EXHIBIT 13
REGISTRANT'S ANNUAL REPORT TO SHAREHOLDER
INTRODUCTION
Management's discussion and analysis of earnings and related financial data
are presented to assist in understanding the financial condition and results of
operations of First Citizens BancShares, Inc. ("BancShares"), for the years
1997, 1996 and 1995. BancShares is a bank holding company with three wholly
owned banking subsidiaries -- First-Citizens Bank & Trust Company (the "Bank"),
a North Carolina-chartered bank (with branches in North Carolina and Virginia),
First-Citizens Bank & Trust Company ("FCB-WV"), a West Virginia-chartered bank,
and Atlantic States Bank, a federally chartered thrift institution with offices
in Raleigh, North Carolina and the metropolitan Atlanta, Georgia area.
This discussion and related financial data should be read in conjunction
with the audited consolidated financial statements and related footnotes
presented on pages 37 through 58 of this report.
Table 1
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
1997 1996
--------------- ---------------
(thousands, except share data
and ratios)
SUMMARY OF OPERATIONS
Interest income .......................................... $ 572,276 $ 534,195
Interest expense ......................................... 268,013 248,250
------------ ------------
Net interest income ...................................... 304,263 285,945
Provision for loan losses ................................ 8,726 8,907
------------ ------------
Net interest income after provision for loan losses ...... 295,537 277,038
Noninterest income ....................................... 115,307 103,304
Noninterest expense ...................................... 300,794 278,668
------------ ------------
Income before income taxes ............................... 110,050 101,674
Income taxes ............................................. 39,492 36,207
------------ ------------
Net income ............................................... $ 70,558 $ 65,467
============ ============
Net interest income, taxable equivalent .................. $ 306,726 $ 288,251
============ ============
SELECTED AVERAGE BALANCES
Total assets ............................................. $ 8,304,412 $ 7,681,019
Investment securities .................................... 2,300,706 1,998,059
Loans .................................................... 5,086,723 4,842,266
Interest-earning assets .................................. 7,569,075 6,987,659
Deposits ................................................. 7,088,018 6,653,302
Interest-bearing liabilities ............................. 6,521,818 6,044,553
Long-term obligations .................................... 10,472 13,483
Shareholders' equity ..................................... $ 638,825 $ 576,988
Shares outstanding ....................................... 11,341,153 11,340,982
============ ============
SELECTED PERIOD-END BALANCES
Total assets ............................................. $ 8,951,109 $ 8,055,572
Investment securities .................................... 2,483,294 2,161,236
Loans .................................................... 5,445,772 4,930,508
Interest-earning assets .................................. 8,010,841 7,247,744
Deposits ................................................. 7,579,567 6,954,028
Interest-bearing liabilities ............................. 7,052,749 6,265,482
Long-term obligations .................................... 10,856 6,922
Shareholders' equity ..................................... $ 601,640 $ 615,507
Shares outstanding ....................................... 10,627,453 11,410,880
============ ============
PROFITABILITY RATIOS (AVERAGES)
Rate of return on:
Total assets ............................................ 0.85% 0.85%
Shareholders' equity .................................... 11.04 11.35
Dividend payout ratio .................................... 16.08 16.03
============ ============
LIQUIDITY AND CAPITAL RATIOS (AVERAGES)
Loans to deposits ........................................ 71.77% 72.78%
Shareholders' equity to total assets ..................... 7.69 7.51
Time certificates of $100,000 or more ....................
to total deposits ....................................... 9.62 8.99
============ ============
PER SHARE OF STOCK
Net income ............................................... $ 6.22 $ 5.77
Cash dividends ........................................... 1.000 0.925
Market price at December 31 (Class A) .................... 104.03 77.00
Book value at December 31 ................................ 56.61 53.94
Tangible book value at December 31 ....................... 47.11 45.42
============ ============
1995 1994 1993
--------------- --------------- ---------------
(thousands, except share data and ratios)
SUMMARY OF OPERATIONS
Interest income .......................................... $ 471,109 $ 376,005 $ 364,881
Interest expense ......................................... 224,664 148,126 137,934
------------ ------------ -----------
Net interest income ...................................... 246,445 227,879 226,947
Provision for loan losses ................................ 5,364 2,786 15,245
------------ ------------ -----------
Net interest income after provision for loan losses ...... 241,081 225,093 211,702
Noninterest income ....................................... 92,128 83,325 85,737
Noninterest expense ...................................... 245,880 230,582 213,213
------------ ------------ -----------
Income before income taxes ............................... 87,329 77,836 84,226
Income taxes ............................................. 30,423 26,867 28,641
------------ ------------ -----------
Net income ............................................... $ 56,906 $ 50,969 $ 55,585
============ ============ ===========
Net interest income, taxable equivalent .................. $ 248,707 $ 229,732 $ 228,445
============ ============ ===========
SELECTED AVERAGE BALANCES
Total assets ............................................. $ 6,846,959 $ 6,098,944 $ 5,576,179
Investment securities .................................... 1,611,549 1,599,565 1,522,715
Loans .................................................... 4,433,517 3,800,318 3,401,093
Interest-earning assets .................................. 6,191,422 5,476,690 5,002,144
Deposits ................................................. 5,952,090 5,335,057 4,894,319
Interest-bearing liabilities ............................. 5,410,495 4,838,749 4,445,120
Long-term obligations .................................... 26,307 52,499 29,318
Shareholders' equity ..................................... $ 487,895 $ 416,983 $ 362,733
Shares outstanding ....................................... 10,597,066 9,944,927 9,701,389
============ ============ ===========
SELECTED PERIOD-END BALANCES
Total assets ............................................. $ 7,383,950 $ 6,333,324 $ 6,101,016
Investment securities .................................... 1,983,148 1,458,969 1,814,787
Loans .................................................... 4,580,719 4,148,133 3,584,991
Interest-earning assets .................................. 6,604,312 5,613,852 5,419,778
Deposits ................................................. 6,388,082 5,517,589 5,358,187
Interest-bearing liabilities ............................. 5,844,125 4,984,455 4,871,015
Long-term obligations .................................... 22,957 34,542 60,326
Shareholders' equity ..................................... $ 520,837 $ 449,411 $ 389,050
Shares outstanding ....................................... 10,716,167 10,188,840 9,766,137
============ ============ ===========
PROFITABILITY RATIOS (AVERAGES)
Rate of return on:
Total assets ............................................ 0.83% 0.84% 1.00%
Shareholders' equity .................................... 11.66 12.22 15.32
Dividend payout ratio .................................... 15.36 14.13 10.91
============ ============ ===========
LIQUIDITY AND CAPITAL RATIOS (AVERAGES)
Loans to deposits ........................................ 74.49% 71.23% 69.49%
Shareholders' equity to total assets ..................... 7.13 6.84 6.51
Time certificates of $100,000 or more ....................
to total deposits ....................................... 8.33 6.41 6.31
============ ============ ===========
PER SHARE OF STOCK
Net income ............................................... $ 5.37 $ 5.13 $ 5.73
Cash dividends ........................................... 0.825 0.725 0.625
Market price at December 31 (Class A) .................... 55.13 43.50 46.50
Book value at December 31 ................................ 48.60 44.11 39.84
Tangible book value at December 31 ....................... 41.75 39.97 36.53
============ ============ ===========
17
SUMMARY
BancShares experienced a 7.8 percent increase in earnings during 1997,
compared to 1996. The increase was due to increased levels of net interest
income and noninterest income, which more than offset the growth in noninterest
expense during 1997. Significant to the comparison of 1997 net income to 1996
net income is the absence during 1997 of the $6.3 million after-tax impact of
the 1996 assessment of the Federal Deposit Insurance Corporation's ("FDIC") on
certain of BancShares' deposit liabilities. This assessment added $10.0 million
to noninterest expense during 1996. Without the FDIC assessment, net income
during 1997 would have decreased $1.3 million or 1.7 percent from 1996.
Consolidated net income amounted to $70.6 million during 1997, compared to
$65.5 million during 1996 and $56.9 million during 1995. Net income per share
for the year ended December 31, 1997 totaled $6.22, compared to $5.77 and $5.37
for 1996 and 1995, respectively. Return on average assets was 0.85 percent, 0.85
percent and 0.83 percent during 1997, 1996 and 1995, 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, and a discussion of these changes and trends follows. The
information presented in Table 6 is useful in making such an analysis.
BancShares' growth in recent years has resulted partially from various business
combinations. Table 2 details the significant transactions, all of which were
accounted for as purchases, with the results of operations included with
BancShares' Statements of Income since the respective acquisition dates.
Table 2
SIGNIFICANT ACQUISITIONS
Total Total
Date Institution and Location Assets Deposits
- ---------------------- ------------------------------------------ ----------- -----------
(thousands)
September 1997 First Savings Financial Corp. $ 45,431 $ 36,025
Reidsville, North Carolina
May 1997 Four Wachovia Bank branches 80,613 86,460
Western North Carolina
April 1997 Three First Union National Bank branches 42,171 45,179
Western North Carolina
February 1996 Allied Bank Capital, Inc. 248,998 208,394
Sanford, North Carolina
June 1995 Bank of White Sulphur Springs 64,589 59,174
White Sulphur Springs, West Virginia
May 1995 Nine NationsBank of Virginia branches 133,175 143,494
Southern Virginia
March 1995 State Bank 49,700 41,238
Fayetteville, North Carolina
February 1995 Pace American Bank 58,660 53,303
Lawrenceville, Virginia
February 1995 First Investors Savings Bank, Inc., SSB 44,426 40,846
Whiteville, North Carolina
18
INTEREST-EARNING ASSETS
Interest-earning assets averaged $7.57 billion during 1997, an increase of
$581.4 million or 8.3 percent over 1996 levels, compared to a $796.2 million or
12.9 percent increase in 1996 over 1995 levels. Growth among interest-earning
assets during 1997 included increases in loan and investment securities
balances.
Loans. As of December 31, 1997, gross loans outstanding were $5.45 billion,
a 10.5 percent increase over the December 31, 1996 balance of $4.93 billion. Of
the $515.3 million in loan growth during 1997, acquisitions contributed a total
of $37.8 million; the remaining loan volume resulted from internal growth. Loan
balances for the last five years are provided in Table 3.
During 1997, average loans were $5.09 billion, an increase of $244.5
million or 5.0 percent over 1996, compared to an increase of $408.7 million or
9.2 percent in 1996 when compared to 1995. Loans secured by real estate averaged
$3.14 billion during 1997, compared to $3.04 billion during 1996. Much of the
growth in real estate secured loans during 1997 was in home equity loans. These
loans experienced robust growth during 1997, as average EquityLine loans
increased $93.0 million or 23.0 percent during the year. Average residential
mortgage loans declined during 1997, the result of ongoing loan sales. Non-real
estate commercial and industrial loans experienced strong growth during 1997,
averaging $567.2 million during the current year compared to $500.3 million in
1996, an increase of $66.9 million or 13.4 percent. Commercial and industrial
growth during 1997 continued to be especially strong among small business
customers.
Table 3
LOANS
December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(thousands)
Real estate:
Construction and land development ..... $ 113,735 $ 109,806 $ 104,540 $ 100,708 $ 117,693
Mortgage:
1-4 family residential ............... 1,411,279 1,542,836 1,438,655 1,296,713 1,138,254
Commercial ........................... 1,055,529 882,067 770,246 720,407 614,018
Equity Line .......................... 603,714 411,856 397,225 349,092 293,200
Other ................................ 136,639 132,954 129,292 109,069 56,029
Commercial and industrial ............... 633,580 514,535 466,462 373,947 408,565
Consumer ................................ 1,402,093 1,251,704 1,199,400 1,119,994 889,260
Lease financing ......................... 74,589 68,694 59,899 60,598 45,398
Other ................................... 14,614 16,056 15,000 17,605 22,574
---------- ---------- ---------- ---------- ----------
Total ................................ 5,445,772 4,930,508 4,580,719 4,148,133 3,584,991
Less reserve for loan losses ............ 84,360 81,439 78,495 72,017 70,049
---------- ---------- ---------- ---------- ----------
Net loans ............................ $5,361,412 $4,849,069 $4,502,224 $4,076,116 $3,514,942
========== ========== ========== ========== ==========
- ---------
All information presented in this table relates to domestic loans as
BancShares makes no foreign loans.
19
Table 4
LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
December 31, 1997
------------------------------------------------------
Within One to Five After
One Year Years Five Years Total
------------- ------------- ------------ -------------
(thousands)
Real estate:
Construction and land development ....... $ 54,951 $ 55,172 $ 7,773 $ 117,896
Mortgage:
1-4 family residential ................ 303,647 469,221 655,755 1,428,623
Commercial ............................ 479,853 481,784 67,876 1,029,513
Equity Line ........................... 42,260 150,928 410,526 603,714
Other ................................. 65,790 66,054 9,306 141,150
Commercial and industrial ................ 307,357 285,837 40,386 633,580
Consumer ................................. 471,668 905,390 25,035 1,402,093
Lease financing .......................... 18,647 55,942 -- 74,589
Other .................................... 7,037 6,538 1,039 14,614
---------- ---------- ---------- ----------
Total ................................. $1,751,210 $2,476,866 $1,217,696 $5,445,772
========== ========== ========== ==========
Loans maturing after one year with:
Fixed interest rates .................... $1,966,545 $ 629,044 $2,595,589
Floating or adjustable rates ............ 510,321 588,652 1,098,973
---------- ---------- ----------
Total ................................. $2,476,866 $1,217,696 $3,694,562
========== ========== ==========
Consumer loans averaged $1.30 billion during 1997 compared to $1.22 billion
during 1996. Demand for retail installment financing was mixed during 1997.
Indirect automobile lending experienced strong growth, averaging $782.8 million
during 1997, an increase of 10.0 percent. Direct installment financing
experienced some run-off during 1997, as customer preference for home equity
loans becomes stronger. During 1997, credit card loans averaged $155.9 million,
compared to $141.8 million during 1996, an increase of 9.9 percent. During 1998,
management anticipates continued growth among small business loans. Among retail
products, management anticipates continued expansion of EquityLine and indirect
installment lending.
To minimize the potential adverse impact of interest rate fluctuations,
management continuously monitors the maturity and repricing distribution of the
loan portfolio. BancShares also offers variable rate loan products and fixed
rate callable loans to ease the interest rate risk. Table 4 details the maturity
and repricing distribution as of December 31, 1997. Of the gross loans
outstanding on December 31, 1997, 32.2 percent have scheduled maturities within
one year, 45.5 percent have scheduled maturities between one and five years,
while the remaining 22.3 percent have scheduled maturities extending beyond five
years.
Investment Securities. At December 31, 1997, and 1996, the investment
portfolio totaled $2.48 billion and $2.16 billion, respectively. In each period,
U.S. Treasury securities represented substantially all of the portfolio.
Investment securities averaged $2.30 billion during 1997, $2.00 billion during
1996 and $1.61 billion during 1995. The $302.6 million or 15.1 percent increase
in the average investment security portfolio during 1997 was the result of
enhanced liquidity resulting from sustained deposit growth. The weighted-average
maturity of the investment portfolio was 14 months at December 31, 1997,
compared to 17 months at December 31, 1996. Management continues to maintain a
portfolio of securities with short maturities, consistent with BancShares' focus
on liquidity. At December 31, 1997, the fair value of the Bank's investment
portfolio was $5.4 million above book value. The net unrealized loss existing as
of December 31, 1996, was $800,000. The investment portfolio's fair value
premium at December 31, 1997 resulted from the market rate reductions during
late 1997, which caused current fair values to improve. Table 5 presents
detailed information relating to the investment portfolio.
20
Table 5
INVESTMENT SECURITIES
December 31,
------------------------------------------------------
1997
------------------------------------------------------
Average Taxable
Fair Maturity Equivalent
Cost Value (Yrs./Mos.) Yield
------------- ------------- ------------- ------------
(thousands)
Securities held to maturity:
U.S. Government:
Within one year ........... $1,055,289 $1,055,725 0/6 5.80%
One to five years ......... 1,388,079 1,392,567 1/8 5.98
Five to ten years ......... 2,747 2,792 5/10 5.42
Over ten years ............ 4,519 4,629 19/10 7.47
---------- ---------- ----- ----
Total ................... 2,450,634 2,455,713 1/2 5.90
---------- ---------- ----- ----
State, county and
municipal:
Within one year ........... 1,549 1,761 0/8 6.40
One to five years ......... 3,197 3,298 3/4 7.16
Five to ten years ......... 175 175 19/8 9.14
---------- ---------- ----- ----
Total ................... 4,921 5,234 3/1 6.99
---------- ---------- ----- ----
Other:
Within one year ........... 1,102 1,099 0/4 7.30
One to five years ......... 55 55 1/2 5.47
Five to ten years ......... 10 10 5/1 5.63
---------- ---------- ----- ----
Total ................... 1,167 1,164 1/0 4.91
---------- ---------- ----- ----
Marketable equity
securities ................. 10,817 26,572 -- --
---------- ---------- ----- ----
Total investment
securities .................. $2,467,539 $2,488,683 1/2 5.90%
========== ========== ===== ====
December 31,
-------------------------------------------------------
1996 1995
--------------------------- ---------------------------
Fair Fair
Cost Value Cost Value
------------- ------------- ------------- -------------
(thousands)
Securities held to maturity:
U.S. Government:
Within one year ........... $ 778,908 $ 779,668 $ 927,931 $ 930,120
One to five years ......... 1,340,399 1,338,453 1,034,722 1,040,954
Five to ten years ......... 3,312 3,301 2,305 2,258
Over ten years ............ 7,418 7,501 7,171 7,198
---------- ---------- ---------- ----------
Total ................... 2,130,037 2,128,923 1,972,129 1,980,530
---------- ---------- ---------- ----------
State, county and
municipal:
Within one year ........... 1,128 1,135 1,324 1,328
One to five years ......... 3,717 3,997 4,287 4,355
Five to ten years ......... 1,456 1,493 2,422 2,518
---------- ---------- ---------- ----------
Total ................... 6,301 6,625 8,033 8,201
---------- ---------- ---------- ----------
Other:
Within one year ........... 1,300 1,299 506 506
One to five years ......... 1,158 1,149 2,425 2,424
Five to ten years ......... 35 35 55 55
---------- ---------- ---------- ----------
Total ................... 2,493 2,483 2,986 2,985
---------- ---------- ---------- ----------
Marketable equity
securities ................. 11,238 22,405 -- --
---------- ---------- ---------- ----------
Total investment
securities .................. $2,150,069 $2,160,436 $1,938,148 $1,991,716
========== ========== ========== ==========
- ---------
Yields are based on amortized cost; yields related to securities that are exempt
from federal and/or state income taxes are stated on a taxable-equivalent basis
assuming statutory rates of 35% for federal taxes for all periods and 7.50%,
7.75% and 7.75% for state income taxes for 1997, 1996 and 1995, respectively.
Investment securities available for sale includes marketable equity
securities that are recorded at their fair value, with the unrealized gain
included as a component of shareholders' equity.
Income on Interest-Earning Assets. Table 6 analyzes the interest-earning
assets and interest-bearing liabilities for the five years ending December 31,
1997. Table 9 identifies the causes for changes in interest income and interest
expense for 1997 and 1996. Interest income amounted to $572.3 million during
1997, a $38.1 million increase from 1996 levels, compared to a $63.1 million
increase from 1995 to 1996. Interest income growth during 1997 resulted from a
higher volume of earning assets, as the blended yield on all earning assets
declined during 1997. During 1996, volume growth and higher yields both
contributed to the increase in interest income over 1995.
21
Table 6
AVERAGE BALANCE SHEETS
1997 1996
----------------------------------- ------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------- ---------- ---------- ------------- ----------- ----------
(thousands, taxable equivalent)
ASSETS
Loans:
Secured by real estate ........................... $3,136,005 $257,764 8.22% $3,037,689 $250,356 8.24%
Commercial and industrial ........................ 567,182 50,501 8.90 500,313 44,911 8.98
Consumer ......................................... 1,295,805 115,350 8.90 1,221,063 110,838 9.08
Lease financing .................................. 72,585 6,256 8.62 66,557 5,398 8.11
Other ............................................ 15,146 1,062 7.01 16,644 1,329 7.98
---------- -------- ---- ---------- -------- ----
Total loans .................................... 5,086,723 430,933 8.47 4,842,266 412,832 8.53
Investment securities:
U. S. Government ................................. 2,267,652 133,007 5.87 1,988,518 114,831 5.77
State, county and municipal ...................... 5,560 421 7.57 6,607 507 7.67
Other ............................................ 27,494 481 1.75 2,934 172 5.86
---------- -------- ---- ---------- -------- ----
Total investment securities .................... 2,300,706 133,909 5.82 1,998,059 115,510 5.78
Federal funds sold ................................ 181,646 9,897 5.45 147,334 8,159 5.54
---------- -------- ---- ---------- -------- ----
Total interest-earning assets .................. 7,569,075 $574,739 7.59% 6,987,659 $536,501 7.68%
Cash and due from banks ........................... 345,578 324,353
Premises and equipment ............................ 251,163 218,434
Other assets ...................................... 220,828 231,140
Reserve for loan losses ........................... (82,232) (80,567)
---------- ----------
Total assets ................................... $8,304,412 $7,681,019
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Checking With Interest ........................... $ 928,122 $ 9,909 1.07% $ 878,878 $ 10,791 1.23%
Savings .......................................... 704,531 14,121 2.00 719,962 15,059 2.09
Money market accounts ............................ 919,049 34,062 3.71 825,139 29,217 3.54
Time deposits .................................... 3,489,614 185,657 5.32 3,258,713 175,838 5.40
---------- -------- ---- ---------- -------- ----
Total interest-bearing deposits ................ 6,041,316 243,749 4.03 5,682,692 230,905 4.06
Short-term borrowings ............................. 470,030 23,420 4.98 348,378 16,388 4.70
Long-term obligations ............................. 10,472 844 8.06 13,483 957 7.10
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities ............. 6,521,818 $268,013 4.11% 6,044,553 $248,250 4.11%
Demand deposits ................................... 1,046,703 970,610
Other liabilities ................................. 97,066 88,868
Shareholders' equity .............................. 638,825 576,988
---------- ----------
Total liabilities and shareholders' equity ..... $8,304,412 $7,681,019
========== ==========
Interest rate spread .............................. 3.48% 3.57%
==== ====
Net interest income and net yield
on interest-earning assets ....................... $306,726 4.05% $288,251 4.13%
======== ==== ======== ====
- ---------
Average loan balances include nonaccrual loans. BancShares earns tax-exempt
interest on certain loans and investment securities due to the borrower or
issuer being either a governmental agency or a quasi-governmental agency. Yields
related to loans and securities exempt from both federal and state income taxes,
federal income taxes only, or state income taxes only, are stated on a
taxable-equivalent basis assuming a statutory federal income tax rate of 35% for
all periods, and state income tax rates of 7.5%, 7.75%, and 7.75% for 1997, 1996
and 1995, respectively. The taxable equivalent adjustment was $2,463, $2,306,
and $2,262 for the years 1997, 1996 and 1995, respectively.
Total interest-earning assets yielded 7.59 percent during 1997, a nine
basis point reduction from the 7.68 percent reported in 1996. The average
taxable-equivalent yield on the loan portfolio fell from 8.53 percent in 1996 to
8.47 percent in 1997. The lower loan yield during 1997 reflects general market
conditions and the competitive loan pricing that exists in BancShares' market
areas. Loan interest income increased $18.3 million or 4.5 percent from 1996,
the result of loan growth that more than offset the impact of the lower loan
yields. This followed an increase of 7.9 percent in loan interest income in 1996
from 1995.
22
Table 6
AVERAGE BALANCE SHEETS (continued)
1995 1994 1993
- ---------------------------------------- --------------------------------------- ----------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- -------------- ---------- ---------- ------------- ---------- ---------- ------------- ----------- ----------
(thousands, taxable equivalent)
$ 2,752,463 $233,055 8.47% $2,265,054 $177,494 7.84% $2,173,262 $170,150 7.83%
437,970 41,099 9.38 440,566 34,165 7.75 381,722 27,596 7.23
1,167,923 102,666 8.79 1,012,359 85,523 8.45 789,374 71,112 9.01
58,332 4,499 7.71 51,160 3,861 7.55 40,576 3,433 8.46
16,829 1,402 8.33 31,179 1,741 5.58 16,159 985 6.10
----------- -------- ---- ---------- -------- ---- ---------- -------- ----
4,433,517 382,721 8.63 3,800,318 302,784 7.97 3,401,093 273,276 8.03
1,600,713 81,219 5.07 1,597,051 71,573 4.48 1,521,949 90,655 5.96
8,016 622 7.76 2,192 176 8.03 451 43 9.53
2,820 184 6.52 322 28 8.70 315 20 6.35
----------- -------- ---- ---------- -------- ---- ---------- -------- ----
1,611,549 82,025 5.09 1,599,565 71,777 4.49 1,522,715 90,718 5.96
146,356 8,625 5.89 76,807 3,297 4.29 78,336 2,385 3.04
----------- -------- ---- ---------- -------- ---- ---------- -------- ----
6,191,422 $473,371 7.65% 5,476,690 $377,858 6.90% 5,002,144 $366,379 7.32%
349,998 354,875 320,688
200,674 189,421 169,062
180,675 148,932 147,422
(75,810) (70,974) (63,117)
----------- ---------- ----------
$ 6,846,959 $6,098,944 $5,576,179
=========== ========== ==========
$ 816,391 $ 13,555 1.66% $ 788,673 $ 13,495 1.71% $ 704,614 $ 13,271 1.88%
693,187 15,728 2.27 687,322 15,390 2.24 571,559 14,413 2.52
742,537 25,167 3.39 788,063 19,280 2.45 797,260 19,017 2.39
2,824,074 152,784 5.41 2,279,639 89,127 3.91 2,116,104 83,653 3.95
----------- -------- ---- ---------- -------- ---- ---------- -------- ----
5,076,189 207,234 4.08 4,543,697 137,292 3.02 4,189,537 130,354 3.11
307,999 15,773 5.12 242,553 8,314 3.43 226,265 6,118 2.70
26,307 1,657 6.30 52,499 2,520 4.80 29,318 1,462 4.99
----------- -------- ---- ---------- -------- ---- ---------- -------- ----
5,410,495 $224,664 4.15% 4,838,749 $148,126 3.06% 4,445,120 $137,934 3.10%
875,901 791,360 704,782
72,668 51,852 63,544
487,895 416,983 362,733
----------- ---------- ----------
$ 6,846,959 $6,098,944 $5,576,179
=========== ========== ==========
3.50% 3.84% 4.22%
==== ==== ====
$248,707 4.02% $229,732 4.19% $228,445 4.57%
======== ==== ======== ==== ======== ====
Interest income earned on the investment portfolio amounted to $133.4
million, $115.3 million and $81.8 million during the years ended December 31,
1997, 1996 and 1995, respectively. The average taxable-equivalent yield on the
portfolio for these years was 5.82 percent, 5.78 percent and 5.09 percent,
respectively. The $18.0 million increase in investment interest income during
1997 reflected the benefit of the portfolio growth as well as a four basis point
yield improvement. The $33.5 million increase in investment interest income from
1995 to 1996 was the result of growth in the investment securities portfolio as
well as more favorable yields on the portfolio during 1996.
23
INTEREST-BEARING LIABILITIES
At December 31, 1997, and 1996 interest-bearing liabilities totaled $7.05
billion and $6.27 billion, respectively. Interest-bearing liabilities averaged
$6.52 billion during 1997, an increase of $477.3 million or 7.9 percent over
1996 levels, with most of the growth occurring in interest-bearing deposits.
During 1996, interest-bearing liabilities averaged $6.04 billion, an increase of
11.7 percent over 1995.
Deposits. At December 31, 1997, deposits totaled $7.58 billion, an increase
of $625.5 million or 9.0 percent from December 31, 1996. Acquisitions
contributed to $167.5 million of the increase, with the remaining growth coming
from the existing branch network. Total deposits averaged $7.09 billion in 1997,
an increase of $434.7 million or 6.5 percent over 1996. Average interest-bearing
deposits were $6.04 billion during 1997, an increase of $358.6 million or 6.3
percent. Time deposits averaged $3.49 billion during 1997, an increase of $230.9
million or 7.1 percent over 1996. Average time deposits increased $434.6 million
or 15.4 percent from 1995 to 1996. The average rate on time deposits decreased
from 5.41 percent in 1995 to 5.40 percent in 1996 and 5.32 percent in 1997, the
result of market rate changes.
BancShares has historically avoided excessive reliance on time deposits
with balances exceeding $100,000. During 1997, these funds averaged 9.62 percent
of total average deposits, compared to 8.99 percent in 1996. Table 7 provides a
maturity distribution for these deposits.
Table 7
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 1997
------------------
(thousands)
Less than three months ...... $331,689
Three to six months ......... 191,298
Six to 12 months ............ 157,962
More than 12 months ......... 70,102
--------
Total ...................... $751,051
========
Borrowed Funds. BancShares has access to various short-term borrowings,
including the purchase of federal funds, overnight repurchase obligations and
credit lines with various correspondent banks. At December 31, 1997, short-term
borrowings totaled $593.8 million, compared to $392 million one year earlier.
For the year ended December 31, 1997, short-term borrowings averaged $470.0
million, compared to $348.4 million during 1996 and $308 million during 1995.
The increase from 1996 to 1997 resulted from higher levels of short-term
borrowings by the holding company and by growth in an overnight borrowing
arrangement between BancShares and commercial depositors. The increase from 1995
to 1996 resulted from growth in the overnight borrowing between BancShares and
commercial customers. Table 8 provides additional information regarding
short-term borrowed funds.
24
Table 8
SHORT-TERM BORROWINGS
1997 1996 1995
---------------------- ---------------------- ----------------------
Amount Rate Amount Rate Amount Rate
----------- ---------- ----------- ---------- ----------- ----------
(thousands)
Master notes
At December 31 ....................... $315,529 4.40% $295,428 4.23% $257,178 4.74%
Average during year .................. 301,558 4.63 266,476 4.46 203,114 4.96
Maximum month-end balance during year 332,055 -- 316,628 -- 257,178 --
Federal funds purchased
At December 31 ....................... 45,380 5.72 45,075 6.27 64,085 5.44
Average during year .................. 28,752 5.30 32,948 6.24 49,226 5.83
Maximum month-end balance during year 45,420 -- 57,740 -- 72,165 --
Repurchase agreements
At December 31 ....................... 54,796 4.15 21,816 3.98 25,022 4.46
Average during year .................. 34,848 4.32 21,633 4.30 23,784 4.86
Maximum month-end balance during year 56,942 -- 22,497 -- 25,337 --
U.S. Treasury tax and loan accounts
At December 31 ....................... 19,989 4.92 20,356 4.38 17,581 5.49
Average during year .................. 12,374 7.56 15,318 5.09 17,070 5.71
Maximum month-end balance during year 54,583 -- 27,248 -- 22,410 --
Other
At December 31 ....................... 158,130 5.95 9,331 6.02 12,665 4.50
Average during year .................. 92,498 5.93 12,003 6.14 14,805 4.69
Maximum month-end balance during year 158,764 -- 19,901 -- 16,666 --
At December 31, 1997 and 1996, long-term obligations totaled $10.9 million
and $6.9 million, respectively. During 1997, long-term obligations averaged
$10.5 million, compared to $13.5 million during 1996 and $26.3 million during
1995. The reduction from 1995 to 1996 and from 1996 to 1997 results from the
reclassification of long-term obligations to short-term borrowings once the
scheduled maturity is within twelve months. The larger balances in prior years
primarily related to liabilities assumed from acquired institutions.
Expense of Interest-Bearing Liabilities. Interest expense amounted to
$268.0 million in 1997, a $19.8 million or 8.0 percent increase from 1996. This
followed a 10.5 percent increase in interest expense during 1996 compared to
1995. The increased interest expense during 1997 and 1996 was the result of
growth in interest-bearing liabilities as interest rates declined during both
periods.
The aggregate rate on interest-bearing deposits was 4.03 percent during
1997, compared to 4.06 percent during 1996 and 4.08 percent during 1995. Despite
these rate reductions, interest expense on total interest-bearing deposits
amounted to $243.7 million during 1997, an increase from the $230.9 million
recorded during 1996 and $207.2 million recorded during 1995. The growth in
interest expense in each period resulted from deposit growth.
Interest expense on short-term borrowings amounted to $23.4 million in
1997, an increase of $7.0 million or 42.9 percent from 1996. Interest expense
related to short-term borrowings totaled $16.4 million and $15.8 million,
respectively, in 1996 and 1995. The increase was attributable to the growth in
short-term borrowings and higher interest rates during 1997.
Interest expense associated with long-term obligations decreased during
1997 to $844,000 from $957,000 recorded during 1996. The decrease results from a
reduction in average long-term obligations.
25
Table 9
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
1997 1996
------------------------------------- ---------------------------------------
Change from previous Change from previous
year due to: year due to:
------------------------------------- ---------------------------------------
Yield/ Total Yield/ Total
Volume Rate Change Volume Rate Change
----------- ------------- ----------- ----------- -------------- ------------
(thousands)
ASSETS:
Loans:
Secured by real estate .................. $ 8,058 $ (650) $ 7,408 $23,895 $(6,594) $ 17,301
Commercial and industrial ............... 5,998 (408) 5,590 5,706 (1,894) 3,812
Consumer ................................ 6,748 (2,236) 4,512 4,484 3,688 8,172
Lease financing ......................... 504 354 858 650 249 899
Other ................................... (113) (154) (267) (15) (58) (73)
------- ------- ------- ------- ------- --------
Total loans ............................ 21,195 (3,094) 18,101 34,720 (4,609) 30,111
Investment securities:
U.S. Government ......................... 16,147 2,029 18,176 21,034 12,578 33,612
State, county and municipal ............. (80) (6) (86) (109) (6) (115)
Other ................................... 934 (625) 309 7 (19) (12)
------- --------- ------- ------- --------- --------
Total investment securities ............ 17,001 1,398 18,399 20,932 12,553 33,485
Federal funds sold ........................ 1,886 (148) 1,738 52 (518) (466)
------- --------- ------- ------- --------- --------
Total interest-earning assets .......... $40,082 $(1,844) $38,238 $55,704 $ 7,426 $ 63,130
======= ========= ======= ======= ========= ========
LIABILITIES:
Deposits:
Checking With Interest .................. $ 565 $(1,447) $ (882) $ 892 $(3,656) $ (2,764)
Savings ................................. (306) (632) (938) 593 (1,262) (669)
Money market accounts ................... 3,383 1,462 4,845 2,868 1,182 4,050
Time .................................... 12,447 (2,628) 9,819 23,425 (371) 23,054
------- --------- ------- ------- --------- --------
Total interest-bearing deposits ........ 16,089 (3,245) 12,844 27,778 (4,107) 23,671
Short-term borrowings ..................... 5,887 1,145 7,032 1,988 (1,373) 615
Long-term obligations ..................... (228) 115 (113) (859) 159 (700)
------- --------- ------- ------- --------- --------
Total interest-bearing liabilities ..... $21,748 $(1,985) $19,763 $28,907 $(5,321) $ 23,586
======= ========= ======= ======= ========= ========
Change in net interest income .......... $18,334 $ 141 $18,475 $26,797 $12,747 $ 39,544
======= ========= ======= ======= ========= ========
- ---------
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. Table 6 provides detailed information on average balances,
income/expense and yield/rate by category. The rate/volume variance is allocated
equally between the changes in volume and rate.
NET INTEREST INCOME
Taxable-equivalent net interest income totaled $306.7 million during 1997,
an increase of 6.4 percent over 1996. This followed an increase of 15.9 percent
during 1996. Table 9 presents the annual changes in net interest income by
components due to changes in volume, yields and rates. This table is presented
on a taxable-equivalent basis to adjust for the tax-exempt status of income
earned on certain loans, leases and municipal securities.
26
The interest rate spread was 3.48 percent during 1997 compared to 3.57
percent during 1996 and 3.50 percent achieved in 1995. The net yield on
interest-earning assets was 4.05 percent in 1997, 4.13 percent during 1996, and
4.02 percent during 1995.
Rate Sensitivity. A principal objective of BancShares' asset/liability
function is to manage interest rate risk or the exposure to changes in interest
rate. Management maintains portfolios of interest-earning assets and
interest-bearing liabilities with maturities or repricing opportunities that
will protect against wide interest rate fluctuations, thereby limiting, to the
extent possible, the ultimate interest rate exposure. Table 10 provides
BancShares' interest-sensitivity position as of December 31, 1997, which
reflected a one year interest-sensitivity gap of $2.32 billion. As a result of
this one year interest-sensitivity gap, increases in interest rates could have
an unfavorable impact on net interest income.
Table 10
INTEREST-SENSITIVITY ANALYSIS
December 31, 1997
---------------------------------------------
1-30 31-90 91-180
Days Days Days
Sensitive Sensitive Sensitive
---------------- -------------- -------------
(thousands)
ASSETS:
Loans ........................ $ 1,488,015 $ 152,164 $ 234,318
Investment securities ........ 104,248 327,339 198,314
Federal funds sold ........... 81,775 -- --
------------ ---------- ----------
Total interest-
earning assets ........... $ 1,674,038 $ 479,503 $ 432,632
============ ========== ==========
LIABILITIES:
Checking With Interest ....... $ 1,009,577 -- --
Savings and money
market accounts ............. 1,034,527 -- --
Time deposits ................ 577,829 $ 822,601 $1,009,970
Short-term borrowings ........ 451,283 $ 564 140,564
Long-term obligations ........ -- -- --
------------ ---------- ----------
Total interest-
bearing liabilities ...... $ 3,073,216 $ 823,165 $1,150,534
============ ========== ==========
Interest-sensitivity gap ..... $ (1,399,178) $ (343,662) $ (717,902)
============ ========== ==========
December 31, 1997
---------------------------------------------------------
181-365 Total
Days One Year Total
Sensitive Sensitive Nonsensitive Total
----------- ---------------- -------------- -------------
(thousands)
ASSETS:
Loans ........................ $507,834 $ 2,382,331 $3,063,441 $5,445,772
Investment securities ........ 429,042 1,058,943 1,424,351 2,483,294
Federal funds sold ........... -- 81,775 -- 81,775
-------- ------------ ---------- ----------
Total interest-
earning assets ........... $936,876 $ 3,523,049 $4,487,792 $8,010,841
======== ============ ========== ==========
LIABILITIES:
Checking With Interest ....... -- $ 1,009,577 -- $1,009,577
Savings and money
market accounts ............. -- 1,034,527 $ 679,165 1,713,692
Time deposits ................ $791,131 3,201,531 523,269 3,724,800
Short-term borrowings ........ $ 1,413 593,824 -- 593,824
Long-term obligations ........ -- -- 10,856 10,856
-------- ------------ ---------- ----------
Total interest-
bearing liabilities ...... $792,544 $ 5,839,459 $1,213,290 $7,052,749
======== ============ ========== ==========
Interest-sensitivity gap ..... $144,332 $ (2,316,410) $3,274,502 $ 958,092
======== ============ ========== ==========
- ---------
Assets and liabilities with maturities of one year or less and those that may be
adjusted within this period are considered interest-sensitive. The
interest-sensitivity position has meaning only as of the date for which it was
prepared.
In addition to other asset/liability management strategies, BancShares
generally underwrites long-term fixed-rate residential mortgage loans to
secondary market standards and sells such loans as they are originated. As of
December 31, 1997, BancShares had $127.6 million in residential mortgage loans
available for sale that were reported at the lower of aggregate cost or market.
Additionally, BancShares attempts to reduce exposure resulting from changes in
market rates by entering into forward commitments to sell portions of its
current production of residential mortgage loans.
Table 11 provides information regarding the market risk profile of
BancShares at December 31, 1997. Market risk is the potential economic loss
resulting from changes in market prices and interest rates. This risk can either
result in diminished current fair values or reduced net interest income in
future periods.
ASSET QUALITY
Nonperforming Assets. Nonperforming asset balances for the past five years
are presented in Table 11. BancShares' nonperforming assets at December 31, 1997
included nonaccrual loans totaling $12.7 million and $1.5 million in foreclosed
property. Nonperforming assets as of December 31, 1997 represent 0.26 percent of
loans outstanding. Total nonperforming assets totaled $14.0 million and $15.4
million, respectively, as of December 31, 1996, and 1995. Of the $12.7 million
in nonaccrual loans at December 31, 1997, $6.9 million was classified as
impaired. At December 31, 1996, BancShares reported $12.8 million in nonaccrual
loans, of which $9.9 million were impaired.
27
Table 11
MARKET RISK DATA
Maturing in Years ended December 31,
-------------------------------------------
1998 1999 2000
--------------- ------------- -------------
(thousands)
ASSETS:
Loans:
Fixed rate ............... $ 1,115,085 $ 701,195 $ 525,991
Average rate (%) ......... 8.01% 8.09% 8.07%
Variable rate ............ 636,125 181,961 136,495
Average rate (%) ......... 8.51% 8.32% 8.15%
Investment securities:
Fixed rate ............... 1,057,940 1,228,894 159,142
Average rate (%) ......... 5.80% 5.96% 6.04%
LIABILITIES:
Savings and interest-
bearing checking
Fixed rate ............... 2,723,270
Average rate (%) ......... 2.03%
Certificates of deposit:
Fixed rate ............... 3,177,303 165,155 181,524
Average rate (%) ......... 5.29% 5.43% 5.70%
Variable rate ............ 36,305 14,814
Average rate (%) ......... 4.95% 4.95%
Long-term obligations:
Fixed rate ............... 190 341 392
Average rate (%) ......... 8.00% 7.60% 7.78%
Variable rate ............ -- 2,255 2,255
Average rate (%) ......... -- 6.49% 6.49%
Maturing in Years ended December 31,
----------------------------------------------------------------------
2001 2002 Thereafter Total Fair value
------------- ------------- ------------ --------------- -------------
(thousands)
ASSETS:
Loans:
Fixed rate ............... $ 417,921 $ 321,439 $ 629,044 $ 3,710,674 $3,593,779
Average rate (%) ......... 8.06% 8.19% 8.96% 8.22%
Variable rate ............ 108,451 83,414 588,652 1,735,098 1,735,098
Average rate (%) ......... 8.02% 7.88% 7.40% 8.02%
Investment securities:
Fixed rate ............... 28,333 1,538 7,447 2,483,294 2,488,683
Average rate (%) ......... 5.97% 5.57% 5.24% 5.90%
LIABILITIES:
Savings and interest-
bearing checking
Fixed rate ............... 2,723,270 2,723,270
Average rate (%) ......... 2.03%
Certificates of deposit:
Fixed rate ............... 85,685 63,896 317 3,673,880 3,674,291
Average rate (%) ......... 5.78% 5.80% 5.85% 5.33%
Variable rate ............ 50,919 50,919
Average rate (%) ......... 4.95%
Long-term obligations:
Fixed rate ............... 1,573 259 3,027 5,782 6,417
Average rate (%) ......... 7.36% 8.00% 7.58% 7.57%
Variable rate ............ 564 -- -- 5,074 5,074
Average rate (%) ......... 6.49% 6.49%
Table 12
RISK ELEMENTS
December 31
-------------------------------
1997 1996
--------------- ---------------
(thousands, except ratios)
Nonaccrual loans .................................... $ 12,681 $ 12,810
Restructured loans .................................. -- --
Other real estate ................................... 1,462 1,160
----------- -----------
Total nonperforming assets ........................ $ 14,143 $ 13,970
=========== ===========
Accruing loans 90 days or more past due ............. $ 3,953 $ 4,983
Loans at December 31 ................................ $ 5,445,772 $ 4,930,508
Ratio of nonperforming assets to total loans plus
other real estate ................................. 0.26% 0.28%
----------- -----------
Interest income that would have been earned on
nonperforming loans had they been performing ....... $ 1,156 $ 1,162
Interest income earned on nonperforming loans ....... 349 259
=========== ===========
December 31
-----------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
(thousands, except ratios)
Nonaccrual loans .................................... $ 13,208 $ 21,069 $ 33,726
Restructured loans .................................. -- -- 571
Other real estate ................................... 2,154 5,926 15,879
----------- ----------- -----------
Total nonperforming assets ........................ $ 15,362 $ 26,995 $ 50,176
=========== =========== ===========
Accruing loans 90 days or more past due ............. $ 4,230 $ 5,326 $ 9,202
Loans at December 31 ................................ $ 4,580,719 $ 4,148,133 $ 3,584,991
Ratio of nonperforming assets to total loans plus
other real estate ................................. 0.34% 0.65% 1.39%
----------- ----------- -----------
Interest income that would have been earned on
nonperforming loans had they been performing ....... $ 1,556 $ 1,430 $ 2,354
Interest income earned on nonperforming loans ....... 595 693 1,083
=========== =========== ===========
- ---------
There are no loan concentrations to any multiple number of borrowers engaged in
similar activities or industries in excess of 10 percent of total loans at
December 31, 1997. There were no foreign loans outstanding in any period.
Accrual of interest on loans is discontinued when management deems that
collection of additional interest is doubtful. Loans are returned to an accrual
status when both principal and interest are current, and the loan is determined
to be performing in accordance with the applicable loan terms.
Management continually monitors the loan portfolio to ensure that all loans
having or potentially having credit weaknesses have been classified as
nonperforming. Should economic conditions deteriorate, the inability of
distressed customers to service their existing debt could cause higher levels of
nonperforming loans.
Reserve for Loan Losses. Management evaluates the risk characteristics of
the loan portfolio under current and projected economic conditions and considers
such factors as the financial condition of the borrower, fair market value of
collateral and other items that, in management's opinion, deserve current
recognition in estimating possible credit losses. Further, management strives to
maintain the reserve at a level sufficient to absorb both potential losses on
identified nonperforming assets as well as general losses at historical and
projected levels.
28
At December 31, 1997, BancShares' reserve for loan losses was $84.4 million
or 1.55 percent of loans outstanding. This compares to $81.4 million or 1.65
percent at December 31, 1996, and $78.5 million or 1.71 percent at December 31,
1995. The reduction in the reserve ratio over the two year period reflects the
reduced level of nonperforming loans.
Table 13
SUMMARY OF LOAN LOSS EXPERIENCE
1997 1996 1995 1994 1993
---------------- -------------- -------------- -------------- ----------------
(thousands, except ratios)
Balance at beginning of year ................. $ 81,439 $ 78,495 $ 72,017 $ 70,049 $ 58,380
Reserve of acquired institutions ............. 481 1,387 3,231 1,009 8,269
Provision for loan losses .................... 8,726 8,907 5,364 2,786 15,245
Charge-offs:
Real estate:
Construction and land development ......... (7) (40) (118) (334) (786)
Mortgage:
1-4 family residential ................... (1,350) (1,604) (994) (1,048) (1,349)
Commercial ............................... (245) (248) (255) (1,502) (2,013)
Equity Line .............................. (90) (58) (47) (192) (250)
Other .................................... -- (52) (34) -- (3)
Commercial and industrial .................. (1,061) (1,076) (826) (1,302) (7,331)
Consumer ................................... (11,540) (8,515) (4,988) (4,085) (3,860)
Lease financing ............................ (38) (60) -- (17) (51)
----------- ---------- ---------- ---------- -----------
Total charge-offs ......................... (14,331) (11,653) (7,262) (8,480) (15,643)
----------- ---------- ---------- ---------- -----------
Recoveries:
Real estate:
Construction and land development ......... 1,723 307 440 920 230
Mortgage:
1-4 family residential ................... 2,505 1,534 1,160 834 286
Commercial ............................... 1,502 530 1,476 2,765 856
Equity Line .............................. 3 19 28 28 85
Other .................................... -- -- -- -- 3
Commercial and industrial .................. 698 493 761 689 1,240
Consumer ................................... 1,614 1,420 1,233 1,396 1,085
Lease financing ............................ -- -- 47 21 13
----------- ---------- ---------- ---------- -----------
Total recoveries .......................... 8,045 4,303 5,145 6,653 3,798
----------- ---------- ---------- ---------- -----------
Net charge-offs ........................... (6,286) (7,350) (2,117) (1,827) (11,845)
----------- ---------- ---------- ---------- -----------
Balance at end of year ....................... $ 84,360 $ 81,439 $ 78,495 $ 72,017 $ 70,049
=========== ========== ========== ========== ===========
HISTORICAL STATISTICS
Balances
Average total loans ........................ $5,086,723 $4,842,266 $4,433,517 $3,800,318 $3,401,093
Total loans at year-end .................... 5,445,772 4,930,508 4,580,719 4,148,133 3,584,991
Ratios
Net charge-offs to average total loans ..... 0.12% 0.15% 0.05% 0.05% 0.35%
Reserve for loan losses to total loans
at year-end ............................... 1.55 1.65 1.71 1.74 1.95
- ---------
All information presented in this table relates to domestic loans as BancShares
makes no foreign loans.
The provision for loan losses charged to operations was $8.7 million during
1997 compared to $8.9 million during 1996 and $5.4 million during 1995. Net
charge-offs for 1997 totaled $6.3 million, compared to $7.4 million during 1996
and $2.1 million during 1995. During 1997, net charge-offs of consumer purpose
loans were $9.9 million, compared to $7.1 million during 1996 and $3.8 million
during 1995. The increase in net consumer-purpose charge-offs primarily resulted
from higher losses on credit cards. Net credit card losses totaled $4.6 million
during 1997, compared to $2.6 million during 1996 and $1.2 million during 1995.
The trend of higher losses related to consumer loans results from the continuing
high level of personal bankruptcies.
29
During 1997, BancShares continued to report net recoveries among
real-estate secured loans. During 1997, net recoveries of $2.3 million were
recorded, compared to net recoveries of $388,000 during 1996 and $1.7 million
during 1995. Commercial and industrial loans experienced net charge-offs of
$363,000 during 1997, compared to net charge-offs of $583,000 in 1996 and
$65,000 during 1995. Stringent underwriting standards continue to result in
minimal losses among the real-estate secured and commercial and industrial
portfolios.
The ratio of net charge-offs to average loans equaled 0.12 percent during
1997, 0.15 percent during 1996 and 0.05 percent during 1995. These loss ratios
reflect the quality of BancShares' balance sheet, as these ratios remain low by
industry standards. Table 13 provides details concerning the reserve and
provision for loan losses for the past five years.
Management considers the established reserve adequate to absorb future
losses that relate to loans outstanding at December 31, 1997, although future
additions to the reserve may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the reserve for loan losses. Such
agencies may require the recognition of additions to the reserve based on their
judgments of information available to them at the time of their examination.
Table 14 details management's allocation of the reserve among the various
loan types. During 1997, as BancShares recorded longer-term retail installment
loans and charge-offs among retail loan products continued to grow, BancShares
allocated a larger portion of its reserve for loan losses to the consumer
portfolio. This resulted in a reduction in the unallocated reserve at December
31, 1997.
At December 31, 1997, BancShares had no foreign loans or any material
highly leveraged transactions. Further, management does not contemplate
originating or participating in such transactions in the foreseeable future.
Table 14
ALLOCATION OF RESERVE FOR LOAN LOSSES
December 31
--------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Percent Percent Percent
of Loans of Loans of Loans
to Total to Total to Total
Reserve Loans Reserve Loans Reserve Loans
--------- ---------- --------- ---------- --------- ----------
(thousands)
Real estate:
Construction and land development ...... $ 3,235 2.09% $ 3,234 2.23% $ 3,090 2.28%
Mortgage:
1-4 family residential ................ 14,779 25.92 13,127 31.29 13,125 31.41
Commercial ............................ 16,388 19.38 16,514 17.89 15,305 16.81
Equity Line ........................... 4,257 11.09 2,898 8.35 2,788 8.67
Other ................................. 1,712 2.51 1,798 2.70 1,318 2.82
Commercial and industrial ............... 9,533 11.63 9,243 10.44 8,384 10.18
Consumer ................................ 31,025 25.74 24,890 25.38 21,587 26.18
Lease financing ......................... 992 1.37 985 1.39 639 1.31
Other ................................... 324 0.27 324 0.33 -- 0.33
Unallocated ............................. 2,115 -- 8,426 -- 12,259 --
------- ------ ------- ------ ------- ------
Total ................................. $84,360 100.00% $81,439 100.00% $78,495 100.00%
======= ====== ======= ====== ======= ======
December 31
------------------------------------------
1994 1993
-------------------- ---------------------
Percent Percent
of Loans of Loans
to Total to Total
Reserve Loans Reserve Loans
--------- ---------- --------- -----------
(thousands)
Real estate:
Construction and land development ...... $ 2,919 2.43% $ 3,135 3.28%
Mortgage:
1-4 family residential ................ 13,459 31.26 15,175 31.74
Commercial ............................ 13,636 17.37 13,997 17.13
Equity Line ........................... 2,585 8.42 2,112 8.18
Other ................................. 1,581 2.63 1,493 1.56
Commercial and industrial ............... 10,029 9.01 11,650 11.40
Consumer ................................ 20,373 27.00 17,079 24.81
Lease financing ......................... 197 1.46 454 1.27
Other ................................... -- 0.42 -- 0.63
Unallocated ............................. 7,238 -- 4,954 --
------- ------ ------- ------
Total ................................. $72,017 100.00% $70,049 100.00%
======= ====== ======= ======
NONINTEREST INCOME
Total noninterest income was $115.3 million during 1997, an increase of
11.6 percent. This compares to $103.3 million during 1996 and $92.1 million
during 1995. Table 14 presents the major components of noninterest income for
the past five years. Trust income was $11.3 million in 1997, up 12.7 percent
from 1996 principally due to growth in retirement plan services. Income from
service charges on deposit accounts was $41.7 million during 1997, an increase
of 2.5 percent. This increase was the result of higher bad check charge income.
Deposit service charge income amounted to $40.7 million and $39.9 million for
the years ended December 31, 1996 and 1995, respectively.
30
Table 15
NONINTEREST INCOME
Year ended December 31
-----------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- ----------- ---------
(thousands)
Trust income .............................. $ 11,284 $ 10,008 $ 8,886 $ 8,228 $ 7,197
Service charges on deposit accounts ....... 41,748 40,710 39,909 38,567 43,277
Credit card income ........................ 20,053 16,147 13,561 12,390 10,618
Other service charges and fees ............ 27,788 23,878 21,227 16,672 8,564
Gain (loss) on sale of mortgage loans ..... 219 502 809 (862) 8,010
Other ..................................... 14,215 12,059 7,736 8,330 8,071
-------- -------- ------- ------- -------
Total .................................... $115,307 $103,304 $92,128 $83,325 $85,737
======== ======== ======= ======= =======
Credit card income was $20.1 million during 1997, a $3.9 million or 24.2
percent increase over 1996. The $16.1 million earned by the credit card
operation during 1996 represented an increase of $2.6 million or 19.1 percent
over 1995. During 1997, in an effort to optimize credit card profitability,
BancShares relocated the credit card function to Roanoke, Virginia. Virginia
banking laws are less restrictive to lenders and allow more favorable terms than
North Carolina laws.
Other service charge and fee income amounted to $27.8 million in 1997,
$23.9 million in 1996 and $21.2 million in 1995. Fees generated by First
Citizens Investor Services contributed $6.4 million during 1997, compared to
$4.5 million during 1996 and $2.8 million during 1995. These fees primarily
result from the sale of mutual fund and annuity products. Fees earned for data
processing services provided to other banks also experienced growth during 1997,
contributing $10.5 million during 1997, $9.7 million during 1996 and $8.9
million during 1995. These fees are collected from banks that use BancShares'
check processing centers and other technical support services.
During 1997, BancShares collected $5.0 million from ATM convenience fees, a
fee paid by non-customers who access their accounts at other banks through
BancShares' ATM network. Such fees generated $2.8 million during 1996, when they
were first introduced.
NONINTEREST EXPENSE
Total noninterest expense for 1997 amounted to $300.8 million. This was a
7.9 percent increase over 1996, following an 13.3 percent increase of 1996
noninterest expenses over 1995. Table 15 presents the major components of
noninterest expense for the past five years.
Salary expense was $126.4 million during 1997, compared to $115.5 million
during 1996, an increase of $11.0 million or 9.5 percent, following an $8.9
million or 8.3 percent increase in 1996 over 1995. Increases during each period
resulted from merit increases and new positions. During 1996, BancShares
established FCDirect, a significant expansion of the alternative delivery
network. This resulted in new positions for telephone banking, home banking, and
financial service center banking. Also, during 1997, the expansions in Georgia
and Virginia resulted in growth in employee headcount.
Employee benefits expense was $23.7 million during 1997, an increase of
$3.3 million or 16.1 percent from 1996. The $20.4 million in benefits expense
recorded during 1996 represented an increase of $3.3 million or 19.6 percent
over 1995. During 1997, expenses related to BancShares' health and life plans
totaled $8.5 million, compared to $7.2 million during 1996. Higher pension and
FICA expenses also contributed to the increase in total employee benefits
expense during 1997 and 1996.
31
Table 16
NONINTEREST EXPENSE
Year ended December 31
---------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ----------
(thousands)
Salaries and wages .................. $126,474 $115,461 $106,607 $ 99,282 $ 92,579
Employee benefits ................... 23,718 20,425 17,080 14,535 13,500
Occupancy expense ................... 23,338 22,023 20,446 18,691 16,972
Equipment expense ................... 32,035 27,068 24,504 23,839 21,231
Credit card expense ................. 11,723 10,097 9,106 8,587 6,814
Amortization of intangibles ......... 9,034 8,197 5,877 3,993 3,157
Telecommunication expense ........... 8,032 7,711 6,790 6,743 6,528
Postage ............................. 6,623 6,383 5,701 4,907 3,996
FDIC insurance ...................... 1,818 13,586 8,418 11,831 10,496
Other ............................... 57,999 47,717 41,351 38,174 37,940
-------- -------- -------- -------- --------
Total ............................. $300,794 $278,668 $245,880 $230,582 $213,213
======== ======== ======== ======== ========
BancShares recorded occupancy expense of $23.3 million during 1997, an
increase of $1.3 million or 6.0 percent during 1997 due to higher depreciation
expense on newly constructed and recently renovated facilities. Occupancy
expense during 1996 was $22.0 million, an increase of $1.6 million or 7.7
percent over 1995, the result of higher local property tax expense and higher
depreciation expense.
Equipment expense for 1997 was $32.0 million, an increase of $5.0 million
or 18.4 percent over 1996, when total equipment expenses were $27.1 million. The
increase during 1997 and 1996 resulted from the rapid expansion of the ATM
network during late 1996 and 1997 and higher levels of hardware and software
depreciation related to mainframe and branch automation applications installed
during 1995 and 1996.
The cost of FDIC insurance was $1.8 million during 1997, a reduction of
$11.8 million from 1996. The higher 1996 expense was due to a special one-time
assessment on deposit liabilities insured by the FDIC's Savings Association
Insurance Fund ("SAIF"). The Bank paid $10 million for the assessment, which was
to establish sufficient reserves for the SAIF. Total cost of FDIC insurance was
$13.6 million in 1996 and $8.4 million during 1995.
Expenses related to the amortization of intangibles were $9.0 million
during 1997, an increase of $837,000 or 10.2 percent. The increase reflects the
impact of the goodwill and deposit intangibles that were recorded during 1997.
Intangible amortization totaled $8.2 million during 1996 and $5.9 million during
1995, the increase resulting from intervening acquisitions that generated
incremental capitalized intangible assets.
Telecommunications expense was $8.0 million during 1997, an increase of
$321,000 during 1997 due to the expansion of FCDirect, the network of
alternative delivery channels that includes telephone banking and PC banking.
Telecommunications expense was $7.7 million during 1996 and $6.8 million during
1995, also due to expansion of alternative delivery channels.
During 1997, BancShares recognized $5.6 million in consulting expense,
compared to $3.4 million during 1996. The $2.2 million or 64.2 percent increase
is due to expenses incurred related to the year 2000 compliance project.
BancShares has established a plan to modify and test all internal systems prior
to the turn of the century. All costs related to that project are expensed as
incurred. During 1997, BancShares recognized $2.2 million in expense related to
year 2000 remediation, with an additional $2 million to $3 million to be
incurred prior to achieving compliance.
The responsibility for ensuring year 2000 compliance extends to
governmental agencies, businesses and customers who exchange information or
services with BancShares or are dependent on computer-generated information to
meet their contractual obligations with others. To the extent that these
unaffiliated organizations and customers are not successful in their compliance
efforts and BancShares is dependent on those organizations for information,
services, satisfaction of loan repayments or other contractual obligations,
there are uncertainties as to the ultimate impact that the year 2000 will have
on BancShares. For further discussion of year 2000 issues, refer to Business in
BancShares 1997 Annual Report on Form 10-K.
32
INCOME TAXES
During 1997, BancShares recorded total income tax expense of $39.5 million,
compared to $36.2 million in income tax expense during 1996, the increase
resulting from higher pre-tax income. BancShares' effective tax rate was 35.9
percent in 1997, 35.6 percent in 1996 and 34.8 percent in 1995. Total effective
tax rates were less than the combined statutory federal and state income tax
rates primarily due to tax-exempt interest income.
LIQUIDITY
Management places great importance on the maintenance of a highly liquid
investment portfolio with varying maturities to provide needed cash flows to
meet liquidity requirements. At December 31, 1997, the investment portfolio
totaled $2.48 billion or 27.7 percent of total assets. This compares to $2.16
billion or 26.8 percent in 1996.
The ability to generate retail deposits is an additional source of
liquidity. The rate of growth in average deposits was 6.5 percent during 1997,
11.8 percent during 1996 and 11.6 percent during 1995. The deposit growth
results from the existing branch network as well as deposit liability
assumptions associated with various business combinations.
These liquidity sources have enabled BancShares to place little dependence
on borrowed funds for its liquidity needs. However, there are readily available
sources for borrowed funds through the correspondent bank network.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
BancShares maintains an adequate capital position and exceeds all minimum
regulatory capital requirements. BancShares' total risk-based capital ratios
were 9.87 percent, 11.5 percent and 10.9 percent, respectively, at December 31,
1997, 1996 and 1995. BancShares' Tier 1 capital ratios for December 31, 1997,
1996 and 1995 were 8.63 percent, 10.2 percent, and 9.6 percent respectively. The
minimum capital ratios established by Federal Reserve guidelines are 8 percent
for total capital and 4 percent for Tier 1 capital.
The reduction in the total and Tier 1 capital ratios at December 31, 1997
resulted from two capital stock transactions that occurred during the fourth
quarter of 1997. First, the Board of Directors of BancShares agreed to
repurchase 600,000 shares of Class A common stock. BancShares recorded the
redemption of the stock during December 1997, when the commitment was made to
repurchase the shares. The commitment was funded during January 1998. The other
material transaction was the reclassification of 126,000 shares of Class A
common stock and 31,600 shares of Class B common stock that are held by the
Bank's pension plan. These shares are subject to a put option that would allow
the independent investment manager to require BancShares to repurchase those
shares at any time. At December 31, 1997, BancShares reclassified those shares
from shareholders' equity to other liabilities. See Note I of the notes to the
consolidated financial statements.
At December 31, 1997, BancShares' leverage capital ratio was 5.83 percent,
compared to 6.4 percent and 6.1 percent at December 31, 1996 and 1995,
respectively. The minimum leverage ratio is 3 percent. Failure to meet certain
capital requirements may result in certain actions by regulatory agencies that
could have a direct material effect on the financial statements.
In addition to the previously discussed capital stock transactions, during
the fourth quarter of 1997 the Board of Directors of BancShares reauthorized the
purchase of its Class A and Class B common stock. Management views the purchase
of its stock as a good investment and will continue to repurchase shares when
market conditions are favorable for such transactions.
FOURTH QUARTER ANALYSIS
BancShares' net income for the fourth quarter of 1997 totaled $17.4
million, compared to $19.8 million during the same period of 1996. The reduction
in net income was primarily due to a $9.8 million increase in noninterest
expense, partially offset by higher net interest income and noninterest income.
As shown in Table 17, during the fourth quarter of 1997 and 1996, total assets
averaged $8.79 billion and $7.94 billion, respectively. Average interest-earning
assets increased 10.9 percent during the fourth quarter of 1997, compared to the
same period of 1996. Average loans outstanding during the fourth quarter
increased $428.5 million during 1997 over 1996. Average investment securities
increased $405.8 million between the two periods, the result of deposit growth
that exceeded loan demand.
Interest income on interest-earning assets increased $12.6 million or 9.1
percent in the fourth quarter of 1997 when compared to the same period of 1996.
The improved interest income during 1997 resulted from a $7.3 million increase
in loan interest income and a $6.2 million increase in investment securities
interest income. These increases resulted from
33
average volume growth among loans and investments and, in the case of
investments, a slight yield increase. Interest-earning assets yielded 7.52
percent during the fourth quarter of 1997, a reduction from the 7.63 percent
yield recorded during the fourth quarter of 1996.
Table 17
SELECTED QUARTERLY DATA
1997
---------------------------------------------------------------
Fourth Third Second First
--------------- --------------- --------------- ---------------
(thousands, except per share data and ratios)
SUMMARY OF OPERATIONS
Interest income ......................................... $ 150,225 $ 145,494 $ 140,118 $ 136,439
Interest expense ........................................ 72,818 68,947 64,542 61,706
------------ ------------ ------------ ------------
Net interest income ..................................... 77,407 76,547 75,576 74,733
Provision for loan losses ............................... 3,753 1,309 2,097 1,567
------------ ------------ ------------ ------------
Net interest income after provision for loan losses ..... 73,654 75,238 73,479 73,166
Noninterest income ...................................... 31,912 31,087 28,894 23,414
Noninterest expense ..................................... 78,832 76,561 74,817 70,584
------------ ------------ ------------ ------------
Income before income taxes .............................. 26,734 29,764 27,556 25,996
Income taxes ............................................ 9,370 10,746 9,972 9,404
Net income .............................................. 17,364 19,018 17,584 16,592
------------ ------------ ------------ ------------
Net interest income -- taxable equivalent ............... $ 78,327 $ 77,052 $ 76,092 $ 75,255
============ ============ ============ ============
SELECTED QUARTERLY AVERAGES
Total assets ............................................ $ 8,794,596 $ 8,411,774 $ 8,099,236 $ 7,903,566
Investment securities ................................... 2,503,443 2,359,115 2,166,362 2,094,376
Loans ................................................... 5,324,286 5,073,404 5,023,409 4,921,346
Interest-earning assets ................................. 7,994,728 7,632,755 7,368,645 7,196,138
Deposits ................................................ 7,427,881 7,144,502 6,952,848 6,823,697
Interest-bearing liabilities ............................ 6,924,776 6,608,892 6,341,125 6,203,598
Long-term obligations ................................... 11,450 12,017 11,545 6,809
Shareholders' equity .................................... $ 649,214 $ 651,923 $ 635,680 $ 619,956
Shares outstanding ...................................... 11,378,368 11,389,472 11,394,965 11,398,246
============ ============ ============ ============
SELECTED QUARTER-END BALANCES
Total assets ............................................ $ 8,951,109 $ 8,595,591 $ 8,351,978 $ 7,975,617
Investment securities ................................... 2,483,294 2,432,424 2,271,282 2,063,526
Loans ................................................... 5,445,772 5,208,195 4,996,770 4,955,135
Interest-earning assets ................................. 8,010,841 7,710,619 7,467,252 7,225,661
Deposits ................................................ 7,579,567 7,297,884 7,127,282 6,911,806
Interest-bearing liabilities ............................ 7,052,749 6,744,133 6,501,771 6,217,905
Long-term obligations ................................... 10,856 11,482 12,150 6,827
Shareholders' equity .................................... $ 601,640 $ 662,490 $ 644,210 $ 629,265
Shares outstanding ...................................... 10,627,453 11,389,928 11,392,085 11,395,656
============ ============ ============ ============
PROFITABILITY RATIOS (averages)
Rate of return (annualized) on:
Total assets ........................................... 0.78% 0.90% 0.87% 0.85%
Shareholders' equity ................................... 10.61 11.57 11.10 10.85
Dividend payout ratio ................................... 16.13 14.97 16.23 17.12
============ ============ ============ ============
LIQUIDITY AND CAPITAL
RATIOS (averages)
Loans to deposits ....................................... 71.68% 71.01% 72.25% 72.12%
Shareholders' equity to total assets .................... 7.38 7.75 7.85 7.84
Time certificates of $100,000 or more to total
deposits ............................................... 10.05 9.68 9.36 9.30
============ ============ ============ ============
PER SHARE OF STOCK
Net income .............................................. $ 1.55 $ 1.67 $ 1.54 $ 1.46
Cash dividends .......................................... 0.250 0.250 0.250 0.250
Class A sales price
High ................................................... 121.00 101.00 95.50 88.00
Low .................................................... 94.50 83.50 79.00 73.00
Class B sales price
High ................................................... 109.50 86.50 80.75 77.00
Low .................................................... 91.00 86.50 77.00 73.00
============ ============ ============ ============
1996
---------------------------------------------------------------
Fourth Third Second First
--------------- --------------- --------------- ---------------
(thousands, except per share data and ratios)
SUMMARY OF OPERATIONS
Interest income ......................................... $ 137,655 $ 134,270 $ 132,702 $ 129,568
Interest expense ........................................ 62,964 61,378 61,484 62,424
------------ ------------ ------------ ------------
Net interest income ..................................... 74,691 72,892 71,218 67,144
Provision for loan losses ............................... 3,321 1,787 2,255 1,544
------------ ------------ ------------ ------------
Net interest income after provision for loan losses ..... 71,370 71,105 68,963 65,600
Noninterest income ...................................... 28,082 26,077 25,260 23,885
Noninterest expense ..................................... 69,023 78,097 68,263 63,285
------------ ------------ ------------ ------------
Income before income taxes .............................. 30,429 19,085 25,960 26,200
Income taxes ............................................ 10,611 6,647 9,575 9,374
Net income .............................................. 19,818 12,438 16,385 16,826
------------ ------------ ------------ ------------
Net interest income -- taxable equivalent ............... $ 75,258 $ 73,459 $ 71,799 $ 67,735
============ ============ ============ ============
SELECTED QUARTERLY AVERAGES
Total assets ............................................ $ 7,935,197 $ 7,670,538 $ 7,658,682 $ 7,462,756
Investment securities ................................... 2,097,690 1,919,935 1,990,346 1,984,027
Loans ................................................... 4,895,815 4,907,435 4,884,818 4,679,692
Interest-earning assets ................................. 7,209,982 6,989,109 6,975,341 6,779,461
Deposits ................................................ 6,831,926 6,641,427 6,660,204 6,477,795
Interest-bearing liabilities ............................ 6,185,161 6,017,476 6,043,119 5,934,180
Long-term obligations ................................... 6,866 7,762 15,676 23,763
Shareholders' equity .................................... $ 599,953 $ 589,618 $ 576,742 $ 546,603
Shares outstanding ...................................... 11,415,943 11,441,007 11,432,661 11,072,395
============ ============ ============ ============
SELECTED QUARTER-END BALANCES
Total assets ............................................ $ 8,055,572 $ 7,826,118 $ 7,631,287 $ 7,736,162
Investment securities ................................... 2,160,914 1,912,448 1,888,476 2,005,645
Loans ................................................... 4,930,508 4,914,748 4,921,774 4,837,073
Interest-earning assets ................................. 7,247,422 7,030,796 6,860,260 6,932,878
Deposits ................................................ 6,954,028 6,808,365 6,632,271 6,743,913
Interest-bearing liabilities ............................ 6,265,482 6,063,362 5,991,901 6,129,508
Long-term obligations ................................... 6,922 6,715 7,893 15,608
Shareholders' equity .................................... $ 615,507 $ 592,964 $ 584,283 $ 570,258
Shares outstanding ...................................... 11,410,880 11,427,980 11,449,278 11,427,981
============ ============ ============ ============
PROFITABILITY RATIOS (averages)
Rate of return (annualized) on:
Total assets ........................................... 0.99% 0.65% 0.86% 0.91
Shareholders' equity ................................... 13.14 8.39 11.43 12.38
Dividend payout ratio ................................... 14.37 20.83 15.73 14.80
============ ============ ============ ============
LIQUIDITY AND CAPITAL
RATIOS (averages)
Loans to deposits ....................................... 71.66% 73.89% 73.34% 72.24
Shareholders' equity to total assets .................... 7.56 7.69 7.53 7.32
Time certificates of $100,000 or more to total
deposits ............................................... 8.79 8.56 8.98 9.59
============ ============ ============ ============
PER SHARE OF STOCK
Net income .............................................. $ 1.74 $ 1.08 $ 1.43 $ 1.52
Cash dividends .......................................... 0.250 0.225 0.225 0.225
Class A sales price
High ................................................... 83.00 67.00 67.00 66.25
Low .................................................... 64.50 59.50 59.00 53.75
Class B sales price
High ................................................... 71.00 63.50 64.25 55.00
Low .................................................... 71.00 60.00 55.00 48.06
============ ============ ============ =============
- ---------
Average loan balances include nonaccrual loans. Yields related to loans and
securities exempt from both federal and state income taxes, federal income taxes
only, or state income taxes only, are stated on a taxable-equivalent basis
assuming a statutory federal income tax rate of 35% for all periods, and state
income tax rates of 7.5%, 7.75% and 7.75% for 1997, 1996, and 1995,
respectively.
Stock information related to Class A common stock reflects the sales price, as
reported on the Nasdaq National Market System. Stock information for Class B was
obtained from a broker-dealer, reflecting the bid prices, prior to any mark-ups,
mark-downs or commissions. As of December 31, 1997, there were 3,746 holders of
record of the Class A common stock and 677 holders of record of the Class B
common stock.
Interest expense increased $9.8 million during the fourth quarter of 1997
compared to the fourth quarter of 1996. Average interest-bearing liabilities
experienced a $739.6 million increase from the fourth quarter of 1996 to the
same period of
34
1997, the result of increases in average deposits and short-term borrowings. The
rate on these interest-bearing liabilities increased from 4.04 percent to 4.17
percent between the two periods.
Net interest income increased $2.7 million from the fourth quarter of 1996
to the fourth quarter of 1997, the increase resulting from growth among
interest-earning assets that exceeded the growth among interest-bearing
liabilities.
Noninterest income for the fourth quarter of 1997 was $31.9 million, an
increase of $3.8 million or 13.6 percent. Much of the increase resulted from
higher credit card income and an increase in other service charges and fees.
Noninterest expense amounted to $78.8 million for the quarter ended December 31,
1997, compared to $69.0 million for the quarter ended December 31, 1996. Most of
the 14.2 percent increase was in salary expense, equipment expense and
consulting expense. Much of the increase in consulting expense relates to year
2000 compliance and those costs are projected to remain at current levels
through 1998. Tables 17 and 18 are useful when making quarterly comparisons.
Table 18
CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS -- Fourth Quarter
1997 1996
----------------------------------- ------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------- ---------- ---------- ------------- ----------- ----------
(thousands)
ASSETS
Loans:
Secured by real estate .................. $3,240,498 $ 66,119 8.12% $3,056,155 $ 63,112 8.22%
Commercial and industrial ............... 607,095 13,734 8.99 514,554 11,205 8.65
Consumer ................................ 1,386,990 30,074 8.66 1,238,383 28,325 9.13
Lease financing ......................... 74,812 1,640 8.77 70,192 1,492 8.50
Other ................................... 14,891 184 4.90 16,531 316 7.58
---------- -------- ---- ---------- -------- ----
Total loans ............................ 5,324,286 111,751 8.36 4,895,815 104,450 8.50
Investment securities:
U. S. Government ........................ 2,468,535 36,546 5.87 2,088,697 30,647 5.82
State, county and municipal ............. 4,920 109 8.79 6,188 119 7.63
Other ................................... 29,988 397 5.25 2,805 41 5.80
---------- -------- ---- ---------- -------- ----
Total investment securities ............ 2,503,443 37,052 5.87 2,097,690 30,807 5.83
Federal funds sold ....................... 166,999 2,342 5.56 216,477 2,965 5.43
---------- -------- ---- ---------- -------- ----
Total interest-earning assets .......... $7,994,728 $151,145 7.52% $7,209,982 $138,222 7.63%
========== ======== ==== ========== ======== ====
LIABILITIES
Deposits:
Checking With Interest .................. $ 968,305 $ 2,586 1.06% $ 917,915 $ 2,584 1.12%
Savings ................................. 689,246 3,246 1.87 722,281 3,750 2.06
Money market accounts ................... 974,343 9,187 3.74 855,950 7,693 3.57
Time deposits ........................... 3,697,101 49,952 5.36 3,293,064 44,166 5.32
---------- -------- ---- ---------- -------- ----
Total interest-bearing deposits ........ 6,328,995 64,971 4.07 5,789,210 58,193 3.99
Short-term borrowings .................... 584,331 7,614 5.17 389,085 4,627 4.72
Long-term obligations .................... 11,450 233 8.07 6,866 144 8.32
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities ..... $6,924,776 $ 72,818 4.17% $6,185,161 $ 62,964 4.04%
========== ======== ==== ========== ======== ====
Interest rate spread ..................... 3.35% 3.59%
==== ====
Net interest income and net yield ........
on interest-earning assets .............. $ 78,327 3.89% $ 75,258 4.14%
======== ==== ======== ====
Increase (decrease) due to:
--------------------------------------
Yield/ Total
Volume Rate Change
----------- -------------- -----------
(thousands)
ASSETS
Loans:
Secured by real estate .................. $ 4,077 $(1,070) $ 3,007
Commercial and industrial ............... 2,062 467 2,529
Consumer ................................ 3,268 (1,519) 1,749
Lease financing ......................... 99 49 148
Other ................................... (25) (107) (132)
------- ------- -------
Total loans ............................ 9,481 (2,180) 7,301
Investment securities:
U. S. Government ........................ 5,604 295 5,899
State, county and municipal ............. (26) 16 (10)
Other ................................... 379 (23) 356
------- ------- -------
Total investment securities ............ 5,957 288 6,245
Federal funds sold ....................... (686) 63 (623)
------- ------- -------
Total interest-earning assets .......... $14,752 $(1,829) $12,923
======= ======= =======
LIABILITIES
Deposits:
Checking With Interest .................. 142 $ (140) $ 2
Savings ................................. (165) (339) (504)
Money market accounts ................... 1,096 398 1,494
Time deposits ........................... 5,436 350 5,786
------- ------- -------
Total interest-bearing deposits ........ 6,509 269 6,778
Short-term borrowings .................... 2,434 553 2,987
Long-term obligations .................... 95 (6) 89
------- ---------- -------
Total interest-bearing liabilities ..... $ 9,038 $ 816 $ 9,854
======= ========= =======
Interest rate spread .....................
Net interest income and net yield ........
on interest-earning assets .............. $ 5,714 $(2,645) $ 3,069
======= ========= =======
- ---------
Average loan balances include nonaccrual loans.
LEGAL PROCEEDINGS
BancShares and various subsidiaries have been named as defendants in
various legal actions arising from their normal business activities in which
damages in various amounts are claimed. Although the amount of any ultimate
liability with respect to such matters cannot be determined, in the opinion of
management, any such liability will not have a material effect on BancShares'
consolidated financial position.
35
ACCOUNTING AND REGULATORY ISSUES
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting comprehensive
income. It does not address issues of recognition or measurement for
comprehensive income and its components. SFAS 130 is effective for BancShares in
fiscal 1998.
SFAS No. 131 requires that public business enterprises report certain
information about operating segments in complete sets of financial statements,
as well as information about products, services, geographic areas in which they
operate and their major customers. The provisions of SFAS 131, which is
effective in 1998, are not expected to have a material effect on BancShares'
consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132 "Employers Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements of pensions and other postretirement benefits and does
not change any measurement or recognition provisions. The adoption of SFAS No.
132 during 1998 will not have a material impact on BancShares' consolidated
financial statements.
FORWARD LOOKING 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.
The foregoing discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of BancShares and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of BancShares'
customers, actions of government regulators, the level of market interest rates,
and general economic conditions.
36
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
FIRST CITIZENS BANCSHARES, INC.
We have audited the accompanying consolidated balance sheets of First
Citizens BancShares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Citizens BancShares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
January 26, 1998
37
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
---------------------------
1997 1996
------------- -------------
(thousands, except
share data)
ASSETS
Cash and due from banks .................................................................. $ 506,771 $ 437,029
Investment securities held to maturity (fair value of $2,462,111 in 1997
and $2,138,031 in 1996).................................................................. 2,456,722 2,138,831
Investment securities available for sale (cost of $10,817 in 1997
and $11,238 in 1996)..................................................................... 26,572 22,405
Federal funds sold ....................................................................... 81,775 156,000
Loans .................................................................................... 5,445,772 4,930,508
Less reserve for loan losses ............................................................. 84,360 81,439
---------- ----------
Net loans ............................................................................. 5,361,412 4,849,069
Premises and equipment ................................................................... 278,473 229,496
Income earned not collected .............................................................. 66,631 60,175
Other assets ............................................................................. 172,753 162,567
---------- ----------
Total assets .......................................................................... $8,951,109 $8,055,572
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing ..................................................................... $1,131,498 $1,087,474
Interest-bearing ........................................................................ 6,448,069 5,866,554
---------- ----------
Total deposits ........................................................................ 7,579,567 6,954,028
Short-term borrowings .................................................................... 593,824 392,006
Long-term obligations .................................................................... 10,856 6,922
Other liabilities ........................................................................ 165,222 87,109
---------- ----------
Total liabilities ..................................................................... 8,349,469 7,440,065
SHAREHOLDERS' EQUITY
Common stock:
Class A -- $1 par value (11,000,000 shares authorized; 8,905,199 shares issued for 1997;
9,651,900 shares issued for 1996) ..................................................... 8,906 9,652
Class B -- $1 par value (2,000,000 shares authorized; 1,722,254 shares issued for 1997;
1,758,980 shares issued for 1996) ..................................................... 1,722 1,759
Surplus .................................................................................. 143,760 143,760
Retained earnings ........................................................................ 437,794 453,640
Unrealized securities gains, net of taxes ................................................ 9,458 6,696
---------- ----------
Total shareholders' equity ............................................................ 601,640 615,507
---------- ----------
Total liabilities and shareholders' equity ............................................ $8,951,109 $8,055,572
========== ==========
See accompanying Notes to Consolidated Financial Statements.
38
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
(thousands, except share
and per share data)
INTEREST INCOME
Loans ................................................... $ 428,997 $ 410,703 $ 380,676
Investment securities:
U. S. Government ....................................... 133,007 114,831 81,219
State, county and municipal ............................ 273 330 405
Other .................................................. 102 172 184
----------- ----------- -----------
Total investment securities interest income .......... 133,382 115,333 81,808
Federal funds sold ...................................... 9,897 8,159 8,625
----------- ----------- -----------
Total interest income ................................ 572,276 534,195 471,109
INTEREST EXPENSE
Deposits ................................................ 243,749 230,905 207,234
Short-term borrowings ................................... 23,420 16,388 15,773
Long-term obligations ................................... 844 957 1,657
----------- ----------- -----------
Total interest expense ............................... 268,013 248,250 224,664
----------- ----------- -----------
Net interest income .................................. 304,263 285,945 246,445
Provision for loan losses ............................... 8,726 8,907 5,364
----------- ----------- -----------
Net interest income after provision for loan losses .. 295,537 277,038 241,081
NONINTEREST INCOME
Trust income ............................................ 11,284 10,008 8,886
Service charges on deposit accounts ..................... 41,748 40,710 39,909
Credit card income ...................................... 20,053 16,147 13,561
Other service charges and fees .......................... 27,788 23,878 21,227
Other ................................................... 14,434 12,561 8,545
----------- ----------- -----------
Total noninterest income ............................. 115,307 103,304 92,128
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and wages ...................................... 126,474 115,461 106,607
Employee benefits ....................................... 23,718 20,425 17,080
Occupancy expense ....................................... 23,338 22,023 20,446
Equipment expense ....................................... 32,035 27,068 24,504
Other ................................................... 95,229 93,691 77,243
----------- ----------- -----------
Total noninterest expense ............................ 300,794 278,668 245,880
----------- ----------- -----------
Income before income taxes .............................. 110,050 101,674 87,329
Income taxes ............................................ 39,492 36,207 30,423
----------- ----------- -----------
Net income ........................................... $ 70,558 $ 65,467 $ 56,906
=========== =========== ===========
PER SHARE INFORMATION
Net income ............................................. $ 6.22 $ 5.77 $ 5.37
Cash dividends ......................................... 1.00 0.925 0.825
Weighted average shares outstanding ..................... 11,341,153 11,340,892 10,597,066
=========== ============ ============
See accompanying Notes to Consolidated Financial Statements.
39
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unrealized
Class A Class B Securities Total
Common Common Retained Gains, Shareholders'
Stock Stock Surplus Earnings Net of Taxes Equity
--------- ------------- ----------- ------------ -------------- --------------
(thousands, except share data)
Balance at December 31, 1994 ................ $8,419 $1,770 $ 82,631 $ 356,591 -- $ 449,411
Issuance of 64,881 shares of Class A common
stock pursuant to employee stock purchase
plans ...................................... 65 2,556 2,621
Redemption of 28,386 shares of Class A
common stock and 2,987 shares of Class B
common stock ............................... (28) (4) (1,513) (1,545)
Issuance of 8,998 shares of Class A common
stock pursuant to the Dividend
Reinvestment Plan .......................... 9 406 415
Issuance of 484,821 shares of Class A common
stock in connection with various
acquisitions ............................... 485 21,361 21,846
Net income .................................. 56,906 56,906
Cash dividends .............................. (8,817) (8,817)
--------- ---------
Balance at December 31, 1995 ................ 8,950 1,766 106,954 403,167 -- 520,837
Issuance of 87,992 shares of Class A common
stock pursuant to employee stock purchase
plans ...................................... 88 3,958 4,046
Redemption of 63,195 shares of Class A
common stock and 7,484 shares of Class B
common stock ............................... (64) (7) (4,435) (4,506)
Issuance of 8,746 shares of Class A common
stock pursuant to the Dividend
Reinvestment Plan .......................... 9 114 123
Issuance of 668,654 shares of Class A common
stock in connection with various
acquisitions ............................... 669 32,734 33,403
Net income .................................. 65,467 65,467
Unrealized securities gains, net of taxes ... 6,696 6,696
Cash dividends .............................. (10,559) (10,559)
--------- ---------
Balance at December 31, 1996 ................ 9,652 1,759 143,760 453,640 6,696 615,507
Redemption of 20,301 shares of Class A
common stock and 5,126 shares of Class B
common stock ............................... (20) (5) (2,086) (2,111)
Obligations to repurchase common stock ...... (726) (32) (72,934) (73,692)
Net income .................................. 70,558 70,558
Unrealized securities gains, net of taxes ... 2,762 2,762
Cash dividends .............................. (11,384) (11,384)
--------- ---------
Balance at December 31, 1997 ................ $8,906 $1,722 $143,760 $ 437,794 $9,458 $ 601,640
====== ======= ======== ========= ====== =========
See accompanying Notes to Consolidated Financial Statements.
40
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended December 31,
---------------------------------------------
1997 1996 1995
------------- --------------- ---------------
(thousands)
OPERATING ACTIVITIES
Net income ...................................................................... $ 70,558 $ 65,467 $ 56,906
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of intangibles .................................................... 9,034 8,197 5,877
Provision for loan losses ...................................................... 8,726 8,907 5,364
Deferred tax expense (benefit) ................................................. 1,475 (1,833) (1,454)
Change in current taxes payable ................................................ (71) (88) 3,241
Depreciation ................................................................... 19,273 16,932 16,882
Change in accrued interest payable ............................................. 4,805 1,807 26,696
Change in income earned not collected .......................................... (6,573) (862) (11,746)
Origination of loans held for sale ............................................. (434,471) (149,146) (85,148)
Proceeds from sale of loans .................................................... 334,762 137,314 75,964
Gain on sale of mortgage loans ................................................. (219) (502) (809)
Net amortization of premiums and discounts ..................................... 8,277 11,658 19,634
Net change in other assets ..................................................... 19,102 (4,301) (15,383)
Net change in other liabilities ................................................ (3,100) (1,225) 4,798
---------- ------------ ------------
Net cash provided by operating activities ...................................... 31,578 92,325 100,822
---------- ------------ ------------
INVESTING ACTIVITIES
Net increase in loans outstanding .............................................. (383,839) (139,670) (254,326)
Purchases of investment securities ............................................. (817,725) (1,039,460) (1,328,178)
Proceeds from maturities and issuer calls of investment securities ............. 476,114 890,363 826,129
Net change in federal funds sold ............................................... 74,225 (115,555) (25,023)
Dispositions of premises and equipment ......................................... 2,051 5,983 3,445
Additions to premises and equipment ............................................ (69,011) (42,184) (31,147)
Purchase of institutions, net of cash acquired ................................. 106,016 7,584 106,092
---------- ------------ ------------
Net cash used by investing activities .......................................... (612,169) (432,939) (703,008)
---------- ------------ ------------
FINANCING ACTIVITIES
Net change in time deposits .................................................... 299,926 99,448 536,251
Net change in demand and other interest-bearing deposits ....................... 158,150 258,104 (3,811)
Net change in short-term borrowings ............................................ 205,752 (17,643) 69,992
Repurchases of common stock .................................................... (2,111) (4,506) (1,545)
Proceeds from issuance of stock ................................................ -- 4,169 3,036
Cash dividends paid ............................................................ (11,384) (10,559) (8,817)
---------- ------------ ------------
Net cash provided by financing activities ...................................... 650,333 329,013 595,106
---------- ------------ ------------
Change in cash and due from banks .............................................. 69,742 (11,601) (7,080)
Cash and due from banks at beginning of period ................................. 437,029 448,630 455,710
---------- ------------ ------------
Cash and due from banks at end of period ....................................... $ 506,771 $ 437,029 $ 448,630
========== ============ ============
CASH PAYMENTS FOR:
Interest ....................................................................... $ 263,722 $ 246,443 $ 197,334
Income taxes ................................................................... 37,984 35,554 27,454
---------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisitions ........................................... $ -- $ 33,403 $ 21,846
Long-term obligations issued for acquisitions .................................. -- 1,468 2,494
Unrealized securities gains .................................................... 4,588 11,167 --
Obligations to repurchase common stock ......................................... 73,692 -- --
========== ============ ============
See accompanying Notes to Consolidated Financial Statements.
41
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
First Citizens BancShares, Inc. ("BancShares") is a bank holding company
with three banking subsidiaries -- First-Citizens Bank & Trust Company,
headquartered in Raleigh, North Carolina ("FCB-NC"), which operates branches in
North Carolina and Virginia; First-Citizens Bank & Trust Company, headquartered
in White Sulphur Springs, West Virginia ("FCB-WV"), which operates branches in
West Virginia; and Atlantic States Bank ("ASB"), a federally-chartered thrift
institution with branch offices in Raleigh, North Carolina and the metropolitan
Atlanta, Georgia area.
FCB-NC, FCB-WV and ASB offer full-service banking services designed to meet
the needs of both consumers and commercial entities in the markets in which they
serve. These services include normal taking of deposits, commercial and consumer
lending, a full service trust department and other activities incidental to
commercial banking.
FCB-NC has eight wholly-owned subsidiaries. Neuse, Incorporated owns a
number of the facilities in which FCB-NC operates branches. American Guaranty
Insurance Company is engaged in writing fire and casualty insurance. Triangle
Life Insurance Company writes credit life and credit accident and health
insurance. First Citizens Investor Services provides investment services,
including sales of annuities and third party mutual funds and discount brokerage
services. First Citizens Bank, A Virginia Corporation, is the issuing and
processing bank for BancShares' retail credit cards. Other subsidiaries are
either inactive or are not material to the consolidated financial statements.
Nontraditional banking segments within BancShares' operations are not material
to the consolidated financial statements.
The accounting and reporting policies of BancShares and its subsidiaries
are in accordance with generally accepted accounting principles and, with regard
to the banking subsidiaries, conform to general industry practices. The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates made by BancShares in the preparation of its consolidated
financial statements are the determination of the reserve for loan losses, the
valuation allowance for deferred tax assets, and fair value estimates.
Intercompany accounts and transactions have been eliminated. Certain
amounts for prior years have been reclassified to conform with statement
presentations for 1997. However, the reclassifications have no effect on
shareholders' equity or net income as previously reported.
Investment Securities
For investment securities classified as held to maturity, BancShares has
the ability and the positive intent to hold those investments until maturity.
These securities are stated at cost adjusted for amortization of premium and
accretion of discount. Accreted discounts and amortized premiums are included in
interest income on an effective yield basis.
Marketable equity securities classified as available for sale are carried
at their fair value, and the difference between the cost basis and the fair
value, net of deferred income taxes, is recorded as a component of shareholders'
equity. At December 31, 1997 and 1996, BancShares had no investment securities
classified as held for trading purposes.
Loans
Loans that are held for investment purposes are carried at their principal
amount outstanding. Those loans that are available for sale are included in
residential mortgage loans in Note C and 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.
42
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Loan Fees
Fees collected and certain costs incurred related to loan originations are
deferred and amortized as an adjustment to interest income over the life of the
related loans. The deferred fees and costs are recorded as an adjustment to
loans outstanding using a method that approximates a constant yield.
Mortgage Servicing Rights
The estimated value of the right to service mortgage loans for others
("MSRs") is included in other assets on BancShares' consolidated balance sheet.
Capitalization of the MSRs occurs when the underlying loans are sold or
securitized. Capitalized MSRs are amortized into income over the projected life
of the servicing life of the underlying loans. Capitalized MSRs are periodically
reviewed for impairment. At December 31, 1997 and 1996, the carrying values of
capitalized mortgage servicing rights were $2,527 and $1,430, respectively.
BancShares adopted Statement of Financial Accounting Standards No. 125
("Statement 125"), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" effective January 1, 1997. Statement 125
superseded Statement 122 "Accounting for Mortgage Servicing Rights" and provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. Adoption of Statement 125 did not
have a material effect on BancShares' financial condition or results of
operations.
Reserve for Loan Losses
The reserve for loan losses is established by charges to operating expense.
To determine the reserve needed, management evaluates the risk characteristics
of the loan portfolio under current and projected 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 possible credit losses.
Management considers the established reserve adequate to absorb future
losses that relate to loans outstanding as of December 31, 1997, although future
additions to the reserve may be necessary based on changes in economic and other
conditions. Additionally, various regulatory agencies, as an integral part of
their examination process, periodically review BancShares' reserve for loan
losses. Such agencies may require the recognition of additions to the reserve
based on their judgments of information available to them at the time of their
examination.
Nonaccrual Loans, Impaired Loans and Other Real Estate
Accrual of interest on loans is discontinued when management deems that
collection of additional interest is doubtful. Loans are returned to an accrual
status when both principal and interest are current and the loan is determined
to be performing in accordance with the applicable loan terms.
Management considers a loan to be impaired when based on current
information and events, it is probable that a borrower will be unable to pay all
amounts due according to contractual terms of the loan agreement. Impaired loans
are valued using either the discounted expected cash flow method using the
loan's original effective interest rate or the collateral value. When the
ultimate collectibility of an impaired loan's principal is doubtful, all cash
receipts are applied to principal. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to interest income, to the
extent that any interest has been foregone. Future cash receipts are recorded as
recoveries of any amounts previously charged off.
Other real estate acquired through foreclosure 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.
43
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Intangible Assets
Goodwill arising from acquisitions in which the purchase price exceeds the
fair value of net assets acquired is amortized using the straight-line method
over a 15 year period. Deposit intangibles are amortized using the straight-line
method over a 15 year period. Intangible assets are subject to periodic review
and are adjusted for any impairment of value.
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 income. Maintenance and repairs are charged
to occupancy expense or equipment expense as incurred.
Income Taxes
Income tax expense is based on consolidated income before income taxes and
generally differs from income taxes paid due to deferred income taxes and
benefits arising from income and expenses being recognized in different periods
for financial and income tax reporting purposes. BancShares uses the asset and
liability method to account for deferred income taxes. The objective of the
asset and liability method is to establish deferred tax assets and liabilities
for the temporary differences between the financial reporting basis and the
income tax basis of BancShares' assets and liabilities at enacted rates expected
to be in effect when such amounts are realized or settled. BancShares and its
subsidiaries file a consolidated federal income tax return. Each subsidiary pays
its allocation of federal income taxes or receives a payment to the extent that
tax benefits are realized. BancShares and its subsidiaries each file separate
state income tax returns.
Per Share Data
BancShares adopted the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("Statement 128"), during December 1997.
Statement 128 replaces the presentation of primary earnings per share ("EPS")
with a presentation of basic EPS and replaces the presentation of fully diluted
EPS with a presentation of diluted EPS. However, since BancShares does not have
any potential dilutive securities, adoption of Statement 128 did not have any
impact on BancShares' consolidated financial statements.
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 1997, 1996 and
1995 was 11,341,153; 11,340,982; and 10,597,066, respectively.
Cash dividends per share apply to both Class A and Class B common stock.
Class A common stock carries one vote per share, while shares of Class B common
stock carry 16 votes per share.
44
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE B -- INVESTMENT SECURITIES
The cost and fair values of investment securities at December 31 with
unrealized gains and losses determined on an individual security basis are as
follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ -------------- -------------
Investment securities held to maturity at December 31,
1997
U. S. Government treasury securities ................. $2,450,634 $ 6,664 $(1,585) $2,455,713
State, county and municipal .......................... 4,921 313 -- 5,234
Other ................................................ 1,167 -- (3) 1,164
---------- ------- ---------- ----------
Total investment securities held to maturity ........ $2,456,722 $ 6,977 $(1,588) $2,462,111
========== ======= ========= ==========
1996
U. S. Government treasury securities ................. $2,130,037 $ 855 $(1,969) $2,128,923
State, county and municipal .......................... 6,301 324 -- 6,625
Other ................................................ 2,493 -- (10) 2,483
---------- ------- --------- ----------
Total investment securities held to maturity ........ $2,138,831 $ 1,179 $(1,979) $2,138,031
========== ======= ========= ==========
Investment securities available for sale at December 31,
1997
Marketable equity securities ......................... $ 10,817 $15,755 -- $ 26,572
========== ======= ========= ==========
1996
Marketable equity securities ......................... $ 11,238 $11,167 -- $ 22,405
========== ======= ========= ==========
The maturities of investment securities held to maturity at December 31 are
as follows:
1997 1996
--------------------------- ---------------------------
Fair Fair
Cost Value Cost Value
------------- ------------- ------------- -------------
Within one year ................................ $1,057,940 $1,058,585 $ 781,336 $ 782,102
One through five years ......................... 1,391,331 1,395,920 1,345,274 1,343,599
Five to 10 years ............................... 2,932 2,977 4,803 4,829
Over 10 years .................................. 4,519 4,629 7,418 7,501
---------- ---------- ---------- ----------
Total investment securities held to maturity $2,456,722 $2,462,111 $2,138,831 $2,138,031
========== ========== ========== ==========
Investment securities having an aggregate par value of $1,094,261 at
December 31, 1997, and $1,025,145 at December 31, 1996, were pledged as
collateral to secure public funds on deposit and for other purposes as required
by law.
45
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE C -- LOANS
Loans at December 31 include the following:
1997 1996
------------- -------------
Loans secured by real estate:
Construction and land development ... $ 113,735 $ 109,806
Residential ......................... 1,411,279 1,954,692
Other ............................... 1,795,882 1,015,021
---------- ----------
Total loans secured by real estate ... 3,320,896 3,079,519
Commercial and industrial ............ 633,580 514,535
Consumer ............................. 1,402,093 1,251,704
Lease financing ...................... 74,589 68,694
All other loans ...................... 14,614 16,056
---------- ----------
Total loans ......................... $5,445,772 $4,930,508
========== ==========
There were no foreign loans outstanding during either period, nor were
there any highly leveraged transactions. There are no loan concentrations
exceeding ten percent of loans outstanding involving multiple borrowers in
similar activities or industries at December 31, 1997. Substantially all loans
are to customers domiciled within BancShares' principal market areas.
At December 31, 1997 and 1996 nonperforming loans consisted of nonaccrual
loans and amounted to $12,681 and $12,810, respectively. Gross interest income
on nonperforming loans that would have been recorded had these loans been
performing was $1,156; $1,162, and $1,556, respectively, during 1997, 1996 and
1995. Interest income recognized on nonperforming loans was $349, $259 and $595
during the respective periods. As of December 31, 1997 and 1996, other real
estate acquired through foreclosure was $1,462 and $1,160, respectively. Loans
transferred to other real estate totaled $1,683, $1,649 and $2,110 during 1997,
1996 and 1995, respectively.
1997 1996 1995
----------- ---------- ----------
Loans held for sale at December 31 .......... $127,650 $ 27,722 $15,388
For the year ended December 31:
Loans sold ................................. 334,543 136,812 75,155
Net gain on sale of loans .................. 219 502 809
The Bank services mortgage loans for itself and others. The carrying value
of loans serviced for others as of December 31, 1997 and 1996 was $970,842 and
$657,520, respectively.
NOTE D -- RESERVE FOR LOAN LOSSES
Activity in the reserve for loan losses is summarized as follows:
1997 1996 1995
------------ ------------ ----------
Balance at the beginning of year ........... $ 81,439 $ 78,495 $ 72,017
Reserves of acquired institutions .......... 481 1,387 3,231
Provision for loan losses .................. 8,726 8,907 5,364
Loans charged off .......................... (14,331) (11,653) (7,262)
Loans recovered ............................ 8,045 4,303 5,145
--------- --------- --------
Net charge-offs ............................ (6,286) (7,350) (2,117)
--------- --------- --------
Balance at the end of year ................. $ 84,360 $ 81,439 $ 78,495
========= ========= ========
46
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE D -- RESERVE FOR LOAN LOSSES -- Continued
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired was $9,132 and $9,880, respectively, all of which were
classified as nonaccrual. Specific reserves of $1,033 and $833 have been
established for impaired loans outstanding as December 31, 1997 and 1996,
respectively. The average recorded investment in impaired loans during the years
ended December 31, 1997, 1996 and 1995, was $6,779, $11,463 and $14,326,
respectively. For the years ended December 31, 1997, 1996 and 1995, BancShares
recognized cash basis interest income on those impaired loans of $212, $57 and
$543, respectively.
NOTE E -- PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows:
1997 1996
---------- ----------
Land ............................................ $ 46,609 $ 44,254
Premises and leasehold improvements ............. 185,956 184,970
Furniture and equipment ......................... 174,229 116,643
-------- --------
Total .......................................... 406,794 345,867
Less accumulated depreciation and amortization .. 128,321 116,371
-------- --------
Net book value ................................. $278,473 $229,496
======== ========
Premises with a book value of $4,600 at December 31, 1997, and $2,887 at
December 31, 1996, were pledged to secure mortgage notes payable.
BancShares leases certain premises and equipment under various lease
agreements that provide for payment of property taxes, insurance and maintenance
costs. Generally, operating leases provide for one or more renewal options on
the same basis as current rental terms. However, certain leases require
increased rentals under cost of living escalation clauses. Certain of the leases
also provide purchase options.
Future minimum rental commitments for noncancellable operating leases with
initial or remaining terms of one or more years consisted of the following at
December 31, 1997:
Year Ending December 31: Amount
- ------------------------------------------- ---------
1998 ............................. $ 8,910
1999 ............................. 8,287
2000 ............................. 6,061
2001 ............................. 4,444
2002 ............................. 3,868
Thereafter ....................... 47,487
-------
Total minimum payments .......... $79,057
=======
Total rent expense for all operating leases amounted to $14,700 in 1997,
$13,501 in 1996 and $11,998 in 1995.
47
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE F -- DEPOSITS
Deposits at December 31 are summarized as follows:
1997 1996
------------- -------------
Demand, non-interest bearing .... $1,131,498 $1,087,474
Checking With Interest .......... 1,009,577 943,900
Money market accounts ........... 1,034,528 892,953
Savings ......................... 679,165 712,525
Time ............................ 3,724,799 3,317,176
---------- ----------
Total deposits ................ $7,579,567 $6,954,028
========== ==========
Total time deposits with a minimum denomination of $100 were $751,051 and
$617,076 at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits were:
1998 ......................... $3,213,608
1999 ......................... 179,769
2000 ......................... 181,524
2001 ......................... 85,685
2002 ......................... 63,896
Thereafter ................... 317
----------
Total time deposits ......... $3,724,799
==========
NOTE G -- SHORT-TERM BORROWINGS
Short-term borrowings at December 31 are as follows:
1997 1996
----------- -----------
Master notes ............................. $315,529 $295,428
Notes payable ............................ 158,130 9,331
Repurchase agreements .................... 54,796 21,816
Federal funds purchased .................. 45,380 45,075
U. S. Treasury tax and loan accounts ..... 19,989 20,356
-------- --------
Total short-term borrowings ............ $593,824 $392,006
======== ========
Master notes are overnight unsecured borrowings by BancShares from Bank
customers. The rate on Master notes was 4.40 percent as of December 31, 1997.
During 1997, the weighted average rate on Master note borrowings was 4.63
percent, and the average amount outstanding was $301,558. The largest amount
outstanding at any month-end during 1997 was $332,055. During 1996, the average
rate on Master note borrowings was 4.46 percent, while the average amount
outstanding was $266,476. The rate at December 31, 1996 was 4.23 percent, and
the largest amount outstanding at any month-end was $316,628.
At December 31, 1997, notes payable represent various borrowings, including
$155,000 borrowed from other banks, with maturities extending to May 1998.
During 1997,these borrowings averaged $92,498 and the rate on these borrowings
averaged 5.93 percent The weighted-average rate on these borrowings at December
31, 1997 was 5.95 percent, and the largest amount outstanding at any month end
was $158,764. During 1996, the average rate for notes payable was 6.14 percent
and the average amount outstanding was $12,003. The largest amount outstanding
at any month end during 1996 was $19,901, and the weighted-average rate at
December 31, 1996 was 6.02 percent.
48
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE H -- LONG-TERM OBLIGATIONS
Long-term obligations at December 31 are as follows:
1997 1996
---------- ---------
Subordinated notes payable:
7 percent maturing June 18, 1998 ................................................ $ -- $ 849
7 percent maturing February 22, 1999 ............................................ 135 135
7.5 percent maturing February 23, 2000 .......................................... 170 170
7.25 percent maturing February 22, 2001 ......................................... 1,332 1,332
8 percent maturing February 23, 2005 ............................................ 2,277 2,278
Unsecured variable rate note at 6.49 percent payable in quarterly installments 5,074 --
8 percent mortgage notes, due in periodic payments through 2004, secured by
premises ........................................................................ 1,493 1,659
Other ............................................................................. 375 499
------- ------
Total long-term obligations ..................................................... $10,856 $6,922
======= ======
Long-term obligations maturing in each of the five years subsequent to
December 31, 1997, are as follows:
1998 ............... $ 190
1999 ............... 2,596
2000 ............... 2,647
2001 ............... 2,137
2002 ............... 259
Thereafter ......... 3,027
-------
$10,856
=======
NOTE I -- COMMON STOCK
On October 27, 1997 the Board of Directors of BancShares authorized the
purchase in the open market or in private transactions of up to 300,000 shares
of its outstanding Class A common stock and up to 100,000 shares of its
outstanding Class B common stock. The authorization is effective for a period of
12 months.
The following table sets forth information related to shares purchased for
the years ended December 31:
1997 1996 1995
--------- --------- ---------
Class A
Number of shares purchased ........ 20,301 63,195 28,386
Cash disbursed .................... $ 1,643 $ 4,027 $ 1,394
Class B
Number of shares purchased ........ 5,126 7,484 2,987
Cash disbursed .................... $ 468 $ 479 $ 151
Stock purchases are retired by a charge to common stock for the par value
of the shares retired and to retained earnings for the cost in excess of par
value.
On December 2, 1997, the Board of Directors of BancShares authorized the
purchase of 600,000 shares of BancShares Class A common stock from a related
party. The purchase price was established based on an independent valuation of
the shares. The shares were repurchased by BancShares and retired on January 27,
1998. In connection with this commitment, BancShares has recorded a reduction in
shareholders' equity and an obligation of $58,077 in the accompanying
consolidated balance sheet as of December 31, 1997. The obligation is included
in other liabilities.
49
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE I -- COMMON STOCK -- Continued
On December 31, 1997, BancShares adjusted its equity balances to reclassify
126,400 shares of Class A common stock and 31,600 shares of Class B common stock
that are owned by a related defined benefit pension plan. The plan's interests
for all purposes with respect to the shares are represented by an independent
investment manager, in accordance with an agreement with the Department of
Labor. BancShares has executed an agreement to purchase any or all of the shares
held by the plan if the investment manager determines that is in the best
interests of the plan. The estimated fair value of those shares at December 31,
1997, was $15,615, which is included in other liabilities. Subsequent changes in
fair value for these shares will be reflected in BancShares' Consolidated
Statement of Income.
NOTE J -- ESTIMATED FAIR VALUES
Fair value estimates are made at a specific point in time based on relevant
market data 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 or financial instruments payable
upon demand or within 90 days equals the carrying value.
The carrying values and estimated fair values for financial instruments at
December 31 are as follows:
1997 1996
------------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
Cash and due from banks ................. $ 506,771 $ 506,771 $ 437,029 $ 437,029
Investment securities held to maturity .. 2,456,722 2,462,111 2,138,831 2,138,031
Investment securities available for sale 26,572 26,572 22,405 22,405
Federal funds sold ...................... 81,775 81,775 156,000 156,000
Loans, net of reserve for loan losses ... 5,361,412 5,328,877 4,849,069 4,852,568
Income earned not collected ............. 66,631 66,631 60,175 60,175
Deposits ................................ 7,579,567 7,579,978 6,954,028 6,957,475
Short-term borrowings ................... 593,824 593,824 392,006 392,006
Long-term obligations ................... 10,856 11,491 6,922 7,267
Accrued interest payable ................ 53,819 53,819 49,528 49,528
Forward commitments to sell loans as of December 31, 1997, and 1996 had no
carrying value and unrealized losses of $829 and $39, respectively. For other
off-balance sheet commitments and contingencies, carrying amounts are reasonable
estimates of the fair values for such financial instruments. Carrying amounts
include unamortized fee income and, in some cases, reserves for any projected
credit loss from those financial instruments. These amounts are not material to
BancShares' financial position.
NOTE K -- EMPLOYEE BENEFIT PLANS
Employees who qualify under length of service and other requirements
participate in a noncontributory defined benefit pension plan. Under the plan,
retirement benefits are based on years of service and average earnings. The
policy is to
50
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE K -- EMPLOYEE BENEFIT PLANS -- Continued
fund the maximum amount that is deductible for federal income tax purposes. No
contributions were made during the three-year period ending December 31, 1997.
The plan's assets consist primarily of investments in the Bank's common trust
funds, which include listed common stocks and fixed income securities.
At December 31, 1997, the plan's assets also included BancShares common
stock with an appraised value of $15,615. See Note I for additional information
regarding these shares.
The following table sets forth the plan's funded status at December 31:
1997 1996
------------- -------------
Pension benefit obligation:
Vested ...................................................................... $ (95,833) $ (86,838)
Nonvested ................................................................... (3,463) (1,653)
---------- ----------
Accumulated benefit obligation ............................................... (99,296) (88,491)
Effect of projected future compensation levels ............................... (25,998) (20,893)
---------- ----------
Projected benefit obligation ................................................. (125,294) (109,384)
Fair value of plan assets .................................................... 159,197 137,758
---------- ----------
Plan's assets in excess of projected benefit obligation ...................... 33,903 28,374
Unrecognized net transition asset ............................................ (6,076) (7,303)
Unrecognized net gain due to diference in past experience and assumptions .... (30,195) (21,769)
Unrecognized prior service cost .............................................. 1,198 1,352
---------- ----------
Prepaid (accrued) pension expense ............................................ $ (1,170) $ 654
========== ==========
The net periodic pension cost for the years ended December 31 included the
following:
1997 1996 1995
------------ ------------ ------------
Service costs .......................... $ 3,975 $ 3,596 $ 3,139
Interest costs ......................... 8,131 7,565 7,073
Actual return on plan assets ........... (26,182) (13,491) (26,745)
Net amortization and deferral .......... 15,899 3,475 16,842
--------- --------- ---------
Net periodic pension cost .............. $ 1,823 $ 1,145 $ 309
========= ========= =========
Prior service cost is being amortized on a straight-line basis over the
estimated average remaining service period of employees. In determining the
projected benefit obligation at December 31, 1997, 1996 and 1995, the following
assumptions were used:
1997 1996 1995
---------- ---------- ----------
Weighted average discount rate ................. 7.25% 7.25% 7.25%
Rate of future compensation increases .......... 4.50 4.25 4.25
Long-term rate of return on plan assets ........ 8.25 8.25 8.25
Employees are also eligible to participate in a matching savings plan after
one year of service. During 1997 BancShares made participating contributions to
this plan of $3,758 compared to $3,473 in 1996 and $3,155 during 1995.
Under the 1994 Employee Stock Purchase Plan, certain employees received
options to purchase shares of BancShares' Class A common stock. All options
expired on June 30, 1996. No options were outstanding at December 31, 1997 or
1996.
51
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE L -- OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
Other noninterest income for the years ended December 31 consisted of the
following:
1997 1996 1995
--------- --------- ---------
ATM income ................................ $ 7,329 $ 5,289 $2,729
Net premium income ........................ 3,584 3,364 3,964
Other ..................................... 3,521 3,908 1,852
------- ------- ------
Total other noninterest income .......... $14,434 $12,561 $8,545
======= ======= ======
Other noninterest expense for the years ended December 31 consisted of the
following:
1997 1996 1995
---------- ---------- ---------
Credit card expense ........................ $11,722 $10,097 $ 9,106
Amortization of intangibles ................ 9,034 8,197 5,877
Telecommunications ......................... 8,032 7,711 6,790
Postage .................................... 6,623 6,383 5,701
FDIC insurance ............................. 1,818 13,586 8,418
Other ...................................... 58,000 47,717 41,351
------- ------- -------
Total other noninterest expense .......... $95,229 $93,691 $77,243
======= ======= =======
During 1996, FDIC insurance expense included a special assessment of
deposit liabilities insured by the FDIC's Savings Association Insurance Fund.
The gross amount of the assessment was $10,007.
NOTE M -- INCOME TAXES
At December 31, income tax expense consisted of the following:
1997 1996 1995
---------- ---------- ----------
Current tax expense
Federal ....................................... $37,937 $ 37,923 $ 30,757
State ......................................... 80 117 1,120
------- -------- --------
Total current tax expense .................... 38,017 38,040 31,877
------- -------- --------
Deferred tax expense (benefit)
Federal ....................................... 1,179 (1,255) (111)
State ......................................... 296 (578) (1,343)
------- -------- --------
Total deferred tax expense (benefit) ......... 1,475 (1,833) (1,454)
------- -------- --------
Total income tax expense ..................... $39,492 $ 36,207 $ 30,423
======= ======== ========
52
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE M -- INCOME TAXES -- Continued
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:
1997 1996 1995
---------- ---------- ----------
Income tax at statutory rate ............................................................ $ 38,518 $ 35,586 $ 30,565
Increase (reduction) in income taxes resulting from:
Amortization of goodwill .............................................................. 2,099 1,991 1,280
Nontaxable income on loans and investments, net of nondeductible expenses ............. (1,295) (1,387) (1,378)
State and local income taxes (benefit), including change in valuation allowance, net of
federal income tax benefit ........................................................... 244 (300) (145)
Other, net ............................................................................ (74) 317 101
-------- -------- --------
Total tax expense .................................................................... $ 39,492 $ 36,207 $ 30,423
======== ======== ========
The net deferred tax asset included the following components at December
31:
1997 1996
---------- ----------
Reserve for loan losses ............................... $ 32,930 $ 32,553
Net deferred loan fees and costs ...................... -- 2,292
Losses on other real estate ........................... 1,500 1,512
Net operating loss carryforwards ...................... 710 871
Accrued pension expense ............................... 466 --
Other ................................................. 6,750 6,580
-------- --------
Gross deferred tax asset ............................. 42,356 43,808
Less: valuation allowance ............................. (2,547) (2,617)
-------- --------
Deferred tax asset less valuation allowance .......... 39,809 41,191
-------- --------
Accelerated depreciation .............................. 4,386 4,692
Accretion of bond discount ............................ 2,015 1,094
Prepaid pension expense ............................... -- 160
Tax reserve for loan losses reversal .................. 797 1,424
Unrealized securities gains ........................... 6,297 4,471
Net deferred loan fees and costs ...................... 502 --
Other ................................................. 5,625 6,089
-------- --------
Deferred tax liability ............................... 19,622 17,930
-------- --------
Net deferred tax asset ............................... $ 20,187 $ 23,261
======== ========
BancShares has historically incurred immaterial amounts of state income tax
expense. The valuation allowance of $2,547 and $2,617 at December 31, 1997 and
1996, respectively, is the amount necessary to reduce BancShares' gross state
deferred tax asset to the amount which will more likely than not be realized.
NOTE N -- RELATED PARTY TRANSACTIONS
The banks have had, and expect to have in the future, banking transactions
in the ordinary course of business with several directors, officers and their
associates ("related parties"), on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with others. Those transactions neither involve more than the
normal risk of collectibility nor present any unfavorable features.
53
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE N -- RELATED PARTY TRANSACTIONS -- Continued
An analysis of changes in the aggregate amounts of related party loans for
the year ended December 31, 1997, is as follows:
Balance at beginning of year .... $12,496
New loans ....................... 14,559
Repayments ...................... 3,025
-------
Balance at end of year .......... $24,030
=======
BancShares provides certain processing and operational services to other
financial institutions. Certain of these institutions are deemed to be related
parties since certain control persons of BancShares are also deemed to be
control persons of the other banks. During 1997, 1996 and 1995, BancShares
received $10,558, $9,953 and $9,031, respectively, for services rendered to
these related parties, substantially all of which is included in other service
charges and fees and relates to data processing services provided.
See Note I for information regarding a commitment to purchase 600,000
shares of Class A common stock from a related party.
NOTE O -- ACQUISITIONS
BancShares and the Bank have consummated numerous acquisitions in recent
years. All of the transactions have been accounted for as purchases, with the
results of operations not included in BancShares' Consolidated Statements of
Income until after the transaction date. The pro forma impact of the
acquisitions as though they had been made at the beginning of the periods
presented is not material to BancShares' consolidated financial statements.
As of December 31, 1997 and 1996, BancShares had goodwill of $68,909 and
$72,910, respectively. Deposit intangibles totaled $32,039 and $24,344,
respectively.
The following table provides information regarding the acquisitions that
have been consummated during the three-year period ended December 31, 1997:
Assets Deposits Resulting
Date Institution and Location Acquired Assumed Intangible
- ---------------- ------------------------------------------ ---------- ---------- -----------
September 1997 First Savings Financial Corp. $ 45,431 $ 36,025 $ 1,826
Reidsville, North Carolina
May 1997 Four Wachovia Bank branches 80,613 86,460 7,250
Western North Carolina
April 1997 Three First Union National Bank branches 42,171 45,179 3,010
Western North Carolina
February 1996 Allied Bank Capital, Inc. 248,998 208,394 29,031
Sanford, North Carolina
June 1995 Bank of White Sulphur Springs 64,589 59,174 5,691
White Sulphur Springs, West Virginia
May 1995 Nine NationsBank of Virginia branches 133,175 143,494 10,801
Southern Virginia
March 1995 State Bank 49,700 41,238 5,555
Fayetteville, North Carolina
February 1995 Pace American Bank 58,660 53,303 6,954
Lawrenceville, Virginia
February 1995 First Investors Savings Bank, Inc., SSB 44,426 40,846 4,325
Whiteville, North Carolina
54
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE P -- REGULATORY REQUIREMENTS
BancShares and its banking subsidiaries are subject to certain requirements
imposed by state and federal banking statutes and regulations. These regulations
establish guidelines for minimum capital levels, restrict certain dividend
payments and require the maintenance of noninterest-bearing reserve balances at
the Federal Reserve Bank. Such reserves averaged $125,981 during 1997, of which
$107,390 was satisfied by vault cash and the remainder by amounts held in the
Federal Reserve Bank.
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 4 percent of
tangible assets. To meet the FDIC's well capitalized standards, the Tier 1 and
total capital ratios must be at least 6 percent and 10 percent, respectively.
Failure to meet minimum capital requirements may result in certain actions by
regulators that could have a direct material effect on the consolidated
financial statements.
FCB-NC's capital components and ratios as of December 31, 1997 and 1996 are
set forth below:
1997 1996
-------------- --------------
Risk-based capital:
Tier 1 capital ................. $ 526,411 $ 476,580
Total capital .................. 598,576 539,308
Risk-adjusted assets ........... 5,762,939 5,018,215
Tangible assets ................ 8,410,057 7,823,101
Tier 1 capital ratio ........... 9.13% 9.50%
Total capital ratio ............ 10.39 10.75
Leverage capital ratio ......... 6.26 6.09
At December 31, 1997 and 1996, BancShares, FCB-WV and ASB met their
respective minimum capital requirements.
The Board of Directors of FCB-NC may declare a dividend of a portion of its
undivided profits as it may deem appropriate, subject to the requirements of the
FDIC and the General Statutes of North Carolina, without prior approval from the
requisite regulatory authorities. As of December 31, 1997, this amount was
approximately $422,804. Dividends declared by FCB-NC amounted to $24,727 in
1997, $33,940 in 1996 and $39,273 in 1995.
NOTE Q -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, BancShares and its subsidiaries have
financial instruments with off-balance sheet risk in order to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, standby letters of credit and forward commitments to sell loans. These
instruments involve, to varying degrees, elements of credit, interest rate or
liquidity risk.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
Established lending standards control the potential credit-risk exposure
associated with these commitments. In some cases, BancShares requires that
collateral be pledged to secure the commitment. At December 31, 1997 and 1996,
BancShares has unused commitments totaling $2,006,327 and $1,596,468,
respectively.
Standby letters of credit are conditional commitments guaranteeing
performance of a customer to a third party. Those guarantees are issued
primarily to support public and private borrowing arrangements. In order to
minimize its exposure, BancShares' credit policies also govern the issuance of
standby letters of credit. At December 31, 1997 and 1996, BancShares had standby
letters of credit amounting to $12,885 and $14,178, respectively.
55
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE Q -- COMMITMENTS AND CONTINGENCIES -- Continued
Management has elected to enter into forward commitments to sell loans to
protect BancShares' commitments to originate residential mortgage loans from the
potential negative effects of fluctuating market prices. These forward sales
commitments, which totaled $60,000 and $18,000 at December 31, 1997 and 1996,
respectively, were at fixed prices and were scheduled to settle within 60 days
of that date. At December 31, 1997 and 1996, these forward sales commitments had
no carrying value and unrealized losses of $829 and $39 respectively. These
amounts are included with the carrying value of loans held for sale and
commitments to originate mortgage loans when determining whether a valuation
allowance is required to reduce the mortgage loans held for sale and commitments
to originate mortgage loans held for sale to the lower of cost or fair value.
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.
See Note I for information concerning BancShares' commitment to purchase
shares of its common stock.
56
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE R -- FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY)
First Citizens BancShares, Inc.'s principal assets are its investments in
and receivables from its banking subsidiaries. Its sources of income are
dividends and interest income on funds borrowed by the Bank. The Parent
Company's condensed balance sheets as of December 31, 1997 and 1996, and the
related condensed statements of income and cash flows for the years ended
December 31, 1997, 1996 and 1995 are as follows:
Condensed Balance Sheets
December 31,
-------------------------
1997 1996
------------- -----------
ASSETS
Cash ................................................. $ 7,290 $ 4,002
Investment securities held to maturity ............... 204,126 --
Investment securities available for sale ............. 26,206 22,083
Investment in bank subsidiaries ...................... 615,416 521,208
Due from subsidiaries ................................ 111,108 313,515
Other assets ......................................... 67,001 59,662
---------- --------
Total assets ....................................... $1,031,147 $920,470
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings ................................ $ 345,529 $295,428
Other liabilities .................................... 83,978 9,535
Common Stock:
Class A ............................................ 8,906 9,652
Class B ............................................ 1,722 1,759
Surplus .............................................. 143,760 143,760
Retained Earnings .................................... 437,794 453,640
Unrealized securities gains, net of taxes ............ 9,458 6,696
---------- --------
Total liabilities and shareholders' equity ......... $1,031,147 $920,470
========== ========
Condensed Statements of Income
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
Interest income .......................................................... $15,276 $12,445 $10,562
Interest expense ......................................................... 14,484 12,164 10,081
------- ------- -------
Net interest income ...................................................... 792 281 481
Dividends from bank subsidiary ........................................... 32,814 33,940 39,273
Noninterest income ....................................................... 437 1,487 39
Noninterest operating expense ............................................ 6,531 6,162 3,472
------- ------- -------
Income before income tax benefit and equity in undistributed net income of
subsidiaries ........................................................... 27,512 29,546 36,321
Income tax (benefit) expense ............................................. (37) 11 (75)
------- ------- -------
Income before equity in undistributed income of subsidiaries ............. 27,549 29,535 36,396
Equity in undistributed net income of subsidiaries ....................... 43,009 35,932 20,510
------- ------- -------
Net income ............................................................. $70,558 $65,467 $56,906
======= ======= =======
57
FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Dollars in thousands)
NOTE R -- FIRST CITIZENS BANCSHARES, INC. (PARENT COMPANY) -- Continued
Condensed Statements of Cash Flows
Year Ended December 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
OPERATING ACTIVITIES
Net income ............................................................... $ 70,558 $ 65,467 $ 56,906
Adjustments ..............................................................
Undistributed net income of subsidiaries ............................... (43,009) (35,932) (20,510)
Change in other assets ................................................. (8,699) (9,447) (96,128)
Change in other liabilities ............................................ 751 3,038 3,387
---------- --------- ---------
Net cash provided (used) by operating activities ......................... 19,601 23,126 (56,345)
---------- --------- ---------
INVESTING ACTIVITIES
Net change in due from subsidiaries .................................... 202,407 (51,556) (83,223)
Purchase of investment securities ...................................... (204,126) (3,258) (43,099)
Investment in subsidiaries ............................................. (51,200) -- --
Purchase of institutions, net of cash acquired ......................... -- 7,584 106,092
---------- --------- ---------
Net cash used by investing activities .................................... (52,919) (47,230) (20,230)
---------- --------- ---------
FINANCING ACTIVITIES
Net change in short-term borrowings .................................... 50,101 38,250 83,928
Repurchase of common stock ............................................. (2,112) (4,506) (1,545)
Proceeds from issuance of common stock ................................. -- 4,169 3,036
Cash dividends paid .................................................... (11,383) (10,559) (8,817)
---------- --------- ---------
Net cash provided by financing activities ................................ 36,606 27,354 76,602
---------- --------- ---------
Net change in cash ....................................................... 3,288 3,250 27
Cash balance at beginning of year ........................................ 4,002 752 725
---------- --------- ---------
Cash balance at end of year .............................................. $ 7,290 $ 4,002 $ 752
---------- --------- ---------
Cash payments for
Interest ............................................................... $ 14,484 $ 12,164 $ 10,081
Income taxes ........................................................... 37,984 35,554 27,454
---------- --------- ---------
Supplemental disclosure of noncash investing and financing activities:
Common stock issued for acquisitions ................................... -- $ 33,403 $ 21,846
Unrealized gain on marketable equity securities ........................ $ 4,588 11,167 --
Obligations to repurchase common stock ................................. 73,692 -- --
58