UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission File Number 0-16471
FIRST CITIZENS BANCSHARES, INC.
(Exact name of Registrant as specified in the charter)
| | |
| Delaware | | 56-1528994 |
| (State or other jurisdiction | | (I.R.S. Employer |
| of incorporation or organization) | | Identification Number) |
3128 Smoketree Court
Raleigh, North Carolina 27604
(Address of Principal Executive Offices, Zip Code)
(919) 716-7000
(Registrant’s Telephone Number, including Area Code)
| | | | |
| | | Securities registered pursuant to: | | |
| | | Section 12(b) of the Act: | | 8.40% Preferred Securities of FCB/NC Capital Trust II |
| | | Section 12(g) of the Act: | | Class A Common Stock, Par Value $1 |
| | | | | Class B Common Stock, Par Value $1 |
| | | | | (Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ Nox
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. Yesx 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.¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| | | | |
| Large accelerated filerx | | Accelerated filer¨ | | Non-accelerated filer¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
The aggregate market value of the Registrant’s common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $864,788,307.
On March 10, 2006, there were 8,756,778 outstanding shares of the Registrant’s Class A Common Stock and 1,677,675 outstanding shares of the Registrant’s Class B Common Stock.
Portions of the Registrant’s definitive Proxy Statement dated March 17, 2006 are incorporated in Part III of this report.
CROSS REFERENCE INDEX
| * | | Information required by Item 10 is incorporated herein by reference to the information that appears under the headings ‘Section 16(a) Beneficial Ownership Reporting Compliance’ on page 5, ‘Proposal 1: Election of Directors’ on pages 6-7, ‘Audit and Compliance Committee—Function’ and ‘Audit and Compliance Committee—Members’ on page 8 and ‘Executive Officers’ on page 12 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders (2006 Proxy Statement) and under the headings “Procedures for Shareholder Recommendations to Nominating Committee” and “Code of Ethics” on page 7 of this Form 10-K. |
| | | Information required by Item 11 is incorporated herein by reference to the information that appears under the heading ‘Director Compensation’ on page 7 and under the heading ‘Executive Compensation’ on pages 13-15 of the 2006 Proxy Statement. |
| | | Information required by Item 12 is incorporated herein by reference to the information that appears under the heading ‘Beneficial Ownership of Voting Securities’ on pages 3-5 of the 2006 Proxy Statement. |
| | | Information required by Item 13 is incorporated herein by reference to the information that appears under the heading ‘Transactions with Related Parties’ on pages 16-17 of the 2006 Proxy Statement. |
| | | Information required by Item 14 is incorporated by reference to the information that appears under the heading ‘Services and Fees During 2004 and 2005’ on page 18 of the 2006 Proxy Statement. |
2
Business
First Citizens BancShares, Inc. (BancShares) was incorporated under the laws of Delaware on August 7, 1986, to become the holding company of First-Citizens Bank & Trust Company (First Citizens Bank or FCB), its banking subsidiary. FCB opened in 1898 as the Bank of Smithfield, Smithfield, North Carolina, and through a series of mergers and name changes, it later became First-Citizens Bank & Trust Company. As of December 31, 2005, FCB operated 339 offices in North Carolina, Virginia, West Virginia, Maryland and Tennessee.
On April 28, 1997, BancShares launched Atlantic States Bank (ASB), a federally chartered thrift institution. During 2004, ASB changed its name to IronStone Bank (ISB). ISB branches were initially concentrated within the metropolitan Atlanta, Georgia market. In 1999, ISB expanded its presence into Florida, focusing initially on selected markets in southwest Florida. The targeted market areas within Florida have grown to now include Jacksonville and Fort Lauderdale. During 2002, ISB continued its expansion into high-growth markets by opening offices in Austin, Texas.
During 2003, ISB opened offices in Scottsdale, Arizona, the San Diego, Newport Beach and LaJolla communities in Southern California and Sacramento in Northern California. ISB continued its expansion in 2004 and 2005 by opening branch facilities in Denver, Colorado, Albuquerque, New Mexico, Santa Fe, New Mexico, Portland, Oregon and Seattle, Washington. These markets have been selected based on their strong anticipated economic growth rates and the desire to bring a bank with a focus on customer service in these communities. At December 31, 2005, ISB had 53 offices.
BancShares’ executive offices are located at 3128 Smoketree Court, Raleigh, North Carolina 27604, and its telephone number is (919) 716-7000. Although BancShares does not maintain a dedicated website, information regarding BancShares is available at FCB’s website, www.firstcitizens.com. At December 31, 2005, BancShares and its subsidiaries employed a full-time staff of 3,925 and a part-time staff of 869 for a total of 4,794 employees.
BancShares’ subsidiary banks seek to meet the needs of both consumers and commercial entities in their respective market areas. These services, offered at most offices, include normal taking of deposits, cashing of checks, and providing for individual and commercial cash needs; numerous checking and savings plans; commercial, business and consumer lending; a full-service trust department; and other activities incidental to commercial banking. Triangle Life Insurance Company underwrites and sells credit-related life insurance products. First Citizens Investor Services, Inc. (FCIS) and IronStone Securities (ISS) provide various investment products, including annuities, discount brokerage services and third-party mutual funds to customers. First Citizens Bank, National Association (FCB-NA) is the issuing and processing bank for retail credit cards and provides processing services for merchants. Pending regulatory approval, FCB-NA will be merged into FCB during 2006. Various other subsidiaries are not material to BancShares’ consolidated financial position or to consolidated net income.
The business and operations of BancShares and its subsidiary banks are subject to significant federal and state governmental regulation and supervision. BancShares is a financial holding company registered with the Federal Reserve Board (FRB) under the Bank Holding Company Act of 1956, as amended. It is subject to supervision and examination by, and the regulations and reporting requirements of, the FRB.
FCB is a state-chartered bank, subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks. ISB is a federally-chartered thrift institution supervised by the Office of Thrift Supervision. FCB-NA operates under a national charter, is regulated by the Office of the Comptroller of the Currency and is also a member of the Federal Reserve System. Deposit obligations of FCB and ISB are insured by the FDIC.
The various regulatory authorities supervise all areas of the banking subsidiaries, including their reserves, loans, mergers, the payment of dividends, and other aspects of their operations. The regulators conduct regular examinations, and the banking subsidiaries must furnish periodic reports to their regulators containing detailed financial and other information regarding their affairs.
There are many statutes and regulations that apply to and restrict the activities of the banking subsidiaries, including limitations on the ability to pay dividends, capital requirements, reserve requirements, deposit insurance requirements and restrictions on transactions with related parties. The impact of these statutes and regulations is discussed below and in the accompanying audited consolidated financial statements.
The Gramm-Leach-Bliley Act (GLB Act) adopted by Congress during 1999 expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. The GLB Act permits bank holding companies to become “financial holding companies” and expands
3
activities in which banks and bank holding companies may participate, including opportunities to affiliate with securities firms and insurance companies. During 2000, BancShares became a financial holding company and American Guaranty Insurance Company (AGI), formerly a wholly-owned subsidiary of FCB, became a wholly-owned subsidiary of BancShares. As a direct subsidiary of BancShares, AGI has more flexibility in its product offering than it did as a subsidiary of FCB. The GLB Act also contains extensive customer privacy protection provisions which require banks to adopt and implement policies and procedures for the protection of the financial privacy of their customers, including procedures that allow customers to elect that certain financial information not be disclosed to certain persons.
Under Delaware law, BancShares is authorized to pay dividends declared by its Board of Directors, provided that no distribution results in its insolvency on a going concern or balance sheet basis. The ability of the banking subsidiaries to pay dividends to BancShares is governed by statutes of each entity’s chartering jurisdiction and rules and regulations issued by each entity’s respective regulatory authority. Under federal law, and as insured banks, each of the banking subsidiaries is prohibited from making any capital distributions, including paying a cash dividend, if it is, or after making the distribution it would become, “undercapitalized” as that term is defined in the Federal Deposit Insurance Act (FDIA).
BancShares is required to comply with the capital adequacy standards established by the FRB, and the banking subsidiaries are required to comply with the capital adequacy standards established by the FDIC. The FRB and FDIC have promulgated risk-based capital and leverage capital guidelines for determining the adequacy of the capital of a bank holding company or a bank, and all applicable capital standards must be satisfied for a bank holding company or a bank to be considered in compliance with these capital requirements.
Current federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”), and it is required to take certain mandatory supervisory actions, and is authorized to take other discretionary actions, with respect to banks in the three undercapitalized categories.
Under the FDIC’s rules implementing the prompt corrective action provisions, an insured, state-chartered bank that has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or greater, a Leverage Ratio of 5.0% or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC, is considered to be “well-capitalized.” Each of BancShares’ banking subsidiaries is well-capitalized.
Under regulations of the FRB, all FDIC-insured banks must maintain average daily reserves against their transaction accounts. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the Banks’ interest-earning assets.
The FDIC currently uses a risk-based assessment system that takes into account the risks attributable to different categories and concentrations of assets and liabilities for purposes of calculating deposit insurance assessments to be paid by insured banks. The risk-based assessment system uses three capital categories and three supervisory subgroups within each capital group to establish nine assessment risk classifications, each of which has a specified deposit insurance rate.
The FDIC is charged with the responsibility of maintaining the adequacy of the Bank Insurance Fund and the Savings Association Insurance Fund, and the amounts paid by banks for deposit insurance is influenced not only by the bank’s capital category and supervisory subgroup but also by the adequacy of the insurance funds at any time. FDIC insurance assessments could be increased substantially in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the insurance funds.
Each of the banking subsidiaries is subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of certain transactions with affiliate entities. The total amount of the transactions by any of the banking subsidiaries with a single affiliate is limited to 10% of the banking subsidiary’s capital and surplus and, for all affiliates, to 20% of the banking subsidiary’s capital and surplus. Each of the transactions among affiliates must also meet specified collateral requirements and must comply with other provisions of Section 23A designed to avoid transfers of low-quality assets between affiliates.
The banking subsidiaries are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the banking subsidiary or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
4
The USA Patriot Act of 2001 (Patriot Act) is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The Patriot Act contains sweeping anti-money laundering and financial transparency laws which require various new regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The Patriot Act has required financial institutions to adopt new policies and procedures to combat money laundering, and it grants the Secretary of the Treasury broad authority to establish regulations and impose requirements and restrictions on financial institutions’ operations.
Under the Community Reinvestment Act, as implemented by regulations of the federal bank regulatory agencies, an insured bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods.
The Sarbanes-Oxley Act of 2002 (SOX Act) mandated important new corporate governance, financial reporting and disclosure requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process, and it created a new regulatory body to oversee auditors of public companies. The SOX Act also mandated new enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. Additionally, the SOX Act increased the opportunity for private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.
The SOX Act requires various securities exchanges, including The Nasdaq Stock Market, to prohibit the listing of the stock of an issuer unless that issuer maintains an independent audit committee. In addition, the securities exchanges have imposed various corporate governance requirements, including the requirement that various corporate matters (including executive compensation and board nominations) be approved, or recommended for approval by the issuer’s full board of directors, by directors of the issuer who are “independent” as defined by the exchanges’ rules or by committees made up of “independent” directors. Since BancShares’ Class A common stock is a listed stock, BancShares is subject to those provisions of the Act and to corporate governance requirements of The Nasdaq Stock Market.
The economic and operational effects of this new legislation on public companies, including BancShares, have been and will continue to be significant in terms of the time, resources and costs associated with complying with the new law.
FCIS and ISS are registered broker-dealers and investment advisers. Broker-dealer activities are subject to regulation by the National Association of Securities Dealers (NASD), a self-regulatory organization to which the Securities and Exchange Commission (SEC) has delegated regulatory authority for broker-dealers, as well as by the state securities authorities of the various states in which FCIS and ISS operate. Investment advisory activities are subject to direct regulation by the SEC, and investment advisory representatives must register with the state securities authorities of the various states in which they operate.
FCIS and ISS are also licensed as insurance agencies in connection with various investment products, such as annuities, that are regulated as insurance products. FCIS’ and ISS’ insurance sales activities are subject to concurrent regulation by securities regulators and by the insurance regulators of the various states in which FCIS and ISS do business.
AGI and Triangle Life Insurance Company are regulated by the North Carolina Department of Insurance.
Statistical information regarding our business activities is found in Management’s Discussion and Analysis.
5
Risk Factors
An investment in BancShares’ common stock will involve some level of risk. As a publicly-traded security, the value of our stock moves up and down based on trends or market expectations that may affect a broad range of equity investments, specific industries, or individual securities. These movements may result from external disclosures about various topics, such as economic growth, interest rates, employment or inflation.
Movements in our stock price may also result from our own activities, by our earnings or by changes in strategies or management. In conjunction with our investment in ISB over the past nine years, we have entered new markets that are not adjacent to our existing footprint. Losses generated by ISB as it continues its de novo growth have adversely impacted net income. In addition to the impact on net income, the geographic dispersion of these markets represents additional shareholder risk.
In addition to the capital requirements mandated by regulatory authorities, our ability to grow is limited by the amount of capital we generate. In recent years, we have focused on earnings retention and have used non-equity capital sources to support our growth. We have not traditionally issued capital stock to support balance sheet growth. Capital adequacy is therefore a significant risk factor.
To the extent that we are dependent on our banking subsidiaries’ lending and deposit gathering functions to generate income, shareholders are also exposed to credit risk, interest rate risk and liquidity risk.
Properties
Through its subsidiary financial institutions, as of December 31, 2005, BancShares operated branch offices at 392 locations in North Carolina, Virginia, West Virginia, Maryland, Tennessee, Florida, Georgia, Texas, Arizona, California, New Mexico, Colorado, Oregon and Washington. BancShares owns many of the buildings and leases other facilities from third parties.
During 2005, BancShares acquired a nine-story building in Raleigh, which will serve as our corporate headquarters beginning in mid-2006. The 163,000 square foot building was purchased for $29.3 million. Additional information relating to premises, equipment and lease commitments is set forth in Note E of BancShares’ consolidated financial statements.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
BancShares’ Class A and Class B common stock is traded in the over-the-counter market, and the Class A common stock is quoted on the Nasdaq National Market System under the symbol FCNCA. The Class B common stock is quoted on the OTC Bulletin Board under the symbol FCNCB. As of December 31, 2005, there were 2,348 holders of record of the Class A common stock, and 436 holders of record of the Class B common stock.
The per share cash dividends declared by BancShares and the high and low sales prices for each quarterly period during 2005 and 2004 are set forth in Table 18 under the caption ‘Per Share of Stock’ of this report. A cash dividend of 27.5 cents per share was declared by the Board of Directors on January 23, 2006, payable April 3, 2006, to holders of record as of March 20, 2006. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. BancShares’ principal source of liquidity for payment of shareholder dividends is the dividend it receives from FCB. FCB is subject to various requirements under federal and state banking laws that restrict the payment of dividends and its ability to lend to BancShares. Subject to the foregoing, it is currently management’s expectation that comparable cash dividends will continue to be paid in the future.
During the fourth quarter of 2005, BancShares did not issue, sell or repurchase any Class A or Class B common stock.
6
Controls and Procedures
BancShares’ management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares’ disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, BancShares’ disclosure controls and procedures were effective in enabling it to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act.
Management’s Annual Report on Internal Control Over Financial Reporting is included on page 37 of this Report. The attestation report of BancShares’ independent accountants regarding management’s assessment of BancShares’ internal control over financial reporting is included on page 40 of this Report.
No change in BancShares’ internal control over financial reporting occurred during our fourth quarter of 2005 that has materially affected, or is reasonably likely to materially affect, BancShares’ internal control over financial reporting.
Procedures for Shareholder Recommendations to Nominating Committee
BancShares’ Nominating Committee has adopted procedures to be followed by shareholders who wish to recommend candidates to the Committee for its consideration in connection with its recommendation of director nominees to the Board of Directors. A copy of those procedures is attached as an exhibit to this Report.
Code of Ethics
BancShares has adopted a code of ethics that applies to all its executive officers, including its principal executive and principal financial and accounting officers. A copy of the code of ethics will be provided without charge upon request. Requests for copies should be directed to Alex G. MacFadyen, Secretary, First Citizens BancShares, Inc., Post Office Box 27131, Raleigh, North Carolina 27611-7131 or by e-mail to fcbdirectors@firstcitizens.com.
Available Information
BancShares does not have its own separate Internet website. However, FCB’s Internet website (www.firstcitizens.com) includes a hyperlink to the SEC’s website where the public may obtain copies of BancShares’ annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Interested parties may also directly access the SEC’s Internet website that contains reports and other information that BancShares files electronically with the SEC. The address of the SEC’s website iswww.sec.gov.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. (BancShares), for the years 2005, 2004 and 2003. BancShares is a financial holding company with two wholly-owned banking subsidiaries: First-Citizens Bank & Trust Company (FCB), a North Carolina-chartered bank, and IronStone Bank (ISB), a federally-chartered thrift institution. FCB operates branches in North Carolina, Virginia, West Virginia, Maryland and Tennessee. ISB operates branches in Florida, Georgia, Texas, New Mexico, Arizona, California, Colorado, Oregon and Washington.
This discussion and related financial data should be read in conjunction with our audited consolidated financial statements and related footnotes, presented on pages 38 through 68 of this report. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2005, the reclassifications have no effect on shareholders’ equity or net income as previously reported.
CRITICAL ACCOUNTING POLICIES
The preparation of our audited financial statements and the information included in management’s discussion and analysis is governed by policies that are based on accounting principles generally accepted in the United States of America and general practices within the banking industry. Among the more significant policies are those that govern accounting for the allowance for loan and lease losses, impairment of investment securities and pension plan assumptions.
Estimates and judgments are integral to accounting for certain items, and those estimates and judgments affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent assets and liabilities. BancShares periodically evaluates its estimates, including those related to the allowance for loan and lease losses, impairment of investment securities, and pension plan assumptions. While we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or outcomes.
Allowance for loan and lease losses. The allowance for loan and lease losses reflects the estimated losses that will result from the inability of our customers to make required payments. The allowance for loan and lease losses results from management’s evaluation of the risk characteristics of the loan and lease portfolio under current economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in our opinion, deserve current recognition in estimating possible loan and lease losses. Our evaluation process is based on historical evidence and current trends among delinquencies, defaults and nonperforming assets. Our estimate of the allowance for loan and lease losses does not include the impact of events that might occur in the future.
Management considers the established allowance adequate to absorb losses that relate to loans and leases outstanding at December 31, 2005, although future additions may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses. These agencies may require the recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additions to the allowance may be required.
Other than temporary impairment of investment securities. An individual investment security with a fair value less than 80 percent of its carrying value over a continuous period that spans two quarter-ends is evaluated for impairment during the subsequent quarter. That evaluation includes an assessment of both qualitative and quantitative measures to determine whether, in management’s judgment, the investment is likely to recover its value. When that evaluation concludes that a recovery is unlikely, the unrealized loss is reported as an other than temporary impairment within securities losses on the consolidated statements of income. Changes in market interest rates and the resulting impact on fair value are not typically deemed to create other than temporary impairment. If evidence suggests that an unrealized loss is unlikely to be recovered, management may elect to record an other than temporary impairment even if the prescribed period of time has not lapsed.
Pension plan assumptions. Although the assets and liabilities associated with the defined benefit pension plan maintained for our associates are not included within the consolidated financial statements, the selection of key
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assumptions used to determine the pension obligation and the future value of the plan’s assets have a direct impact on the pension expense that we report within employee benefit expense in our consolidated statements of income. We establish an appropriate discount rate that is used to determine the present value of the benefits that the pension plan will pay to the plan participants. The discount rate reflects the interest rate that could be obtained by a suitable investment used to fund the pension obligation. Given the reductions in market interest rates during the past several years, the discount rate used to estimate the pension obligation has declined to 5.50 percent at December 31, 2005 compared to 5.75 percent at December 31, 2004 and 6.00 percent at December 31, 2003. Assuming other variables remain unchanged, a reduction in the assumed discount rate would cause an increase in the pension plan’s benefit obligations, which would result in higher pension expense for BancShares.
We also derive an estimated long-term rate of return on plan assets that is used to calculate the value of plan assets over time. Based on favorable asset returns during the prior two years, optimistic market conditions and forecasts for future market performance, a return on assets assumption of 8.50 percent was used during 2005 and 2004, compared to 8.00 percent in 2003. Assuming other variables remain unchanged, an increase in the assumed long-term rate of return on plan assets would result in quicker appreciation in the fair value of pension plan’s assets, which would trigger a reduction in pension expense for BancShares.
The assumed rate of future compensation increases is reviewed annually based on actual experience and future salary expectations. The compensation increase assumption was adjusted downward effective January 1, 2006 to 4.25 percent compared to 4.75 percent during the previous three years. Assuming other variables remain unchanged, a reduction in the rate of future compensation reduces benefit obligations for the pension plan, which would result in lower pension expense for BancShares.
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Table 1
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
| | | | | | | | | | | | | | | | | | | | |
| | | 2005
| | | 2004
| | | 2003
| | | 2002
| | | 2001
| |
| | | (thousands, except share data and ratios) | |
SUMMARY OF OPERATIONS | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 665,934 | | | $ | 521,117 | | | $ | 510,477 | | | $ | 596,169 | | | $ | 715,427 | |
Interest expense | | | 218,151 | | | | 133,826 | | | | 148,537 | | | | 214,018 | | | | 346,510 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Net interest income | | | 447,783 | | | | 387,291 | | | | 361,940 | | | | 382,151 | | | | 368,917 | |
Provision for credit losses | | | 33,109 | | | | 34,473 | | | | 24,187 | | | | 26,550 | | | | 24,134 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Net interest income after provision for credit losses | | | 414,674 | | | | 352,818 | | | | 337,753 | | | | 355,601 | | | | 344,783 | |
Noninterest income | | | 263,352 | | | | 250,956 | | | | 243,936 | | | | 220,295 | | | | 214,643 | |
Noninterest expense | | | 499,356 | | | | 479,579 | | | | 465,088 | | | | 432,353 | | | | 421,685 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Income before income taxes | | | 178,670 | | | | 124,195 | | | | 116,601 | | | | 143,543 | | | | 137,741 | |
Income taxes | | | 65,808 | | | | 49,352 | | | | 41,414 | | | | 50,787 | | | | 50,805 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Net income | | $ | 112,862 | | | $ | 74,843 | | | $ | 75,187 | | | $ | 92,756 | | | $ | 86,936 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Net interest income, taxable equivalent | | $ | 449,256 | | | $ | 388,556 | | | $ | 362,991 | | | $ | 383,494 | | | $ | 370,857 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
SELECTED AVERAGE BALANCES | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 13,905,260 | | | $ | 12,856,102 | | | $ | 12,245,840 | | | $ | 11,843,239 | | | $ | 11,235,859 | |
Investment securities | | | 2,533,161 | | | | 2,157,367 | | | | 2,585,376 | | | | 2,610,622 | | | | 2,196,473 | |
Loans and leases | | | 9,364,327 | | | | 8,892,317 | | | | 7,886,948 | | | | 7,379,607 | | | | 7,105,915 | |
Interest-earning assets | | | 12,492,955 | | | | 11,483,694 | | | | 10,932,853 | | | | 10,553,574 | | | | 10,038,074 | |
Deposits | | | 11,714,569 | | | | 10,961,380 | | | | 10,433,781 | | | | 10,007,398 | | | | 9,405,328 | |
Interest-bearing liabilities | | | 10,113,999 | | | | 9,327,436 | | | | 9,163,960 | | | | 9,129,168 | | | | 8,798,893 | |
Long-term obligations | | | 353,885 | | | | 287,333 | | | | 255,379 | | | | 263,291 | | | | 186,636 | |
Shareholders’ equity | | $ | 1,131,066 | | | $ | 1,053,860 | | | $ | 996,578 | | | $ | 924,877 | | | $ | 847,374 | |
Shares outstanding | | | 10,434,453 | | | | 10,435,247 | | | | 10,452,523 | | | | 10,478,843 | | | | 10,507,289 | |
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SELECTED PERIOD-END BALANCES | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 14,639,392 | | | $ | 13,265,711 | | | $ | 12,566,961 | | | $ | 12,237,534 | | | $ | 11,869,425 | |
Investment securities | | | 2,929,516 | | | | 2,125,524 | | | | 2,469,447 | | | | 2,539,236 | | | | 2,791,296 | |
Loans and leases | | | 9,642,994 | | | | 9,354,387 | | | | 8,326,598 | | | | 7,620,263 | | | | 7,196,177 | |
Interest-earning assets | | | 13,053,522 | | | | 11,863,654 | | | | 11,090,450 | | | | 10,783,069 | | | | 10,489,382 | |
Deposits | | | 12,173,858 | | | | 11,350,798 | | | | 10,711,332 | | | | 10,439,620 | | | | 9,961,605 | |
Interest-bearing liabilities | | | 10,745,696 | | | | 9,641,368 | | | | 9,251,903 | | | | 9,298,080 | | | | 9,206,903 | |
Long-term obligations | | | 408,987 | | | | 285,943 | | | | 289,277 | | | | 253,409 | | | | 284,009 | |
Shareholders’ equity | | $ | 1,181,059 | | | $ | 1,086,310 | | | $ | 1,029,305 | | | $ | 967,291 | | | $ | 885,043 | |
Shares outstanding | | | 10,434,453 | | | | 10,434,453 | | | | 10,436,345 | | | | 10,473,294 | | | | 10,483,456 | |
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PROFITABILITY RATIOS (averages) | | | | | | | | | | | | | | | | | | | | |
Rate of return on: | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 0.81 | % | | | 0.58 | % | | | 0.61 | % | | | 0.78 | % | | | 0.77 | % |
Shareholders’ equity | | | 9.98 | | | | 7.10 | | | | 7.54 | | | | 10.03 | | | | 10.26 | |
Dividend payout ratio | | | 10.17 | | | | 15.34 | | | | 15.30 | | | | 11.30 | | | | 12.09 | |
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LIQUIDITY AND CAPITAL RATIOS (averages) | | | | | | | | | | | | | | | | | | | | |
Loans and leases to deposits | | | 79.94 | % | | | 81.12 | % | | | 75.59 | % | | | 73.74 | % | | | 75.55 | % |
Shareholders’ equity to total assets | | | 8.13 | | | | 8.20 | | | | 8.14 | | | | 7.81 | | | | 7.54 | |
Time certificates of $100,000 or more to total deposits | | | 12.57 | | | | 11.05 | | | | 10.33 | | | | 10.87 | | | | 11.43 | |
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PER SHARE OF STOCK | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 10.82 | | | $ | 7.17 | | | $ | 7.19 | | | $ | 8.85 | | | $ | 8.27 | |
Cash dividends | | | 1.10 | | | | 1.10 | | | | 1.10 | | | | 1.00 | | | | 1.00 | |
Market price at December 31 (Class A) | | | 174.42 | | | | 148.25 | | | | 120.50 | | | | 96.60 | | | | 97.75 | |
Book value at December 31 | | | 113.19 | | | | 104.11 | | | | 98.63 | | | | 92.36 | | | | 84.42 | |
Tangible book value at December 31 | | | 102.35 | | | | 93.12 | | | | 87.56 | | | | 81.73 | | | | 73.78 | |
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10
SUMMARY
BancShares’ earnings and cash flows are primarily derived from the commercial banking activities conducted by its banking subsidiaries. These activities include commercial and consumer lending, deposit and cash management products, cardholder, merchant, wealth management services as well as various other products and services incidental to commercial banking. FCB and ISB gather deposits from retail and commercial customers and, along with BancShares and other non-bank subsidiaries, obtain funding through borrowings from various non-deposit sources. We invest the liquidity generated from these funding sources in various types of interest-earning assets such as loans and leases, investment securities and overnight investments. We also invest in the bank premises, furniture and equipment incidental to the subsidiaries’ commercial banking business.
External Influences. Various external factors influence customer demand for our loan, lease and deposit products. The general strength of the economy influences loan and lease demand as well as the quality and collectibility of our loan and lease portfolio. External economic indicators such as consumer bankruptcy rates and business debt service capacity closely follow trends in the economic cycle. In an effort to stimulate and control the rate of growth of economic activity, monetary actions by the Federal Reserve are significant to the interest rate environment in which we operate. At any point in time, both the existing level and anticipated movement of interest rates have a profound impact on customer demand for our products, our pricing of those products and on our profitability.
In order to control inflation while sustaining the current level of economic growth, the Federal Reserve initiated significant interest rate increases during 2005. Within this environment of rising interest rates, we experienced relatively strong growth in deposit products and weak loan demand. During 2004, loans increased at a robust pace while deposit growth lagged. The trends in each period resulted primarily from external economic and competitive factors that significantly affected both our ability and capacity to grow our loan portfolio and to generate incremental levels of deposits. Although we are unable to control the external factors that influence our business, through the utilization of various asset–liability management and asset quality tools, we seek to minimize the potential adverse risks of unforeseen and unfavorable economic trends and take advantage of favorable economic and competitive conditions when appropriate.
Strategic emphasis. Financial institutions frequently focus their strategic and operating emphasis on maximizing profitability, and therefore measure their relative success by reference to profitability measures such as return on average assets or return on average shareholders’ equity. BancShares’ profitability measures have historically compared unfavorably to the returns of similar-sized financial holding companies. BancShares has instead placed primary emphasis upon asset quality, balance sheet liquidity and capital conservation and creation, even when those priorities may be detrimental to short-term profitability.
Based on our organization’s strengths and competitive position within the financial services industry, we believe opportunities for significant growth and expansion exist. We operate in diverse and growing geographic markets and believe that through competitive products and superior customer service, we can increase our business volumes and profitability. In recent years, we have focused our efforts on customers who own their own businesses, medical and other professionals and individuals who are financially active. Among all of our customers, we seek to increase fee income in areas such as merchant processing, factoring, insurance, cash management, wealth management and private banking services. We also focus on opportunities to generate income by providing processing services to other banks. We attempt to mitigate certain of the risks that can endanger our profitability and growth prospects. These risks generally fall into categories of economic, industry systemic, competitive and regulatory. While we are attentive to all areas of risk, economic risk is especially problematic due to the lack of control and the potential material impact upon our financial results. Specific economic risks include recession, rapid movements in interest rates and significant changes in inflation expectations. Compared to our larger competitors, our relatively small asset size and limited capital resources create a level of economic risk that requires significant and constant management attention.
Net income. BancShares reported net income of $112.9 million during 2005, compared to $74.8 million in 2004 and $75.2 million in 2003. Net income for 2005 represented a 50.8 percent increase when compared to 2004. Significant items affecting 2005 net income included materially higher net interest income and improved levels of noninterest income, both of which were partially offset by higher noninterest expense and income tax expense. The $344,000 decrease in net income in 2004 when compared to 2003 was the result of higher noninterest expense and provision for credit losses, as well as higher income tax expense. These unfavorable items fully offset the benefit of higher net interest income and noninterest income. Net income per share for 2005 totaled $10.82, compared to $7.17 and $7.19 for 2004 and 2003, respectively.
11
Shareholders Equity. BancShares continues to exceed minimum capital standards and the banking subsidiaries remain well-capitalized. However, ISB’s continued de novo expansion and rapid balance sheet growth has required BancShares to contribute significant amounts of additional capital. Infusions totaled $20.0 million in 2005 compared to $30.0 million in 2004 and 2003. Since ISB was formed in 1997, BancShares has provided $250.0 million in capital. ISB recorded net losses of $2.9 million, $3.0 million and $2.0 million during 2005, 2004 and 2003, respectively. Losses incurred since ISB’s inception total $29.2 million. Based on plans for further growth and expansion, BancShares will infuse $30.0 million into ISB during 2006, and additional capital infusions will likely extend into the foreseeable future.
Detailed information regarding the components of net income over the five years from 2001 through 2005 is provided in the accompanying tables. Table 1 provides a summary of key financial data. Table 5 provides information on net interest income. Table 13 provides details related to the provision for credit losses. Tables 15 and 16 present information regarding the components of noninterest income and expense, respectively.
An analysis of BancShares’ financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities. The information presented in Table 5 is useful in making such an analysis. Table 2 details acquisitions and divestitures during 2005, 2004 and 2003. All of the acquisitions were accounted for as purchases, with the results of operations included with BancShares’ Consolidated Statements of Income since the respective acquisition date. There were no material purchase transactions during the three-year period presented.
Table 2
ACQUISITIONS AND DIVESTITURES
| | | | | | | | | | |
| | | | | Total | | | Total | |
Year
| | Institution and Location
| | Loans
| | | Deposits
| |
| | | | | (thousands) | |
2005 | | Purchase of one branch by First Citizens Bank | | $ | 11 | | | $ | 20,957 | |
2004 | | Purchase of one branch by First Citizens Bank | | | 2,288 | | | | 11,565 | |
2004 | | Sale of one branch by IronStone Bank | | | — | | | | (12,156 | ) |
2003 | | Purchase of two branches by First Citizens Bank | | | 18,523 | | | | 67,887 | |
2003 | | Sale of four branches by First Citizens Bank | | | (31,380 | ) | | | (114,727 | ) |
INTEREST-EARNING ASSETS
Interest-earning assets include loans and leases, investment securities and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate, but expose the investor to potentially higher levels of default. We have historically focused on maintaining high asset quality, which results in a loan and lease portfolio subjected to strenuous underwriting and monitoring procedures. Our investment securities portfolio includes high-quality assets, primarily United States Treasury and government agency securities. Generally, the investment securities portfolio grows and shrinks based on loan, lease and deposit trends. When deposit growth exceeds loan and lease demand, which occurred in 2005, we invest excess funds in the securities portfolio. Conversely, as we experienced during 2004, when loan and lease demand exceeds deposit growth, we use proceeds from maturing securities to fund loan and lease demand. Overnight investments are selectively made with other financial institutions that are within our risk tolerance.
Interest-earning assets averaged $12.49 billion during 2005, an increase of $1.01 billion or 8.8 percent over 2004 levels, compared to a $550.8 million or 5.0 percent increase in 2004 over 2003 levels. The increase among interest-earning assets during 2005 resulted from growth among loans, leases, investment securities and overnight investments. Growth among interest-earning assets during 2004 also resulted from strong loan and lease growth, partially offset by lower investment securities.
Loans and leases. As of December 31, 2005, gross loans and leases outstanding were $9.64 billion, a 3.1 percent increase over the December 31, 2004 balance of $9.35 billion. The $288.6 million increase in loans and leases during 2005 resulted from growth throughout multiple segments of the loan and lease portfolio. Loan and lease growth during 2005 was negatively affected by FCB’s securitization and sale of $256.2 million of revolving mortgage loans during the second quarter. Including the impact of the securitization and sale of the revolving mortgage loans, FCB loans and leases declined $17.2 million or 0.2 percent during 2005. ISB loans and leases increased $305.8 million or 22.3 percent during 2005. Loan and lease balances for the last five years are presented in Table 3.
12
Loans secured by real estate totaled $6.84 billion at December 31, 2005, compared to $6.73 billion at December 31, 2004 and $5.87 billion at December 31, 2003. Loans secured by mortgages on commercial property totaled $3.52 billion at December 31, 2005, a $238.8 million or 7.3 percent increase from December 31, 2004. Although commercial mortgage loans increased during 2005, the rate of growth slowed from 2004 and 2003, when we achieved growth rates of 23.6 percent and 12.2 percent, respectively. The reduced growth during 2005 resulted from heightened pricing pressure from competitor banks and the desire by management to reduce the level of loans considered as high loan to value. As a percentage of total loans and leases, loans secured by commercial mortgages represent 36.5 percent at December 31, 2005, compared to 35.1 percent and 31.9 percent at December 31, 2004 and 2003, respectively. A large percentage of our commercial mortgage portfolio is secured by owner-occupied facilities, rather than investment property. These loans are underwritten based primarily upon the cash flow from the operation of the business rather than the value of the real estate collateral.
Revolving loans secured by real estate totaled $1.37 billion at December 31, 2005, compared to $1.71 billion and $1.60 billion at December 31, 2004 and 2003, respectively. The $345.3 million or 20.1 percent reduction in 2005 reflects the impact of the securitization and sale as well as customer preference for fixed rate closed-end residential mortgages. The securitization and sale transaction was executed in order to reduce our mix of revolving loans secured by real estate and to generate additional liquidity for other loan types. At December 31, 2005, revolving mortgage loans represent 14.2 percent of total loans and leases, compared to 18.3 percent and 19.2 percent, respectively, at December 31, 2004 and 2003.
Table 3
LOANS AND LEASES
| | | | | | | | | | | | | | | |
| | | December 31
|
| | | 2005
| | 2004
| | 2003
| | 2002
| | 2001
|
| | | (thousands) |
Real estate: | | | | | | | | | | | | | | | |
Construction and land development | | $ | 766,945 | | $ | 588,092 | | $ | 509,578 | | $ | 433,123 | | $ | 409,560 |
Commercial mortgage | | | 3,518,563 | | | 3,279,729 | | | 2,654,414 | | | 2,366,149 | | | 2,168,643 |
Residential mortgage | | | 1,016,677 | | | 979,663 | | | 929,096 | | | 1,077,937 | | | 1,279,708 |
Revolving mortgage | | | 1,368,729 | | | 1,714,032 | | | 1,598,603 | | | 1,335,024 | | | 1,024,181 |
Other mortgage | | | 172,712 | | | 171,700 | | | 173,489 | | | 166,023 | | | 164,045 |
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Total real estate loans | | | 6,843,626 | | | 6,733,216 | | | 5,865,180 | | | 5,378,256 | | | 5,046,137 |
Commercial and industrial | | | 1,193,349 | | | 969,729 | | | 929,039 | | | 925,775 | | | 915,596 |
Consumer | | | 1,318,971 | | | 1,397,820 | | | 1,303,718 | | | 1,154,280 | | | 1,073,954 |
Lease financing | | | 233,499 | | | 192,164 | | | 160,390 | | | 141,372 | | | 139,966 |
Other | | | 53,549 | | | 61,458 | | | 68,271 | | | 20,580 | | | 20,524 |
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Total loans and leases | | | 9,642,994 | | | 9,354,387 | | | 8,326,598 | | | 7,620,263 | | | 7,196,177 |
Less allowance for loan and lease losses | | | 128,847 | | | 123,861 | | | 112,304 | | | 106,888 | | | 102,653 |
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Net loans and leases | | $ | 9,514,147 | | $ | 9,230,526 | | $ | 8,214,294 | | $ | 7,513,375 | | $ | 7,093,524 |
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All information presented in this table relates to domestic loans and leases. There were no foreign loans or leases in any period.
Consumer loans totaled $1.32 billion at December 31, 2005, a decrease of $78.8 million or 5.6 percent during 2005, primarily the result of lower demand for indirect loans within our sales finance unit. During 2004, consumer loans increased 7.2 percent. At December 31, 2005, 2004 and 2003, consumer loans represented 13.7 percent, 14.9 percent and 15.7 percent of the total portfolio, respectively.
Commercial and industrial loans were $1.19 billion at December 31, 2005, compared to $969.7 million at December 31, 2004 and $929.0 million at December 31, 2003. After several years of sluggish growth, commercial and industrial loans increased $223.6 million or 23.1 percent during 2005. Growth among these loans in 2005 is evidence of optimistic economic expectations by our customers and positive results from the geographic expansion of ISB. Commercial and industrial loans represent 12.4 percent, 10.4 percent and 11.2 percent of total loans and leases, respectively, as of December 31, 2005, 2004 and 2003.
13
Residential mortgage loans increased $37.0 million or 3.8 percent to $1.02 billion during 2005, following a $50.6 million or 5.4 percent rate of growth in 2004. Growth during both 2005 and 2004 is primarily due to moderately higher levels of origination activity of loans that are not structured as marketable.
Construction and land development loans totaled $766.9 million at December 31, 2005, an increase of $178.9 million or 30.4 percent. As of December 31, 2005, these loans represented 8.0 percent of loans and leases, compared to 6.3 percent and 6.1 percent, respectively, at December 31, 2004 and December 31, 2003.
Our recent growth through ISB has allowed us to mitigate our historic exposure to geographic risk concentration in North Carolina and Virginia. We are aware however that rapid loan growth in new markets may present incremental lending risks. As ISB continues to expand into new markets, we have endeavored to ensure that rigorous centralized underwriting and monitoring controls are functioning effectively. We will continue to place emphasis upon maintaining strong lending standards in new markets.
We maintain a well-diversified loan and lease portfolio, and seek to avoid the risk associated with large concentrations within specific industries. Over the past several years, we have aggressively sought opportunities to provide financial services to businesses associated with and professionals within the medical community. Due to strong growth within this industry, our loans for offices and clinics of medical doctors and dentists increased to $1.32 billion as of December 31, 2005, which represents 13.7 percent of total loans and leases outstanding. Except for this single concentration, no other industry represented more than 10 percent of total loans and leases outstanding at December 31, 2005.
In addition to industry concentrations, we monitor our loan and lease portfolio for other risk characteristics. Among the key indicators of credit risk are loan-to-value ratios, which measure a lender’s exposure as compared to the value of the underlying collateral. Regulatory agencies have established guidelines that define high loan-to-value loans as those real estate loans that exceed 65 percent to 85 percent of the collateral value depending upon the type of collateral. At December 31, 2005, we had $1.08 billion or 11.2 percent of loans and leases that exceeded the loan-to-value ratios recommended by the guidelines. While we continuously strive to limit our high loan-to-value loans, we believe that the inherent risk within these loans is lessened by mitigating factors, such as our strict underwriting criteria and the high rate of owner-occupied properties.
We anticipate growth in commercial mortgage and commercial and industrial loans in 2006, as our expansion into new markets translates into higher levels of loan demand among our business customers. Our continued expansion will likewise diversify risks resulting from regional concentrations. All growth projections are subject to change as a result of economic deterioration or improvement, competitive forces and other external factors. Due to uncertainty about interest rates, we will encourage variable rate loan and lease products in order to reduce our overall level of interest rate risk.
Investment Securities. At December 31, 2005, and 2004, the investment securities portfolio totaled $2.93 billion and $2.13 billion, respectively. Investment securities held to maturity totaled $636.5 million and $877.5 million, respectively, at December 31, 2005 and 2004. The $241.0 million reduction in investment securities held to maturity during 2005 resulted from the continued migration of investments to the available-for-sale portfolio. In each period, U.S. Treasury and government agency securities represented substantially the entire balance of the held-to-maturity portfolio. Securities that are classified as held-to-maturity reflect BancShares’ ability and positive intent to hold those investments until maturity.
Investment securities available for sale at December 31, 2005 and 2004 totaled $2.29 billion and $1.25 billion, respectively, a $1.04 billion increase. Available-for-sale securities are reported at their aggregate fair value. The growth in investment securities available for sale during 2005 resulted from deposit and short-term borrowings growth that exceeded loan demand. Generally, excess balance sheet liquidity and maturities of investment securities which have been classified as held-to-maturity are invested in the available-for-sale portfolio in order to maximize overall balance sheet management flexibility. Investment securities available for sale include U.S. Treasury obligations, government agency securities and a small equity securities portfolio. Unrealized gains and losses on available-for-sale securities are included as a component of shareholders’ equity, net of deferred taxes.
14
Table 4
INVESTMENT SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31
|
| | | 2005
| | | 2004
| | 2003
|
| | | Cost
| | Fair Value
| | Average
Maturity
(Yrs./Mos.)
| | Taxable
Equivalent
Yield
| | | Cost
| | Fair Value
| | Cost
| | Fair Value
|
| | | (thousands, except maturity and yield information) |
Investment securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | | |
U. S. Government: | | | | | | | | | | | | | | | | | | | | | | | |
Within one year | | $ | 416,172 | | $ | 413,289 | | 0/6 | | 2.67 | % | | $ | 511,421 | | $ | 509,932 | | $ | 972,621 | | $ | 976,638 |
One to five years | | | 209,207 | | | 207,234 | | 1/4 | | 3.67 | | | | 351,264 | | | 349,425 | | | 234,640 | | | 236,429 |
Five to ten years | | | — | | | — | | | | | | | | 21 | | | 22 | | | 58 | | | 62 |
Over ten years | | | 9,294 | | | 9,385 | | 11/4 | | 5.62 | | | | 12,790 | | | 13,255 | | | 17,229 | | | 17,913 |
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|
Total | | | 634,673 | | | 629,908 | | 0/11 | | 3.04 | | | | 875,496 | | | 872,634 | | | 1,224,548 | | | 1,231,042 |
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State, county and municipal: | | | | | | | | | | | | | | | | | | | | | | | |
Within one year | | | — | | | — | | | | | | | | 165 | | | 168 | | | — | | | — |
One to five years | | | 147 | | | 155 | | 3/4 | | 5.88 | | | | 146 | | | 155 | | | 355 | | | 355 |
Five to ten years | | | — | | �� | — | | | | | | | | — | | | — | | | 145 | | | 155 |
Over ten years | | | 1,426 | | | 1,563 | | 12/4 | | 6.02 | | | | 1,422 | | | 1,572 | | | 1,419 | | | 1,586 |
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Total | | | 1,573 | | | 1,718 | | 11/6 | | 6.01 | | | | 1,733 | | | 1,895 | | | 1,919 | | | 2,096 |
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Other: | | | | | | | | | | | | | | | | | | | | | | | |
Within one year | | | — | | | — | | | | | | | | — | | | — | | | — | | | — |
One to five years | | | 250 | | | 250 | | 2/7 | | 7.75 | | | | 250 | | | 250 | | | 250 | | | 250 |
Five to ten years | | | — | | | — | | | | | | | | — | | | — | | | — | | | — |
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Total | | | 250 | | | 250 | | 2/7 | | 7.75 | | | | 250 | | | 250 | | | 250 | | | 250 |
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Total investment securities held to maturity | | | 636,496 | | | 631,876 | | 0/11 | | 3.05 | | | | 877,479 | | | 874,779 | | | 1,226,717 | | | 1,233,388 |
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Investment securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | |
U. S. Government: | | | | | | | | | | | | | | | | | | | | | | | |
Within one year | | | 1,159,556 | | | 1,140,602 | | 0/5 | | 3.03 | % | | | 927,250 | | | 916,427 | | | 878,667 | | | 875,337 |
One to five years | | | 1,055,472 | | | 1,044,913 | | 1/8 | | 3.94 | | | | 253,120 | | | 250,317 | | | 291,787 | | | 290,774 |
Five to ten years | | | 115 | | | 109 | | 5/7 | | 5.45 | | | | 159 | | | 156 | | | 721 | | | 723 |
Over ten years | | | 29,721 | | | 29,097 | | 27/2 | | 5.30 | | | | 21,300 | | | 21,166 | | | 11,048 | | | 11,027 |
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Total | | | 2,244,864 | | | 2,214,721 | | 1/4 | | 3.49 | | | | 1,201,829 | | | 1,188,066 | | | 1,182,223 | | | 1,177,861 |
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State, county and municipal: | | | | | | | | | | | | | | | | | | | | | | | |
Within one year | | | 954 | | | 947 | | 0/5 | | 2.06 | | | | 838 | | | 835 | | | 1,139 | | | 1,138 |
One to five years | | | 3,013 | | | 2,977 | | 2/7 | | 3.55 | | | | 4,059 | | | 4,065 | | | 3,635 | | | 3,642 |
Five to ten years | | | 1,115 | | | 1,110 | | 6/4 | | 4.64 | | | | 1,301 | | | 1,305 | | | 2,673 | | | 2,689 |
Over ten years | | | 145 | | | 145 | | 26/11 | | 1.15 | | | | 145 | | | 145 | | | 145 | | | 145 |
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| |
|
| |
|
| |
|
| |
|
|
Total | | | 5,227 | | | 5,179 | | 3/8 | | 3.44 | | | | 6,343 | | | 6,350 | | | 7,592 | | | 7,614 |
| | |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
|
| |
|
|
Other: | | | | | | | | | | | | | | | | | | | | | | | |
Within one year | | | — | | | — | | | | | | | | — | | | — | | | — | | | — |
One to five years | | | — | | | — | | | | | | | | — | | | — | | | — | | | — |
Five to ten years | | | — | | | — | | | | | | | | — | | | — | | | — | | | — |
Over ten years | | | 11,902 | | | 11,902 | | 11/11 | | 11.09 | | | | — | | | — | | | — | | | — |
| | |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
|
| |
|
|
Total | | | 11,902 | | | 11,902 | | 11/11 | | 11.09 | | | | — | | | — | | | — | | | — |
| | |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
|
| |
|
|
Equity securities | | | 34,409 | | | 61,218 | | | | | | | | 32,447 | | | 53,629 | | | 35,318 | | | 57,255 |
| | |
|
| |
|
| | | | | | |
|
| |
|
| |
|
| |
|
|
Total investment securities available for sale | | | 2,296,402 | | | 2,293,020 | | | | | | | | 1,240,619 | | | 1,248,045 | | | 1,225,133 | | | 1,242,730 |
| | |
|
| |
|
| | | | | | |
|
| |
|
| |
|
| |
|
|
Total investment securities | | $ | 2,932,898 | | $ | 2,924,896 | | | | | | | $ | 2,118,098 | | $ | 2,122,824 | | $ | 2,451,850 | | $ | 2,476,118 |
| | |
|
| |
|
| | | | | | |
|
| |
|
| |
|
| |
|
|
The average maturity assumes callable securities mature on their earliest call date; yields are based on amortized cost; yields related to securities that are exempt from federal and/or state income taxes are stated on a taxable-equivalent basis assuming statutory rates of 35% for federal income taxes and 6.90% for state income taxes for all periods.
15
Table 5
AVERAGE BALANCE SHEETS
| | | | | | | | | | | | | | | | | | | | |
| | | 2005
| | | 2004
| |
| | | Average
Balance
| | | Interest
Income/Expense
| | Yield/
Rate
| | | Average
Balance
| | | Interest
Income/Expense
| | Yield/
Rate
| |
| | | | | | | | | | | (thousands, taxable equivalent) | |
Assets | | | | | | | | | | | | | | | | | | | | |
Loans and leases | | $ | 9,364,327 | | | $ | 572,129 | | 6.11 | % | | $ | 8,892,317 | | | $ | 467,429 | | 5.26 | % |
Investment securities: | | | | | | | | | | | | | | | | | | | | |
U. S. Government | | | 2,463,545 | | | | 73,472 | | 2.98 | | | | 2,096,869 | | | | 47,515 | | 2.27 | |
State, county and municipal | | | 7,238 | | | | 374 | | 5.17 | | | | 8,667 | | | | 423 | | 4.88 | |
Other | | | 62,378 | | | | 2,224 | | 3.57 | | | | 51,831 | | | | 1,137 | | 2.19 | |
| | |
|
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
|
Total investment securities | | | 2,533,161 | | | | 76,070 | | 3.00 | | | | 2,157,367 | | | | 49,075 | | 2.27 | |
Overnight investments | | | 595,467 | | | | 19,208 | | 3.23 | | | | 434,010 | | | | 5,878 | | 1.35 | |
| | |
|
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
|
Total interest-earning assets | | | 12,492,955 | | | $ | 667,407 | | 5.34 | % | | | 11,483,694 | | | $ | 522,382 | | 4.55 | % |
Cash and due from banks | | | 654,821 | | | | | | | | | | 679,955 | | | | | | | |
Premises and equipment | | | 608,668 | | | | | | | | | | 554,480 | | | | | | | |
Other assets | | | 276,784 | | | | | | | | | | 262,807 | | | | | | | |
Allowance for loan and lease losses | | | (127,968 | ) | | | | | | | | | (124,834 | ) | | | | | | |
| | |
|
|
| | | | | | | |
|
|
| | | | | | |
Total assets | | $ | 13,905,260 | | | | | | | | | $ | 12,856,102 | | | | | | | |
| | |
|
|
| | | | | | | |
|
|
| | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | |
Checking With Interest | | $ | 1,570,010 | | | $ | 1,923 | | 0.12 | % | | $ | 1,500,638 | | | $ | 1,796 | | 0.12 | % |
Savings | | | 737,830 | | | | 1,521 | | 0.21 | | | | 743,629 | | | | 1,492 | | 0.20 | |
Money market accounts | | | 2,643,330 | | | | 50,171 | | 1.90 | | | | 2,571,468 | | | | 21,594 | | 0.84 | |
Time deposits | | | 4,209,996 | | | | 123,016 | | 2.92 | | | | 3,778,048 | | | | 83,557 | | 2.21 | |
| | |
|
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
|
Total interest-bearing deposits | | | 9,161,166 | | | | 176,631 | | 1.93 | | | | 8,593,783 | | | | 108,439 | | 1.26 | |
Short-term borrowings | | | 598,948 | | | | 14,966 | | 2.50 | | | | 446,320 | | | | 3,611 | | 0.81 | |
Long-term obligations | | | 353,885 | | | | 26,554 | | 7.50 | | | | 287,333 | | | | 21,776 | | 7.58 | |
| | |
|
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
|
Total interest-bearing liabilities | | | 10,113,999 | | | $ | 218,151 | | 2.16 | % | | | 9,327,436 | | | $ | 133,826 | | 1.43 | % |
Demand deposits | | | 2,553,403 | | | | | | | | | | 2,367,597 | | | | | | | |
Other liabilities | | | 106,792 | | | | | | | | | | 107,209 | | | | | | | |
Shareholders’ equity | | | 1,131,066 | | | | | | | | | | 1,053,860 | | | | | | | |
| | |
|
|
| | | | | | | |
|
|
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 13,905,260 | | | | | | | | | $ | 12,856,102 | | | | | | | |
| | |
|
|
| | | | | | | |
|
|
| | | | | | |
Interest rate spread | | | | | | | | | 3.18 | % | | | | | | | | | 3.12 | % |
Net interest income and net yield on interest-earning assets | | | | | | $ | 449,256 | | 3.60 | % | | | | | | $ | 388,556 | | 3.38 | % |
| | | | | | |
|
| |
|
| | | | | |
|
| |
|
|
Average loan balances include nonaccrual loans. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and a state income tax rate of 6.90% for all periods.
Total investment securities averaged $2.53 billion during 2005, $2.16 billion during 2004 and $2.59 billion during 2003. As a percentage of average interest-earning assets, investment securities represented 20.3 percent, 18.8 percent and 23.6 percent during 2005, 2004 and 2003, respectively. The growth of average investment securities during 2005 was the result of deposit growth outpacing loan demand. During 2004, loan growth exceeded the increase in deposit levels, and maturing investment securities were needed to fund loan demand. Table 4 presents detailed information relating to the investment securities portfolio.
16
Table 5
AVERAGE BALANCE SHEETS(continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2003
| | | 2002
| | | 2001
| |
| | | Average
Balance
| | Interest
Income/Expense
| | Yield/
Rate
| | | Average
Balance
| | | Interest
Income/Expense
| | Yield/
Rate
| | | Average
Balance
| | | Interest
Income/Expense
| | Yield/
Rate
| |
| | | | | | | | | | (thousands, taxable equivalent) | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | $7,886,948 | | $ | 445,639 | | 5.65 | % | | $ | 7,379,607 | | | $ | 491,770 | | 6.66 | % | | $ | 7,105,915 | | | $ | 568,379 | | 8.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2,525,007 | | | 59,350 | | 2.35 | | | | 2,550,835 | | | | 94,794 | | 3.72 | | | | 2,147,697 | | | | 117,608 | | 5.48 | |
| | | | 5,151 | | | 235 | | 4.56 | | | | 3,699 | | | | 301 | | 8.14 | | | | 4,804 | | | | 416 | | 8.66 | |
| | | | 55,218 | | | 1,345 | | 2.44 | | | | 56,088 | | | | 1,673 | | 2.98 | | | | 43,972 | | | | 2,288 | | 5.20 | |
| | |
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
|
| | | | 2,585,376 | | | 60,930 | | 2.36 | | | | 2,610,622 | | | | 96,768 | | 3.71 | | | | 2,196,473 | | | | 120,312 | | 5.48 | |
| | | | 460,529 | | | 4,959 | | 1.08 | | | | 563,345 | | | | 8,974 | | 1.59 | | | | 735,686 | | | | 28,676 | | 3.90 | |
| | |
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
|
| | | | 10,932,853 | | $ | 511,528 | | 4.68 | % | | | 10,553,574 | | | $ | 597,512 | | 5.66 | % | | | 10,038,074 | | | $ | 717,367 | | 7.15 | % |
| | | | 667,979 | | | | | | | | | 669,770 | | | | | | | | | | 592,270 | | | | | | | |
| | | | 522,548 | | | | | | | | | 494,534 | | | | | | | | | | 466,549 | | | | | | | |
| | | | 238,197 | | | | | | | | | 235,484 | | | | | | | | | | 243,841 | | | | | | | |
| | | | (115,737) | | | | | | | | | (110,123 | ) | | | | | | | | | (104,875 | ) | | | | | | |
| | |
|
| | | | | | | |
|
|
| | | | | | | |
|
|
| | | | | | |
| | | | $12,245,840 | | | | | | | | $ | 11,843,239 | | | | | | | | | $ | 11,235,859 | | | | | | | |
| | |
|
| | | | | | | |
|
|
| | | | | | | |
|
|
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | $1,379,479 | | $ | 1,923 | | 0.14 | % | | $ | 1,266,185 | | | $ | 3,450 | | 0.27 | % | | $ | 1,145,115 | | | $ | 6,060 | | 0.53 | % |
| | | | 690,705 | | | 2,151 | | 0.31 | | | | 642,764 | | | | 3,435 | | 0.53 | | | | 608,882 | | | | 6,680 | | 1.10 | |
| | | | 2,563,589 | | | 22,208 | | 0.87 | | | | 2,305,486 | | | | 35,743 | | 1.55 | | | | 1,744,389 | | | | 54,309 | | 3.11 | |
| | | | 3,811,476 | | | 98,507 | | 2.58 | | | | 4,121,474 | | | | 145,278 | | 3.52 | | | | 4,453,109 | | | | 243,703 | | 5.47 | |
| | |
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
|
| | | | 8,445,249 | | | 124,789 | | 1.48 | | | | 8,335,909 | | | | 187,906 | | 2.25 | | | | 7,951,495 | | | | 310,752 | | 3.91 | |
| | | | 463,332 | | | 2,795 | | 0.60 | | | | 529,968 | | | | 4,528 | | 0.85 | | | | 660,762 | | | | 20,643 | | 3.12 | |
| | | | 255,379 | | | 20,953 | | 8.21 | | | | 263,291 | | | | 21,584 | | 8.20 | | | | 186,636 | | | | 15,115 | | 8.10 | |
| | |
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
|
| | | | 9,163,960 | | $ | 148,537 | | 1.62 | % | | | 9,129,168 | | | $ | 214,018 | | 2.34 | % | | | 8,798,893 | | | $ | 346,510 | | 3.94 | % |
| | | | 1,988,532 | | | | | | | | | 1,671,489 | | | | | | | | | | 1,453,833 | | | | | | | |
| | | | 96,770 | | | | | | | | | 117,705 | | | | | | | | | | 135,759 | | | | | | | |
| | | | 996,578 | | | | | | | | | 924,877 | | | | | | | | | | 847,374 | | | | | | | |
| | |
|
| | | | | | | |
|
|
| | | | | | | |
|
|
| | | | | | |
| | | $ | 12,245,840 | | | | | | | | $ | 11,843,239 | | | | | | | | | $ | 11,235,859 | | | | | | | |
| | |
|
| | | | | | | |
|
|
| | | | | | | |
|
|
| | | | | | |
| | | | | | | | | 3.06 | % | | | | | | | | | 3.32 | % | | | | | | | | | 3.21 | % |
| | | | | | $ | 362,991 | | 3.32 | % | | | | | | $ | 383,494 | | 3.63 | % | | | | | | $ | 370,857 | | 3.69 | % |
| | | | | |
|
| |
|
| | | | | |
|
| |
|
| | | | | |
|
| |
|
|
Overnight Investments. At December 31, 2005 and 2004, overnight investments, which include federal funds sold and interest-bearing deposits in other financial institutions, totaled $481.0 million and $383.7 million, respectively. These investments averaged $595.5 million, $434.0 million and $460.5 million, respectively, during 2005, 2004 and 2003. During 2005, average overnight securities increased $161.5 million or 37.2 percent due to general balance sheet liquidity needs. The reduction in 2004 resulted from stronger loan demand.
17
Income on Interest-Earning Assets. Interest income amounted to $665.9 million during 2005, a $144.8 million or 27.8 percent increase from 2004, compared to a $10.6 million or 2.1 percent increase from 2003 to 2004. The increase in interest income during 2005 resulted from higher average assets and significantly improved yields. The taxable-equivalent yield on interest-earning assets was 5.34 percent during 2005, a 79 basis point increase from the 4.55 percent reported in 2004. The taxable-equivalent yield on interest-earning assets was 4.68 percent in 2003.
Table 5 analyzes interest-earning assets and interest-bearing liabilities for the five years ending December 31, 2005. To assess the impact of the tax-exempt status of income earned on certain loans, leases and municipal securities, Table 5 is prepared on a taxable-equivalent basis. The taxable-equivalent yield on the loan and lease portfolio increased from 5.26 percent in 2004 to 6.11 percent in 2005. The combination of the 85 basis point yield increase, and the 5.3 percent growth in average loans and leases contributed to an increase in loan and lease interest income of $104.6 million or 22.4 percent over 2004. This followed an increase of $21.7 million or 4.9 percent in loan and lease interest income in 2004 over 2003, the net result of a $1.01 billion increase in average loans and leases outstanding and a 39 basis point loan yield reduction. The higher yields during 2005 reflect the impact of Federal Reserve actions beginning during the third quarter of 2004 to increase market interest rates.
We believe that further actions by the Federal Reserve to increase interest rates during 2006 will be modest, and the yield on interest-earning assets will increase marginally compared to the end of 2005.
Interest income earned on the investment securities portfolio amounted to $75.9 million, $48.9 million and $60.9 million during 2005, 2004 and 2003, respectively. The taxable-equivalent yield on the investment securities portfolio was 3.00 percent, 2.27 percent and 2.36 percent, respectively, for 2005, 2004 and 2003. The $27.0 million increase in investment interest income during 2005 reflected higher average volume and stronger yields. The $12.0 million reduction in investment interest income from 2003 to 2004 was the result of lower average investment securities and lower yields.
Interest earned on overnight investments was $19.2 million during 2005, compared to $5.9 million during 2004 and $5.0 million during 2003. The $13.3 million increase during 2005 resulted from a 188 basis point yield increase and the $161.5 million increase in average overnight investments. During 2004, interest income earned from overnight investments increased $919,000 over 2003, the net result of a 27 basis point yield increase and a $26.5 million decrease in average overnight investments.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include our interest-bearing deposits as well as short-term borrowings and long-term obligations. Deposits are our primary funding source, although we also utilize non-deposit borrowings to stabilize our liquidity base and to fulfill commercial customer requirements for cash management services. Certain of our long-term borrowings also qualify as capital under guidelines established by the Federal Reserve. We currently do not gather interest-bearing liabilities on a wholesale basis or through the services of brokers.
At December 31, 2005 and 2004, interest-bearing liabilities totaled $10.75 billion and $9.64 billion, respectively, an increase of $1.10 billion or 11.5 percent. The higher balances during 2005 result from our continuing focus upon the importance of increasing deposits and short-term borrowings throughout the entire branch network. Interest-bearing liabilities averaged $10.11 billion during 2005, an increase of $786.6 million or 8.4 percent over 2004 levels. During 2004, interest-bearing liabilities averaged $9.33 billion, an increase of $163.5 million or 1.8 percent over 2003.
Deposits. At December 31, 2005, deposits totaled $12.17 billion, an increase of $823.1 million or 7.3 percent from the $11.35 billion in deposits recorded as of December 31, 2004. Total deposits averaged $11.71 billion in 2005, an increase of $753.2 million or 6.9 percent over 2004, with a significant portion of that growth attributable to time deposits. During 2004, total deposits averaged $10.96 billion, an increase of $527.6 million or 5.1 percent over 2003.
Average interest-bearing deposits were $9.16 billion during 2005, an increase of $567.4 million or 6.6 percent. Average interest-bearing deposits were $8.59 billion during 2004, an increase of $148.5 million or 1.8 percent over 2003. In 2005, the increase in deposits was primarily the result of growth in average time deposits, which increased $431.9
18
million or 11.4 percent. Customer preference for time deposits is highly correlated to the level of interest rates. Due to the substantial increases in interest rates during 2005, customers rotated large amounts of liquidity from money market and Checking With Interest accounts to time deposits. The growth in time deposits during 2005 reversed a three-year trend of rate-influenced run-off. In 2004, our interest-bearing non-time products increased over the prior period, while average time deposits declined from the prior period. During 2004, average time deposits declined $33.4 million or 0.9 percent, compared to a reduction of $310.0 million or 7.5 percent in 2003.
Table 6
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
| | | |
| | | December 31, 2005
|
| | | (thousands) |
Less than three months | | $ | 376,732 |
Three to six months | | | 255,730 |
Six to 12 months | | | 547,118 |
More than 12 months | | | 500,255 |
| | |
|
|
Total | | $ | 1,679,835 |
| | |
|
|
Competition for deposit business in our market areas is extremely intense. While we have access to non-deposit borrowing sources, we prefer to fund loan demand with traditional bank deposits. Therefore, generating acceptable levels of deposit growth is a critical challenge for us, particularly during periods of strong loan demand.
Short-Term Borrowings. At December 31, 2005, short-term borrowings totaled $779.0 million, compared to $447.7 million one year earlier, a 74.0 percent increase. For the year ended December 31, 2005, short-term borrowings averaged $598.9 million, compared to $446.3 million during 2004 and $463.3 million during 2003. The $152.6 million or 34.2 percent increase in 2005 was the result of significantly higher demand for our commercial master note product. We continue to have access to various short-term borrowings, including the purchase of federal funds, overnight repurchase obligations and a correspondent bank credit line. At December 31, 2005, we had immediate access of up to $430.0 million on an unsecured basis and additional amounts under secured borrowing agreements with the Federal Home Loan Bank of Atlanta. Table 7 provides additional information regarding short-term borrowed funds.
Long-Term Obligations. At December 31, 2005 and 2004, long-term obligations totaled $409.0 million and $285.9 million, respectively, an increase of $123.0 million or 43.0 percent. Long-term obligations include $125.0 million in 5.125 percent subordinated notes payable issued by FCB during 2005. The notes mature in 2015 and are redeemable, subject to regulatory approval, at any time based on specific redemption provisions.
For 2005 and 2004, the outstanding balance includes $257.8 million in junior subordinated debentures representing obligations to two equity method subsidiaries, FCB/NC Capital Trust I and FCB/NC Capital Trust II (the Capital Trusts). The Capital Trusts are the grantor trusts for $250.0 million of trust preferred capital securities. The proceeds from the trust preferred capital securities were loaned by the Capital Trusts to BancShares in exchange for the junior subordinated debentures. Under regulatory standards, these trust preferred capital securities qualify as Tier 1 capital for BancShares.
The $150.0 million in trust preferred capital securities issued by FCB/NC Capital Trust I mature in 2028 and may be redeemed in whole or in part after March 1, 2008. The $100.0 million in trust preferred capital securities issued by FCB/NC Capital Trust II mature in 2031 and may be redeemed in whole or in part on or after October 31, 2006. Although no definitive action has been directed by the board of directors, given current interest rates, it is likely that the trust preferred capital securities issued by FCB/NC Capital Trust II will be redeemed during late 2006.
19
Table 7
SHORT-TERM BORROWINGS
| | | | | | | | | | | | | | | | | | |
| | | 2005
| | | 2004
| | | 2003
| |
| | | Amount
| | Rate
| | | Amount
| | Rate
| | | Amount
| | Rate
| |
| | | (thousands) | |
Master notes | | | | | | | | | | | | | | | | | | |
At December 31 | | $ | 520,585 | | 3.19 | % | | $ | 213,387 | | 1.23 | % | | $ | 190,978 | | 0.40 | % |
Average during year | | | 353,871 | | 2.61 | | | | 197,268 | | 0.82 | | | | 216,591 | | 0.63 | |
Maximum month-end balance during year | | | 520,585 | | — | | | | 213,387 | | — | | | | 221,346 | | — | |
| | | | | | |
Repurchase agreements | | | | | | | | | | | | | | | | | | |
At December 31 | | | 150,054 | | 2.69 | | | | 131,367 | | 0.73 | | | | 136,756 | | 0.20 | |
Average during year | | | 143,813 | | 1.71 | | | | 141,959 | | 0.41 | | | | 156,406 | | 0.32 | |
Maximum month-end balance during year | | | 165,758 | | — | | | | 145,884 | | — | | | | 164,899 | | — | |
| | | | | | |
Federal funds purchased | | | | | | | | | | | | | | | | | | |
At December 31 | | | 36,620 | | 3.80 | | | | 36,933 | | 2.10 | | | | 38,300 | | 0.70 | |
Average during year | | | 45,595 | | 3.10 | | | | 46,676 | | 1.23 | | | | 45,226 | | 0.96 | |
Maximum month-end balance during year | | | 59,139 | | — | | | | 66,125 | | — | | | | 60,535 | | — | |
| | | | | | |
Other | | | | | | | | | | | | | | | | | | |
At December 31 | | | 71,769 | | 3.43 | | | | 65,999 | | 1.90 | | | | 64,157 | | 0.98 | |
Average during year | | | 55,669 | | 3.32 | | | | 60,417 | | 1.39 | | | | 45,109 | | 1.12 | |
Maximum month-end balance during year | | | 72,351 | | — | | | | 74,171 | | — | | | | 71,450 | | — | |
Expense of Interest-Bearing Liabilities. Interest expense amounted to $218.2 million in 2005, an $84.3 million or 63.0 percent increase from 2004. This followed a $14.7 million or 9.9 percent decrease in interest expense during 2004 compared to 2003. In 2005, the increase in interest expense was the result of increased levels of interest-bearing liabilities and higher rates. For 2004, the decrease in interest expense was the result of lower rates, partially offset by moderately higher average volume. The blended rate on all interest-bearing liabilities was 2.16 percent during 2005, compared to 1.43 percent in 2004 and 1.62 percent in 2003. The increase during 2005 was the result of higher market interest rates resulting from actions by the Federal Reserve and deposit mix changes toward higher cost time deposits. The extremely low rates in 2004 resulted from prior actions by the Federal Reserve Bank to reduce the discount and federal funds rates, which triggered historically low deposit and borrowing rates.
The aggregate rate on interest-bearing deposits was 1.93 percent during 2005, compared to 1.26 percent during 2004 and 1.48 percent during 2003. Interest expense on interest-bearing deposits amounted to $176.6 million during 2005, a 62.9 percent increase from the $108.4 million recorded during 2004, which was a 13.1 percent decrease from the $124.8 million recorded during 2003.
NET INTEREST INCOME
Net interest income was $447.8 million during 2005, a $60.5 million or 15.6 percent favorable variance from 2004. During 2004, net interest income was $387.3 million, a $25.4 million or 7.0 percent decrease from 2003. The net yield on interest-earning assets equaled 3.60 percent in 2005, a 22 basis point improvement as compared to 2004 due primarily to the favorable impact of rate changes among interest-earning assets and interest-bearing liabilities. In addition, 2005’s net yield on interest earning assets was favorably impacted by higher growth in average interest-earning assets than average interest-bearing liabilities. The net yield increased 6 basis points in 2004 over 2003 as a result of a higher ratio of loans to interest-earning assets.
Table 8 presents the annual changes in net interest income due to changes in volume, yields and rates. Like Table 5, this table is presented on a taxable-equivalent basis to adjust for the tax-exempt status of income earned on certain loans, leases and municipal securities.
During 2005, interest rate increases created a significant favorable rate variance, while growth among interest-earning assets generated favorable volume variances. During 2004, the favorable volume variance triggered by loan growth offset the unfavorable rate variance caused by falling interest rates.
20
Table 8
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005
| | | 2004
| |
| | | Change from previous year due to:
| | | Change from previous year due to:
| |
| | | Volume
| | | Yield/ Rate
| | | Total Change
| | | Volume
| | | Yield/ Rate
| | | Total Change
| |
| | | (thousands) | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Loans and leases | | $ | 26,971 | | | $ | 77,729 | | | $ | 104,700 | | | $ | 54,676 | | | $ | (32,886 | ) | | $ | 21,790 | |
Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | |
U. S. Government | | | 9,696 | | | | 16,261 | | | | 25,957 | | | | (9,939 | ) | | | (1,896 | ) | | | (11,835 | ) |
State, county and municipal | | | (72 | ) | | | 23 | | | | (49 | ) | | | 186 | | | | 2 | | | | 188 | |
Other | | | 301 | | | | 786 | | | | 1,087 | | | | (77 | ) | | | (131 | ) | | | (208 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total investment securities | | | 9,925 | | | | 17,070 | | | | 26,995 | | | | (9,830 | ) | | | (2,025 | ) | | | (11,855 | ) |
Overnight investments | | | 3,675 | | | | 9,655 | | | | 13,330 | | | | (306 | ) | | | 1,225 | | | | 919 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total interest-earning assets | | $ | 40,571 | | | $ | 104,454 | | | $ | 145,025 | | | $ | 44,540 | | | $ | (33,686 | ) | | $ | 10,854 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Checking With Interest | | $ | 105 | | | $ | 22 | | | $ | 127 | | | $ | 159 | | | $ | (286 | ) | | $ | (127 | ) |
Savings | | | (29 | ) | | | 58 | | | | 29 | | | | 132 | | | | (791 | ) | | | (659 | ) |
Money market accounts | | | 961 | | | | 27,616 | | | | 28,577 | | | | 111 | | | | (725 | ) | | | (614 | ) |
Time deposits | | | 11,090 | | | | 28,369 | | | | 39,459 | | | | (855 | ) | | | (14,095 | ) | | | (14,950 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total interest-bearing deposits | | | 12,127 | | | | 56,065 | | | | 68,192 | | | | (453 | ) | | | (15,897 | ) | | | (16,350 | ) |
Short-term borrowings | | | 2,524 | | | | 8,831 | | | | 11,355 | | | | (130 | ) | | | 946 | | | | 816 | |
Long-term obligations | | | 5,026 | | | | (248 | ) | | | 4,778 | | | | 2,513 | | | | (1,690 | ) | | | 823 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total interest-bearing liabilities | | $ | 19,677 | | | $ | 64,648 | | | $ | 84,325 | | | $ | 1,930 | | | $ | (16,641 | ) | | $ | (14,711 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Change in net interest income | | $ | 20,894 | | | $ | 39,806 | | | $ | 60,700 | | | $ | 42,610 | | | $ | (17,045 | ) | | $ | 25,565 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Changes in income relating to certain loans and investment securities are stated on a fully tax-equivalent basis at a rate that approximates BancShares’ marginal tax rate. The taxable equivalent adjustment was $1,473, $1,265 and $1,051 for the years 2005, 2004 and 2003 respectively. Table 5 provides detailed information on average balances, income/expense, yield/rate by category and the relevant income tax rates. The rate/volume variance is allocated equally between the changes in volume and rate.
Rate Sensitivity. A principal objective of BancShares’ asset/liability function is to monitor and manage interest rate risk, the exposure of net interest income to changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with repricing characteristics that are intended to protect against extreme interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. We do not utilize interest rate swaps, floors, collars or other derivative financial instruments to attempt to hedge our rate sensitivity and interest rate risk.
Table 9 provides information relative to BancShares’ interest-sensitivity position as of December 31, 2005. Checking With Interest is included in the 1-30 day sensitive category due to our contractual ability to change the interest rates on such products. During 2005, however, the relative change in the actual rates on such products was insignificant as compared to the change in general short-term market interest rates. Thus, the actual impact on net interest income of changes in market interest rates may not be accurately inferred purely by way of reference to the interest-sensitivity gap. As a result of the $1.23 billion one year liability-sensitive position, increases in interest rates will have an unfavorable impact on net interest income, if the interest rates on interest-earning assets and interest-bearing liabilities react identically to increased market interest rates. We believe that further actions by the Federal Reserve to increase interest rates during 2006 will be modest and that the net yield on interest-earning assets will decline slightly from the 2005 level.
21
Table 9
INTEREST-SENSITIVITY ANALYSIS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2005
| | 1-30 Days
Sensitive
| | | 31-90 Days
Sensitive
| | | 91-180
Days
Sensitive
| | | 181-365
Days
Sensitive
| | | Total One
Year
Sensitive
| | | Total
Nonsensitive
| | Total
|
| | | (thousands) |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans and leases | | $ | 4,490,289 | | | $ | 179,662 | | | $ | 264,532 | | | $ | 550,116 | | | $ | 5,484,599 | | | $ | 4,158,395 | | $ | 9,642,994 |
Investment securities held to maturity | | | 69,980 | | | | 66,028 | | | | 101,429 | | | | 178,735 | | | | 416,172 | | | | 220,324 | | | 636,496 |
Investment securities available for sale | | | — | | | | 54,256 | | | | 104,372 | | | | 423,134 | | | | 581,762 | | | | 1,711,258 | | | 2,293,020 |
Overnight investments | | | 481,012 | | | | — | | | | — | | | | — | | | | 481,012 | | | | — | | | 481,012 |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
Total interest-earning assets | | $ | 5,041,281 | | | $ | 299,946 | | | $ | 470,333 | | | $ | 1,151,985 | | | $ | 6,963,545 | | | $ | 6,089,977 | | $ | 13,053,522 |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 4,766,510 | | | $ | 449,472 | | | $ | 682,019 | | | $ | 1,516,603 | | | $ | 7,414,604 | | | $ | 2,143,077 | | $ | 9,557,681 |
Short-term borrowings | | | 727,478 | | | | 375 | | | | 645 | | | | 50,530 | | | | 779,028 | | | | — | | | 779,028 |
Long-term obligations | | | — | | | | — | | | | — | | | | — | | | | — | | | | 408,987 | | | 408,987 |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
Total interest-bearing liabilities | | $ | 5,493,988 | | | $ | 449,847 | | | $ | 682,664 | | | $ | 1,567,133 | | | $ | 8,193,632 | | | $ | 2,552,064 | | $ | 10,745,696 |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
Interest-sensitivity gap | | $ | (452,707 | ) | | $ | (149,901 | ) | | $ | (212,331 | ) | | $ | (415,148 | ) | | $ | (1,230,087 | ) | | $ | 3,537,913 | | $ | 2,307,826 |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
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.
To minimize the potential adverse impact of interest rate fluctuations, we monitor the repricing characteristics of the loan portfolio and interest-bearing liabilities to reduce our interest rate risk. Virtually all of our traditional fixed-rate residential mortgage loan production is originated through correspondents, protecting BancShares from the interest rate exposure that is typical in such lending. Table 10 details the maturity and repricing distribution of our loan and lease portfolio as of December 31, 2005. Of the loans and leases outstanding on December 31, 2005, 21.6 percent have scheduled maturities within one year, 45.3 percent have scheduled maturities between one and five years, while the remaining 33.1 percent have scheduled maturities extending beyond five years.We continue to offer competitive variable rate lending options to lessen our interest rate exposure resulting from fixed-rate loans.
Table 10
LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
| | | | | | | | | | | | |
| | | December 31, 2005
|
| | | Within One
Year
| | One to Five
Years
| | After Five
Years
| | Total
|
| | | | (thousands) |
Real estate: | | | | | | | | | | | | |
Construction and land development | | $ | 318,684 | | $ | 311,091 | | $ | 137,170 | | $ | 766,945 |
Commercial mortgage | | | 835,429 | | | 1,720,569 | | | 962,565 | | | 3,518,563 |
Residential mortgage | | | 168,228 | | | 453,179 | | | 395,270 | | | 1,016,677 |
Revolving mortgage | | | 116,625 | | | 328,500 | | | 923,604 | | | 1,368,729 |
Other mortgage | | | 81,169 | | | 64,824 | | | 26,719 | | | 172,712 |
| | |
|
| |
|
| |
|
| |
|
|
Total real estate loans | | | 1,520,135 | | | 2,878,163 | | | 2,445,328 | | | 6,843,626 |
Commercial and industrial | | | 304,740 | | | 411,135 | | | 477,474 | | | 1,193,349 |
Consumer | | | 176,220 | | | 882,084 | | | 260,667 | | | 1,318,971 |
Lease financing | | | 58,375 | | | 175,124 | | | — | | | 233,499 |
Other | | | 27,046 | | | 17,866 | | | 8,637 | | | 53,549 |
| | |
|
| |
|
| |
|
| |
|
|
Total | | $ | 2,086,516 | | $ | 4,364,372 | | $ | 3,192,106 | | $ | 9,642,994 |
| | |
|
| |
|
| |
|
| |
|
|
Loans maturing after one year with: | | | | | | | | | | | | |
Fixed interest rates | | | | | $ | 2,308,530 | | $ | 1,303,664 | | $ | 3,612,194 |
Floating or adjustable rates | | | | | | 2,055,842 | | | 1,888,442 | | | 3,944,284 |
| | | | | |
|
| |
|
| |
|
|
Total | | | | | $ | 4,364,372 | | $ | 3,192,106 | | $ | 7,556,478 |
| | | | | |
|
| |
|
| |
|
|
22
Table 11
MARKET RISK DISCLOSURES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Maturing in Years ended December 31,
| | | Thereafter
| | | Total
| | | Fair Value
|
| | | 2006
| | | 2007
| | | 2008
| | | 2009
| | | 2010
| | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment securities held to maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | $ | 416,172 | | | $ | 209,195 | | | $ | 250 | | | $ | — | | | $ | 12 | | | $ | 10,867 | | | $ | 636,496 | | | $ | 631,876 |
Average rate (%) | | | 2.67 | % | | | 3.67 | % | | | 7.75 | % | | | | | | | 8.00 | % | | | 5.69 | % | | | 3.05 | % | | | |
Investment securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 581,762 | | | | 1,284,557 | | | | 303,044 | | | | 2,032 | | | | 671 | | | | 59,736 | | | | 2,231,802 | | | | 2,231,802 |
Average rate (%) | | | 3.02 | % | | | 3.51 | % | | | 4.00 | % | | | 3.83 | % | | | 3.47 | % | | | 5.32 | % | | | 3.50 | % | | | |
Equity securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | 61,218 | | | | 61,218 | | | | 61,218 |
Loans and leases | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 730,894 | | | | 610,310 | | | | 614,669 | | | | 552,664 | | | | 530,887 | | | | 1,303,664 | | | | 4,343,088 | | | | 4,179,089 |
Average rate (%) | | | 5.81 | % | | | 5.73 | % | | | 5.65 | % | | | 5.77 | % | | | 5.99 | % | | | 5.97 | % | | | 5.84 | % | | | |
Variable rate | | | 1,355,622 | | | | 691,140 | | | | 643,120 | | | | 464,481 | | | | 257,101 | | | | 1,888,442 | | | | 5,299,906 | | | | 5,299,906 |
Average rate (%) | | | 7.09 | % | | | 6.75 | % | | | 6.54 | % | | | 6.18 | % | | | 5.61 | % | | | 6.69 | % | | | 6.68 | % | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Savings and interest-bearing checking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 5,017,221 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,017,221 | | | | 5,017,221 |
Average rate (%) | | | 1.29 | % | | | | | | | | | | | | | | | | | | | | | | | 1.29 | % | | | |
Time deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 3,068,467 | | | | 943,844 | | | | 204,517 | | | | 127,656 | | | | 168,040 | | | | 13 | | | | 4,512,537 | | | | 4,568,631 |
Average rate (%) | | | 3.22 | % | | | 3.81 | % | | | 3.56 | % | | | 3.64 | % | | | 4.12 | % | | | 7.90 | % | | | 3.40 | % | | | |
Variable rate | | | 21,606 | | | | 6,317 | | | | — | | | | — | | | | — | | | | — | | | | 27,923 | | | | 27,923 |
Average rate (%) | | | 1.75 | % | | | 3.00 | % | | | | | | | | | | | | | | | | | | | 2.03 | % | | | |
Short-term borrowings | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 779,028 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 779,028 | | | | 779,028 |
Average rate (%) | | | 3.20 | % | | | | | | | | | | | | | | | | | | | | | | | 3.20 | % | | | |
Long-term obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 134 | | | | 25,147 | | | | 160 | | | | 175 | | | | 190 | | | | 383,181 | | | | 408,987 | | | | 418,221 |
Average rate (%) | | | 6.00 | % | | | 3.45 | % | | | 6.00 | % | | | 6.00 | % | | | 6.00 | % | | | 7.19 | % | | | 6.96 | % | | | |
Market risk disclosures. Table 11 provides information regarding the market risk profile of BancShares at December 31, 2005. Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can result in diminished current fair values or reduced net interest income or both in future periods. The more significant changes in our market risk profile from December 31, 2004 to December 31, 2005 include:
| | • | | the fair value of investment securities held to maturity declined $242.9 million or 27.8 percent; all of the decrease relates to reductions in fixed-rate securities; |
| | • | | the fair value of investment securities available for sale increased $1.04 billion or 83.7 percent; excluding the marketable equity securities, all of the decrease relates to growth among fixed-rate securities; |
| | • | | the fair value of fixed rate loans and leases has increased $749.5 million or 21.9 percent due to loan growth during 2005; |
| | • | | the fair value of variable rate loans and leases has decreased $549.1 million or 9.4 percent due to customer demand for fixed rate loans; |
| | • | | the fair value of savings and interest-bearing checking deposits increased $25.7million or 0.5 percent; |
| | • | | the fair value of fixed rate time deposits increased $645.9 million or 16.5 percent; the increase results from rate-influenced customer demand for time deposits; |
| | • | | the fair value of short-term borrowings increased $331.3 million or 74.0 percent due to volume increases; |
| | • | | the fair value of long-term obligations, all of which are fixed-rate, increased $121.7 million, primarily due to the $125.0 million of subordinated notes payable issued in 2005; |
23
ASSET QUALITY
The maintenance of excellent asset quality is one of our key performance measures. We have historically dedicated significant resources to ensuring we are prudent both in decisions to extend credit and in the monitoring of asset quality on an ongoing basis.
Nonperforming Assets. Nonperforming assets include nonaccrual loans and leases and other real estate. With the exception of certain residential mortgage loans, the accrual of interest on loans and leases is discontinued when we deem that collection of additional principal or interest is doubtful. Loans and leases are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable loan terms. The accrual of interest on certain residential mortgage loans is discontinued when a loan is more than three monthly payments past due, and the accrual of interest resumes when the loan is less than three monthly payments past due.
Other real estate includes foreclosed property as well as branch facilities that we have closed but not sold. Nonperforming asset balances for the past five years are presented in Table 12.
Table 12
RISK ELEMENTS
| | | | | | | | | | | | | | | | | | | | |
| | | December 31,
| |
| | | 2005
| | | 2004
| | | 2003
| | | 2002
| | | 2001
| |
| | | (thousands, except ratios) | |
Nonaccrual loans and leases | | $ | 18,969 | | | $ | 14,266 | | | $ | 18,190 | | | $ | 15,521 | | | $ | 13,983 | |
Other real estate | | | 6,753 | | | | 9,020 | | | | 5,949 | | | | 7,330 | | | | 6,263 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total nonperforming assets | | $ | 25,722 | | | $ | 23,286 | | | $ | 24,139 | | | $ | 22,851 | | | $ | 20,246 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Accruing loans and leases 90 days or more past due | | $ | 9,180 | | | $ | 12,192 | | | $ | 11,492 | | | $ | 9,566 | | | $ | 12,981 | |
Loans and leases at December 31 | | $ | 9,642,994 | | | $ | 9,354,387 | | | $ | 8,326,598 | | | $ | 7,620,263 | | | $ | 7,196,177 | |
Ratio of nonperforming assets to total loans and leases plus other real estate | | | 0.27 | % | | | 0.25 | % | | | 0.29 | % | | | 0.30 | % | | | 0.28 | % |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Interest income that would have been earned on nonperforming loans and leases had they been performing | | $ | 549 | | | $ | 773 | | | $ | 1,182 | | | $ | 1,190 | | | $ | 1,060 | |
Interest income earned on nonperforming loans and leases | | | 226 | | | | 281 | | | | 356 | | | | 753 | | | | 333 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
There were no foreign loans or leases outstanding in any period.
BancShares’ nonperforming assets at December 31, 2005 totaled $25.7 million, compared to $23.3 million at December 31, 2004 and $24.1 million at December 31, 2003. As a percentage of total loans, leases and other real estate, nonperforming assets represented 0.27 percent, 0.25 percent and 0.29 percent as of December 31, 2005, 2004 and 2003. These ratios are low by industry standards, evidence of our strong focus on asset quality.
Nonperforming assets included nonaccrual loans and leases totaling $19.0 million at December 31, 2005, compared to $14.3 million at December 31, 2004 and $18.2 million at December 31, 2003. At December 31, 2005, nonaccrual loans and leases included $15.1 million in balances classified as impaired. At December 31, 2004, impaired loans totaled $8.0 million. The increase in loan balances classified as nonaccrual and impaired resulted from a single relationship. We do not believe this represents an unfavorable trend in nonperforming assets.
We continue to closely monitor past due accounts to identify any loans and leases that should be classified as impaired or nonaccrual.
24
Table 13
ALLOWANCE FOR CREDIT LOSSES
| | | | | | | | | | | | | | | | | | | | |
| | | 2005
| | | 2004
| | | 2003
| | | 2002
| | | 2001
| |
| | | (thousands, except ratios) | |
Allowance for credit losses at beginning of period | | $ | 130,832 | | | $ | 119,357 | | | $ | 112,533 | | | $ | 107,087 | | | $ | 102,655 | |
Adjustment for sale of loans | | | (1,585 | ) | | | — | | | | — | | | | — | | | | (777 | ) |
Acquired allowance for credit loss | | | — | | | | — | | | | 409 | | | | — | | | | — | |
Provision for credit losses | | | 33,109 | | | | 34,473 | | | | 24,187 | | | | 26,550 | | | | 24,134 | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | |
Construction and land development | | | (1 | ) | | | (13 | ) | | | (16 | ) | | | (580 | ) | | | (205 | ) |
Commercial mortgage | | | (551 | ) | | | (804 | ) | | | (318 | ) | | | (1,186 | ) | | | (2,758 | ) |
Residential mortgage | | | (1,912 | ) | | | (2,351 | ) | | | (1,594 | ) | | | (2,916 | ) | | | (1,171 | ) |
Revolving mortgage | | | (951 | ) | | | (1,384 | ) | | | (1,392 | ) | | | (902 | ) | | | (899 | ) |
Other mortgage loans | | | — | | | | — | | | | — | | | | — | | | | — | |
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Total real estate loans | | | (3,415 | ) | | | (4,552 | ) | | | (3,320 | ) | | | (5,584 | ) | | | (5,033 | ) |
Commercial and industrial | | | (18,319 | ) | | | (9,583 | ) | | | (7,101 | ) | | | (7,654 | ) | | | (6,736 | ) |
Consumer | | | (10,425 | ) | | | (12,238 | ) | | | (10,481 | ) | | | (10,117 | ) | | | (10,101 | ) |
Lease financing | | | (347 | ) | | | (173 | ) | | | (756 | ) | | | (1,585 | ) | | | (422 | ) |
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Total charge-offs | | | (32,506 | ) | | | (26,546 | ) | | | (21,658 | ) | | | (24,940 | ) | | | (22,292 | ) |
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Recoveries: | | | | | | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | |
Construction and land development | | | — | | | | 34 | | | | 10 | | | | — | | | | — | |
Commercial mortgage | | | 409 | | | | 236 | | | | 164 | | | | 954 | | | | 504 | |
Residential mortgage | | | 432 | | | | 244 | | | | 631 | | | | 239 | | | | 260 | |
Revolving mortgage | | | 155 | | | | 103 | | | | 63 | | | | 15 | | | | 58 | |
Other mortgage loans | | | — | | | | — | | | | — | | | | — | | | | — | |
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Total real estate loans | | | 996 | | | | 617 | | | | 868 | | | | 1,208 | | | | 822 | |
Commercial and industrial | | | 2,164 | | | | 1,084 | | | | 1,428 | | | | 1,212 | | | | 755 | |
Consumer | | | 2,672 | | | | 1,761 | | | | 1,590 | | | | 1,413 | | | | 1,787 | |
Lease financing | | | 88 | | | | 86 | | | | — | | | | 3 | | | | 3 | |
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Total recoveries | | | 5,920 | | | | 3,548 | | | | 3,886 | | | | 3,836 | | | | 3,367 | |
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Net charge-offs | | | (26,586 | ) | | | (22,998 | ) | | | (17,772 | ) | | | (21,104 | ) | | | (18,925 | ) |
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Allowance for credit losses at end of period | | $ | 135,770 | | | $ | 130,832 | | | $ | 119,357 | | | $ | 112,533 | | | $ | 107,087 | |
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Allowance for credit losses includes: | | | | | | | | | | | | | | | | | | | | |
Allowance for loan and lease losses | | $ | 128,847 | | | $ | 123,861 | | | $ | 112,304 | | | $ | 106,889 | | | $ | 102,653 | |
Liability for unfunded credit commitments | | | 6,923 | | | | 6,971 | | | | 7,053 | | | | 5,644 | | | | 4,434 | |
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Allowance for credit losses at end of period | | $ | 135,770 | | | $ | 130,832 | | | $ | 119,357 | | | $ | 112,533 | | | $ | 107,087 | |
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Average total loans and leases | | $ | 9,364,327 | | | $ | 8,892,317 | | | $ | 7,886,948 | | | $ | 7,379,607 | | | $ | 7,105,915 | |
Loans and leases at year-end | | | 9,642,994 | | | | 9,354,387 | | | | 8,326,598 | | | | 7,620,263 | | | | 7,196,177 | |
Ratios | | | | | | | | | | | | | | | | | | | | |
Net charge-offs to average total loans and leases | | | 0.28 | % | | | 0.26 | % | | | 0.23 | % | | | 0.29 | % | | | 0.27 | % |
Percent of total loans and leases at period-end: | | | | | | | | | | | | | | | | | | | | |
Allowance for loan and lease losses | | | 1.34 | | | | 1.32 | | | | 1.35 | | | | 1.40 | | | | 1.43 | |
Liability for unfunded credit commitments | | | 0.07 | | | | 0.07 | | | | 0.08 | | | | 0.07 | | | | 0.06 | |
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Allowance for credit losses | | | 1.41 | | | | 1.40 | | | | 1.43 | | | | 1.48 | | | | 1.49 | |
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All information presented in this table relates to domestic loans and leases as BancShares makes no foreign loans and leases.
25
Allowance for credit losses. At December 31, 2005, BancShares’ allowance for credit losses was $135.8 million or 1.41 percent of loans and leases outstanding. This compares to $130.8 million or 1.40 percent at December 31, 2004, and $119.4 million or 1.43 percent at December 31, 2003.
The provision for credit losses charged to operations was $33.1 million during 2005 compared to $34.5 million during 2004 and $24.2 million during 2003. The $1.4 million or 4.0 percent decrease in provision for credit losses from 2004 to 2005 resulted from slower loan growth, which required smaller additions to the allowance.
Net charge-offs for 2005 totaled $26.6 million, compared to $23.0 million during 2004, and $17.8 million during 2003. The ratio of net charge-offs to average loans and leases outstanding equaled 0.28 percent during 2005, 0.26 percent during 2004 and 0.23 percent during 2003. These low loss ratios reflect the quality of BancShares’ loan and lease portfolio and are a key indicator that we closely monitor to evaluate our financial performance. Table 13 provides details concerning the allowance for credit losses and provision for credit losses for the past five years.
Table 14
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31
| |
| | | 2005
| | | 2004
| | | 2003
| | | 2002
| | | 2001
| |
| | | Allowance for Credit Losses
| | Percent of Loans to Total Loans
| | | Allowance for Credit Losses
| | Percent of Loans to Total Loans
| | | Allowance for Credit Losses
| | Percent of Loans to Total Loans
| | | Allowance for Credit Losses
| | Percent of Loans to Total Loans
| | | Allowance for Credit Losses
| | Percent of Loans to Total Loans
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| | | | | | | | | | | | | (thousands) | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction and land development | | $ | 8,985 | | 7.95 | % | | $ | 7,704 | | 6.29 | % | | $ | 7,806 | | 10.26 | % | | $ | 7,911 | | 10.49 | % | | $ | 7,099 | | 11.14 | % |
Commercial mortgage | | | 39,356 | | 36.49 | | | | 37,769 | | 35.06 | | | | 33,054 | | 28.20 | | | | 31,380 | | 26.71 | | | | 32,875 | | 25.14 | |
Residential mortgage | | | 6,822 | | 10.54 | | | | 6,387 | | 10.47 | | | | 5,577 | | 10.86 | | | | 5,581 | | 13.89 | | | | 6,498 | | 17.51 | |
Revolving mortgage | | | 9,094 | | 14.19 | | | | 11,992 | | 18.32 | | | | 9,725 | | 19.20 | | | | 7,519 | | 17.52 | | | | 5,349 | | 14.23 | |
Other mortgage | | | 2,242 | | 1.79 | | | | 2,249 | | 1.84 | | | | 2,113 | | 1.92 | | | | 1,863 | | 1.97 | | | | 2,290 | | 2.10 | |
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Total real estate | | | 66,499 | | 70.96 | | | | 66,101 | | 71.98 | | | | 58,275 | | 70.44 | | | | 54,254 | | 70.58 | | | | 54,111 | | 70.12 | |
Commercial and industrial | | | 32,834 | | 12.38 | | | | 29,191 | | 10.37 | | | | 26,921 | | 11.16 | | | | 23,705 | | 12.15 | | | | 19,833 | | 12.72 | |
Consumer | | | 24,519 | | 13.68 | | | | 25,845 | | 14.94 | | | | 24,564 | | 15.65 | | | | 25,326 | | 15.14 | | | | 23,754 | | 14.92 | |
Lease financing | | | 2,389 | | 2.42 | | | | 2,229 | | 2.05 | | | | 2,518 | | 1.93 | | | | 2,036 | | 1.86 | | | | 1,624 | | 1.95 | |
Other | | | 576 | | 0.56 | | | | 743 | | 0.66 | | | | 901 | | 0.82 | | | | 255 | | 0.27 | | | | 151 | | 0.29 | |
Unallocated | | | 8,953 | | | | | | 6,723 | | | | | | 6,178 | | | | | | 6,957 | | | | | | 7,614 | | | |
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Total | | $ | 135,770 | | 100.00 | % | | $ | 130,832 | | 100.00 | % | | $ | 119,357 | | 100.00 | % | | $ | 112,533 | | 100.00 | % | | $ | 107,087 | | 100.00 | % |
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Table 14 details the allocation of the allowance for credit losses among the various loan types. The process used to allocate the allowance considers, among other factors, whether the borrower is a retail or commercial customer, whether the loan is secured or unsecured, and whether the loan is an open or closed-end agreement. Generally, loans, leases and unfunded commitments to commercial customers are evaluated individually and assigned a credit grade, while loans to retail customers are evaluated among groups of loans with similar characteristics. Loans, leases and commitments evaluated individually are assigned a credit grade using such factors as the borrower’s cash flow, the value of any underlying collateral and the strength of any guarantee. The credit grade becomes the basis for the allowance allocation. Groups of loans are aggregated over their remaining estimated behavioral lives and probable loss projections for each period become the basis for the allowance allocation. The loss projections are based on historical loss patterns and current economic conditions. The amount of the allowance for loan and lease losses not allocated through these loss models represents the unallocated portion of the allowance. The increase in the unallocated allowance during 2005 and 2004 results from growth in the loan portfolio.
26
NONINTEREST INCOME
The growth of noninterest income is essential to our ability to sustain adequate levels of profitability. The primary sources of noninterest income are service charges generated from deposit accounts, cardholder and merchant service income, various types of commission-based income, fees from processing services, and various types of revenues derived from wealth management services, including trust and asset management fees and commission income earned from broker-dealer activities. Total noninterest income was $263.4 million during 2005, an increase of $12.4 million or 4.9 percent over 2004. Noninterest income during 2004 was $251.0 million, a $7.0 million or 2.9 percent increase over the $243.9 million recorded during 2003. Table 15 presents the major components of noninterest income for the past five years.
Much of the increase in noninterest income during 2005 can be attributed to increases in cardholder and merchant services income, gains resulting from the securitization and sale of revolving mortgage loans and check cashing fees. These increases were partially offset by reductions in service charge income. Cardholder and merchant services income was $72.9 million in 2005, compared to $64.1 million in 2004 and $55.3 million in 2003. The growth in 2005 represents an $8.8 million or 13.7 percent increase, the result of higher credit card merchant discount and interchange fees for debit and credit card transactions. We continue to view this source of noninterest income as a key growth area.
Table 15
NONINTEREST INCOME
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| | | Year ended December 31
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| | | 2005
| | | 2004
| | 2003
| | 2002
| | | 2001
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| | | (thousands) |
Service charges on deposit accounts | | $ | 77,376 | | | $ | 81,478 | | $ | 78,273 | | $ | 75,870 | | | $ | 70,066 |
Cardholder and merchant services | | | 72,921 | | | | 64,118 | | | 55,321 | | | 49,387 | | | | 44,399 |
Commission-based income: | | | | | | | | | | | | | | | | | |
Investments | | | 15,119 | | | | 14,719 | | | 15,387 | | | 14,000 | | | | 12,585 |
Insurance | | | 7,318 | | | | 7,008 | | | 6,180 | | | 5,930 | | | | 5,220 |
Factoring | | | 3,606 | | | | 2,896 | | | 2,380 | | | 2,037 | | | | 1,969 |
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Total commission-based income | | | 26,043 | | | | 24,623 | | | 23,947 | | | 21,967 | | | | 19,774 |
Fees from processing services | | | 25,598 | | | | 23,888 | | | 20,590 | | | 18,929 | | | | 17,452 |
Trust and asset management fees | | | 18,588 | | | | 16,913 | | | 15,005 | | | 14,897 | | | | 15,114 |
Mortgage income | | | 7,868 | | | | 8,352 | | | 15,469 | | | 11,605 | | | | 11,645 |
ATM income | | | 10,220 | | | | 10,201 | | | 9,005 | | | 9,205 | | | | 9,552 |
Other service charges and fees | | | 16,507 | | | | 13,688 | | | 14,463 | | | 14,744 | | | | 13,896 |
Securities transactions | | | (492 | ) | | | 1,852 | | | 309 | | | (1,081 | ) | | | 7,189 |
Gain on sale of branches | | | — | | | | 426 | | | 5,710 | | | — | | | | — |
Other | | | 8,723 | | | | 5,417 | | | 5,844 | | | 4,772 | | | | 5,556 |
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Total | | $ | 263,352 | | | $ | 250,956 | | $ | 243,936 | | $ | 220,295 | | | $ | 214,643 |
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The securitization and sale of $256.2 million in revolving mortgage loans generated a gain of $2.9 million during 2005. This gain is included in other noninterest income. No revolving mortgage loan securitization activities were recorded in prior periods.
During 2005, check cashing fees totaled $3.2 million compared to $939,000 in 2004. The growth in this fee source during 2005 reflects the initiation of policies surrounding charging non-customers for cashing checks drawn on our commercial deposit accounts. Check cashing fees are included in other service charges and fees.
Service charge income was $77.4 million during 2005, compared to $81.5 million in 2004 and $78.3 million in 2003. The $4.1 million or 5.0 percent decrease in service charge income during 2005 reflects the net impact of lower service charges for both personal and commercial customers and higher bad check income when compared to 2004. Personal service charge income decreased during 2005 due to the growth of low-cost and free checking accounts. Commercial service charge income declined due to higher interest rates, which allowed customers on commercial analysis to offset a higher amount of various services by the earnings credit for amounts on deposit.
27
During 2005, fees from processing services totaled $25.6 million, an increase of $1.7 million or 7.2 percent over 2004. During 2004, BancShares recognized $23.9 million in fees from processing services, an increase of $3.3 million or 16.0 percent over the $20.6 million recognized during 2003. Growth in the number of transactions processed and the addition of new client banks created a favorable volume variance during 2005. In each year, a substantial portion of the income resulted from services provided to related parties. We continue to seek opportunities to provide processing services to unrelated parties.
During 2005, trust and asset management fees totaled $18.6 million, compared to $16.9 million during 2004 and $15.0 million in 2003. Improvements in capital market conditions and our emphasis on wealth management services have resulted in higher income.
Commission-based income increased $1.4 million to $26.0 million in 2005 from $24.6 million in 2004. In 2003, commission-based income was $23.9 million. The 5.8 percent increase in 2005 resulted from growth in broker-dealer activities and higher factoring fees. The increase during 2004 resulted from growth within our life insurance and factoring operations.
Mortgage income was $7.9 million, a decrease of $484,000 or 5.8 percent from the $8.4 million recorded in 2004. The reduction during 2005 was caused by $915,000 of unrealized losses incurred on discounted affordable mortgage loans that were originated in late 2005 and were held for sale at December 31, 2005.
We anticipate continued growth during 2006 among cardholder and merchant services income, processing services, trust and asset management fees and selected commission-based income sources.
NONINTEREST EXPENSE
The primary components of noninterest expense are salaries and related employee benefit costs, equipment and software costs related to branch offices and technology, and occupancy costs related to branch offices and support facilities. Noninterest expense for 2005 amounted to $499.4 million, a $19.8 million or 4.1 percent increase over 2004. Noninterest expense in 2004 was $479.6 million, a $14.5 million or 3.1 percent increase over 2003. Table 16 presents the major components of noninterest expense for the past five years. For 2005 and 2004, $12.9 million and $7.7 million of the respective increases in total noninterest expense are attributable to the continued growth and expansion of ISB.
Salary expense was $215.5 million during 2005, compared to $207.1 million during 2004, an increase of $8.4 million or 4.1 percent, following a $7.4 million or 3.7 percent increase in 2004 over 2003. ISB’s salary costs increased by $4.5 million in 2005, primarily related to additional staff for expansion and growth in new markets. The balance of the overall increase related primarily to annual merit increases. ISB’s continuing expansion requires additional staff, which will contribute to higher 2006 salary expense.
Employee benefits expense equaled $51.5 million during 2005, an increase of $2.9 million or 5.9 percent from 2004. During 2005, we incurred a $1.8 million increase in the costs related to supplemental post-retirement benefits for company executives. We also recognized a $1.3 million increase in pension expense, primarily the result of a reduction in the discount rate used to calculate future pension obligations. Employee health expense declined $1.1 million in 2005 when compared to 2004 due to more favorable claims experience of our self-insured plan.
Our equipment expense has remained stable for the past three years. Equipment expense for 2005 was $50.3 million and $50.1 million in 2004. The $166,000 change during 2005 resulted from higher costs for depreciation on furniture and equipment, software depreciation, ATM expense and software maintenance, offset by reduced hardware depreciation and equipment maintenance costs. During 2004, equipment expense was $311,000 or 0.62 percent below the amount recorded during 2003, the result of lower hardware rental costs.
BancShares recorded occupancy expense of $46.9 million during 2005, an increase of $2.9 million or 6.6 percent during 2005. Occupancy expense during 2004 was $44.0 million, an increase of $1.6 million or 3.7 percent over 2003. The increase in occupancy expense in each period resulted from higher depreciation expense attributable to newly constructed branches both in new markets and as replacement branches in existing markets. The growth during 2005 also reflected the
28
acquisition of a 163,000 square foot nine-store office building in Raleigh, North Carolina, which will become our corporate headquarters during 2006. Our branch expansion plans for 2006 will result in continued increases in occupancy costs.
Expenses related to card processing were $32.1 million in 2005 and $28.3 million in 2004. This increase of $3.8 million or 13.4 percent is due to growth in credit and debit card transactions as well as higher levels of merchant volume. In 2004, card processing expense increased $4.2 million or 17.3 percent from 2003, likewise due to volume increases. We anticipate this volume-based expense will continue to increase during 2006.
Telecommunications expense decreased $588,000 during 2005, a 5.6 percent reduction that resulted from competitive pricing for the telecommunications services that we use.
Advertising expense equaled $7.2 million during 2005, a $775,000 decrease from the $8.0 million reported in 2004. The 9.7 percent decrease was primarily the result of utilizing less expensive forms of advertising media.
Table 16
NONINTEREST EXPENSE
| | | | | | | | | | | | | | | |
| | | Year ended December 31
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| | | 2005
| | 2004
| | 2003
| | 2002
| | 2001
|
| | | (thousands) |
Salaries and wages | | $ | 215,504 | | $ | 207,088 | | $ | 199,703 | | $ | 186,756 | | $ | 180,288 |
Employee benefits | | | 51,517 | | | 48,624 | | | 45,958 | | | 42,199 | | | 35,715 |
Equipment expense | | | 50,291 | | | 50,125 | | | 50,436 | | | 45,406 | | | 40,861 |
Occupancy expense | | | 46,912 | | | 43,997 | | | 42,430 | | | 38,316 | | | 35,584 |
Cardholder and merchant services expense | | | 32,067 | | | 28,290 | | | 24,119 | | | 22,123 | | | 19,514 |
Telecommunication expense | | | 9,873 | | | 10,461 | | | 11,455 | | | 10,753 | | | 11,052 |
Postage expense | | | 8,045 | | | 8,639 | | | 8,826 | | | 8,242 | | | 8,055 |
Advertising expense | | | 7,206 | | | 7,981 | | | 7,566 | | | 7,520 | | | 6,928 |
Legal expense | | | 4,124 | | | 5,978 | | | 5,851 | | | 5,063 | | | 3,713 |
Consultant expense | | | 3,362 | | | 2,980 | | | 3,747 | | | 2,543 | | | 3,470 |
Amortization of intangibles | | | 2,453 | | | 2,360 | | | 2,583 | | | 2,803 | | | 11,585 |
Other | | | 68,002 | | | 63,056 | | | 62,414 | | | 60,629 | | | 64,920 |
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Total | | $ | 499,356 | | $ | 479,579 | | $ | 465,088 | | $ | 432,353 | | $ | 421,685 |
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INCOME TAXES
BancShares continually monitors and evaluates the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, BancShares evaluates its income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions that BancShares is required to file income tax returns, as well as potential or pending audits or assessments by such tax auditors.
During 2005, BancShares recorded total income tax expense of $65.8 million, compared to $49.4 million during 2004 and $41.4 million in 2003. BancShares’ effective tax rate was 36.8 percent in 2005, 39.7 in 2004 and 35.5 percent in 2003. The higher 2004 effective tax rate resulted from additional state income tax expense. We do not anticipate material changes to the effective tax rate during 2006.
During 2004, in conjunction with our ongoing review of the adequacy of our income tax obligations, we identified unallocated income tax liabilities that were no longer needed and were therefore reversed. Also during 2004, the North Carolina Department of Revenue conducted an examination of BancShares’ North Carolina tax returns for 2000, 2001 and 2003. Including interest and net of federal benefit, the net additional amount of tax expense recorded for these items amounted to $2.7 million.
LIQUIDITY
BancShares has historically maintained a strong focus on liquidity and our deposit base represents our primary liquidity source. The rate of growth in average deposits was 6.9 percent during 2005, 5.1 percent during 2004, and 4.3
29
percent during 2003. Through our deposit pricing strategies and our extensive branch network, we have the ability to stimulate or curtail deposit growth. In addition to deposits, BancShares maintains additional sources for borrowed funds through federal funds lines of credit and other borrowing facilities. At December 31, 2005, BancShares had access to $480.0 million in unfunded borrowings through its various sources.
Once we have generated the needed liquidity and have satisfied our loan demand, residual liquidity is invested in overnight and longer-term investment products. Investment securities available for sale provide immediate liquidity as needed. At December 31, 2005, investment securities available for sale totaled $2.29 billion compared to $1.25 billion at December 31, 2004. At December 31, 2005 and 2004, the sum of cash and due from banks, overnight investments and investment securities available for sale represent 24.3 percent and 17.4 percent of total assets, respectively.
In addition, investment securities held to maturity provide an ongoing liquidity source based on the scheduled maturity dates of the securities. These securities totaled $636.5 million at December 31, 2005 compared to $877.5 million at December 31, 2004. Total investment securities represent 20.0 percent and 16.0 percent of total assets at December 31, 2005 and 2004, respectively.
SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum regulatory capital requirements. BancShares’ total risk-based capital ratios were 15.1 percent at December 31, 2005, 13.5 percent at December 31, 2004 and 14.2 percent at December 31, 2003. BancShares’ Tier 1 capital ratios for December 31, 2005, 2004 and 2003 were 12.6 percent, 12.1 percent and 12.9 percent, respectively. The minimum capital ratios established by Federal Reserve guidelines are 8 percent for total capital and 4 percent for Tier 1 capital. At December 31, BancShares’ leverage capital ratio was 9.2 percent for 2005 and 9.3 percent for 2004 and 2003. The minimum leverage ratio is 3 percent. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material effect on the financial statements.
FCB’s total risk-based capital ratios were 14.1 percent at December 31, 2005 compared to 11.7 percent December 31, 2004. The improvement in total capital during 2005 for both BancShares and FCB resulted from $125 million in subordinated notes issued during the second quarter of 2005. The subordinated notes mature in 2015 and qualify as Tier 2 capital under current risk-based capital guidelines.
Due to significant growth in risk-adjusted assets during 2005, ISB’s total risk-based capital ratio declined from 15.0 percent at December 31, 2004 to 13.0 percent at December 31, 2005. In order to maintain adequate capital levels, BancShares infused $20 million and $30 million into ISB during 2005 and 2004, respectively.
Dividends from FCB to BancShares provide the source for capital infusions into ISB to fund its continuing growth and expansion. These dividends also fund BancShares’ payment of shareholder dividends and interest payments on its long-term obligations. During 2005, FCB declared dividends to BancShares in the amount of $32.2 million compared to $50.2 million in 2004.
Table 17
ANALYSIS OF BANCSHARES’ CAPITAL ADEQUACY
| | | | | | | | | | | | | | | |
| | | December 31
| | | Regulatory Minimum
| |
| | | 2005
| | | 2004
| | | 2003
| | |
| | | (dollars in thousands) | | | | |
Tier 1 capital | | $ | 1,320,152 | | | $ | 1,217,149 | | | $ | 1,152,309 | | | | |
Tier 2 capital | | | 267,989 | | | | 134,386 | | | | 121,348 | | | | |
| | |
|
|
| |
|
|
| |
|
|
| | | |
Total capital | | $ | 1,588,141 | | | $ | 1,351,535 | | | $ | 1,273,657 | | | | |
| | |
|
|
| |
|
|
| |
|
|
| | | |
Risk-adjusted assets | | $ | 10,510,254 | | | $ | 10,023,469 | | | $ | 8,951,402 | | | | |
| | | | |
Risk-based capital ratios | | | | | | | | | | | | | | | |
Tier 1 capital | | | 12.56 | % | | | 12.14 | % | | | 12.87 | % | | 4.00 | % |
Total capital | | | 15.11 | % | | | 13.48 | % | | | 14.23 | % | | 8.00 | % |
Tier 1 leverage ratio | | | 9.17 | % | | | 9.26 | % | | | 9.34 | % | | 3.00 | % |
30
SEGMENT REPORTING
BancShares conducts its banking operations through its two wholly owned subsidiaries, FCB and ISB. Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets and has separate management groups. We monitor growth and financial results in these institutions separately and, within each institution, by geographic segregation.
Although FCB has grown through acquisition in certain markets, throughout its history much of its expansion has been accomplished on a de novo basis. However, because of FCB’s relative size, the costs associated with de novo branching at its current rate of expansion are not material to FCB’s financial performance. ISB has followed a similar business model of expanding on a de novo basis since it first opened in 1997. However, due to the large number of branch offices that have yet to attain sufficient size for profitability, the financial results and trends of ISB are significantly affected by its current and continuing growth. Each new market ISB enters creates additional operating costs that are typically not offset by revenues until the third year of operation. ISB’s rapid growth in new markets in recent years has continued to adversely impact its financial performance.
IronStone Bank. At December 31, 2005, ISB operated 53 facilities in Florida, Georgia, Texas, New Mexico, Arizona, California, Colorado, Oregon and Washington, having established seven new banking facilities during 2005. ISB continues to focus on markets with favorable growth prospects. Our business model for these new markets has two pivotal requirements. First, we hire experienced bankers who are established in the markets we are entering and who focus on delivering high quality customer service while maintaining strong asset quality. Second, we occupy attractive and accessible branch facilities that are located in areas conducive to attracting medical and professional customers. Both of these are costly goals, but we believe that they are critical to establishing a solid foundation for our future success in these new markets.
As a result of expansion into new markets and rapid growth in existing markets, ISB’s total assets increased from $1.50 billion at December 31, 2004 to $1.86 billion at December 31, 2005, an increase of $355.1 million or 23.7 percent. ISB’s net interest income increased $14.4 million or 30.6 percent during 2005, the result of balance sheet growth and an improved net yield on interest-earning assets. Loans and leases increased 22.3 percent from $1.37 billion at December 31, 2004 to $1.68 billion at December 31, 2005.
Provision for credit losses increased $3.1 million or 62.1 percent during 2005, due primarily to increased net charge-offs. Net charge-offs equaled $3.7 million during 2005, compared to $1.2 million in 2004, an increase of $2.5 million.
ISB’s noninterest income increased $1.7 million or 28.6 percent during 2005, the result of higher cardholder and merchant services income and factoring commissions. These favorable variances were partially offset by lower mortgage and service charge income.
Noninterest expense increased $12.9 million or 24.6 percent during 2005, the result of costs incurred in conjunction with additional branch offices.
ISB recorded a net loss of $2.9 million during 2005 compared to a net loss of $3.0 million during 2004. During the fourth quarter of 2005, ISB generated net income of $385,000, compared to a net loss of $756,000 recorded during the fourth quarter of 2004, a favorable variance of $1.1 million. The improvement in fourth quarter net income reflects the impact of positive earnings from maturing branch locations and the relatively less material impact of incremental costs for each additional new branch. As its growth continues, ISB will continue to incur incremental operating costs, particularly in the areas of personnel, occupancy and equipment. As a result of the planned de novo growth during 2006, ISB’s earnings will continue to be adversely impacted.
First-Citizens Bank & Trust Company. At December 31, 2005, FCB operated 339 branches, compared to 338 branches at December 31, 2004. First Citizens opened new offices in Maryland and Tennessee during 2005, while still operating in North Carolina, Virginia and West Virginia. Planned expansion in 2006 includes further expansion in Maryland, Tennessee and the urban areas of North Carolina and Virginia.
FCB’s total assets increased from $11.69 billion at December 31, 2004 to $12.71 billion at December 31, 2005, an increase of $1.02 billion or 8.7 percent, the result of growth in investment securities. FCB’s net interest income increased
31
$45.9 million or 12.8 percent during 2005, benefiting from an improvement in the net yield on interest-earning assets. Provision for credit losses decreased $4.4 million or 15.0 percent during 2005 due to slower loan growth.
FCB’s noninterest income increased $13.9 million or 5.6 percent during 2005, primarily the result of higher cardholder and merchant services income, the gain on the securitization and sale of revolving mortgages and check cashing fees.
Noninterest expense increased $8.0 million or 1.8 percent during 2005, due to higher personnel, credit card processing and occupancy expense. FCB recorded net income of $128.5 million during 2005 compared to $89.4 million during 2004. This represents a $39.2 million or 43.8 percent increase in net income.
32
Table 18
SELECTED QUARTERLY DATA
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005
| | | 2004
| |
| | | Fourth
Quarter
| | | Third
Quarter
| | | Second
Quarter
| | | First
Quarter
| | | Fourth
Quarter
| | | Third
Quarter
| | | Second
Quarter
| | | First
Quarter
| |
| | | (thousands, except per share data and ratios) | |
SUMMARY OF OPERATIONS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 183,949 | | | $ | 173,534 | | | $ | 160,206 | | | $ | 148,245 | | | $ | 141,352 | | | $ | 131,411 | | | $ | 124,660 | | | $ | 123,694 | |
Interest expense | | | 66,731 | | | | 59,306 | | | | 49,536 | | | | 42,578 | | | | 38,159 | | | | 33,320 | | | | 31,120 | | | | 31,227 | |
| | |
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| |
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|
Net interest income | | | 117,218 | | | | 114,228 | | | | 110,670 | | | | 105,667 | | | | 103,193 | | | | 98,091 | | | | 93,540 | | | | 92,467 | |
Provision for credit losses | | | 13,578 | | | | 7,211 | | | | 6,994 | | | | 5,326 | | | | 8,737 | | | | 7,972 | | | | 9,917 | | | | 7,847 | |
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|
Net interest income after provision for credit losses | | | 103,640 | | | | 107,017 | | | | 103,676 | | | | 100,341 | | | | 94,456 | | | | 90,119 | | | | 83,623 | | | | 84,620 | |
Noninterest income | | | 65,457 | | | | 68,106 | | | | 68,566 | | | | 61,223 | | | | 62,878 | | | | 63,634 | | | | 62,901 | | | | 61,543 | |
Noninterest expense | | | 125,395 | | | | 128,665 | | | | 123,951 | | | | 121,345 | | | | 118,954 | | | | 120,381 | | | | 121,348 | | | | 118,896 | |
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|
|
Income before income taxes | | | 43,702 | | | | 46,458 | | | | 48,291 | | | | 40,219 | | | | 38,380 | | | | 33,372 | | | | 25,176 | | | | 27,267 | |
Income taxes | | | 15,866 | | | | 16,505 | | | | 18,215 | | | | 15,222 | | | | 13,608 | | | | 16,504 | | | | 9,304 | | | | 9,936 | |
| | |
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|
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|
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|
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|
|
|
| Net income | | $ | 27,836 | | | $ | 29,953 | | | $ | 30,076 | | | $ | 24,997 | | | $ | 24,772 | | | $ | 16,868 | | | $ | 15,872 | | | $ | 17,331 | |
| | |
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|
|
| Net interest income, taxable equivalent | | $ | 117,601 | | | $ | 114,603 | | | $ | 111,038 | | | $ | 106,014 | | | $ | 103,511 | | | $ | 98,403 | | | $ | 93,850 | | | $ | 92,792 | |
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|
SELECTED QUARTERLY AVERAGES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 14,516,620 | | | $ | 14,160,391 | | | $ | 13,618,161 | | | $ | 13,309,802 | | | $ | 13,251,848 | | | $ | 12,935,674 | | | $ | 12,723,435 | | | $ | 12,508,227 | |
Investment securities | | | 2,938,833 | | | | 2,764,377 | | | | 2,345,056 | | | | 2,072,316 | | | | 2,115,389 | | | | 2,022,450 | | | | 2,152,615 | | | | 2,340,956 | |
Loans and leases | | | 9,455,059 | | | | 9,323,115 | | | | 9,324,200 | | | | 9,357,480 | | | | 9,232,186 | | | | 9,058,562 | | | | 8,818,359 | | | | 8,454,599 | |
Interest-earning assets | | | 13,024,871 | | | | 12,750,494 | | | | 12,255,663 | | | | 11,929,086 | | | | 11,852,896 | | | | 11,561,331 | | | | 11,376,825 | | | | 11,138,812 | |
Deposits | | | 12,071,673 | | | | 11,836,193 | | | | 11,562,349 | | | | 11,379,079 | | | | 11,323,508 | | | | 11,039,247 | | | | 10,843,065 | | | | 10,634,865 | |
Interest-bearing liabilities | | | 10,621,384 | | | | 10,312,675 | | | | 9,867,227 | | | | 9,640,417 | | | | 9,532,116 | | | | 9,330,244 | | | | 9,234,863 | | | | 9,210,244 | |
Long-term obligations | | | 409,612 | | | | 409,825 | | | | 308,461 | | | | 285,666 | | | | 286,060 | | | | 286,536 | | | | 287,597 | | | | 289,161 | |
Shareholders’ equity | | $ | 1,169,113 | | | $ | 1,143,391 | | | $ | 1,118,122 | | | $ | 1,094,213 | | | $ | 1,075,566 | | | $ | 1,057,749 | | | $ | 1,044,864 | | | $ | 1,037,260 | |
Shares outstanding | | | 10,434,453 | | | | 10,434,453 | | | | 10,434,453 | | | | 10,434,453 | | | | 10,434,453 | | | | 10,434,453 | | | | 10,435,756 | | | | 10,436,345 | |
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|
SELECTED QUARTER-END BALANCES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 14,639,392 | | | $ | 14,484,919 | | | $ | 14,023,066 | | | $ | 13,592,675 | | | $ | 13,265,711 | | | $ | 13,025,690 | | | $ | 12,836,454 | | | $ | 12,714,237 | |
Investment securities | | | 2,929,516 | | | | 2,871,731 | | | | 2,644,335 | | | | 2,187,374 | | | | 2,125,524 | | | | 2,027,837 | | | | 2,038,227 | | | | 2,150,738 | |
Loans and leases | | | 9,642,994 | | | | 9,359,540 | | | | 9,300,984 | | | | 9,404,742 | | | | 9,354,387 | | | | 9,150,859 | | | | 8,988,095 | | | | 8,616,987 | |
Interest-earning assets | | | 13,053,522 | | | | 12,996,027 | | | | 12,579,346 | | | | 12,234,577 | | | | 11,863,654 | | | | 11,647,239 | | | | 11,426,363 | | | | 11,389,937 | |
Deposits | | | 12,173,858 | | | | 12,123,491 | | | | 11,758,089 | | | | 11,629,382 | | | | 11,350,798 | | | | 11,124,996 | | | | 10,962,062 | | | | 10,795,536 | |
Interest-bearing liabilities | | | 10,745,696 | | | | 10,544,543 | | | | 10,156,552 | | | | 9,818,651 | | | | 9,641,368 | | | | 9,426,235 | | | | 9,266,406 | | | | 9,327,152 | |
Long-term obligations | | | 408,987 | | | | 409,742 | | | | 409,964 | | | | 285,312 | | | | 285,943 | | | | 286,437 | | | | 286,657 | | | | 289,118 | |
Shareholders’ equity | | $ | 1,181,059 | | | $ | 1,158,885 | | | $ | 1,134,242 | | | $ | 1,102,568 | | | $ | 1,086,310 | | | $ | 1,068,014 | | | $ | 1,046,483 | | | $ | 1,047,083 | |
Shares outstanding | | | 10,434,453 | | | | 10,434,453 | | | | 10,434,453 | | | | 10,434,453 | | | | 10,434,453 | | | | 10,434,453 | | | | 10,434,453 | | | | 10,436,345 | |
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|
PROFITABILITY RATIOS (averages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rate of return (annualized) on: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 0.76 | % | | | 0.84 | % | | | 0.89 | % | | | 0.76 | % | | | 0.74 | % | | | 0.52 | % | | | 0.50 | % | | | 0.56 | % |
Shareholders’ equity | | | 9.45 | | | | 10.39 | | | | 10.79 | | | | 9.26 | | | | 9.16 | | | | 6.34 | | | | 6.11 | | | | 6.72 | |
Dividend payout ratio | | | 10.30 | | | | 9.58 | | | | 9.55 | | | | 11.46 | | | | 11.60 | | | | 16.98 | | | | 18.09 | | | | 16.57 | |
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|
LIQUIDITY AND CAPITAL RATIOS (averages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans and leases to deposits | | | 78.32 | % | | | 78.77 | % | | | 80.64 | % | | | 82.23 | % | | | 81.53 | % | | | 82.06 | % | | | 81.33 | % | | | 79.50 | % |
Shareholders’ equity to total assets | | | 8.05 | | | | 8.07 | | | | 8.21 | | | | 8.22 | | | | 8.12 | | | | 8.18 | | | | 8.21 | | | | 8.29 | |
Time certificates of $100,000 or more to total deposits | | | 13.45 | | | | 12.59 | | | | 12.24 | | | | 11.90 | | | | 11.43 | | | | 11.16 | | | | 10.91 | | | | 10.69 | |
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|
PER SHARE OF STOCK | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 2.67 | | | $ | 2.87 | | | $ | 2.88 | | | $ | 2.40 | | | $ | 2.37 | | | $ | 1.62 | | | $ | 1.52 | | | $ | 1.66 | |
Cash dividends (Class A and B) | | | 0.275 | | | | 0.275 | | | | 0.275 | | | | 0.275 | | | | 0.275 | | | | 0.275 | | | | 0.275 | | | | 0.275 | |
Class A sales price | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
High | | | 191.75 | | | | 174.25 | | | | 147.66 | | | | 154.36 | | | | 153.00 | | | | 122.86 | | | | 126.84 | | | | 126.40 | |
Low | | | 160.00 | | | | 144.21 | | | | 126.20 | | | | 132.71 | | | | 115.63 | | | | 113.78 | | | | 109.10 | | | | 115.51 | |
Class B sales price | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
High | | | 188.00 | | | | 170.00 | | | | 143.00 | | | | 152.35 | | | | 151.50 | | | | 121.00 | | | | 123.00 | | | | 123.00 | |
Low | | | 165.00 | | | | 136.00 | | | | 130.25 | | | | 138.00 | | | | 118.00 | | | | 116.00 | | | | 109.25 | | | | 116.00 | |
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Average loan and lease balances include nonaccrual loans and leases. Yields related to loans, leases 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 federal income tax rate of 35% and a state income tax rate of 6.9% for all periods.
Stock information related to Class A common stock reflects the sales price, as reported on the Nasdaq National Market System. Stock information related to Class B common stock reflects the sales price as reported on the OTC Bulletin Board. As of December 31, 2005, there were 2,348 holders of record of the Class A common stock and 436 holders of record of the Class B common stock.
33
FOURTH QUARTER ANALYSIS
BancShares reported net income of $27.8 million for the quarter ending December 31, 2005, compared to $24.8 million for the corresponding period of 2004, an increase of 12.4 percent. Per share income for the fourth quarter 2005 totaled $2.67 compared to $2.37 for the same period of 2004. BancShares’ results generated an annualized return on average assets of 0.76 percent for the fourth quarter of 2005, compared to 0.74 percent for the same period of 2004. The annualized return on average equity equaled 9.45 percent during the fourth quarter of 2005, compared to 9.16 percent for the same period of 2004. In the fourth quarter, higher net interest and noninterest income contributed to the improvement in net income. These benefits were partially offset by higher provision for credit losses, noninterest expense and income tax expense.
Net interest income increased $14.0 million or 13.6 percent in the fourth quarter of 2005, compared to the same period of 2004. The improvement in net interest income resulted from growth in loans and leases and investment securities and an improved net yield on interest-earning assets. The taxable-equivalent net yield on interest-earning assets increased from 3.47 percent in the fourth quarter of 2004 to 3.58 percent for the fourth quarter of 2005.
Interest income increased $42.6 million or 30.1 percent in the fourth quarter of 2005 when compared to the same period of 2004. Average interest-earning assets increased $1.17 billion to $13.02 billion from the fourth quarter of 2004 to the fourth quarter of 2005. Average loans and leases outstanding during the fourth quarter of 2005 were $9.46 billion, an increase of $222.9 million or 2.4 percent over 2004. The yield on interest-earning assets increased 86 basis points from 4.76 percent in 2004 to 5.62 percent in 2005. The yield on average loans and leases improved 97 basis points to 6.44 percent while the taxable-equivalent yield on investment securities increased 101 basis points to 3.33 percent.
Interest expense increased $28.6 million from $38.2 million in the fourth quarter of 2004 to $66.7 million in the fourth quarter of 2005 due to increased rates and higher average volume. The rate on average interest-bearing liabilities increased 90 basis points to 2.49 percent in 2005. Average interest-bearing liabilities increased $1.09 billion to $10.62 billion.
The provision for credit losses increased $4.8 million or 55.4 percent in the fourth quarter of 2005, compared to the same period of 2004 due to higher net charge-offs. Net charge-offs were $11.0 million during the fourth quarter of 2005, compared to $5.8 million during the same period of 2004, primarily due to losses incurred on a single relationship during 2005.
Noninterest income increased $2.6 million or 4.1 percent during the fourth quarter. Cardholder and merchant services income increased $2.2 million or 13.2 percent caused by favorable volume growth, while commission income increased $944,000 or 16.9 percent due to improved broker-dealer revenue. Growth was also noted in fees from processing services and trust and asset management fees. These increases were partially offset by an $826,000 reduction in service charge income. Mortgage income decreased during the fourth quarter of 2005, primarily due to a $918,000 reserve established for unrealized losses related to loans held for sale at December 31, 2005. Securities losses totaled $470,000 during the fourth quarter of 2005.
Noninterest expense increased $6.4 million or 5.4 percent during the fourth quarter of 2005, when compared to the same period of 2004. Salaries increased $3.7 million or 7.0 percent from the fourth quarter of 2004 to the fourth quarter of 2005. Employee benefits expense increased $769,000 or 6.8 percent to $12.1 million from 2004 to 2005. Occupancy costs increased $1.2 million or 11.4 percent from $10.7 million during the fourth quarter of 2004 to $11.9 million during the fourth quarter of 2005. Higher personnel and occupancy costs were impacted by the continued expansion of the ISB branch network. Among other expense, credit card processing fees increased $909,000 or 12.5 percent due to higher transaction volume in the fourth quarter of 2005 when compared to the fourth quarter of 2004.
34
Table 19
CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS—FOURTH QUARTER
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005
| | | 2004
| | | Increase (decrease) due to:
| |
| | | Average
Balance
| | Interest
Income/
Expense
| | Yield/
Rate
| | | Average
Balance
| | Interest
Income/
Expense
| | Yield/
Rate
| | | Volume
| | | Yield/
Rate
| | | Total
Change
| |
| | | (thousands) | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans and leases | | $ | 9,455,059 | | $ | 153,386 | | 6.44 | % | | $ | 9,232,186 | | $ | 126,936 | | 5.47 | % | | $ | 3,475 | | | $ | 22,975 | | | $ | 26,450 | |
Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U. S. Government | | | 2,859,418 | | | 23,851 | | 3.31 | | | | 2,055,678 | | | 11,936 | | 2.31 | | | | 5,707 | | | | 6,208 | | | | 11,915 | |
State, county and municipal | | | 6,761 | | | 91 | | 5.34 | | | | 8,144 | | | 100 | | 4.88 | | | | (18 | ) | | | 9 | | | | (9 | ) |
Other | | | 72,654 | | | 729 | | 3.98 | | | | 51,567 | | | 281 | | 2.17 | | | | 164 | | | | 284 | | | | 448 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Total investment securities | | | 2,938,833 | | | 24,671 | | 3.33 | | | | 2,115,389 | | | 12,317 | | 2.32 | | | | 5,853 | | | | 6,501 | | | | 12,354 | |
Overnight investments | | | 630,979 | | | 6,275 | | 3.95 | | | | 505,321 | | | 2,417 | | 1.90 | | | | 924 | | | | 2,934 | | | | 3,858 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Total interest-earning assets | | $ | 13,024,871 | | $ | 184,332 | | 5.62 | % | | $ | 11,852,896 | | $ | 141,670 | | 4.76 | % | | $ | 10,252 | | | $ | 32,410 | | | $ | 42,662 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Checking With Interest | | $ | 1,589,807 | | $ | 495 | | 0.12 | % | | $ | 1,533,394 | | $ | 466 | | 0.12 | % | | $ | 23 | | | $ | 6 | | | $ | 29 | |
Savings | | | 711,796 | | | 381 | | 0.21 | | | | 751,416 | | | 380 | | 0.20 | | | | (19 | ) | | | 20 | | | | 1 | |
Money market accounts | | | 2,678,368 | | | 15,320 | | 2.27 | | | | 2,596,916 | | | 7,534 | | 1.15 | | | | 345 | | | | 7,441 | | | | 7,786 | |
Time deposits | | | 4,471,095 | | | 37,113 | | 3.29 | | | | 3,897,595 | | | 22,987 | | 2.35 | | | | 4,144 | | | | 9,982 | | | | 14,126 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Total interest-bearing deposits | | | 9,451,066 | | | 53,309 | | 2.24 | | | | 8,779,321 | | | 31,367 | | 1.42 | | | | 4,493 | | | | 17,449 | | | | 21,942 | |
Short-term borrowings | | | 760,706 | | | 5,982 | | 3.12 | | | | 466,735 | | | 1,349 | | 1.15 | | | | 1,584 | | | | 3,049 | | | | 4,633 | |
Long-term obligations | | | 409,612 | | | 7,440 | | 7.21 | | | | 286,060 | | | 5,443 | | 7.57 | | | | 2,307 | | | | (310 | ) | | | 1,997 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Total interest-bearing liabilities | | $ | 10,621,384 | | $ | 66,731 | | 2.49 | % | | $ | 9,532,116 | | $ | 38,159 | | 1.59 | % | | $ | 8,384 | | | $ | 20,188 | | | $ | 28,572 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Interest rate spread | | | | | | | | 3.13 | % | | | | | | | | 3.17 | % | | | | | | | | | | | | |
| | | | | | | | |
|
| | | | | | | |
|
| | | | | | | | | | | | |
Net interest income and net yield on interest-earning assets | | | | | $ | 117,601 | | 3.58 | % | | | | | $ | 103,511 | | 3.47 | % | | $ | 1,868 | | | $ | 12,222 | | | $ | 14,090 | |
| | | | | |
|
| |
|
| | | | |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Average loan balances include nonaccrual loans. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable-equivalent basis assuming a statutory federal income tax rate of 35% and a state income tax rate of 6.9% for each period.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
As a normal part of its business, BancShares, FCB, ISB and other subsidiaries enter into various contractual obligations and participate in certain commercial commitments. Table 20 identifies significant obligations and commitments as of December 31, 2005.
LEGAL PROCEEDINGS
BancShares and its subsidiaries have been named as defendants in various legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.
In addition to claims that have been brought against BancShares, there are also exposures related to unasserted claims that may or may not be initiated. These unasserted claims relate to relationships with customers, supervisory agencies and other governmental agencies that have authority over BancShares and its subsidiaries. Unless and until those claims are made, we are unable to estimate the ultimate liability that may exist.
35
Table 20
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
| | | | | | | | | | | | | | | |
| | | Payments due by period
|
Type of obligation
| | Less than 1 year
| | 1-3 years
| | 4-5 years
| | Thereafter
| | Total
|
Contractual obligations | | | | | | | | | | | | | | | |
Deposits | | $ | 10,723,471 | | $ | 1,154,678 | | $ | 295,696 | | $ | 13 | | $ | 12,173,858 |
Short-term borrowings | | | 779,028 | | | — | | | — | | | — | | | 779,028 |
Long-term obligations | | | 134 | | | 25,307 | | | 365 | | | 383,181 | | | 408,987 |
Operating leases | | | 13,291 | | | 22,855 | | | 14,676 | | | 61,286 | | | 112,108 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Total contractual obligations | | $ | 11,515,924 | | $ | 1,202,840 | | $ | 310,737 | | $ | 444,480 | | $ | 13,473,981 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Commitments | | | | | | | | | | | | | | | |
Loan commitments | | $ | 1,912,240 | | $ | 173,792 | | $ | 90,713 | | $ | 2,043,896 | | $ | 4,220,641 |
Standby letters of credit | | | 36,414 | | | 7,503 | | | 155 | | | — | | | 44,072 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Total commercial commitments | | $ | 1,948,654 | | $ | 181,295 | | $ | 90,868 | | $ | 2,043,896 | | $ | 4,264,713 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
RELATED PARTY TRANSACTIONS
BancShares’ related parties include our directors and officers, their immediate family members and any businesses or entities they control. As a result of significant common ownership, several financial institutions that are not a part of BancShares’ corporate organization are also viewed as related parties. We routinely conduct business with these individuals and entities. Some of these related party relationships affect our consolidated statements of income. Fees from processing services includes $24.0 million, $23.0 million and $20.0 million recorded during 2005, 2004 and 2003, for services we provided to related parties. The rates charged the related parties for such processing services are determined on an arm’s length basis and are subject to rigorous pricing and competitive reviews. During 2003, BancShares recognized a $5.7 million gain on sale of branches to a related party. The prices negotiated for the sale of the branches are believed to be reflective of appropriate prices for similar transactions among unrelated parties. During 2005, 2004 and 2003, we recognized legal expense of $4.3 million, $5.3 million and $4.9 million to the law firm that serves as our General Counsel. The senior member of that firm is a member of our board of directors.
Certain of these related party transactions also affect our consolidated balance sheets. At December 31, 2005 and 2004, loans and leases outstanding include $34.0 million and $31.6 million due from related parties. Investment securities available for sale include an equity investment in a related party with a carrying value of $25.2 million and $18.9 million at December 31, 2005 and 2004, respectively. The carrying value of this equity investment is established based upon the quoted price per share as of December 31 in the over-the-counter market on the OTC Bulletin Board. Short-term borrowings include $29.9 million and $24.6 million in federal funds purchased from related parties at December 31, 2005 and 2004. Additionally, BancShares had off balance sheet obligations for unfunded loan commitments to related parties that totaled $15.4 million and $16.3 million at December 31, 2005 and 2004, respectively.
CURRENT ACCOUNTING AND REGULATORY ISSUES
In November 2003, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03- 01”). In September 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position (FSP EITF 03-1-b). In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1. Collectively, these documents consider when an investment is considered impaired, what disclosures are appropriate for impairment losses, and what disclosures are appropriate for unrealized losses that have not been recognized as other-than-temporary impairments. The new disclosure requirements are effective for reporting periods beginning after December 15, 2005.
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), “Accounting Changes and Error Corrections”, which replaces prior accounting guidance related to accounting changes and error corrections. SFAS 154 changes the requirements for the accounting for and reporting of a change in an accounting
36
principle. SFAS 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. We adopted SFAS 154 on January 1, 2006. There will be no material impact on our consolidated financial statements.
Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.
FORWARD-LOOKING STATEMENTS
Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission.
Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.
Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions particularly changes that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, and the values of collateral, and other developments or changes in our business that we do not expect.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.
37
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors And Stockholders
First Citizens BancShares, Inc.
We have audited the accompanying consolidated balance sheets of First Citizens BancShares, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years then ended. 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. The accompanying consolidated statements of income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2003, were audited by other auditors whose report thereon dated February 20, 2004, expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 2005 and 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Citizens BancShares, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of First Citizens BancShares’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2006 expressed unqualified opinions on both management’s assessment of the company’s internal control over financial reporting and the effectiveness of the company’s internal control over financial reporting.
Raleigh, North Carolina
March 13, 2006
38
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of First Citizens BancShares, Inc. (BancShares) is responsible for establishing and maintaining adequate internal control over financial reporting. BancShares’ internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
BancShares’ management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Integrated Framework. Based on that assessment, we believe that, as of December 31, 2005, the company’s internal control over financial reporting is effective based on those criteria.
BancShares’ independent auditors have issued an audit report on our assessment of the company’s internal control over financial reporting. This report appears on page 40.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
First Citizens BancShares, Inc.
We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that First Citizens BancShares, Inc. and subsidiaries (BancShares) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. BancShares’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that BancShares maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, BancShares maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of BancShares as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years then ended, and our report dated March 13, 2006, expressed an unqualified opinion.
Raleigh, North Carolina
March 13, 2006
40
CONSOLIDATED BALANCE SHEETS
First Citizens BancShares, Inc. and Subsidiaries
| | | | | | | |
| | | December 31
|
| | | 2005
| | | 2004
|
| | | (thousands, except share
data) |
ASSETS | | | |
Cash and due from banks | | $ | 777,928 | | | $ | 679,683 |
Overnight investments | | | 481,012 | | | | 383,743 |
Investment securities held to maturity (fair value of $631,876 in 2005 and $874,779 in
2004) | | | 636,496 | | | | 877,479 |
Investment securities available for sale (cost of $2,296,402 in 2005 and $1,240,619 in
2004) | | | 2,293,020 | | | | 1,248,045 |
Loans and leases | | | 9,642,994 | | | | 9,354,387 |
Less allowance for loan and lease losses | | | 128,847 | | | | 123,861 |
| | |
|
|
| |
|
|
Net loans and leases | | | 9,514,147 | | | | 9,230,526 |
Premises and equipment | | | 639,469 | | | | 568,365 |
Income earned not collected | | | 54,879 | | | | 40,574 |
Goodwill | | | 102,735 | | | | 102,635 |
Other intangible assets | | | 10,318 | | | | 12,037 |
Other assets | | | 129,388 | | | | 122,624 |
| | |
|
|
| |
|
|
Total assets | | $ | 14,639,392 | | | $ | 13,265,711 |
| | |
|
|
| |
|
|
LIABILITIES | | | | | | | |
Deposits: | | | | | | | |
Noninterest-bearing | | $ | 2,616,177 | | | $ | 2,443,059 |
Interest-bearing | | | 9,557,681 | | | | 8,907,739 |
| | |
|
|
| |
|
|
Total deposits | | | 12,173,858 | | | | 11,350,798 |
Short-term borrowings | | | 779,028 | | | | 447,686 |
Long-term obligations | | | 408,987 | | | | 285,943 |
Other liabilities | | | 96,460 | | | | 94,974 |
| | |
|
|
| |
|
|
Total liabilities | | | 13,458,333 | | | | 12,179,401 |
SHAREHOLDERS’ EQUITY | | | | | | | |
Common stock: | | | | | | | |
Class A—$1 par value (11,000,000 shares authorized; 8,756,778 shares issued for each period) | | | 8,757 | | | | 8,757 |
Class B—$1 par value (2,000,000 shares authorized; 1,677,675 shares issued for each period) | | | 1,678 | | | | 1,678 |
Surplus | | | 143,766 | | | | 143,766 |
Retained earnings | | | 1,029,005 | | | | 927,621 |
Accumulated other comprehensive income (loss) | | | (2,147 | ) | | | 4,488 |
| | |
|
|
| |
|
|
Total shareholders’ equity | | | 1,181,059 | | | | 1,086,310 |
| | |
|
|
| |
|
|
Total liabilities and shareholders’ equity | | $ | 14,639,392 | | | $ | 13,265,711 |
| | |
|
|
| |
|
|
See accompanying Notes to Consolidated Financial Statements.
41
CONSOLIDATED STATEMENTS OF INCOME
First Citizens BancShares, Inc. and Subsidiaries
| | | | | | | | | | | |
| | | Year Ended December 31
|
| | | 2005
| | | 2004
| | | 2003
|
| | | (thousands, except share and per share
data) |
INTEREST INCOME | | | |
Loans and leases | | $ | 570,778 | | | $ | 466,312 | | | $ | 444,639 |
Investment securities: | | | | | | | | | | | |
U. S. Government | | | 73,472 | | | | 47,515 | | | | 59,350 |
State, county and municipal | | | 252 | | | | 275 | | | | 184 |
Other | | | 2,224 | | | | 1,137 | | | | 1,345 |
| | |
|
|
| |
|
|
| |
|
|
Total investment securities interest and dividend income | | | 75,948 | | | | 48,927 | | | | 60,879 |
Overnight investments | | | 19,208 | | | | 5,878 | | | | 4,959 |
| | |
|
|
| |
|
|
| |
|
|
Total interest income | | | 665,934 | | | | 521,117 | | | | 510,477 |
INTEREST EXPENSE | | | | | | | | | | | |
Deposits | | | 176,631 | | | | 108,439 | | | | 124,789 |
Short-term borrowings | | | 14,966 | | | | 3,611 | | | | 2,795 |
Long-term obligations | | | 26,554 | | | | 21,776 | | | | 20,953 |
| | |
|
|
| |
|
|
| |
|
|
Total interest expense | | | 218,151 | | | | 133,826 | | | | 148,537 |
| | |
|
|
| |
|
|
| |
|
|
Net interest income | | | 447,783 | | | | 387,291 | | | | 361,940 |
Provision for credit losses | | | 33,109 | | | | 34,473 | | | | 24,187 |
| | |
|
|
| |
|
|
| |
|
|
Net interest income after provision for credit losses | | | 414,674 | | | | 352,818 | | | | 337,753 |
NONINTEREST INCOME | | | | | | | | | | | |
Service charges on deposit accounts | | | 77,376 | | | | 81,478 | | | | 78,273 |
Cardholder and merchant services income | | | 72,921 | | | | 64,118 | | | | 55,321 |
Commission-based income | | | 26,043 | | | | 24,623 | | | | 23,947 |
Fees from processing services | | | 25,598 | | | | 23,888 | | | | 20,590 |
Trust and asset management fees | | | 18,588 | | | | 16,913 | | | | 15,005 |
Mortgage income | | | 7,868 | | | | 8,352 | | | | 15,469 |
ATM income | | | 10,220 | | | | 10,201 | | | | 9,005 |
Other service charges and fees | | | 16,507 | | | | 13,688 | | | | 14,463 |
Gain on sale of branches | | | — | | | | 426 | | | | 5,710 |
Securities gains (losses) | | | (492 | ) | | | 1,852 | | | | 309 |
Other | | | 8,723 | | | | 5,417 | | | | 5,844 |
| | |
|
|
| |
|
|
| |
|
|
Total noninterest income | | | 263,352 | | | | 250,956 | | | | 243,936 |
NONINTEREST EXPENSE | | | | | | | | | | | |
Salaries and wages | | | 215,504 | | | | 207,088 | | | | 199,703 |
Employee benefits | | | 51,517 | | | | 48,624 | | | | 45,958 |
Occupancy expense | | | 46,912 | | | | 43,997 | | | | 42,430 |
Equipment expense | | | 50,291 | | | | 50,125 | | | | 50,436 |
Other | | | 135,132 | | | | 129,745 | | | | 126,561 |
| | |
|
|
| |
|
|
| |
|
|
Total noninterest expense | | | 499,356 | | | | 479,579 | | | | 465,088 |
| | |
|
|
| |
|
|
| |
|
|
Income before income taxes | | | 178,670 | | | | 124,195 | | | | 116,601 |
Income taxes | | | 65,808 | | | | 49,352 | | | | 41,414 |
| | |
|
|
| |
|
|
| |
|
|
Net income | | | 112,862 | | | | 74,843 | | | | 75,187 |
| | |
|
|
| |
|
|
| |
|
|
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES | | | | | | | | | | | |
Unrealized securities gains (losses) arising during period | | | (6,933 | ) | | | (5,023 | ) | | | 2,163 |
Less: reclassification adjustment for gains (losses) included in net income | | | (298 | ) | | | 1,121 | | | | 187 |
| | |
|
|
| |
|
|
| |
|
|
Other comprehensive income (loss) | | | (6,635 | ) | | | (6,144 | ) | | | 1,976 |
| | |
|
|
| |
|
|
| |
|
|
Comprehensive income | | $ | 106,227 | | | $ | 68,699 | | | $ | 77,163 |
| | |
|
|
| |
|
|
| |
|
|
PER SHARE INFORMATION | | | | | | | | | | | |
Net income available to common shareholders | | $ | 10.82 | | | $ | 7.17 | | | $ | 7.19 |
Weighted average shares outstanding | | | 10,434,453 | | | | 10,435,247 | | | | 10,452,523 |
| | |
|
|
| |
|
|
| |
|
|
See accompanying Notes to Consolidated Financial Statements.
42
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
First Citizens BancShares, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | |
| | | Class A
Common
Stock
| | | Class B
Common
Stock
| | Surplus
| | Retained
Earnings
| | | Accumulated
Other
Comprehensive
Income (Loss)
| | | Total
Shareholders’
Equity
| |
| | | (thousands, except share data) | |
Balance at December 31, 2002 | | $ | 8,794 | | | $ | 1,678 | | $ | 143,766 | | $ | 804,397 | | | $ | 8,656 | | | $ | 967,291 | |
Redemption of 35,999 shares of Class A common stock | | | (35 | ) | | | | | | | | | (3,530 | ) | | | | | | | (3,565 | ) |
Redemption of 950 shares of Class B common stock | | | | | | | | | | | | | (87 | ) | | | | | | | (87 | ) |
Net income | | | | | | | | | | | | | 75,187 | | | | | | | | 75,187 | |
Unrealized securities gains, net of deferred taxes | | | | | | | | | | | | | | | | | 1,976 | | | | 1,976 | |
Cash dividends | | | | | | | | | | | | | (11,497 | ) | | | | | | | (11,497 | ) |
| | |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Balance at December 31, 2003 | | | 8,759 | | | | 1,678 | | | 143,766 | | | 864,470 | | | | 10,632 | | | | 1,029,305 | |
Net income | | | | | | | | | | | | | 74,843 | | | | | | | | 74,843 | |
Redemption of 1,892 shares of Class A common stock | | | (2 | ) | | | | | | | | | (213 | ) | | | | | | | (215 | ) |
Cash dividends | | | | | | | | | | | | | (11,479 | ) | | | | | | | (11,479 | ) |
Unrealized securities losses, net of deferred taxes | | | | | | | | | | | | | | | | | (6,144 | ) | | | (6,144 | ) |
| | |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Balance at December 31, 2004 | | | 8,757 | | | | 1,678 | | | 143,766 | | | 927,621 | | | | 4,488 | | | | 1,086,310 | |
Net income | | | | | | | | | | | | | 112,862 | | | | | | | | 112,862 | |
Cash dividends | | | | | | | | | | | | | (11,478 | ) | | | | | | | (11,478 | ) |
Unrealized securities losses, net of deferred taxes | | | | | | | | | | | | | | | | | (6,635 | ) | | | (6,635 | ) |
| | |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Balance at December 31, 2005 | | $ | 8,757 | | | $ | 1,678 | | $ | 143,766 | | $ | 1,029,005 | | | $ | (2,147 | ) | | $ | 1,181,059 | |
| | |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
See accompanying Notes to Consolidated Financial Statements.
43
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Citizens BancShares, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | | For the Year Ended
| |
| | | 2005
| | | 2004
| | | 2003
| |
| | | (thousands) | |
OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income | | $ | 112,862 | | | $ | 74,843 | | | $ | 75,187 | |
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | | | | | |
Amortization of intangibles | | | 2,453 | | | | 2,360 | | | | 2,583 | |
Provision for credit losses | | | 33,109 | | | | 34,473 | | | | 24,187 | |
Deferred tax expense (benefit) | | | (1,573 | ) | | | 4,715 | | | | 5,154 | |
Change in current taxes payable | | | 1,581 | | | | (15,475 | ) | | | 9,375 | |
Depreciation | | | 45,075 | | | | 43,810 | | | | 41,628 | |
Change in accrued interest payable | | | 15,005 | | | | 4 | | | | (8,162 | ) |
Change in income earned not collected | | | (14,305 | ) | | | 1,355 | | | | 5,030 | |
Securities losses (gains) | | | 492 | | | | (1,852 | ) | | | (309 | ) |
Origination of loans held for sale | | | (535,897 | ) | | | (518,079 | ) | | | (938,598 | ) |
Proceeds from sale of loans | | | 731,913 | | | | 502,314 | | | | 937,468 | |
Gain on sale of loans | | | (4,680 | ) | | | (3,781 | ) | | | (7,166 | ) |
Gain on sale of branches | | | — | | | | (426 | ) | | | (5,710 | ) |
Net amortization of premiums and discounts | | | (1,436 | ) | | | 6,954 | | | | 17,800 | |
Net change in other assets | | | (1,022 | ) | | | (23,252 | ) | | | (15,895 | ) |
Net change in other liabilities | | | (15,100 | ) | | | 3,672 | | | | (9,944 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided by operating activities | | | 368,477 | | | | 111,635 | | | | 132,628 | |
| | |
|
|
| |
|
|
| |
|
|
|
INVESTING ACTIVITIES | | | | | | | | | | | | |
Net change in loans outstanding | | | (508,055 | ) | | | (1,028,953 | ) | | | (728,668 | ) |
Purchases of investment securities held to maturity | | | (264,700 | ) | | | (630,471 | ) | | | (719,034 | ) |
Purchases of investment securities available for sale | | | (1,334,214 | ) | | | (275,263 | ) | | | (1,615,817 | ) |
Proceeds from maturities of investment securities held to maturity | | | 507,119 | | | | 972,755 | | | | 1,892,100 | |
Proceeds from maturities of investment securities available for sale | | | 277,939 | | | | 261,629 | | | | 543,555 | |
Net change in overnight investments | | | (97,269 | ) | | | (89,338 | ) | | | 329,165 | |
Dispositions of premises and equipment | | | 9,542 | | | | 8,201 | | | | 20,930 | |
Additions to premises and equipment | | | (123,948 | ) | | | (80,707 | ) | | | (92,261 | ) |
Purchase and sale of branches, net of cash transferred | | | 18,343 | | | | (2,497 | ) | | | (79,403 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash used by investing activities | | | (1,515,243 | ) | | | (864,644 | ) | | | (449,433 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
FINANCING ACTIVITIES | | | | | | | | | | | | |
Net change in time deposits | | | 603,248 | | | | 241,081 | | | | (273,438 | ) |
Net change in demand and other interest-bearing deposits | | | 198,855 | | | | 398,976 | | | | 591,990 | |
Net change in short-term borrowings | | | 329,386 | | | | 14,161 | | | | (33,087 | ) |
Originations of long-term obligations | | | 125,000 | | | | — | | | | 25,000 | |
Redemption of common stock | | | — | | | | (215 | ) | | | (3,652 | ) |
Cash dividends paid | | | (11,478 | ) | | | (11,479 | ) | | | (11,497 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided by financing activities | | | 1,245,011 | | | | 642,524 | | | | 295,316 | |
| | |
|
|
| |
|
|
| |
|
|
|
Change in cash and due from banks | | | 98,245 | | | | (110,485 | ) | | | (21,489 | ) |
Cash and due from banks at beginning of period | | | 679,683 | | | | 790,168 | | | | 811,657 | |
| | |
|
|
| |
|
|
| |
|
|
|
Cash and due from banks at end of period | | $ | 777,928 | | | $ | 679,683 | | | $ | 790,168 | |
| | |
|
|
| |
|
|
| |
|
|
|
CASH PAYMENTS FOR: | | | | | | | | | | | | |
Interest | | $ | 203,146 | | | $ | 133,822 | | | $ | 156,699 | |
Income taxes | | | 65,860 | | | | 39,973 | | | | 22,499 | |
| | |
|
|
| |
|
|
| |
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | | | | |
Unrealized securities gains (losses) | | $ | (10,808 | ) | | $ | (10,171 | ) | | $ | 3,293 | |
| | |
|
|
| |
|
|
| |
|
|
|
See accompanying Notes to Consolidated Financial Statements.
44
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
First Citizens BancShares, Inc. (BancShares) is a financial holding company with two banking subsidiaries: First-Citizens Bank & Trust Company, headquartered in Raleigh, North Carolina (FCB), which operates branches in North Carolina, Virginia, West Virginia, Maryland and Tennessee; and IronStone Bank (ISB), a federally-chartered thrift institution headquartered in Fort Myers, Florida with branch offices in Florida, Georgia, Texas, Arizona, California, New Mexico, Colorado, Oregon and Washington.
FCB and ISB offer full-service banking services designed to meet the needs of retail and commercial customers in the markets in which they operate. The services offered include transaction and savings deposit accounts, commercial and consumer lending, trust and broker-dealer services, insurance services and other activities incidental to commercial banking. BancShares is also the parent company of American Guaranty Insurance Company, which is engaged in writing property and casualty insurance, and Neuse, Incorporated, which owns some of the real property from which ISB operates its branches.
FCB has several subsidiaries that support its full-service banking operation. First Citizens Investor Services and IronStone Securities are registered broker-dealers in securities that provide investment services, including sales of annuities and third party mutual funds. First Citizens Bank, National Association is the issuing and processing bank for FCB’s retail credit cards and merchant accounts. Triangle Life Insurance Company writes credit life and credit accident and health insurance. Neuse Financial Services, Inc. is a title insurance agency. T-TECH, Inc. provides payment processing services to third parties.
The accounting and reporting policies of BancShares and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and, with regard to the banking subsidiaries, conform to general industry practices. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by BancShares in the preparation of its consolidated financial statements are the determination of the allowance for credit losses, the existence of any other-than-temporary impairments of investment securities, and fair value estimates.
Intercompany accounts and transactions have been eliminated. Certain amounts for prior years have been reclassified to conform to statement presentations for 2005. However, the reclassifications have no effect on shareholders’ equity or net income as previously reported.
Investment Securities
BancShares has the ability and the positive intent to hold investment securities held to maturity until the scheduled maturity date. These securities are stated at cost adjusted for amortization of premium and accretion of discount. Accreted discounts and amortized premiums are included in interest income on an effective yield basis.
Investment securities available for sale are carried at their fair value with unrealized gains and losses, net of deferred income taxes, recorded as a component of other comprehensive income within shareholders’ equity. Gains and losses realized from the sales of securities available for sale are determined by specific identification and are included in noninterest income.
Investment securities with a fair value less than 80 percent of cost for more than two consecutive quarters are evaluated to determine whether the investment is other than temporarily impaired. If an investment security is determined to be other than temporarily impaired, the security is written down to its fair value with an offsetting securities loss.
At December 31, 2005 and 2004, BancShares had no investment securities held for trading purposes.
45
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
Overnight Investments
Overnight investments include federal funds sold and interest-bearing demand deposit balances in other banks.
Loans and Leases
Loans and leases that are held for investment purposes are carried at the principal amount outstanding. Loans that are classified as held for sale are carried at the lower of aggregate cost or fair value. Interest on substantially all loans is accrued and credited to interest income on a constant yield basis based upon the daily principal amount outstanding.
Loan Fees
Fees collected and certain costs incurred related to loan originations are deferred and amortized as an adjustment to interest income over the life of the related loans. Deferred fees and costs are recorded as an adjustment to loans outstanding using a method that approximates a constant yield.
Mortgage Servicing Rights
The estimated value of the right to service mortgage loans for others (MSRs) is included in other assets on the consolidated balance sheet. Capitalization of MSRs occurs when the underlying loan is sold. Capitalized MSRs are amortized over the projected life of the serviced loans and are subject to periodic review for impairment.
Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments
The allowance for loan and lease losses (ALLL) represents management’s estimate of probable credit losses within the loan and lease portfolio. The reserve for unfunded commitments (RUC) represents the estimate of probable credit losses among off-balance sheet loan commitments. Adjustments to the ALLL and the RUC are established by charges to the provision for credit losses. To determine the appropriate amount of the ALLL and RUC, management evaluates the risk characteristics of the loan and lease portfolio and outstanding loan commitments under current economic conditions and considers such factors as the financial condition of the borrower, fair value of collateral and other items that, in management’s opinion, deserve current recognition in estimating credit losses.
Management considers the established ALLL adequate to absorb probable losses that relate to loans and leases outstanding as of December 31, 2005. Management considers the established RUC adequate to absorb probable losses that relate to off-balance sheet loan commitments outstanding as of December 31, 2005. Future additions to the ALLL and the RUC may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review BancShares’ ALLL and the RUC. Such agencies may require the recognition of additions to the ALLL and RUC based on their judgments of information available to them at the time of their examination.
Nonaccrual Loans, Impaired Loans and Other Real Estate
Accrual of interest on certain residential mortgage loans is discontinued when the loan is more than three payments past due. Accrual of interest on all other loans and leases is discontinued when management deems that collection of additional principal or interest is doubtful. Residential mortgage loans return to an accrual status when the loan balance is less than three payments past due. Other loans and leases are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable terms.
Management considers a loan to be impaired when based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to contractual terms of the loan agreement. Impaired loans are valued using either the discounted expected cash flow method using the loan’s original effective interest rate or the collateral value. When the ultimate collectibility of an impaired loan’s principal is doubtful, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone.
46
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
Other real estate is valued at the lower of the loan balance at the time of foreclosure or estimated fair value net of selling costs and is included in other assets. Once acquired, other real estate is periodically reviewed to ensure that the fair value of the property supports the carrying value, with writedowns recorded when necessary. Gains and losses resulting from the sale or writedown of other real estate and income and expenses related to the operation of other real estate are recorded in other expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are computed by the straight-line method and are charged to operations over the estimated useful lives of the assets, which range from 25 to 40 years for premises and three to 10 years for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the useful lives of the improvements, whichever is shorter. Gains and losses on dispositions are recorded in other expense. Maintenance and repairs are charged to occupancy expense or equipment expense as incurred.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested at least annually for impairment.
Other intangible assets with estimable lives are amortized on a straight-line basis over their estimated useful lives, which are periodically reviewed for reasonableness.
Income Taxes
Income tax expense is based on consolidated income before income taxes and generally differs from income taxes paid due to deferred income taxes and benefits arising from income and expenses being recognized in different periods for financial and income tax reporting purposes. BancShares uses the asset and liability method to account for deferred income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of BancShares’ assets and liabilities at enacted rates expected to be in effect when such amounts are realized or settled.
BancShares continually monitors and evaluates the potential impact of current events on the estimates used to establish income tax expense and income tax assets and liabilities. On a periodic basis, BancShares evaluates its income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions that BancShares is required to file income tax returns, as well as potential or pending audits or assessments by such tax auditors.
BancShares and its subsidiaries file a consolidated federal income tax return. BancShares and its subsidiaries each file separate state income tax returns except where unitary filing is required.
Per Share Data
Net income per share has been computed by dividing net income by the weighted average number of both classes of common shares outstanding during each period. The weighted average number of shares outstanding for 2005, 2004 and 2003 was 10,434,453; 10,435,247; and 10,452,523, respectively. BancShares had no potential common stock outstanding in any period.
Cash dividends per share apply to both Class A and Class B common stock. Shares of Class A common stock carry one vote per share, while shares of Class B common stock carry 16 votes per share.
47
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists entirely of unrealized gains (losses) on investment securities available for sale.
The tax effects applicable to the components of other comprehensive income (loss) included in the consolidated statements of income are as follows for the years ended December 31:
| | | | | | | | | | | |
| | | 2005
| | | 2004
| | | 2003
|
Unrealized gains (losses) arising during the period | | $ | (4,367 | ) | | $ | (3,296 | ) | | $ | 1,439 |
Less: reclassification adjustments for gains (losses) included in net income | | | (194 | ) | | | 731 | | | | 122 |
| | |
|
|
| |
|
|
| |
|
|
Total | | $ | (4,173 | ) | | $ | (4,027 | ) | | $ | 1,317 |
| | |
|
|
| |
|
|
| |
|
|
Current Accounting Matters
In November 2003, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03- 01”). In September 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position (FSP EITF 03-1-b). In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1. Collectively, these documents consider when an investment is considered impaired, what disclosures are appropriate for impairment losses, and what disclosures are appropriate for unrealized losses that have not been recognized as other-than-temporary impairments. The new disclosure requirements are effective for reporting periods beginning after December 15, 2005.
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), “Accounting Changes and Error Corrections”, which replaces prior accounting guidance related to accounting changes and error corrections. SFAS 154 changes the requirements for the accounting for and reporting of a change in an accounting principle. SFAS 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. We adopted SFAS 154 on January 1, 2006. There will be no material impact on our consolidated financial statements.
Management is not aware of any current recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.
48
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
NOTE B—INVESTMENT SECURITIES
The aggregate values of investment securities at December 31 along with gains and losses determined on an individual security basis are as follows:
| | | | | | | | | | | | |
| | | Cost
| | Gross
Unrealized
Gains
| | Gross
Unrealized
Losses
| | Fair Value
|
Investment securities held to maturity | | | | | | | | | | | | |
2005 | | | | | | | | | | | | |
U. S. Government | | $ | 634,673 | | $ | 162 | | $ | 4,927 | | $ | 629,908 |
State, county and municipal | | | 1,573 | | �� | 145 | | | — | | | 1,718 |
Other | | | 250 | | | — | | | — | | | 250 |
| | |
|
| |
|
| |
|
| |
|
|
Total investment securities held to maturity | | $ | 636,496 | | $ | 307 | | $ | 4,927 | | $ | 631,876 |
| | |
|
| |
|
| |
|
| |
|
|
2004 | | | | | | | | | | | | |
U. S. Government | | $ | 875,496 | | $ | 707 | | $ | 3,569 | | $ | 872,634 |
State, county and municipal | | | 1,733 | | | 162 | | | — | | | 1,895 |
Other | | | 250 | | | — | | | — | | | 250 |
| | |
|
| |
|
| |
|
| |
|
|
Total investment securities held to maturity | | $ | 877,479 | | $ | 869 | | $ | 3,569 | | $ | 874,779 |
| | |
|
| |
|
| |
|
| |
|
|
Investment securities available for sale | | | | | | | | | | | | |
2005 | | | | | | | | | | | | |
U. S. Government | | $ | 2,244,864 | | $ | 45 | | $ | 30,188 | | $ | 2,214,721 |
Equity securities | | | 34,409 | | | 26,809 | | | — | | | 61,218 |
State, county and municipal | | | 5,227 | | | 8 | | | 56 | | | 5,179 |
Other | | | 11,902 | | | — | | | — | | | 11,902 |
| | |
|
| |
|
| |
|
| |
|
|
Total investment securities available for sale | | $ | 2,296,402 | | $ | 26,862 | | $ | 30,244 | | $ | 2,293,020 |
| | |
|
| |
|
| |
|
| |
|
|
2004 | | | | | | | | | | | | |
U. S. Government | | $ | 1,201,829 | | $ | 71 | | $ | 13,834 | | $ | 1,188,066 |
Equity securities | | | 32,447 | | | 21,182 | | | — | | | 53,629 |
State, county and municipal | | | 6,343 | | | 34 | | | 27 | | | 6,350 |
| | |
|
| |
|
| |
|
| |
|
|
Total investment securities available for sale | | $ | 1,240,619 | | $ | 21,287 | | $ | 13,861 | | $ | 1,248,045 |
| | |
|
| |
|
| |
|
| |
|
|
49
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
The following table provides maturity information for investment securities at December 31. Callable securities are assumed to mature on their earliest call date.
| | | | | | | | | | | | |
| | | 2005
| | 2004
|
| | | Cost
| | Fair Value
| | Cost
| | Fair Value
|
Investment securities held to maturity | | | | | | | | | | | | |
Maturing in: | | | | | | | | | | | | |
One year or less | | $ | 416,172 | | $ | 413,289 | | $ | 511,586 | | $ | 510,100 |
One through five years | | | 209,604 | | | 207,639 | | | 351,660 | | | 349,830 |
Five to 10 years | | | — | | | — | | | 21 | | | 22 |
Over 10 years | | | 10,720 | | | 10,948 | | | 14,212 | | | 14,827 |
| | |
|
| |
|
| |
|
| |
|
|
Total investment securities held to maturity | | $ | 636,496 | | $ | 631,876 | | $ | 877,479 | | $ | 874,779 |
| | |
|
| |
|
| |
|
| |
|
|
| | |
| | | 2005
| | 2004
|
| | | Cost
| | Fair Value
| | Cost
| | Fair Value
|
Investment securities available for sale | | | | | | | | | | | | |
Debt securities maturing in: | | | | | | | | | | | | |
One year or less | | $ | 1,160,510 | | $ | 1,141,549 | | $ | 928,088 | | $ | 917,262 |
One through five years | | | 1,058,485 | | | 1,047,890 | | | 257,179 | | | 254,382 |
Five to 10 years | | | 1,230 | | | 1,219 | | | 1,460 | | | 1,461 |
Over 10 years | | | 41,768 | | | 41,144 | | | 21,445 | | | 21,311 |
Equity securities | | | 34,409 | | | 61,218 | | | 32,447 | | | 53,629 |
| | |
|
| |
|
| |
|
| |
|
|
Total investment securities available for sale | | $ | 2,296,402 | | $ | 2,293,020 | | $ | 1,240,619 | | $ | 1,248,045 |
| | |
|
| |
|
| |
|
| |
|
|
The amount of securities gains (losses) reported includes the following:
| | | | | | | | | | | | |
| | | Year ended December 31,
| |
| | | 2005
| | | 2004
| | | 2003
| |
Gains on sales of investment securities available for sale | | $ | — | | | $ | 1,923 | | | $ | 1,515 | |
Losses on sales of investment securities available for sale | | | — | | | | (71 | ) | | | (231 | ) |
Other than temporary impairment losses | | | (469 | ) | | | — | | | | (980 | ) |
Other | | | (23 | ) | | | — | | | | 5 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total securities gains (losses) | | $ | (492 | ) | | $ | 1,852 | | | $ | 309 | |
| | |
|
|
| |
|
|
| |
|
|
|
In conjunction with the securitization and sale of revolving mortgage loans during 2005, BancShares retained a residual interest in the securitized assets in the form of an interest-only strip, which is included within investment securities available for sale and is carried at its estimated fair value. Quoted market prices are not readily available for retained residual interests, so the fair value was estimated based on various factors that may have an impact on the fair value of the retained interests. The assumed discount rate was 10 percent; the assumed rate of credit losses was 10 basis points; the estimated weighted average loan life was 3.3 years. Based on the assumptions used, the estimated fair value of the retained residual interest was $11,586 at the date of the securitization. Based on changes that occurred after the date of the securitization, an other than temporary impairment of $469 was recorded during 2005. The carrying value of the retained interest was $11,902 at December 31, 2005.
50
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
The following table provides additional information regarding unrealized losses as of December 31, 2005 and 2004:
| | | | | | | | | | | | | | | | | | |
| | | Less than 12 months
| | 12 months or more
| | Total
|
| December 31, 2005 | | Fair Value
| | Unrealized
Losses
| | Fair
Value
| | Unrealized
Losses
| | Fair Value
| | Unrealized
Losses
|
Investment securities held to maturity: | | | | | | | | | | | | | | | | | | |
U.S. Government | | $ | 246,462 | | $ | 2,310 | | $ | 373,969 | | $ | 2,617 | | $ | 620,431 | | $ | 4,927 |
State, county and municipal | | | — | | | — | | | — | | | — | | | — | | | — |
Other | | | — | | | — | | | — | | | — | | | — | | | — |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Total | | $ | 246,462 | | $ | 2,310 | | $ | 373,969 | | $ | 2,617 | | $ | 620,431 | | $ | 4,927 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Investment securities available for sale: | | | | | | | | | | | | | | | | | | |
U.S. Government | | $ | 1,285,442 | | $ | 11,477 | | $ | 870,378 | | $ | 18,711 | | $ | 2,155,820 | | $ | 30,188 |
Equity securities | | | — | | | — | | | — | | | — | | | — | | | — |
State, county and municipal | | | 1,898 | | | 27 | | | 2,098 | | | 29 | | | 3,996 | | | 56 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Total | | $ | 1,287,340 | | $ | 11,504 | | $ | 872,476 | | $ | 18,740 | | $ | 2,159,816 | | $ | 30,244 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| December 31, 2004 | | | | | | | | | | | | |
Investment securities held to maturity: | | | | | | | | | | | | | | | | | | |
U.S. Government | | $ | 751,893 | | $ | 3,433 | | $ | 54,612 | | $ | 136 | | $ | 806,505 | | $ | 3,569 |
State, county and municipal | | | — | | | — | | | — | | | — | | | — | | | — |
Other | | | — | | | — | | | — | | | — | | | — | | | — |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Total | | $ | 751,893 | | $ | 3,433 | | $ | 54,612 | | $ | 136 | | $ | 806,505 | | $ | 3,569 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Investment securities available for sale: | | | | | | | | | | | | | | | | | | |
U.S. Government | | $ | 465,920 | | $ | 3,004 | | $ | 714,481 | | $ | 10,830 | | $ | 1,180,401 | | $ | 13,834 |
Equity securities | | | — | | | — | | | — | | | — | | | — | | | — |
State, county and municipal | | | 1,153 | | | 5 | | | 1,832 | | | 22 | | | 2,985 | | | 27 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Total | | $ | 467,073 | | $ | 3,009 | | $ | 716,313 | | $ | 10,852 | | $ | 1,183,386 | | $ | 13,861 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Investment securities with an aggregate fair value of $1,246,445 have had continuous unrealized losses for more than twelve months as of December 31, 2005. The aggregate amount of that unrealized loss was $21,357 at December 31, 2005. These securities include U.S. Government, government agency and state, county and municipal securities. The unrealized losses relate to fixed-rate debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.
Investment securities having an aggregate carrying value of $1,597,723 at December 31, 2005 and $1,666,003 at December 31, 2004, were pledged as collateral to secure public funds on deposit, to secure certain short-term borrowings and for other purposes as required by law.
51
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
NOTE C—LOANS AND LEASES
Loans and leases outstanding at December 31 include the following:
| | | | | | |
| | | 2005
| | 2004
|
Real estate: | | | | | | |
Construction and land development | | $ | 766,945 | | $ | 588,092 |
Commercial mortgage | | | 3,518,563 | | | 3,279,729 |
Residential mortgage | | | 1,016,677 | | | 979,663 |
Revolving mortgage | | | 1,368,729 | | | 1,714,032 |
Other real estate mortgage loans | | | 172,712 | | | 171,700 |
| | |
|
| |
|
|
Total real estate loans | | | 6,843,626 | | | 6,733,216 |
Commercial and industrial | | | 1,193,349 | | | 969,729 |
Consumer | | | 1,318,971 | | | 1,397,820 |
Lease financing | | | 233,499 | | | 192,164 |
Other | | | 53,549 | | | 61,458 |
| | |
|
| |
|
|
Total loans and leases | | $ | 9,642,994 | | $ | 9,354,387 |
| | |
|
| |
|
|
During 2005, BancShares completed the securitization and sale of $256,232 of its revolving mortgage loans. The transaction generated a pre-tax gain of $2,874, which is included in other noninterest income. BancShares continues to service the assets that were sold. The transaction was accounted for under the provisions of Statement of Financial Accounting Standards No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (Statement 140). The transaction was completed using a Qualified Special Purpose Entity (QSPE) which, in accordance with Statement 140, is a legally isolated, bankruptcy remote entity beyond the control of the seller. The QSPE is therefore not included within the consolidated financial statements. BancShares received cash totaling $240,399 from the sale, net of the $7,816 of loans retained by the trust and $8,017 for cash collections and fees retained by the advisors.
In conjunction with the securitization and sale, BancShares established a servicing asset of $1,401, which represented the estimated fair value of the right to service the loans that were securitized and sold. This asset is being amortized over the estimated servicing life of 149 months. Net of the $222 in amortization recorded during 2005, the carrying value of the servicing asset at December 31, 2005 was $1,179. There were no capitalized mortgage servicing rights during 2004.
At December 31, 2005, 13.7 percent of total loans and leases represent loans to customers in medical-related fields. At December 31, 2005, 11.2 percent of loans and leases exceeded the loan-to-value ratios recommended by guidelines established by regulatory agencies. Depending on the type of collateral, the guidelines assign a recommended loan-to-value limit that, for real estate loans, ranges from 65 percent to 85 percent. There were no foreign loans outstanding during either period, nor were there any loans to finance highly leveraged transactions. Substantially all loans are to customers domiciled within BancShares’ principal market areas.
At December 31, 2005 loans totaling $377,946 were pledged to secure long-term borrowings, compared to $417,488 at December 31, 2004.
At December 31, 2005 and 2004 nonperforming loans consisted of nonaccrual loans of $18,969 and $14,266, respectively. Gross interest income on nonperforming loans that would have been recorded had these loans been performing was $551, $773 and $1,182, respectively, during 2005, 2004 and 2003. Interest income recognized on nonperforming loans was $821, $281 and $356 during the respective periods. As of December 31, 2005 and 2004, the balance of other real estate was $6,753 and $9,020. Loans transferred to other real estate totaled $6,431, $5,801 and $4,112 during 2005, 2004 and 2003. Loans 90 days or more past due and still accruing totaled $9,180 and $12,192 at December 31, 2005 and 2004, respectively.
52
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
In each period, BancShares originated much of its residential mortgage loan production through correspondent mortgage banks. Loan sale activity for 2005, 2004 and 2003 is summarized below:
| | | | | | | | | |
| | | 2005
| | 2004
| | 2003
|
Loans held for sale at December 31 | | $ | 61,185 | | $ | 22,770 | | $ | 11,520 |
For the year ended December 31: | | | | | | | | | |
Loans sold | | | 727,233 | | | 498,533 | | | 930,302 |
Net gain on sale of loans | | | 4,680 | | | 3,781 | | | 7,166 |
NOTE D—ALLOWANCE FOR LOAN AND LEASE LOSSES AND RESERVE FOR UNFUNDED COMMITMENTS
Activity in the allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded commitments, is summarized as follows:
| | | | | | | | | | | | |
| | | Allowance for
Loan and
Lease Losses
| | | Reserve for
Unfunded
Commitments
| | | Allowance
for
Credit Losses
| |
Balance at December 31, 2002 | | $ | 106,889 | | | $ | 5,644 | | | $ | 112,533 | |
Acquired reserve | | | 409 | | | | — | | | | 409 | |
Provision for credit losses | | | 22,778 | | | | 1,409 | | | | 24,187 | |
Loans and leases charged off | | | (21,658 | ) | | | — | | | | (21,658 | ) |
Loans and leases recovered | | | 3,886 | | | | — | | | | 3,886 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net charge-offs | | | (17,772 | ) | | | — | | | | (17,772 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Balance at December 31, 2003 | | | 112,304 | | | | 7,053 | | | | 119,357 | |
| | |
|
|
| |
|
|
| |
|
|
|
Provision for credit losses | | | 34,555 | | | | (82 | ) | | | 34,473 | |
Loans and leases charged off | | | (26,546 | ) | | | — | | | | (26,546 | ) |
Loans and leases recovered | | | 3,548 | | | | — | | | | 3,548 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net charge-offs | | | (22,998 | ) | | | — | | | | (22,998 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Balance at December 31, 2004 | | | 123,861 | | | | 6,971 | | | | 130,832 | |
| | |
|
|
| |
|
|
| |
|
|
|
Reserves released from sale of loans | | | (1,537 | ) | | | (48 | ) | | | (1,585 | ) |
Provision for credit losses | | | 33,109 | | | | — | | | | 33,109 | |
Loans and leases charged off | | | (32,506 | ) | | | — | | | | (32,506 | ) |
Loans and leases recovered | | | 5,920 | | | | — | | | | 5,920 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net charge-offs | | | (26,586 | ) | | | — | | | | (26,586 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Balance at December 31, 2005 | | $ | 128,847 | | | $ | 6,923 | | | $ | 135,770 | |
| | |
|
|
| |
|
|
| |
|
|
|
At December 31, 2005 and 2004, impaired loans totaled $15,094 and $8,019, respectively, all of which were classified as nonaccrual. Total allowances of $1,653 and $1,615 have been established for impaired loans outstanding as of December 31, 2005 and 2004, respectively.
The average recorded investment in impaired loans during the years ended December 31, 2005, 2004 and 2003, was $8,480, $9,787 and $10,541, respectively. For the years ended December 31, 2005, 2004 and 2003, BancShares recognized cash basis interest income on those impaired loans of $113, $101 and $211 respectively.
53
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
NOTE E—PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are summarized as follows:
| | | | | | |
| | | 2005
| | 2004
|
Land | | $ | 145,881 | | $ | 137,456 |
Premises and leasehold improvements | | | 531,461 | | | 460,688 |
Furniture and equipment | | | 278,911 | | | 254,844 |
| | |
|
| |
|
|
Total | | | 956,253 | | | 852,988 |
Less accumulated depreciation and amortization | | | 316,784 | | | 284,623 |
| | |
|
| |
|
|
Premises and equipment | | $ | 639,469 | | $ | 568,365 |
| | |
|
| |
|
|
There were no premises pledged to secure borrowings at December 31, 2005 and 2004.
BancShares leases certain premises and equipment under various lease agreements that provide for payment of property taxes, insurance and maintenance costs. Generally, operating leases provide for one or more renewal options on the same basis as current rental terms. However, certain leases require increased rentals under cost of living escalation clauses. Some leases also provide purchase options.
Future minimum rental commitments for noncancellable operating leases with initial or remaining terms of one or more years consisted of the following at December 31, 2005:
| | | |
Year Ending December 31: | | | |
2006 | | $ | 13,291 |
2007 | | | 12,123 |
2008 | | | 10,732 |
2009 | | | 8,399 |
2010 | | | 6,277 |
Thereafter | | | 61,286 |
| | |
|
|
Total minimum payments | | $ | 112,108 |
| | |
|
|
Total rent expense for all operating leases amounted to $14,433 in 2005, $14,332 in 2004 and $14,468 in 2003, net of rent income, which totaled $1,977, $1,200 and $1,723 during 2005, 2004 and 2003.
NOTE F—DEPOSITS
Deposits at December 31 are summarized as follows:
| | | | | | |
| | | 2005
| | 2004
|
Demand | | $ | 2,616,177 | | $ | 2,443,059 |
Checking With Interest | | | 1,658,569 | | | 1,594,092 |
Money market accounts | | | 2,657,653 | | | 2,655,829 |
Savings | | | 700,999 | | | 741,563 |
Time | | | 4,540,460 | | | 3,916,255 |
| | |
|
| |
|
|
Total deposits | | $ | 12,173,858 | | $ | 11,350,798 |
| | |
|
| |
|
|
54
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
Time deposits with a minimum denomination of $100 totaled $1,679,835 and $1,300,243 at December 31, 2005 and 2004, respectively.
At December 31, 2005 the scheduled maturities of time deposits were:
| | | |
2006 | | $ | 3,090,073 |
2007 | | | 950,161 |
2008 | | | 204,517 |
2009 | | | 127,656 |
2010 | | | 168,040 |
Thereafter | | | 13 |
| | |
|
|
Total time deposits | | $ | 4,540,460 |
| | |
|
|
NOTE G—SHORT-TERM BORROWINGS
Short-term borrowings at December 31 are as follows:
| | | | | | |
| | | 2005
| | 2004
|
Master notes | | $ | 520,585 | | $ | 213,387 |
Repurchase agreements | | | 150,054 | | | 131,367 |
Federal funds purchased | | | 36,620 | | | 36,933 |
Notes payable to Federal Home Loan Bank of Atlanta | | | 50,000 | | | 50,000 |
Other | | | 21,769 | | | 15,999 |
| | |
|
| |
|
|
Total short-term borrowings | | $ | 779,028 | | $ | 447,686 |
| | |
|
| |
|
|
At December 31, 2005, BancShares and its subsidiaries had unused credit lines allowing access to overnight borrowings of up to $525,000 on an unsecured basis. Additionally, under various borrowing arrangements with the Federal Reserve and the Federal Home Loan Bank of Atlanta, BancShares and its subsidiaries have access, on a secured basis, to additional borrowings as needed.
NOTE H—LONG-TERM OBLIGATIONS
Long-term obligations at December 31 include:
| | | | | | |
| | | 2005
| | 2004
|
Junior subordinated debenture at 8.05 percent maturing March 5, 2028 | | $ | 154,640 | | $ | 154,640 |
Junior subordinated debenture at 8.40 percent maturing October 31, 2031 | | | 103,093 | | | 103,093 |
Subordinated notes at 5.125 percent maturing June 1, 2015 | | | 125,000 | | | — |
Obligation to the Federal Home Loan Bank of Atlanta maturing December 17, 2007 at a fixed rate of 3.44 percent, secured by mortgage loans | | | 25,000 | | | 25,000 |
Obligations under capitalized leases extending to January 2013 | | | 1,254 | | | 2,674 |
Other | | | — | | | 536 |
| | |
|
| |
|
|
Total long-term obligations | | $ | 408,987 | | $ | 285,943 |
| | |
|
| |
|
|
The 8.05 percent junior subordinated debenture issued in 1998 (the 1998 Debenture) is held by FCB/NC Capital Trust I. The 8.40 percent junior subordinated debenture issued in 2001 (the 2001 Debenture) is held by FCB/NC Capital Trust II. FCB/NC Capital Trust I and FCB/NC Capital Trust II are grantor trusts established by BancShares for the
55
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
purpose of issuing trust preferred capital securities. FCB/NC Capital Trust I issued $150,000 in 8.05 percent trust preferred capital securities in 1998 (the 1998 Preferred Securities), while FCB/NC Capital Trust II issued $100,000 in 8.40 percent trust preferred capital securities in 2001 (the 2001 Preferred Securities).
FCB/NC Capital Trust I invested the proceeds generated by the sale of the 1998 Preferred Securities in the 1998 Debenture, and that investment is the sole asset of the trust. The 1998 Preferred Securities are redeemable in whole or in part after March 1, 2008.
FCB/NC Capital Trust II invested the proceeds generated by the sale of the 2001 Preferred Securities in the 2001 Debenture, and that investment is the sole asset of the trust. The 2001 Preferred Securities are redeemable in whole or in part on or after October 31, 2006.
The subordinated notes issued during 2005 are unsecured obligations of FCB and are junior to existing and future senior indebtedness and obligations to depositors and general or secured creditors.
Long-term obligations maturing in each of the five years subsequent to December 31, 2005 include:
| | | |
2006 | | $ | 134 |
2007 | | | 25,147 |
2008 | | | 160 |
2009 | | | 175 |
2010 | | | 190 |
Thereafter | | | 383,181 |
| | |
|
|
| | | $ | 408,987 |
| | |
|
|
NOTE I—ESTIMATED FAIR VALUES
Fair value estimates are made at a specific point in time based on relevant market information and information about each financial instrument. Where information regarding the fair value of a financial instrument is available, those values are used, as is the case with investment securities and residential mortgage loans. In these cases, an open market exists in which those financial instruments are actively traded.
Because no market exists for many financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For these financial instruments with a fixed interest rate, an analysis of the related cash flows was the basis for estimating fair values. The expected cash flows were then discounted to the valuation date using an appropriate discount rate. The discount rates used represent the rates under which similar transactions would be currently negotiated. Generally, the fair value of variable rate financial instruments equals the book value.
| | | | | | | | | | | | |
| | | December 31, 2005
| | December 31, 2004
|
| | | Carrying
Value
| | Fair Value
| | Carrying
Value
| | Fair Value
|
Cash and due from banks | | $ | 777,928 | | $ | 777,928 | | $ | 679,683 | | $ | 679,683 |
Overnight investments | | | 481,012 | | | 481,012 | | | 383,743 | | | 383,743 |
Investment securities held to maturity | | | 636,496 | | | 631,876 | | | 877,479 | | | 874,779 |
Investment securities available for sale | | | 2,293,020 | | | 2,293,020 | | | 1,248,045 | | | 1,248,045 |
Loans, net of allowance for loan and lease losses | | | 9,514,147 | | | 9,478,995 | | | 9,230,526 | | | 9,285,560 |
Income earned not collected | | | 54,879 | | | 54,879 | | | 40,574 | | | 40,574 |
Deposits | | | 12,173,858 | | | 12,229,952 | | | 11,350,798 | | | 11,389,785 |
Short-term borrowings | | | 779,028 | | | 779,028 | | | 447,686 | | | 447,686 |
Long-term obligations | | | 408,987 | | | 418,221 | | | 285,943 | | | 296,547 |
Accrued interest payable | | | 43,602 | | | 43,602 | | | 28,597 | | | 28,597 |
56
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
No forward commitments to sell loans existed at December 31, 2005 or 2004. For other off-balance sheet commitments and contingencies, carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares’ financial position.
NOTE J—EMPLOYEE BENEFIT PLANS
BancShares sponsors two employee benefit plans for the benefit of its qualifying employees: a noncontributory defined benefit pension plan and a 401(k) Savings Plan. Both of the plans are qualified under the Internal Revenue Code. BancShares also maintains agreements with certain executives that provide supplemental post-retirement and death benefits.
Defined Benefit Pension Plan
Employees who qualify under length of service and other requirements participate in a noncontributory defined benefit pension plan. Under the plan, retirement benefits are based on years of service and average earnings. The policy is to fund amounts approximating the maximum amount that is deductible for federal income tax purposes. BancShares contributed $30,000 in 2005, $20,000 in 2004 and $35,000 in 2003 to the plan. The plan’s assets consist of investments in FCB’s common trust funds, which include listed common stocks and fixed income securities, as well as investments in mid-cap, small-cap, REIT and international stocks through unaffiliated money managers.
Benefit Obligations
The following table calculates the projected benefit obligation at December 31, 2005 and 2004:
| | | | | | | | |
| | | 2005
| | | 2004
| |
Benefit obligation at beginning of year | | $ | 277,833 | | | $ | 242,520 | |
Service cost | | | 13,504 | | | | 12,273 | |
Interest cost | | | 16,101 | | | | 15,206 | |
Actuarial loss (gain) | | | (1,026 | ) | | | 13,427 | |
Transfer from related parties | | | — | | | | 127 | |
Benefits paid | | | (9,703 | ) | | | (9,370 | ) |
Plan amendments | | | — | | | | 3,650 | |
| | |
|
|
| |
|
|
|
Benefit obligation at end of year | | $ | 296,709 | | | $ | 277,833 | |
| | |
|
|
| |
|
|
|
The accumulated benefit obligation for the plan at December 31, 2005 and 2004 was $236,378 and $212,027, respectively. The plan uses a measurement date of December 31.
The weighted average assumptions used to determine the benefit obligations as of December 31 are as follows:
| | | | | | |
| | | 2005
| | | 2004
| |
Discount rate | | 5.50 | % | | 5.75 | % |
Rate of compensation increase | | 4.25 | % | | 4.75 | % |
Plan Assets
The following table describes the changes in plan assets during 2005 and 2004. Employer contributions and benefits paid include only those amounts contributed directly to or paid directly from plan assets.
| | | | | | | | |
| | | 2005
| | | 2004
| |
Fair value of plan assets at beginning of year | | $ | 255,069 | | | $ | 219,350 | |
Actual return on plan assets | | | 21,253 | | | | 24,913 | |
Employer contributions | | | 30,000 | | | | 20,000 | |
Transfer from related parties | | | — | | | | 176 | |
Benefits paid | | | (9,703 | ) | | | (9,370 | ) |
| | |
|
|
| |
|
|
|
Fair value of plan assets at end of year | | $ | 296,619 | | | $ | 255,069 | |
| | |
|
|
| |
|
|
|
57
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
The following table describes the actual allocation of plan assets as of December 31, 2005 and 2004 and the projected allocation for 2006. The expected long-term rate of return on plan assets was 8.50% at December 31, 2005 and 2004.
| | | | | | | | | |
| | | 2006
Target
| | | Actual,
December 31,
| |
| | | | 2005
| | | 2004
| |
Equity securities | | 60 | % | | 60 | % | | 66 | % |
Debt securities | | 40 | % | | 39 | % | | 33 | % |
Cash and equivalents | | — | | | 1 | % | | 1 | % |
| | |
|
| |
|
| |
|
|
Total | | 100 | % | | 100 | % | | 100 | % |
| | |
|
| |
|
| |
|
|
Investment decisions regarding the plan’s assets seek to achieve a favorable annual return through a diversified portfolio that will provide needed capital appreciation and cash flow to allow both current and future benefit obligations to be paid. The target asset mix may change if the objectives for the plan’s assets or risk tolerance change or if a major shift occurs in the expected long-term risk and reward characteristics of one or more asset classes.
Funded Status
The funded status of the plan, which represents the prepaid pension asset included within other assets on the consolidated balance sheet, is:
| | | | | | | | |
| | | December 31,
| |
| | | 2005
| | | 2004
| |
Fair value of plan assets | | $ | 296,619 | | | $ | 255,069 | |
Benefit obligation | | | 296,709 | | | | 277,833 | |
| | |
|
|
| |
|
|
|
Funded status | | | (90 | ) | | | (22,764 | ) |
Amounts not yet recognized: | | | | | | | | |
Unrecognized net loss | | | 31,374 | | | | 36,539 | |
Unrecognized prior service cost | | | 2,432 | | | | 3,772 | |
| | |
|
|
| |
|
|
|
Net asset recognized | | $ | 33,716 | | | $ | 17,547 | |
| | |
|
|
| |
|
|
|
Prepaid benefit cost | | $ | 33,716 | | | $ | 17,547 | |
Accrued benefit cost | | | — | | | | — | |
| | |
|
|
| |
|
|
|
Net asset recognized | | $ | 33,716 | | | $ | 17,547 | |
| | |
|
|
| |
|
|
|
At December 31, 2005 and 2004, the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for a pension plan with a projected benefit obligation in excess of plan assets and for a pension plan with an accumulated benefit obligation in excess of plan assets equals:
| | | | | | | | | | | | |
| | | Projected Benefit Obligation
Exceeds Fair Value of Plan Assets at
December 31,
| | Accumulated
Benefit Obligation
Exceeds Fair Value
of Plan Assets at
December 31,
|
| | | 2005
| | 2004
| | 2005
| | 2004
|
Projected benefit obligation | | $ | 296,709 | | $ | 277,833 | | $ | — | | $ | — |
Accumulated benefit obligation | | | 236,378 | | | 212,027 | | | — | | | — |
Fair value of plan assets | | | 296,619 | | | 255,069 | | | — | | | — |
58
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
Net Periodic Cost
The following table shows the components of periodic benefit cost related to the pension plan for the years ended December 31, 2005, 2004 and 2003.
| | | | | | | | | | | | |
| | | 2005
| | | 2004
| | | 2003
| |
Service cost | | $ | 13,504 | | | $ | 12,273 | | | $ | 9,911 | |
Interest cost | | | 16,101 | | | | 15,206 | | | | 14,042 | |
Expected return on assets | | | (18,893 | ) | | | (17,350 | ) | | | (14,411 | ) |
Amortization of prior service cost | | | 283 | | | | 154 | | | | 154 | |
Amortization of net actuarial loss | | | 2,836 | | | | 2,291 | | | | 716 | |
Amortization of transition asset | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
|
Total net periodic benefit cost | | $ | 13,831 | | | $ | 12,574 | | | $ | 10,412 | |
| | |
|
|
| |
|
|
| |
|
|
|
The weighted average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2005, 2004 and 2003 are as follows:
| | | | | | | | | |
| | | 2005
| | | 2004
| | | 2003
| |
Discount rate | | 5.75 | % | | 6.00 | % | | 6.50 | % |
Rate of compensation increase | | 4.75 | % | | 4.75 | % | | 4.75 | % |
Expected return on plan assets | | 8.50 | % | | 8.50 | % | | 8.00 | % |
The expected return on plan assets represents the average estimated weighted-average rate of return on plan assets over the period the benefit obligation will be paid. The assumed rate is based on historical market data and expectations of future earnings rates for each investment type.
Cash Flows
During 2006, BancShares anticipates making contributions to the pension plan totaling $30,000. The pension plan anticipates making benefit payments in the following periods:
| | | |
| | | Projected
Benefit
payments |
| | |
|
|
2006 | | $ | 9,387 |
2007 | | | 10,042 |
2008 | | | 10,792 |
2009 | | | 11,677 |
2010 | | | 12,666 |
2011-2015 | | | 83,358 |
401(k) Savings Plan
Employees are also eligible to participate in a 401(k) plan after 31 days of service through the deferral of portions of their salary. Based on the employee’s contribution, BancShares will match up to 75% of the employee contribution. BancShares made participating contributions of $5,965, $5,725 and $5,532 during 2005, 2004 and 2003, respectively.
59
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
Post-Retirement Benefits for Executives
FCB and ISB have entered into contractual agreements with certain executives that, under various circumstances, provide supplemental post-retirement income in exchange for consulting services and adherence to covenants not to compete. The agreements also provide a death benefit in the event a participant dies before the term of the agreement ends.
The following table provides the accrued liability as of December 31, 2005 and 2004 and the changes in the accrued liability during the years then ended.
| | | | | | | | |
| | | Year Ended December 31,
| |
| | | 2005
| | | 2004
| |
Present value of accrued liability as of January 1 | | $ | 15,268 | | | $ | 15,085 | |
Benefit expense | | | 2,082 | | | | 75 | |
Benefits paid | | | (745 | ) | | | (758 | ) |
Benefits forfeited | | | (170 | ) | | | (187 | ) |
Interest cost | | | 1,684 | | | | 1,053 | |
| | |
|
|
| |
|
|
|
Present value of accrued liability as of December 31 | | $ | 18,119 | | | $ | 15,268 | |
| | |
|
|
| |
|
|
|
Discount rate at December 31 | | | 5.50 | % | | | 6.00 | % |
NOTE K—NONINTEREST INCOME AND NONINTEREST EXPENSE
During 2005, commission-based income included $15,119 in income from investments, $7,318 from insurance and $3,606 from factoring.
Other noninterest expense for the years ended December 31 included the following:
| | | | | | | | | |
| | | 2005
| | 2004
| | 2003
|
Cardholder and merchant services expense | | $ | 32,067 | | $ | 28,290 | | $ | 24,119 |
Telecommunications expense | | | 9,873 | | | 10,461 | | | 11,455 |
Postage expense | | | 8,045 | | | 8,639 | | | 8,826 |
Advertising expense | | | 7,206 | | | 7,981 | | | 7,566 |
Courier service expense | | | 5,076 | | | 4,757 | | | 4,657 |
Legal expense | | | 4,124 | | | 5,978 | | | 5,851 |
Consultant expense | | | 3,362 | | | 2,980 | | | 3,747 |
Amortization of intangibles | | | 2,453 | | | 2,360 | | | 2,583 |
Other | | | 62,926 | | | 58,299 | | | 57,757 |
| | |
|
| |
|
| |
|
|
Total other noninterest expense | | $ | 135,132 | | $ | 129,745 | | $ | 126,561 |
| | |
|
| |
|
| |
|
|
60
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
NOTE L—INCOME TAXES
At December 31, income tax expense consisted of the following:
| | | | | | | | | | | | |
| | | 2005
| | | 2004
| | | 2003
| |
Current tax expense | | | | | | | | | | | | |
Federal | | $ | 59,190 | | | $ | 29,342 | | | $ | 30,969 | |
State | | | 8,191 | | | | 15,295 | | | | 5,291 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total current tax expense | | | 67,381 | | | | 44,637 | | | | 36,260 | |
| | |
|
|
| |
|
|
| |
|
|
|
Deferred tax expense (benefit) | | | | | | | | | | | | |
Federal | | | (2,120 | ) | | | 6,242 | | | | 8,915 | |
State | | | 547 | | | | (1,527 | ) | | | (3,761 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Total deferred tax expense (benefit) | | | (1,573 | ) | | | 4,715 | | | | 5,154 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total tax expense | | $ | 65,808 | | | $ | 49,352 | | | $ | 41,414 | |
| | |
|
|
| |
|
|
| |
|
|
|
Income tax expense differed from the amounts computed by applying the federal income tax rate of 35 percent in each period to pretax income as a result of the following:
| | | | | | | | | | | | |
| | | 2005
| | | 2004
| | | 2003
| |
Income at statutory rates | | $ | 62,535 | | | $ | 43,468 | | | $ | 40,810 | |
Increase (reduction) in income taxes resulting from: | | | | | | | | | | | | |
Nontaxable income on loans and investments, net of nondeductible expenses | | | (797 | ) | | | (783 | ) | | | (714 | ) |
State and local income taxes, including change in valuation allowance, net of federal income tax benefit | | | 5,680 | | | | 8,949 | | | | 995 | |
Tax credits | | | (1,128 | ) | | | (857 | ) | | | (500 | ) |
Other, net | | | (482 | ) | | | (1,425 | ) | | | 823 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total tax expense | | $ | 65,808 | | | $ | 49,352 | | | $ | 41,414 | |
| | |
|
|
| |
|
|
| |
|
|
|
During 2004, BancShares settled assessments from the North Carolina Department of Revenue arising from a routine audit of North Carolina tax returns for 2002, 2001 and 2000. Including interest, 2004 state income taxes increased $5,033 as a result of that settlement.
61
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
The net deferred tax asset included the following components at December 31:
| | | | | | | |
| | | 2005
| | 2004
| |
Allowance for loan and lease losses | | $ | 51,199 | | $ | 51,970 | |
Supplemental post-retirement expense | | | 7,139 | | | 6,053 | |
Unrealized gain (loss) on equity securities | | | 1,235 | | | (2,938 | ) |
State operating loss carryforward | | | 979 | | | 991 | |
Other | | | 4,100 | | | 2,137 | |
| | |
|
| |
|
|
|
Gross deferred tax asset | | | 64,652 | | | 58,213 | |
Less valuation allowance | | | 1,629 | | | 1,317 | |
| | |
|
| |
|
|
|
Deferred tax asset | | | 63,023 | | | 56,896 | |
| | |
|
| |
|
|
|
Accumulated depreciation | | | 10,187 | | | 13,351 | |
Lease financing activities | | | 13,860 | | | 17,539 | |
Prepaid pension asset | | | 13,351 | | | 6,983 | |
Net deferred loan fees and costs | | | 4,311 | | | 5,670 | |
Intangible asset | | | 6,267 | | | 4,946 | |
Other | | | 3,124 | | | 2,230 | |
| | |
|
| |
|
|
|
Deferred tax liability | | | 51,100 | | | 50,719 | |
| | |
|
| |
|
|
|
Net deferred tax asset | | $ | 11,923 | | $ | 6,177 | |
| | |
|
| |
|
|
|
The valuation allowance of $1,629 and $1,317 at December 31, 2005 and 2004, respectively, is the amount necessary to reduce BancShares’ gross state deferred tax asset to the amount that is more likely than not to be realized.
NOTE M—RELATED PARTY TRANSACTIONS
BancShares, FCB and ISB have had, and expect to have in the future, banking transactions in the ordinary course of business with directors, officers and their associates (Related Parties), on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.
An analysis of changes in the aggregate amounts of loans to Related Parties for the year ended December 31, 2005 is as follows:
| | | |
Balance at beginning of year | | $ | 31,601 |
New loans | | | 14,880 |
Repayments | | | 12,526 |
| | |
|
|
Balance at end of year | | $ | 33,955 |
| | |
|
|
In addition to these outstanding loan balances there is $15,373 available to Related Parties in unfunded loan commitments.
BancShares provides processing and operational services to other financial institutions. Certain of these institutions are deemed to be Related Parties since significant shareholders of BancShares are also deemed to be significant shareholders of the other banks. During 2005, 2004 and 2003, BancShares recognized income totaling $23,961, $23,043 and $20,036, respectively, for services rendered to these Related Parties, substantially all of which is included in fees from processing services and relates to data processing services.
During 2003, BancShares sold several of its branch offices to a Related Party. Income from sale of branches includes gains of $5,710 recognized on the sale of these branches.
62
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
Other expense includes $4,299, $5,325 and $4,897 in legal expense incurred during 2005, 2004 and 2003, respectively, for the firm that serves as BancShares’ general counsel. The senior attorney of that firm is a Related Party since he is member of BancShares’ board of directors.
Investment securities available for sale includes an investment in a Related Party. This investment had a carrying value of $25,229, $18,922 and $18,742 at December 31, 2005, 2004 and 2003, respectively. For each period, the investment had a cost of $508.
NOTE N—ACQUISITIONS AND DIVESTITURES
BancShares and its subsidiaries have participated in numerous business transactions in recent years. All of the acquisitions have been accounted for as purchases, with the results of operations included in BancShares’ Consolidated Statements of Income after the transaction date. The pro forma impact of the acquisitions as though they had been made at the beginning of the periods presented is not material to BancShares’ consolidated financial statements.
The following table provides information regarding the acquisitions and divestitures of branches that have been consummated during the three-year period ended December 31, 2005:
| | | | | | | | | | |
Year
| | Transaction
| | Assets1
| | | Deposits
| |
| 2005 | | Purchase of one branch by First Citizens Bank | | $ | 1,783 | | | $ | 20,957 | |
| 2004 | | Sale of one branch by IronStone Bank | | | — | | | | (12,156 | ) |
| 2004 | | Purchase of one branch by First Citizens Bank | | | 2,343 | | | | 11,565 | |
| 2003 | | Purchase of two branches by First Citizens Bank | | | 76,687 | | | | 67,887 | |
| 2003 | | Sale of four branches by First Citizens Bank2 | | | (32,631 | ) | | | (114,727 | ) |
| | 1 | | Excludes the transfer of cash and the recognition of goodwill and intangible assets |
| | 2 | | Sale of offices to a Related Party; see Note M |
NOTE O—GOODWILL AND INTANGIBLE ASSETS
The following table summarizes goodwill activity during 2005 and 2004:
| | | | | | | |
| | | 2005
| | 2004
| |
Balance, January 1 | | $ | 102,635 | | $ | 102,071 | |
Goodwill generated by branch purchases | | | 100 | | | 573 | |
Goodwill written off due to sale of branches | | | — | | | (9 | ) |
| | |
|
| |
|
|
|
Balance, December 31 | | $ | 102,735 | | $ | 102,635 | |
| | |
|
| |
|
|
|
The following information relates to other intangible assets, all of which are being amortized over their estimated useful lives:
| | | | | | | | |
| | | 2005
| | | 2004
| |
Balance, January 1 | | $ | 12,037 | | | $ | 13,928 | |
Intangible generated by branch purchases | | | 734 | | | | 469 | |
Amortization | | | (2,453 | ) | | | (2,360 | ) |
| | |
|
|
| |
|
|
|
Balance, December 31 | | $ | 10,318 | | | $ | 12,037 | |
| | |
|
|
| |
|
|
|
Based on current estimated useful lives and current carrying values, BancShares anticipates amortization expense for intangible assets in subsequent periods will be:
| | | |
2006 | | $ | 2,318 |
2007 | | | 2,142 |
2008 | | | 2,049 |
2009 | | | 1,656 |
2010 | | | 1,534 |
Beyond 2010 | | | 619 |
| | |
|
|
| | | $ | 10,318 |
| | |
|
|
63
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
NOTE P—REGULATORY REQUIREMENTS
Various regulatory agencies have implemented guidelines that evaluate capital based on risk-adjusted assets. An additional capital computation evaluates tangible capital based on tangible assets. Minimum capital requirements set forth by the regulators require a Tier 1 capital ratio of no less than 4 percent, a total capital ratio of no less than 8 percent of risk adjusted assets, and a leverage capital ratio of no less than 3 percent of tangible assets. To meet the FDIC’s well-capitalized standards, the Tier 1 and total capital ratios must be at least 6 percent and 10 percent, respectively. Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on the consolidated financial statements.
Based on the most recent notifications from its regulators, FCB and ISB are well-capitalized under the regulatory framework for prompt corrective action. Management believes that as of December 31, 2005 BancShares, FCB and ISB met all capital adequacy requirements to which they are subject and was not aware of any conditions or events that would affect FCB’s and ISB’s well-capitalized status.
Following is an analysis of BancShares, FCB and ISB capital ratios as of December 31, 2005 and 2004.
| | | | | | | | | | | | | | | | | | |
| | | December 31, 2005
| | | December 31, 2004
| |
| | | Actual Capital
| | | Requirement for Well-Capitalized
| | | Actual Capital
| | | Requirement for Well-Capitalized
| |
| | | Amount
| | Ratio
| | | | Amount
| | Ratio
| | |
BancShares | | | | | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 1,320,152 | | 12.56 | % | | 6.00 | % | | $ | 1,217,149 | | 12.14 | % | | 6.00 | % |
Total capital | | | 1,588,141 | | 15.11 | | | 10.00 | | | | 1,351,535 | | 13.48 | | | 10.00 | |
Leverage capital | | | 1,320,152 | | 9.17 | | | 5.00 | | | | 1,217,149 | | 9.26 | | | 5.00 | |
FCB | | | | | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 998,152 | | 11.42 | % | | 6.00 | % | | $ | 900,183 | | 10.48 | % | | 6.00 | % |
Total capital | | | 1,232,463 | | 14.10 | | | 10.00 | | | | 1,007,650 | | 11.73 | | | 10.00 | |
Leverage capital | | | 998,152 | | 7.97 | | | 5.00 | | | | 900,183 | | 7.75 | | | 5.00 | |
ISB | | | | | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 215,263 | | 11.82 | % | | 6.00 | % | | $ | 199,577 | | 13.85 | % | | 6.00 | % |
Total capital | | | 236,364 | | 12.98 | | | 10.00 | | | | 215,974 | | 14.98 | | | 10.00 | |
Leverage capital | | | 215,263 | | 11.64 | | | 5.00 | | | | 199,577 | | 13.35 | | | 5.00 | |
The Board of Directors of FCB may declare a dividend on a portion of its undivided profits as it may deem appropriate, subject to the requirements of the FDIC and the General Statutes of North Carolina, without prior regulatory approval. As of December 31, 2005 the amount was $774,271. However, to preserve its well-capitalized status, the maximum amount of the dividend was limited to $357,238. Dividends declared by FCB amounted to $32,194 in 2005, $50,230 in 2004 and $67,394 in 2003.
BancShares and its banking subsidiaries are subject to certain requirements imposed by state and federal banking statutes and regulations. These regulations require the maintenance of noninterest-bearing reserve balances at the Federal Reserve Bank. Banks are allowed to reduce the required balances by the amount of vault cash. For 2005 the requirements averaged $152,307 for FCB and $7,325 for ISB.
NOTE Q—COMMITMENTS AND CONTINGENCIES
In order to meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk.
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit-risk exposure associated with these commitments. In some cases, BancShares requires that collateral be pledged to secure the commitment. At December 31, 2005 and 2004, BancShares had unused commitments totaling $4,220,641 and $4,285,962 respectively.
64
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements. In order to minimize its exposure, BancShares’ credit policies govern the issuance of standby letters of credit. At December 31, 2005 and 2004, BancShares had standby letters of credit amounting to $44,072 and $41,484, respectively.
BancShares and various subsidiaries have been named as defendants in various legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.
NOTE R—SEGMENT DISCLOSURES
BancShares conducts its banking operations through its two wholly-owned subsidiaries, FCB and ISB. Although FCB and ISB offer similar products and services to customers, each entity operates in distinct geographic markets and each entity has separate management groups. Additionally, the financial results and trends of ISB reflect the de novo nature of its growth.
FCB is a mature banking institution that operates from a single charter from its branch network in North Carolina, Virginia, West Virginia, Maryland and Tennessee. ISB began operations in 1997 and operates from a thrift charter in Florida, Georgia, Texas, Arizona, California, New Mexico, Colorado, Oregon and Washington. ISB’s significance to BancShares’ consolidated financial results continues to grow.
Management has determined that FCB and ISB are reportable business segments. In the aggregate, FCB and its consolidated subsidiaries, which are integral to its branch operation, and ISB account for more than 90 percent of consolidated assets, revenues and net income. The ‘Other’ category in the accompanying table includes activities of the parent company, Neuse, Incorporated, a subsidiary that owns real property used in the banking operation and American Guaranty Insurance Corporation, a property insurance company.
The adjustments in the accompanying tables represent the elimination of the impact of certain inter-company transactions. The adjustments for interest income and interest expense neutralize the earnings and cost of inter-company borrowings. The adjustments to noninterest income and noninterest expense reflect the elimination of management fees and other service fees paid from one company to another within BancShares’ consolidated group.
The following table provides selected financial information for BancShares’ reportable business segments:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005
|
| | | ISB
| | | FCB
| | Other
| | | Total
| | Adjustments
| | | Consolidated
|
Interest income | | $ | 97,840 | | | $ | 567,521 | | $ | 11,622 | | | $ | 676,983 | | $ | (11,049 | ) | | $ | 665,934 |
Interest expense | | | 36,622 | | | | 161,895 | | | 30,683 | | | | 229,200 | | | (11,049 | ) | | | 218,151 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Net interest income | | | 61,218 | | | | 405,626 | | | (19,061 | ) | | | 447,783 | | | — | | | | 447,783 |
Provision for credit losses | | | 8,029 | | | | 25,080 | | | — | | | | 33,109 | | | — | | | | 33,109 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Net interest income after provision for credit losses | | | 53,189 | | | | 380,546 | | | (19,061 | ) | | | 414,674 | | | — | | | | 414,674 |
Noninterest income | | | 7,692 | | | | 261,681 | | | 1,547 | | | | 270,920 | | | (7,568 | ) | | | 263,352 |
Noninterest expense | | | 65,150 | | | | 439,683 | | | 2,091 | | | | 506,924 | | | (7,568 | ) | | | 499,356 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Income (loss) before income taxes | | | (4,269 | ) | | | 202,544 | | | (19,605 | ) | | | 178,670 | | | — | | | | 178,670 |
Income taxes | | | (1,390 | ) | | | 74,001 | | | (6,803 | ) | | | 65,808 | | | — | | | | 65,808 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Net income (loss) | | $ | (2,879 | ) | | $ | 128,543 | | $ | (12,802 | ) | | $ | 112,862 | | $ | — | | | $ | 112,862 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
| | | | | | |
At December 31, 2005 | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,855,981 | | | $ | 12,707,475 | | $ | 1,913,563 | | | $ | 16,477,019 | | $ | (1,837,627 | ) | | $ | 14,639,392 |
Loans and leases | | | 1,679,883 | | | | 7,963,111 | | | — | | | | 9,642,994 | | | — | | | | 9,642,994 |
Allowance for loan and lease losses | | | 19,443 | | | | 109,404 | | | — | | | | 128,847 | | | — | | | | 128,847 |
Deposits | | | 1,423,456 | | | | 10,798,361 | | | — | | | | 12,221,817 | | | (47,959 | ) | | | 12,173,858 |
65
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004
|
| | | ISB
| | | FCB
| | Other
| | | Total
| | Adjustments
| | | Consolidated
|
Interest income | | $ | 67,987 | | | $ | 452,908 | | $ | 3,112 | | | $ | 524,007 | | $ | (2,890 | ) | | $ | 521,117 |
Interest expense | | | 21,120 | | | | 93,153 | | | 22,443 | | | | 136,716 | | | (2,890 | ) | | | 133,826 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Net interest income | | | 46,867 | | | | 359,755 | | | (19,331 | ) | | | 387,291 | | | — | | | | 387,291 |
Provision for credit losses | | | 4,954 | | | | 29,519 | | | — | | | | 34,473 | | | — | | | | 34,473 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Net interest income after provision for credit losses | | | 41,913 | | | | 330,236 | | | (19,331 | ) | | | 352,818 | | | — | | | | 352,818 |
Noninterest income | | | 5,981 | | | | 247,767 | | | 4,216 | | | | 257,964 | | | (7,008 | ) | | | 250,956 |
Noninterest expense | | | 52,282 | | | | 431,698 | | | 2,607 | | | | 486,587 | | | (7,008 | ) | | | 479,579 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Income (loss) before income taxes | | | (4,388 | ) | | | 146,305 | | | (17,722 | ) | | | 124,195 | | | — | | | | 124,195 |
Income taxes | | | (1,405 | ) | | | 56,941 | | | (6,184 | ) | | | 49,352 | | | — | | | | 49,352 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Net income (loss) | | $ | (2,983 | ) | | $ | 89,364 | | $ | (11,538 | ) | | $ | 74,843 | | $ | — | | | $ | 74,843 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
| | | | | | |
At December 31, 2004 | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,500,921 | | | $ | 11,686,131 | | $ | 1,550,055 | | | $ | 14,737,107 | | $ | (1,471,396 | ) | | $ | 13,265,711 |
Loans and leases | | | 1,374,055 | | | | 7,980,332 | | | — | | | | 9,354,387 | | | — | | | | 9,354,387 |
Allowance for loan and lease losses | | | 14,713 | | | | 109,148 | | | — | | | | 123,861 | | | — | | | | 123,861 |
Deposits | | | 1,093,272 | | | | 10,306,079 | | | — | | | | 11,399,351 | | | (48,553 | ) | | | 11,350,798 |
| |
| | | 2003
|
| | | ISB
| | | FCB
| | Other
| | | Total
| | Adjustments
| | | Consolidated
|
Interest income | | $ | 58,232 | | | $ | 451,434 | | $ | 3,149 | | | $ | 512,815 | | $ | (2,338 | ) | | $ | 510,477 |
Interest expense | | | 19,103 | | | | 109,050 | | | 22,722 | | | | 150,875 | | | (2,338 | ) | | | 148,537 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Net interest income | | | 39,129 | | | | 342,384 | | | (19,573 | ) | | | 361,940 | | | — | | | | 361,940 |
Provision for credit losses | | | 2,891 | | | | 21,296 | | | — | | | | 24,187 | | | — | | | | 24,187 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Net interest income after provision for credit losses | | | 36,238 | | | | 321,088 | | | (19,573 | ) | | | 337,753 | | | — | | | | 337,753 |
Noninterest income | | | 5,546 | | | | 240,269 | | | 2,922 | | | | 248,737 | | | (4,801 | ) | | | 243,936 |
Noninterest expense | | | 44,625 | | | | 421,564 | | | 3,700 | | | | 469,889 | | | (4,801 | ) | | | 465,088 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Income (loss) before income taxes | | | (2,841 | ) | | | 139,793 | | | (20,351 | ) | | | 116,601 | | | — | | | | 116,601 |
Income taxes | | | (857 | ) | | | 49,076 | | | (6,805 | ) | | | 41,414 | | | — | | | | 41,414 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
Net income (loss) | | $ | (1,984 | ) | | $ | 90,717 | | $ | (13,546 | ) | | $ | 75,187 | | $ | — | | | $ | 75,187 |
| | |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
| | | | | | |
At December 31, 2003 | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,211,322 | | | $ | 11,287,945 | | $ | 1,452,184 | | | $ | 13,951,451 | | $ | (1,384,490 | ) | | $ | 12,566,961 |
Loans and leases | | | 1,087,136 | | | | 7,239,462 | | | — | | | | 8,326,598 | | | — | | | | 8,326,598 |
Allowance for loan and lease losses | | | 11,571 | | | | 100,733 | | | — | | | | 112,304 | | | — | | | | 112,304 |
Deposits | | | 849,649 | | | | 9,894,438 | | | — | | | | 10,744,087 | | | (32,755 | ) | | | 10,711,332 |
66
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
NOTE S—FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY)
First Citizens BancShares, Inc.’s principal assets are its investments in and receivables from its subsidiaries. Its sources of income are dividends and interest income. The Parent Company’s condensed balance sheets as of December 31, 2005 and 2004, and the related condensed statements of income and cash flows for the years ended December 31, 2005, 2004 and 2003 are as follows:
CONDENSED BALANCE SHEETS
| | | | | | |
| | | December 31
|
| | | 2005
| | 2004
|
Assets | | | | | | |
Cash | | $ | 3,698 | | $ | 18,449 |
Investment securities available for sale | | | 114,887 | | | 94,160 |
Investment in subsidiaries | | | 1,356,696 | | | 1,251,510 |
Due from subsidiaries | | | 430,827 | | | 144,290 |
Other assets | | | 61,763 | | | 60,010 |
| | |
|
| |
|
|
Total assets | | $ | 1,967,871 | | $ | 1,568,419 |
| | |
|
| |
|
|
Liabilities and Shareholders’ Equity | | | | | | |
Short-term borrowings | | $ | 520,585 | | $ | 213,387 |
Long-term obligations | | | 257,733 | | | 257,733 |
Other liabilities | | | 8,494 | | | 10,989 |
Shareholders’ equity | | | 1,181,059 | | | 1,086,310 |
| | |
|
| |
|
|
Total liabilities and shareholders’ equity | | $ | 1,967,871 | | $ | 1,568,419 |
| | |
|
| |
|
|
CONDENSED STATEMENTS OF INCOME
| | | | | | | | | | | | |
| | | Year Ended December 31
| |
| | | 2005
| | | 2004
| | | 2003
| |
Interest income | | $ | 11,446 | | | $ | 3,003 | | | $ | 2,975 | |
Interest expense | | | 31,048 | | | | 22,277 | | | | 22,643 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net interest income (expense) | | | (19,602 | ) | | | (19,274 | ) | | | (19,668 | ) |
Dividends from subsidiaries | | | 32,194 | | | | 50,230 | | | | 67,394 | |
Other income | | | (202 | ) | | | 2,077 | | | | (269 | ) |
Other operating expense | | | 1,553 | | | | 1,504 | | | | 1,458 | |
| | |
|
|
| |
|
|
| |
|
|
|
Income before income tax benefit and equity in undistributed net income of subsidiaries | | | 10,837 | | | | 31,529 | | | | 45,999 | |
Income tax benefit | | | (7,516 | ) | | | (6,584 | ) | | | (7,241 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Income before equity in undistributed net income of subsidiaries | | | 18,353 | | | | 38,113 | | | | 53,240 | |
Equity in undistributed net income of subsidiaries | | | 94,509 | | | | 36,730 | | | | 21,947 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net income | | $ | 112,862 | | | $ | 74,843 | | | $ | 75,187 | |
| | |
|
|
| |
|
|
| |
|
|
|
67
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
CONDENSED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | | Year Ended December 31
| |
| | | 2005
| | | 2004
| | | 2003
| |
OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income | | $ | 112,862 | | | $ | 74,843 | | | $ | 75,187 | |
Adjustments | | | | | | | | | | | | |
Undistributed net income of subsidiaries | | | (94,509 | ) | | | (36,730 | ) | | | (21,947 | ) |
Net amortization of premiums and discounts | | | (215 | ) | | | 99 | | | | 485 | |
Securities (gains) losses | | | — | | | | (1,852 | ) | | | (306 | ) |
Change in other assets | | | 2,420 | | | | (11,795 | ) | | | 5,677 | |
Change in other liabilities | | | (2,495 | ) | | | (14,916 | ) | | | 18,689 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided by operating activities | | | 18,063 | | | | 9,649 | | | | 77,785 | |
| | |
|
|
| |
|
|
| |
|
|
|
INVESTING ACTIVITIES | | | | | | | | | | | | |
Net change in due from subsidiaries | | | (286,537 | ) | | | 70,933 | | | | (39,234 | ) |
Purchase of investment securities held to maturity | | | — | | | | (9,936 | ) | | | (5,031 | ) |
Purchase of investment securities available for sale | | | (34,837 | ) | | | (59,755 | ) | | | (20,095 | ) |
Maturities of investment securities held to maturity | | | — | | | | 29,932 | | | | — | |
Maturities of investment securities available for sale | | | 3,517 | | | | 1,241 | | | | — | |
Proceeds from sales of investment securities available for sale | | | — | | | | 7,584 | | | | 52,351 | |
Investment in subsidiaries | | | (10,677 | ) | | | (50,000 | ) | | | (30,000 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash used by investing activities | | | (328,534 | ) | | | (10,001 | ) | | | (42,009 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
FINANCING ACTIVITIES | | | | | | | | | | | | |
Net change in short-term borrowings | | | 307,198 | | | | 22,409 | | | | (48,740 | ) |
Redemption of common stock | | | — | | | | (215 | ) | | | (3,652 | ) |
Cash dividends paid | | | (11,478 | ) | | | (11,479 | ) | | | (11,497 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided (used) by financing activities | | | 295,720 | | | | 10,715 | | | | (63,889 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net change in cash | | | (14,751 | ) | | | 10,363 | | | | (28,113 | ) |
Cash balance at beginning of year | | | 18,449 | | | | 8,086 | | | | 36,199 | |
| | |
|
|
| |
|
|
| |
|
|
|
Cash balance at end of year | | $ | 3,698 | | | $ | 18,449 | | | $ | 8,086 | |
| | |
|
|
| |
|
|
| |
|
|
|
Cash payments for | | | | | | | | | | | | |
Interest | | $ | 30,415 | | | $ | 21,644 | | | $ | 14,962 | |
Income taxes | | | 65,860 | | | | 39,973 | | | | 22,499 | |
Supplemental disclosure of noncash investing and financing activities: | | | | | | | | | | | | |
Unrealized securities gains (losses) | | | (10,808 | ) | | | (10,171 | ) | | | 3,293 | |
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 14, 2006
FIRST CITIZENS BANCSHARES, INC. (Registrant)
/S/ JAMES B. HYLER, JR.
James B. Hyler, Jr.
Vice Chairman and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities indicated on March 14, 2006.
| | | | |
Signature
| | Title
| | Date
|
| | |
/s/ LEWIS R. HOLDING* Lewis R. Holding | | Chairman and Chief Executive Officer (principal executive officer) | | March 14, 2006 |
| | |
/s/ FRANK B. HOLDING* Frank B. Holding | | Executive Vice Chairman | | March 14, 2006 |
| | |
/s/ JAMES B. HYLER, JR. James B. Hyler, Jr. | | Vice Chairman | | March 14, 2006 |
| | |
/s/ FRANK B. HOLDING, JR.* Frank B. Holding, Jr. | | President | | March 14, 2006 |
| | |
/S/ KENNETH A. BLACK Kenneth A. Black | | Vice President, Treasurer, and Chief Financial Officer (principal financial and accounting officer) | | March 14, 2006 |
| | |
/s/ JOHN M. ALEXANDER, JR. * John M. Alexander, Jr. | | Director | | March 14, 2006 |
| | |
/s/ CARMEN HOLDING AMES * Carmen Holding Ames | | Director | | March 14, 2006 |
| | |
/s/ VICTOR E. BELL, III * Victor E. Bell, III | | Director | | March 14, 2006 |
| | |
/s/ GEORGE H. BROADRICK * George H. Broadrick | | Director | | March 14, 2006 |
| | |
/s/ HUBERT M. CRAIG, III * Hubert M. Craig, III | | Director | | March 14, 2006 |
| | |
/s/ H. LEE DURHAM, JR. * H. Lee Durham, Jr. | | Director | | March 14, 2006 |
| | |
/s/ LEWIS M. FETTERMAN Lewis M. Fetterman | | Director | | March 14, 2006 |
| | |
/s/ CHARLES B.C. HOLT Charles B.C. Holt | | Director | | March 14, 2006 |
69
| | | | |
Signature
| | Title
| | Date
|
| |
| | |
/s/ FREEMAN R. JONES * Freeman R. Jones | | Director | | March 14, 2006 |
| | |
/s/ LUCIUS S. JONES * Lucius S. Jones | | Director | | March 14, 2006 |
| | |
Joseph T. Maloney, Jr. | | Director | | |
| | |
/s/ ROBERT T. NEWCOMB * Robert T. Newcomb | | Director | | March 14, 2006 |
| | |
/s/ LEWIS T. NUNNELEE, II * Lewis T. Nunnelee, II | | Director | | March 14, 2006 |
| | |
/s/ C. RONALD SCHEELER * C. Ronald Scheeler | | Director | | March 14, 2006 |
| | |
/s/ RALPH K. SHELTON * Ralph K. Shelton | | Director | | March 14, 2006 |
| | |
/s/ R. C. SOLES, JR. * R. C. Soles, Jr. | | Director | | March 14, 2006 |
| | |
/s/ DAVID L. WARD, JR * David L. Ward, Jr. | | Director | | March 14, 2006 |
| * | | Alexander G. MacFadyen, Jr. hereby signs this Annual Report on Form 10-K on March 14, 2006, on behalf of each of the indicated persons for whom he is attorney-in-fact pursuant to a Power of Attorney filed herewith. |
| | |
| |
| |
By: | | /s/ ALEXANDER G. MACFADYEN, JR.
|
| | | Alexander G. MacFadyen, Jr. As Attorney-In-Fact |
70
EXHIBIT INDEX
| | |
| 3.1 | | Certificate of Incorporation of the Registrant, as amended (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1992) |
| 3.2 | | Bylaws of the Registrant, as amended (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 2003) |
| 4.1 | | Specimen of Registrant’s Class A Common Stock certificate (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1993) |
| 4.2 | | Specimen of Registrant’s Class B Common Stock certificate (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1993) |
| 4.3 | | Amended and Restated Trust Agreement of FCB/NC Capital Trust I (incorporated by reference from Registration No. 333-59039) |
| 4.4 | | Form of Guarantee Agreement (incorporated by reference from Registration No. 333-59039) |
| 4.5 | | Junior Subordinated Indenture dated March 5, 1998 between Registrant and Bankers Trust Company, as Debenture Trustee (incorporated by reference from Registration No. 333-59039) |
| 4.6 | | Amended and Restated Trust Agreement of FCB/NC Capital Trust II (incorporated by reference from Registration No. 333-68340) |
| 4.7 | | Guarantee Agreement relating to Registrant’s guarantee of the capital securities of FCB/NC Capital Trust II (incorporated by reference from Registration No. 333-68340) |
| 4.8 | | Junior Subordinated Indenture dated October 10, 2001, between Registrant and Bankers Trust Company, as Delaware Trustee (incorporated by reference from Registration No. 333-68340) |
| 10.1 | | Amended and Restated Employee Consultation, Post-Retirement Non-Competition and Death Benefit Agreement dated October 25, 2005 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Lewis R. Holding (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005) |
| 10.2 | | Amended and Restated Employee Consultation, Post-Retirement Non-Competition and Death Benefit Agreement dated October 25, 2005 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Frank B. Holding (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005) |
| 10.3 | | Amended and Restated Employee Consultation, Post-Retirement Non-Competition and Death Benefit Agreement dated October 25, 2005 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and James B. Hyler, Jr. (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005) |
| 10.4 | | Amended and Restated Employee Consultation, Post-Retirement Non-Competition and Death Benefit Agreement dated October 25, 2005 between Registrant’s Subsidiary First-Citizens Bank & Trust Company and Frank B. Holding, Jr. (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005) |
| 10.5 | | Amended and Restated Employee Consultation, Post-Retirement Non-Competition and Death Benefit Agreement dated October 25, 2005 between Registrant’s Subsidiary IronStone Bank and James M. Parker (incorporated by reference from Registrant’s Form 10-Q for the quarter ended September 30, 2005) |
| 10.6 | | Second Death Benefit and Post-Retirement Non-Competition and Consultation Agreement dated April 28, 1997, between Registrant’s subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1997) |
| 10.7 | | Consulting Agreement dated February 17, 1988, between Registrant’s subsidiary, First-Citizens Bank & Trust Company, and George H. Broadrick (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 1987) |
| 10.13 | | Article IV Section 4.1.d of the Agreement and Plan of Reorganization and Merger by and among First Investors Savings Bank, Inc., SSB, First-Citizens Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1995, located at page II-38 of Registrant’s S-4 Registration Statement filed with the SEC on December 19, 1994 (Registration No. 33-84514) |
71
| | |
| 10.14 | | Article IV Section 4.1.e of the Agreement and Plan of Reorganization and Merger by and among State Bank and First-Citizens Bank & Trust Company and First Citizens BancShares, Inc., dated October 25, 1995, located at page I-36 of Registrant’s S-4 Registration Statement filed with the SEC on November 16, 1994 (Registration No.
33-86286) |
| 21 | | Subsidiaries of the Registrant (filed herewith) |
| 24 | | Power of Attorney (filed herewith) |
| 31.1 | | Certification of Chief Executive Officer (filed herewith) |
| 31.2 | | Certification of Chief Financial Officer (filed herewith) |
| 32 | | Certification of Chief Executive Officer and Chief Financial Officer (filed herewith) |
| 99.1 | | Proxy Statement for Registrant’s 2006 Annual Meeting (separately filed) |
| 99.2 | | Procedures for Shareholder Recommendations to Nominating Committee (incorporated by reference from Registrant’s Form 10-K for the year ended December 31, 2004) |
| 99.3 | | Reissued report of predecessor independent auditor as of and for the year ended December 31, 2003 (filed herewith) |
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO
KENNETH A. BLACK, CHIEF FINANCIAL OFFICER OF FIRST CITIZENS BANCSHARES, INC.
72
