks, interest bearing
deposits in other banks, and federal funds sold are equal to the fair value due
to the liquid nature of these financial instruments.
INVESTMENT SECURITIES AND FEDERAL HOME LOAN BANK OF ATLANTA STOCK
Fair values of investment securities are based on quoted market prices.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar investment securities.
LOANS RECEIVABLE
Fair values have been estimated by type of loan: residential real
estate loans, consumer loans, commercial loans and other loans. For
variable-rate loans that reprice frequently and with no significant credit risk,
fair values are based on carrying values. The fair values of fixed rate loans
are estimated by discounting the future cash flows using the current rates at
which loans with similar terms would be made to borrowers with similar credit
ratings and for the same remaining maturities. The Company has assigned no fair
value to off-balance sheet financial instruments since they are short term in
nature and subject to immediate repricing.
DEPOSITS
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at year end. Fair value of certificates
of deposit is estimated by discounting the future cash flows using the current
rate offered for similar deposits with the same maturities.
SHORT-TERM BORROWINGS
The carrying amounts of short-term borrowings approximate fair values
due to the fact these borrowings mature within 90 days.
LONG-TERM BORROWINGS
The fair value of the 1999 long-term borrowing is the market value at
the last trade date in 1999.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
<PAGE>
The carrying amount of accrued interest approximates fair value due to
its short-term nature.
The following table presents information for financial assets and
liabilities as of December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks and interest bearing
deposits in other banks .................... $ 72,258 $ 72,258 $ 31,137 $ 31,137
Federal funds sold ............................... 22,600 22,600 87,050 87,050
Investment securities available for sale ......... 7,749 7,749 9,608 9,608
Investment securities held to maturity ........... 135,006 132,844 90,146 90,568
Federal Home Loan Bank of Atlanta stock .......... 2,059 2,059 1,862 1,862
Accrued interest receivable ...................... 4,824 4,824 3,652 3,652
Loans, net ....................................... 546,006 546,198 434,607 435,143
-------- -------- -------- --------
Total financial assets ..................... $790,502 $788,532 $658,062 $659,020
======== ======== ======== ========
Financial liabilities:
Deposits ......................................... $716,014 $716,375 $609,646 $611,411
Short-term borrowings ............................ 22,973 22,973 11,617 11,617
Long-term borrowings ............................. 23,000 19,550 -- --
Accrued interest payable ......................... 4,730 4,730 4,123 4,123
-------- -------- -------- --------
Total financial liabilities ................ $766,717 $763,628 $625,386 $627,151
======== ======== ======== ========
</TABLE>
(14) PARENT COMPANY FINANCIAL DATA
The Company's principal assets are its investment in the Bank and the
Trust. Condensed financial statements for the parent company as of December 31,
1999 and 1998 are as follows (in thousands):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash .................................................. $ 835 $ 428
Investments ........................................... 7,749 9,608
Investment in subsidiaries ............................ 85,635 57,506
Other assets .......................................... 1,470 43
------- -------
Total assets ...................................... $95,689 $67,585
======= =======
Long-term borrowings .................................. $23,711 $ --
Deferred tax liability ................................ 2,083 2,777
Shareholders' equity .................................. 69,895 64,808
------- -------
Total liabilities and shareholders' equity ........ $95,689 $67,585
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Dividends from bank subsidiary ...................... $ 920 $ 920 $ 1,971
Other dividends ..................................... 153 123 100
Interest expense on long-term borrowings ............ (1,097) -- --
Miscellaneous expenses .............................. (109) (296) (26)
Income tax benefit (expense) ........................ 353 -- --
------- ------- -------
Income before equity in undistributed earnings of
subsidiaries .................................. 220 747 2,045
Equity in undistributed earnings of subsidiaries ... 7,417 6,902 5,343
------- ------- -------
Net income ...................................... $ 7,637 $ 7,649 $ 7,388
======= ======= =======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 7,637 $ 7,649 $ 7,388
Equity in undistributed earnings of subsidiaries ....... (7,417) (6,902) (5,343)
Dividend of investment securities from subsidiaries .... -- -- (1,001)
Increase in other assets ............................... (1,428) (7) (28)
-------- -------- --------
Net cash provided (used) by operating activities ..... (1,208) 740 1,016
-------- -------- --------
Cash flows from investing activities:
Capital investment in subsidiary (Trust) ............... (711) -- --
Capital investment in subsidiary (Bank) ................ (20,000) -- --
Return of capital on investment securities ............. -- 456 --
-------- -------- --------
Net cash provided (used) by investing activities ..... (20,711) 456 --
-------- -------- --------
Cash flows from financing activities:
Increase in long-term borrowings ....................... 23,711 -- --
Dividends paid ......................................... (905) (909) (909)
Purchase and retirement of common stock ................ (480) -- --
-------- -------- --------
Net cash provided (used) in financing activities ..... 22,326 (909) (909)
-------- -------- --------
Net increase in cash and cash equivalents ............ 407 287 107
Cash and cash equivalents at beginning of year ............. 428 141 34
-------- -------- --------
Cash and cash equivalents at end of year ................... $ 835 $ 428 $ 141
======== ======== ========
</TABLE>
(15) RELATED PARTIES
The Company has entered into various service contracts with another
bank holding company and its subsidiary (the "Corporation"). The Corporation has
two significant shareholders, who are also significant shareholders of the
Company. At December 31, 1999, the first significant shareholder beneficially
owned 11,155 shares, or 39.60 percent, of the Company's outstanding common
stock. At the same date, the second significant shareholder beneficially owned
2,778 shares, or 9.86 percent, of the Company's outstanding common stock.
These two significant shareholders are directors and executive officers
of the Corporation and at December 31, 1999, beneficially owned 2,532,966
shares, or 28.46 percent, and 1,492,974 shares, or 16.77 percent, respectively,
of the Corporation's outstanding Class A common stock, and 644,031 shares, or
37.43 percent, and 193,897 shares, or 11.27 percent, respectively, of the
Corporation's outstanding Class B common stock. A subsidiary of the Corporation
is First-Citizens Bank & Trust Company ("FCB").
Data and item processing expenses, including courier services, proof
and encoding, microfilming, check storage, statement rendering and item
processing forms, paid by the Company to the Corporation totaled approximately
$1,925,000, $1,420,000 and $1,213,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Other expenses paid by the Company to the
Corporation totaled approximately $1,075,000, $627,000 and $639,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. The Company also has
a correspondent relationship with the Corporation. Correspondent account
balances with the Corporation included in cash, due from banks and federal funds
sold totaled $35,777,835 and $82,602,362 at December 31, 1999 and 1998,
respectively.
During January 1998, the Bank sold rights to service mortgage loans to
Southern Bank and Trust Company. See note 4.
During October 1998 and August 1999, the Company purchased five and
seven branches, respectively, from FCB. See note 2.
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE BANCSHARES
The following table lists BancShares' current directors.
<TABLE>
<CAPTION>
POSITION(S)
WITH BANCSHARES FIRST BUSINESS EXPERIENCE FOR
NAME AND AGE AND THE BANK ELECTED (1) PAST FIVE YEARS
- --------------------------- --------------------- ------------ ------------------------------------------------------
<S> <C> <C> <C>
F. Ray Allen Director 1993 President, Uwharrie Lumber Company, Troy, NC
(40) (hardwood lumber manufacturer)
Wiley H. Cozart, M.D. Director 1963 Retired Physician; former Medical Consultant,
(77) State of North Carolina, Raleigh, NC
Haywood A. Lane, Jr. President and 1979 Officer and director of BancShares and the Bank
(63) Director
D. Gary McRae Director 1999 President & CEO, McRae Industries, Inc.;
(49) President, New South Realty
Wallace H. Mitchell Director 1968 Retired; Partner, Mitchell Farms; former Secretary-Treasurer
(72) and General Manager, Mitchell Chevrolet Company,
Fuquay-Varina, NC (automobile dealership)
Sam C. Riddle, Jr. Director 1979 Owner and former President, Riddle Equipment Company,
(72) Inc., Carthage, NC (farm equipment dealer)
Billy T. Woodard Chief Executive 1970 Officer and director of BancShares and the Bank
(69) Officer and
Chairman of the
Board of Directors
</TABLE>
- ----------
(1) Each individual currently serves as a director of both BancShares and
the Bank. "First elected" indicates the year in which each nominee
first became a director of BancShares or, if before Fidelity's
organization in 1987, a director of the Bank.
The following table lists BancShares' current executive officers.
<TABLE>
<CAPTION>
POSITION(S)
WITH BANCSHARES FIRST BUSINESS EXPERIENCE FOR
NAME AND AGE AND THE BANK ELECTED PAST FIVE YEARS
- --------------------------- --------------------------- -------------- -----------------------------------------------
<S> <C> <C> <C>
Billy T. Woodard Chief Executive Officer 1970 Officer and director of BancShares and the Bank
(69) and Chairman of the
Board of Directors
Haywood A. Lane, Jr. President and Director 1979 Officer and director of BancShares and the Bank
(63)
</TABLE>
ITEM 11 - EXECUTIVE COMPENSATION
OFFICER COMPENSATION. The following table shows the cash and certain other
compensation paid to or deferred by certain executive officers of BancShares for
the years indicated. BancShares' executive officers also serve, and are
compensated, as officers of the Bank, and they receive no salaries or other
separate or additional compensation from BancShares for their services as
executive officers of BancShares.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR (1) ($) (2) (3)
- ----------------------------------------- -------- -------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Billy T. Woodard 1999 $ 233,000 $ -- $ -- $ 9,973
Chairman and Chief Executive Officer 1998 220,817 50,000 -- 9,194
of BancShares and the Bank 1997 159,304 44,000 -- 8,860
Haywood A. Lane, Jr. 1999 $ 190,000 $ -- $ -- $ 9,525
President 1998 174,075 40,000 -- 8,622
of BancShares and the Bank 1997 125,000 30,000 -- 8,521
</TABLE>
- ----------
(1) Includes amounts deferred at the election of each named officer
pursuant to the Bank's Section 401(k) plan.
(2) In addition to compensation paid in cash, BancShares' executive
officers receive certain personal benefits from the Bank. The value of
non-cash benefits received each year by each named officer did not
exceed 10% of his cash compensation for that year.
(3) For 1999, consists of the Bank's contribution to the Section 401(k)
plan for the account of each named officer ($7,573 for Mr. Woodard and
$7,125 for Mr. Lane) and fees received for services as directors of the
Bank ($2,400 for Mr. Woodard and $2,400 for Mr. Lane).
POST-RETIREMENT NONCOMPETITION AND CONSULTATION AGREEMENTS. During 1986, the
Bank entered into Post-Retirement Noncompetition and Consultation Agreements
with Billy T. Woodard and Haywood A. Lane, Jr. Each Agreement, as amended on
January 1, 1999, provides that upon the officer's retirement from full time
employment with the Bank, he will serve as a consultant to the Bank and will
receive monthly payments ($8,738 for Mr. Woodard and $7,125 for Mr. Lane) for a
period of ten years. In the event of the officer's death prior to the expiration
of the ten-year period, any remaining monthly payments will be paid to the
officer's designated beneficiary or estate. If the officer dies prior to
retirement, his designated beneficiary or estate will receive those payments for
a period of ten years following his death.
<PAGE>
PENSION PLAN. The following table shows, for various numbers of years of service
and levels of compensation, the estimated benefits payable to a participant at
normal retirement age under the Bank's qualified defined benefit pension plan
(the "Pension Plan") based on federal tax laws in effect on January 1, 2000.
YEARS OF SERVICE
--------------------------------------------------------------
FINAL AVERAGE
COMPENSATION 10 YEARS 20 YEARS 30 YEARS 40 YEARS
- --------------- ------------ ------------- ----------- ----------
$ 50,000 $ 7,101 $14,202 $ 21,303 $ 27,854
75,000 11,726 23,452 35,178 45,541
100,000 16,351 32,702 49,053 63,229
125,000 20,976 41,952 62,928 80,916
150,000 25,601 51,202 76,803 98,604
175,000 30,226 60,452 90,678 116,291
200,000 34,851 69,702 104,553 130,000
225,000 36,558 73,115 109,673 130,000
250,000 36,558 73,115 109,673 130,000
Benefits shown in the table are computed as straight life annuities beginning at
age 65 and are not subject to a deduction for Social Security benefits or any
other offset amounts. A participant's compensation covered by the pension plan
includes base salary, bonuses, overtime pay, and earnings deferred by the
participant's own contribution pursuant to the Bank's Section 401(k) plan (but
excluding any special bonuses, any directors' fees, the Bank's matching
contributions to the Section 401(k) plan, or any other incidental compensation).
Benefits are calculated based on each participant's "final average
compensation," which is defined as the participant's average earnings during the
five highest consecutive earning years of the last ten complete calendar years
as a participant. However, under current tax laws, $170,000 is the maximum
amount of annual compensation for 2000 that can be included for purposes of
calculating a participant's final average compensation, and the maximum annual
benefit that may be paid to a retiring participant is $135,000. The maximum
years of credited service which may be counted in calculating benefits under the
Pension Plan is 40 years. The estimated years of service and the estimated final
average compensation, respectively, as of December 31, 1999, for each of the
executive officers named in the Summary Compensation Table above are as follows:
Billy T. Woodard -- 40 years and $156,000; and Haywood A. Lane, Jr. -- 37 years
and $153,095.
COMPENSATION OF DIRECTORS. Each director of BancShares and the Bank (including
directors who also are employees) currently receives a fee of $600 for
attendance at each meeting of BancShares' or the Bank's Board of Directors, and
members of the Executive Committee of the Board of Directors (with the exception
of Billy T. Woodard and Haywood A. Lane, Jr.) receive a fee of $500 for
attendance at each meeting of the Committee. Those meeting fees were increased
from $400 per Board meeting and $300 per Executive Committee meeting effective
during June 1999. No fees are paid to any directors for attendance at any other
committee meetings.
Directors are reimbursed for expenses of travel to and from all meetings. Only
one fee is paid for joint meetings of the Boards of BancShares and the Bank and
for any committee meetings held on the same day as a meeting of one of the
Boards.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS. As of March 20, 2000, persons known to BancShares to own
beneficially or of record more than 5% of BancShares' voting securities were as
follows:
AMOUNT AND
NAME AND ADDRESS NATURE OF BENEFICIAL PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
- ----------------------------- --------------------- ------------
Frank B. Holding 11,155 (2) 39.60%
Smithfield, North Carolina
Lewis R. Holding 2,778 (3) 9.86%
Lyford Cay, Bahamas
North State Trustees (4) 7,080 (4) 24.92%
Charlotte, North Carolina
- ----------
(1) Except as otherwise noted, each named individual exercises sole voting
and investment power with respect to all shares.
(2) Includes 3,978 shares held by Mr. F. Holding's adult children and with
respect to which shares he disclaims beneficial ownership.
(3) Includes 51 shares held by Mr. L. Holding's adult daughter and with
respect to which shares he disclaims beneficial ownership.
(4) Consists of shares held by two irrevocable grantor trusts (the "1976
Trust" and the "1990 Trust") with respect to which Carmen P. Holding
currently is the sole beneficiary. Ms. Holding has sole power to direct
the voting, and shared power (with the six trustees) to direct the
disposition, of 345 shares held by the 1976 Trust. The written
agreement pertaining to the 1990 Trust provides that, in connection
with their voting of shares held by the trust, the
<PAGE>
trustees will consult with the then current beneficiaries who are at
least 40 years of age, but that the trustees will not be bound by the
voting preference of any such beneficiary.
MANAGEMENT OWNERSHIP. The beneficial ownership of BancShares' voting securities
as of March 20, 2000, by its current directors individually, and by all current
directors and executive officers as a group, was as follows:
AMOUNT AND
NAME OF NATURE OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
- ---------------------------------- --------------------- ------------
F. Ray Allen 102(2) 0.36%
Biscoe, NC
Wiley H. Cozart, M.D. 12 0.04%
Fuquay-Varina, NC
Haywood A. Lane, Jr. 140 0.50%
Raleigh, NC
D. Gary McRae 10 0.04%
Mount Gilead, NC
Wallace H. Mitchell 100 0.36%
Fuquay-Varina, NC
Sam C. Riddle, Jr. 87(3) 0.31%
Carthage, NC
Billy T. Woodard 733(4) 2.60%
Fuquay-Varina, NC
All directors and executive officers 1,184 4.20%
as a group (7 persons, all of whom
are named above)
- ----------
(1) Except as otherwise noted, each named individual, and individuals
included in the group, exercise sole voting and investment power with
respect to all shares.
(2) Includes 40 shares held by Mr. Allen jointly with his spouse, and 40
shares held by a corporation of which he may be deemed to be a control
person, and with respect to which shares Mr. Allen exercises shared
voting and investment power.
(3) Includes 22 shares held by Mr. Riddle jointly with his spouse and with
respect to which shares he exercises shared voting and investment
power.
(4) Includes 318 shares held by Mr. Woodard's spouse and adult children and
with respect to which shares he may be deemed to exercise shared voting
and investment power.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions in the
ordinary course of business with certain of the directors, executive officers,
principal shareholders of BancShares and the Bank, and their associates. Loans
included in those transactions during 1999 were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and such loans did not involve
more than the normal risk of collectibility or present other unfavorable
features.
The Bank is party to a contract with FCB, pursuant to which FCB provides to the
Bank and BancShares various data and item processing services, securities
portfolio management services, management consulting services and trustee
services for the Bank's pension plan and Section 401(k) plan. The Bank also
purchases business forms, equipment and supplies, together with certain other
services, through FCB. Aggregate fees paid by the Bank to FCB for all such
services during 1999 totaled approximately $3.8 million. The Bank's relationship
with FCB under the agreement will continue during 2000. Frank B. Holding and
Lewis R. Holding, principal shareholders of BancShares, are directors, executive
officers and principal shareholders of First Citizens BancShares, Inc., the bank
holding company for FCB.
The Bank's contract with FCB was negotiated at arms-length and was approved by
BancShares' Board of Directors. Based on its comparison in previous years of the
terms of the contract with terms available to it from other providers of the
services being obtained from FCB, management of the Bank believes the terms of
its contract with FCB, including prices, are no less favorable to the Bank than
could be obtained from an unrelated provider.
During 1999, the Bank purchased assets (including premises and loans) totaling
approximately $29.1 million, and assumed an aggregate of approximately $99.6
million in deposit liabilities, of seven branch offices of FCB located in
Gibsonville, Kings Mountain, Polkville, Shelby, Stokesdale, Stoneville and
Wentworth, North Carolina. In connection with that transaction, the Bank paid an
aggregate deposit premium of approximately $4.1 million.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K
(a)
1. The following consolidated financial statements of Fidelity BancShares
(N.C.), Inc. and subsidiaries, and Independent Auditors' Report
thereon, are included in Item 8 of this Report.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for each of the years
in the three year period ended December 31, 1999
Consolidated Statements of Changes in Shareholders' Equity for each
of the years in the three year period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1999
Notes to Consolidated Financial Statements
2. Financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required
information is contained in the consolidated financial statements or
related notes thereto which are included in Item 8 of this Report.
3. Exhibits
The following exhibits are filed or incorporated herewith as part of
this report on Form 10-K:
3.1 BancShares' Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1 of BancShares' Registration Statement No.
333-62225 filed with the SEC on August 26, 1998)
3.2 BancShares' By-laws (incorporated herein by reference to Exhibit 3.2 of
BancShares' Registration Statement No. 333-62225 filed with the SEC on
August 26, 1998)
4.1 Initial Trust Agreement of FIDBANK Capital Trust I, as amended
(incorporated herein by reference to Exhibit 4.1 of BancShares'
Registration Statement No. 333-62225 filed with the SEC on August 26,
1998)
4.2 Certificate of Trust of FIDBANK Capital Trust I (incorporated herein by
reference to Exhibit 4.2 of BancShares' Registration Statement No.
333-62225 filed with the SEC on August 26, 1998)
4.3 Form of Amended and Restated Trust Agreement of FIDBANK Capital Trust I
(incorporated herein by reference to Exhibit 4.3 of BancShares'
Amendment No. 3 to Registration Statement No. 333-62225 filed with the
SEC on May 25, 1999)
4.4 Form of Capital Security Certificate for FIDBANK Capital Trust I
(incorporated herein by reference to Exhibit 4.4 of BancShares'
Amendment No. 3 to Registration Statement No. 333-62225 filed with the
SEC on May 25, 1999)
4.5 Form of Guarantee Agreement (incorporated herein by reference to
Exhibit 4.5 of BancShares' Amendment No. 3 to Registration Statement
No. 333-62225 filed with the SEC on May 25, 1999)
4.6 Form of Junior Subordinated Indenture between BancShares and Bankers
Trust Company, as Debenture Trustee (incorporated herein by reference
to Exhibit 4.6 of BancShares' Amendment No. 3 to Registration Statement
No. 333-62225 filed with the SEC on May 25, 1999)
4.7 Form of Junior Subordinated Debenture (incorporated herein by reference
to Exhibit 4.7 of BancShares' Amendment No. 3 to Registration Statement
No. 333-62225 filed with the SEC on May 25, 1999)
*10.1 Employee Death Benefit and Post-Retirement Noncompetition and
Consultation Agreement between Billy T. Woodard and The Fidelity Bank
(incorporated by reference to Exhibit 10.1 of BancShares' Registration
Statement No. 333-62225 filed with the SEC on August 26, 1998)
*10.2 First Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Billy T. Woodard and
The Fidelity Bank (incorporated by reference to Exhibit 10.2 of
BancShares' Registration Statement No. 333-62225 filed with the SEC on
August 26, 1998)
*10.3 Employee Death Benefit and Post-Retirement Noncompetition and
Consultation Agreement between Haywood A. Lane, Jr., and The Fidelity
Bank (incorporated by reference to Exhibit 10.3 of BancShares'
Registration Statement No. 333-62225 filed with the SEC on August 26,
1998)
*10.4 First Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation
<PAGE>
Agreement between Haywood A. Lane, Jr., and The Fidelity Bank
(incorporated by reference to Exhibit 10.4 of BancShares' Registration
Statement No. 333-62225 filed with the SEC on August 26, 1998)
*10.5 Agreement for Banking Support Services (incorporated by reference to
Exhibit 10.5 of BancShares' Amendment No. 2 to Registration Statement
No. 333-62225 filed with the SEC on April 23, 1999)
*10.6 Second Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Billy T. Woodard and
The Fidelity Bank (incorporated by reference to Exhibit 10.6 of
BancShares' Amendment No. 2 to Registration Statement No. 333-62225
filed with the SEC on April 23, 1999)
*10.7 Second Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Haywood A. Lane, Jr.,
and The Fidelity Bank (incorporated by reference to Exhibit 10.7 of
BancShares' Amendment No. 2 to Registration Statement No. 333-62225
filed with the SEC on April 23, 1999)
21.1 List of subsidiaries (incorporated herein by reference to Exhibit 21.1
of BancShares' Registration Statement No. 333-62225 filed with the SEC
on August 26, 1998)
27.1 Financial data schedule (filed herewith)
- ----------
* Denotes a management contract or compensatory contract or arrangement.
(b) Reports on Form 8-K. During the fourth quarter of 1999 BancShares filed no
Form 8-K Current Reports.
- ----------
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant' has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FIDELITY BANCSHARES (N.C.), INC.
DATED: MARCH 29, 2000 By: /s/ Billy T. Woodard
------------------------
Billy T. Woodard
Chairman and Chief Executive Officer
In accordance with Section 13 or 15(d) 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 and on the dates indicated.
Signature Title Date
- ----------------------------- ------------------------------- -------------
/s/ Billy T. Woodard Chairman and Chief Executive March 27, 2000
- ---------------------------- Officer (principal executive
Billy T. Woodard officer)
/s/ Mary A. Woodard Chief Financial Officer and March 27, 2000
- ---------------------------- Treasurer (principal financial
Mary A. Woodard and accounting Officer)
/s/ Haywood A. Lane, Jr. President and Director March 24, 2000
- ----------------------------
Haywood A. Lane, Jr.
/s/ F. Ray Allen Director March 24, 2000
- ----------------------------
F. Ray Allen
/s/ Wiley H. Cozart Director March 28, 2000
- ----------------------------
Wiley H. Cozart
/s/ D. Gary McRae Director March 27, 2000
- ----------------------------
D. Gary McRae
/s/ Wallace H. Mitchell Director March 28, 2000
- ----------------------------
Wallace H. Mitchell
/s/ Sam C. Riddle, Jr. Director March 24, 2000
- ----------------------------
Sam C. Riddle, Jr.
<PAGE>
EXHIBIT INDEX
3.1 BancShares' Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1 of BancShares' Registration Statement No.
333-62225 filed with the SEC on August 26, 1998)
3.2 BancShares' By-laws (incorporated herein by reference to Exhibit 3.2 of
BancShares' Registration Statement No. 333-62225 filed with the SEC on
August 26, 1998)
4.1 Initial Trust Agreement of FIDBANK Capital Trust I, as amended
(incorporated herein by reference to Exhibit 4.1 of BancShares'
Registration Statement No. 333-62225 filed with the SEC on August 26,
1998)
4.2 Certificate of Trust of FIDBANK Capital Trust I (incorporated herein by
reference to Exhibit 4.2 of BancShares' Registration Statement No.
333-62225 filed with the SEC on August 26, 1998)
4.3 Form of Amended and Restated Trust Agreement of FIDBANK Capital Trust I
(incorporated herein by reference to Exhibit 4.3 of BancShares'
Amendment No. 3 to Registration Statement No. 333-62225 filed with the
SEC on May 25, 1999)
4.4 Form of Capital Security Certificate for FIDBANK Capital Trust I
(incorporated herein by reference to Exhibit 4.4 of BancShares'
Amendment No. 3 to Registration Statement No. 333-62225 filed with the
SEC on May 25, 1999)
4.5 Form of Guarantee Agreement (incorporated herein by reference to
Exhibit 4.5 of BancShares' Amendment No. 3 to Registration Statement
No. 333-62225 filed with the SEC on May 25, 1999)
4.6 Form of Junior Subordinated Indenture between BancShares and Bankers
Trust Company, as Debenture Trustee (incorporated herein by reference
to Exhibit 4.6 of BancShares' Amendment No. 3 to Registration Statement
No. 333-62225 filed with the SEC on May 25, 1999)
4.7 Form of Junior Subordinated Debenture (incorporated herein by reference
to Exhibit 4.7 of BancShares' Amendment No. 3 to Registration Statement
No. 333-62225 filed with the SEC on May 25, 1999)
*10.1 Employee Death Benefit and Post-Retirement Noncompetition and
Consultation Agreement between Billy T. Woodard and The Fidelity Bank
(incorporated by reference to Exhibit 10.1 of BancShares' Registration
Statement No. 333-62225 filed with the SEC on August 26, 1998)
*10.2 First Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Billy T. Woodard and
The Fidelity Bank (incorporated by reference to Exhibit 10.2 of
BancShares' Registration Statement No. 333-62225 filed with the SEC on
August 26, 1998)
*10.3 Employee Death Benefit and Post-Retirement Noncompetition and
Consultation Agreement between Haywood A. Lane, Jr., and The Fidelity
Bank (incorporated by reference to Exhibit 10.3 of BancShares'
Registration Statement No. 333-62225 filed with the SEC on August 26,
1998)
*10.4 First Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Haywood A. Lane, Jr.,
and The Fidelity Bank (incorporated by reference to Exhibit 10.4 of
BancShares' Registration Statement No. 333-62225 filed with the SEC on
August 26, 1998)
*10.5 Agreement for Banking Support Services (incorporated by reference to
Exhibit 10.5 of BancShares' Amendment No. 2 to Registration Statement
No. 333-62225 filed with the SEC on April 23, 1999)
*10.6 Second Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Billy T. Woodard and
The Fidelity Bank (incorporated by reference to Exhibit 10.6 of
BancShares' Amendment No. 2 to Registration Statement No. 333-62225
filed with the SEC on April 23, 1999)
*10.7 Second Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Haywood A. Lane, Jr.,
and The Fidelity Bank (incorporated by reference to Exhibit 10.7 of
BancShares' Amendment No. 2 to Registration Statement No. 333-62225
filed with the SEC on April 23, 1999)
21.1 List of subsidiaries (incorporated herein by reference to Exhibit 21.1
of BancShares' Registration Statement No. 333-62225 filed with the SEC
on August 26, 1998)
27.1 Financial data schedule (filed herewith)
- ----------
* Denotes a management contract or compensatory contract or arrangement.
- ----------
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000825953
<NAME> FIDELITY BANCSHARES (N.C.), INC.
<PERIOD-TYPE> 12-MOS
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 31,510,348
<INT-BEARING-DEPOSITS> 40,747,611
<FED-FUNDS-SOLD> 22,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,749,252
<INVESTMENTS-CARRYING> 135,006,444
<INVESTMENTS-MARKET> 132,844,175
<LOANS> 551,148,143
<ALLOWANCE> 5,141,647
<TOTAL-ASSETS> 839,087,631
<DEPOSITS> 716,013,626
<SHORT-TERM> 22,972,551
<LIABILITIES-OTHER> 7,206,755
<LONG-TERM> 23,000,000
0
0
<COMMON> 6,902,616
<OTHER-SE> 62,992,083
<TOTAL-LIABILITIES-AND-EQUITY> 839,087,631
<INTEREST-LOAN> 45,264,188
<INTEREST-INVEST> 8,350,444
<INTEREST-OTHER> 1,764,036
<INTEREST-TOTAL> 55,378,668
<INTEREST-DEPOSIT> 21,484,771
<INTEREST-EXPENSE> 23,213,296
<INTEREST-INCOME-NET> 32,165,372
<LOAN-LOSSES> 1,200,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 24,043,702
<INCOME-PRETAX> 12,104,821
<INCOME-PRE-EXTRAORDINARY> 12,104,821
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,636,649
<EPS-BASIC> 270.05
<EPS-DILUTED> 270.05
<YIELD-ACTUAL> 4.70
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,601,000
<CHARGE-OFFS> 1,633,754
<RECOVERIES> 694,401
<ALLOWANCE-CLOSE> 5,141,647
<ALLOWANCE-DOMESTIC> 5,141,647
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 589,880
</TABLE>
