FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999 Commission File Number 0-11172
FIRST CITIZENS BANCORPORATION OF SOUTH CAROLINA, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0738665
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1230 MAIN STREET
COLUMBIA, SOUTH CAROLINA 29201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 733-3456
---------------
NO CHANGE
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
----- -----------------------------
Voting Common Stock, $5.00 Par Value 882,766 Shares
Non-voting Common Stock, $5.00 Par Value 36,409 Shares
FIRST CITIZENS BANCORPORATION OF SOUTH CAROLINA AND SUBSIDIARIES
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET - UNAUDITED (DOLLARS IN THOUSANDS)
MARCH 31, December 31, March 31,
1999 1998 1998
----------- ----------- -----------
Cash and due from banks. . . . . . . . . . . . . . . . . . . . $ 107,001 $ 115,795 $ 111,163
Interest-bearing deposits in financial institutions. . . . . . - - 7,700
Investment securities:
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . 24,413 591,286 589,863
Available-for-sale . . . . . . . . . . . . . . . . . . . . . 600,821 32,542 36,567
----------- ----------- -----------
Total securities . . . . . . . . . . . . . . . . . . . . . . . 625,234 623,828 626,430
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . 87,100 64,000 47,800
Gross loans. . . . . . . . . . . . . . . . . . . . . . . . . . 1,598,043 1,573,069 1,437,676
Less: Reserve for loan losses . . . . . . . . . . . . . . . (28,760) (28,306) (26,306)
----------- ----------- -----------
Net loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,569,283 1,544,763 1,411,370
Other real estate owned. . . . . . . . . . . . . . . . . . . . 207 402 381
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 133,604 134,980 115,892
----------- ----------- -----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . $2,522,429 $2,483,768 $2,320,736
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 361,176 $ 354,239 $ 326,920
Time & Savings . . . . . . . . . . . . . . . . . . . . . . . 1,678,972 1,683,248 1,564,024
----------- ----------- -----------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . 2,040,148 2,037,487 1,890,944
Securities sold under repurchase agreements. . . . . . . . . . 236,725 204,702 189,963
Long-term debt:. . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 50,000
Term loan. . . . . . . . . . . . . . . . . . . . . . . . . . . - - 6,875
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . 18,118 17,404 16,351
----------- ----------- -----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . 2,344,991 2,309,593 2,154,133
Stockholders' Equity:
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . 3,282 3,282 3,282
Non-voting common stock - $5.00 par value, authorized
1,000,000; issued and outstanding March 31, 1999,
December 31, 1998 and March 31, 1998 - 36,409. . . . . . . 182 182 182
Voting common stock - $5.00 par value, authorized 2,000,000;
issued and outstanding March 31, 1999 - 882,766;
December 31, 1998 - 885,275; and March 31, 1998 - 892,813 . 4,414 4,426 4,464
Surplus. . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 55,000 55,000
Undivided profits. . . . . . . . . . . . . . . . . . . . . . 107,381 102,888 88,564
Accumulated other comprehensive income . . . . . . . . . . . 7,179 8,397 15,111
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . . . 177,438 174,175 166,603
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . $2,522,429 $2,483,768 $2,320,736
=========== =========== ===========
2
FIRST CITIZENS BANCORPORATION OF SOUTH CAROLINA AND SUBSIDIARIES
- -----------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998 %
-------- --------- -------
INTEREST INCOME AND FEES:
Loans . . . . . . . . . . . . . . . . . $ 32,626 $ 30,913 5.54
United States Government obligations. . 7,653 7,749 (1.24)
Mortgage-backed securities. . . . . . . 9 17 (47.06)
Tax-exempt securities . . . . . . . . . 342 450 (24.00)
Other securities and federal funds sold 1,254 873 43.64
-------- ---------
41,884 40,002 4.70
-------- ---------
INTEREST EXPENSE:
Deposits. . . . . . . . . . . . . . . . 14,520 14,709 (1.28)
Short-term borrowings . . . . . . . . . 2,877 2,458 17.05
Long-term borrowings. . . . . . . . . . 1,031 362 184.81
-------- ---------
18,428 17,529 5.13
-------- ---------
Net interest income . . . . . . . . . . . 23,456 22,473 4.37
Provision for loan losses . . . . . . . . 663 281 135.94
-------- ---------
Net interest income after
provision for loan losses . . . . . . . 22,793 22,192 2.71
-------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts . . 4,100 3,721 10.19
Fees for other customer services. . . . 2,441 2,294 6.41
Other . . . . . . . . . . . . . . . . . 968 627 54.39
-------- ---------
7,509 6,642 13.05
-------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits. . . . . 10,386 8,750 18.70
Net occupancy expense . . . . . . . . . 833 748 11.36
Furniture and equipment expense . . . . 525 434 20.97
Depreciation expense. . . . . . . . . . 1,681 1,377 22.08
Amortization of intangibles . . . . . . 1,412 2,014 (29.89)
Other . . . . . . . . . . . . . . . . . 7,076 5,768 22.68
-------- ---------
21,913 19,091 14.78
-------- ---------
Income before income taxes. . . . . . . . 8,389 9,743 (13.90)
Applicable income taxes . . . . . . . . . 2,924 3,424 (14.60)
-------- ---------
NET INCOME. . . . . . . . . . . . . . . . $ 5,465 $ 6,319 (13.51)
-------- ---------
============================
NET INCOME PER COMMON SHARE - BASIC . . . $ 5.89 $ 6.80 (13.31)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING. . . . . . . . . . . . 919,835 929,222 (1.01)
3
FIRST CITIZENS BANCORPORATION OF SOUTH CAROLINA AND SUBSIDIARIES
- -----------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
(DOLLARS IN THOUSANDS)
Non- Accumulated Total
Voting Voting Other Stock-
Preferred Common Common Undivided Comprehensive holders'
Stock Stock Stock Surplus Profits Income Equity
------ ------ ------- -------- --------- -------- ------------
Balance at December 31, 1997 . . . . . $3,282 $ 182 $4,464 $ 55,000 $ 82,287 $13,203 $158,418
Comprehensive income:
Net income 6,319
Change in unrealized gain
on investment securities
available-for-sale, net of taxes
of $1,027 1,908
Total comprehensive income 8,227
Preferred stock dividends (42) (42)
------ ------ ------- -------- --------- -------- ---------
Balance at March 31, 1998. . . . . . . 3,282 182 4,464 55,000 88,564 15,111 166,603
Comprehensive income:
Net income 17,299
Change in unrealized gain
on investment securities
available-for-sale, net of taxes
of $3,615 (6,714)
Total comprehensive income 10,585
Reacquired voting common stock (38) (2,846) (2,884)
Preferred stock dividends (129) (129)
------ ------ ------- -------- --------- -------- ---------
Balance at December 31, 1998 . . . . . 3,282 182 4,426 55,000 102,888 8,397 174,175
Comprehensive income:
Net income 5,465
Change in unrealized gain
on investment securities
available-for-sale, net of taxes
of ($2,422) (1,218)
Total comprehensive income 4,247
Reacquired voting common stock (12) (930) (942)
Preferred stock dividends (42) (42)
------ ------ ------- -------- --------- -------- ---------
Balance at March 31, 1998. . . . . . . $3,282 $ 182 $4,414 $ 55,000 $107,381 $ 7,179 $177,438
====== ====== ======= ======== ========= ======== =========
4
FIRST CITIZENS BANCORPORATION OF SOUTH CAROLINA AND SUBSIDIARIES
- -----------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED (DOLLARS IN THOUSANDS)
Three Months Ended
March 31,
---------------------
1999 1998
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,465 $ 6,319
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . 663 281
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 3,090 3,390
Amortization of investment securities . . . . . . . . . . . . . . . 137 247
Provision for deferred income taxes . . . . . . . . . . . . . . . . (6,874) (6,876)
(Gains)/losses on sales of premises and equipment . . . . . . . . . (150) 58
Decrease/(increase) in interest income accrued, not collected . . . 261 (1,986)
Increase in accrued interest payable. . . . . . . . . . . . . . . . 598 654
Originations of loans held for resale . . . . . . . . . . . . . . . (40,738) (30,611)
Proceeds from sales of loans held for resale. . . . . . . . . . . . 46,532 31,516
Gains on sales of loans held for resale . . . . . . . . . . . . . . (223) (97)
Decrease in other assets. . . . . . . . . . . . . . . . . . . . . . 8,949 7,448
Increase in other liabilities . . . . . . . . . . . . . . . . . . . 116 1,709
Other operating activities. . . . . . . . . . . . . . . . . . . . . 0 0
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . 17,826 12,052
========= ==========
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . (30,754) (10,157)
Calls, maturities and prepayments of securities, available-for-sale 79,802 0
Purchases of investment securities, available-for-sale. . . . . . . (83,862) (1,719)
Calls, maturities and prepayments of securities, held-to-maturity . 934 70,433
Purchases of investment securities, held-to-maturity. . . . . . . . (290) (104,047)
Increase in federal funds sold. . . . . . . . . . . . . . . . . . . (23,100) (35,900)
Proceeds from sales of premises and equipment . . . . . . . . . . . 2,512 470
Purchases of premises and equipment . . . . . . . . . . . . . . . . (5,313) (5,906)
Decrease/(increase) in other real estate owned. . . . . . . . . . . 195 191
Net decrease in intangible assets . . . . . . . . . . . . . . . . . (444) (199)
--------- ----------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . (60,320) (86,834)
========= ==========
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits. . . . . . . . . . . . . . . . . . . . . . 2,661 11,524
Increase in federal funds purchased and securities sold
under agreements to repurchase. . . . . . . . . . . . . . . . . . 32,023 5,795
Net increase in long term borrowing . . . . . . . . . . . . . . . . 0 52,000
Principal repayments on long-term debt. . . . . . . . . . . . . . . 0 (8,983)
Maturities of term loan . . . . . . . . . . . . . . . . . . . . . . 0 (625)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (42) (42)
Reacquired common stock . . . . . . . . . . . . . . . . . . . . . . (942) 0
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . 33,700 59,669
========= ==========
DECREASE IN CASH AND DUE FROM BANKS . . . . . . . . . . . . . . . . . . (8,794) (15,113)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD. . . . . . . . . . . . . 115,795 126,276
--------- ----------
CASH AND DUE FROM BANKS AT END OF PERIOD. . . . . . . . . . . . . . . . $107,001 $ 111,163
========= ==========
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies of First Citizens
Bancorporation of South Carolina, Inc. ("Bancorporation") is set forth in Note 1
to the Consolidated Financial Statements in Bancorporation's Annual Report on
Form 10-K for 1998. The significant accounting policies used during the current
quarter are unchanged from those disclosed in the 1998 Annual Report, with the
following exceptions:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Bancorporation adopted SFAS No. 133 effective January 1, 1999.
Accordingly, although Bancorporation does not have derivative instruments,
management, as of January 1, 1999, has elected to transfer the U.S. Government
obligations portion of its held-to-maturity securities into the
available-for-sale category, as permitted by SFAS No. 133. The total
transferred to the available-for-sale category was $568,944 with an adjustment
to stockholders' equity for $1,854, net of tax effect of $998.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage
Backed Securities Retained After the Securitization of Mortgages Held for Sale
by a Mortgage Banking Enterprise". SFAS No. 134 requires that after an entity
that is engaged in mortgage banking activities has securitized mortgage loans
that are held-for-sale, it must classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. The statement is effective for fiscal years
beginning after December 15, 1998. Bancorporation adopted SFAS No. 134 as of
January 1, 1999. The effect of adoption is immaterial.
6
MANAGEMENT'S OPINION
The preceding financial statements and the notes thereto are unaudited; however,
in the opinion of management, all adjustments comprised of normal recurring
accruals necessary for a fair presentation of financial statements have been
included. Certain amounts in prior periods have been reclassified to conform to
the 1999 presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
SUMMARY (dollars in thousands)
Quarter ended
March 31,
------------------------
SELECTED AVERAGE BALANCES: 1999 1998
- ---------------------------------------- ----------- -----------
Total assets . . . . . . . . . . . . . . $2,518,229 $2,264,987
Gross loans. . . . . . . . . . . . . . . 1,579,202 1,432,214
Short-term borrowed funds. . . . . . . . 258,841 205,187
Long-term debt . . . . . . . . . . . . . 50,000 19,583
Noninterest bearing deposits . . . . . . 352,031 318,456
Total deposits . . . . . . . . . . . . . 2,016,090 1,862,645
Stockholders' Equity . . . . . . . . . . 176,979 162,228
QUALITY DATA:
- ----------------------------------------
Nonperforming assets . . . . . . . . . . 2,814 3,097
Net chargeoffs . . . . . . . . . . . . . 209 110
Reserve for loan losses. . . . . . . . . 28,760 26,306
Gross loans. . . . . . . . . . . . . . . 1,598,043 1,437,676
RATIOS:
- ----------------------------------------
Return on assets . . . . . . . . . . . . .87% 1.12%
Return on equity . . . . . . . . . . . . 12.35% 15.58%
Nonperforming assets to gross loans. . . .18% .22%
Annualized net chargeoffs to gross loans .05% .03%
Reserve for loan losses to gross loans . 1.80% 1.83%
Reserve for loan losses times
nonperforming assets. . . . . . . . . 10.22X 8.49x
INVESTMENT SECURITIES (dollars in thousands)
As of March 31, 1999, the investment portfolio was $625,234 compared to $626,430
for the same period in 1998. Bancorporation continues to invest primarily in
short-term U.S. Government obligations thereby minimizing the credit, interest
rate and liquidity risk of the investment portfolio. The portfolio was
comprised of 91.27% U.S. Government obligations as of March 31, 1999 as compared
to 89.05% for the same period in 1998. The remainder of the investment
portfolio primarily consists of municipal bonds owned by First-Citizens Bank and
Trust Company of South Carolina ("Bank") and equity securities owned by
Bancorporation. As a part of Year 2000 cash management planning, Bancorporation
transferred the U. S. Government obligations portion of its held-to-maturity
securities into the available-for-sale category, as permitted by SFAS No. 133.
The total transferred to the available-for-sale category was $568,944 with an
adjustment to stockholders' equity for $1,854, net of tax effect of $998.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
LOANS
Growth in loans is attributed primarily to strong loan demand due to the
continuing favorable interest rate environment. The loan portfolio mix did not
change significantly and no major change is expected in 1999. The growth was
funded by deposits acquired through acquisitions and growth in core deposits and
short-term borrowings.
CAPITAL RATIOS
March 31,
--------------
1999 1998
------ ------
Tier I leverage ratio . . 8.26% 8.07%
Risk based capital ratio:
Total . . . . . . . . . 14.37% 14.51%
Tier I. . . . . . . . . 13.12% 12.89%
Tier II . . . . . . . . 1.25% 1.62%
Regulatory agencies divide capital into Tier I, consisting of stockholders'
equity less ineligible intangible assets, and Tier II, consisting of the
allowable portion of the reserve for loan losses and certain long-term debt.
Capital adequacy is measured by applying both capital levels to the Bank's
risk-adjusted assets and off-balance sheet items. Regulatory requirements
presently specify that Tier I capital should exclude the market appreciation or
depreciation of securities available-for-sale arising from valuation adjustments
under SFAS No. 115. In addition to these capital ratios, regulatory agencies
have established a Tier I leverage ratio which measures Tier I capital to
average assets less ineligible intangible assets.
Regulatory guidelines require a minimum total capital to risk-adjusted assets
ratio of 8 percent (with 50 percent consisting of tangible common stockholders'
equity) and a minimum Tier I leverage ratio of 3 percent. Banks which meet or
exceed a Tier I ratio of 6 percent, a total risk based capital ratio of 10
percent and a Tier I leverage ratio of 5 percent are considered well-capitalized
by regulatory standards.
NET INTEREST INCOME (dollars in thousands)
Despite a decrease in net interest margin, net interest income was up in the
first quarter due to growth in interest-earning assets, primarily commercial and
residential mortgage loans.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME (CONTINUED):
TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS* (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
- -----------------------------------------------------
Average Volume Interest Average Rate Variance Due To
- ---------------------- ---------------- ---------- -----------------
1999 1998 1999 1998 1999 1998 Rate Volume Variance
- ---------- ---------- ------- ------- ---- ---- ------- -------- ----------
INTEREST-EARNING ASSETS:
$1,579,202 $1,432,214 $32,773 $31,032 8.42 8.79 Loans. . . . . . . . . . . . . . . . . . . ($1,353) $ 3,094 $ 1,741
601,830 565,005 7,757 7,845 5.23 5.63 Taxable investment securities. . . . . . . (569) 481 (88)
24,277 32,003 526 692 8.67 8.65 Non-taxable investment securities. . . . . 1 (167) (166)
99,081 49,916 1,159 670 4.74 5.44 Federal funds sold . . . . . . . . . . . . (94) 583 489
0 7,700 0 123 0.00 6.48 Other earning assets . . . . . . . . . . . (123) 0 (123)
------- ------ ------- -------- ----------
2,304,390 2,086,838 42,215 40,362 7.43 7.84 Total interest-earning assets . . . . (2,138) 3,991 1,853
NONINTEREST-EARNING ASSETS:
107,423 88,661 Cash and due from banks
80,269 61,922 Premises and equipment
26,147 27,566 Other, less reserve for loan losses
213,839 178,149 Total noninterest-earning assets
$2,518,229 $2,264,987 TOTAL ASSETS
========== ==========
INTEREST-BEARING LIABILITIES:
$1,664,059 $1,544,189 $14,521 $14,709 3.54 3.86 Deposits . . . . . . . . . . . . . . . . . ($1,249) $ 1,061 ($188)
Federal funds purchased and securities
258,841 205,187 2,876 2,458 4.51 4.86 sold under agreements to repurchase. . . (187) 605 418
50,000 19,583 1,031 362 8.25 7.39 Long-term debt . . . . . . . . . . . . . . 42 627 669
------- ------- -------- ------- ------
1,972,900 1,768,959 18,428 17,529 3.79 4.02 Total interest-bearing liabilities. . (1,394) 2,293 899
------- ------- -------- ------- ------
NONINTEREST-BEARING LIABILITIES:
352,031 318,456 Demand deposits
16,319 15,344 Other liabilities
368,350 333,800 Total noninterest-bearing liabilities
176,979 162,228 Stockholders' equity
TOTAL LIABILITIES AND
$2,518,229 $2,264,987 STOCKHOLDERS' EQUITY
========== ==========
3.64 3.82 Interest rate spread
==== ====
$23,787 $22,833 4.18 4.44 Net interest margin. . . . . . . . . . . . ($744) $ 1,698 $ 954
======= ======= ==== ==== ======= ======= ==========
* Interest income and rates are presented on a fully taxable equivalent basis using the federal income tax rate and state tax
rates, as applicable.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
PROVISION AND RESERVE FOR LOAN LOSSES (dollars in thousands)
The provision for loan losses reflects management's assessment of the adequacy
of the reserve for loan losses to absorb potential losses inherent in the loan
portfolio due to a decline in credit conditions or change in risk profile.
Factors considered in this assessment include growth and mix of the loan
portfolio, current and anticipated economic conditions and historical credit
loss experience.
THREE MONTHS ENDED
MARCH 31,
------------------
RESERVE FOR LOAN LOSSES: 1999 1998
-------- --------
Balance at beginning of period $28,306 $26,135
Provision for loan losses 663 281
-------- --------
Chargeoffs (585) (709)
Recoveries 376 599
-------- --------
Net chargeoffs (209) (110)
-------- --------
Balance at end of period $28,760 $26,306
-------- --------
Nonperforming assets $ 2,814 $ 3,097
Annualized net chargeoffs to:
Average loans .05% .03%
Loans at end of period .05% .03%
Reserve for loan losses 2.91% 1.67%
NONINTEREST INCOME AND EXPENSE (dollars in thousands)
Total noninterest income increased $867 or 13.05% for the three months ended
March 31, 1999. Most of the increase was due to an increase in service charges
on deposit accounts, gain on sale of loans, gain on sale of fixed assets and
preneed fiduciary fees.
Total noninterest expense was up $2,822 or 14.78% for the three months ended
March 31, 1999. Most of the increase was due to normal operating expenses and a
one-time staffing reorganization expense of $465,000 in the first quarter of
1999.
YEAR 2000 (Dollars in thousands)
GENERAL - The Year 2000 ("Y2K") issue confronting Bancorporation and
its suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing
computer programs and systems originally were programmed with six digit dates
that provided only two digits to identify the calendar year in the date field.
With the impending new millennium, these programs and computers will recognize
"00" as the year 1900 rather than the year 2000. Problems also may arise from
other sources as well, such as the use of special codes and conventions in
software that make use of the date field.
10
YEAR 2000 (CONTINUED)
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on Y2K
Project Management Awareness. These statements require financial institutions
to, among other things, examine the Y2K implications of their reliance on
vendors and with respect to data exchange and the potential impact of the Y2K
issue on their customers, suppliers and borrowers. These statements also
require each federally regulated financial institution to survey its exposure,
measure its risk and prepare a plan to address the Y2K issue. In addition, the
federal banking regulators have issued safety and soundness guidelines to be
followed by insured depository institutions, such as the Bank, to assure
resolution of any Y2K problems. The federal banking agencies have asserted that
Y2K testing and certification is a key safety and soundness issue in conjunction
with regulatory exams and, thus, that an institution's failure to address
appropriately the Y2K issue could result in supervisory action, including the
reduction of the institution's supervisory ratings, the denial of applications
for approval of mergers or acquisitions, or the imposition of civil money
penalties.
RISKS - Like most financial service providers, Bancorporation and its
operations may be significantly affected by the Y2K issue due to its dependence
on information technology and date-sensitive data. Computer hardware and
software and other equipment, both within and outside Bancorporation's direct
control, and third parties with whom Bancorporation electronically or
operationally interfaces (including without limitation its customers and third
party vendors) are likely to be affected. If computer systems are not modified
in order to be able to identify the year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations which rely on
date field information, such as interest payments or due dates and other
operating functions, could generate results which are significantly misstated,
and Bancorporation could experience an inability to process transactions,
prepare statements or engage in similar normal business activities. Likewise,
under certain circumstances, a failure to adequately address the Y2K issue could
adversely affect the viability of Bancorporation's suppliers and creditors and
the creditworthiness of its borrowers. Thus, if not adequately addressed, the
Y2K issue could result in a significant adverse impact on Bancorporation's
operations and, in turn, its financial condition and results of operations.
COSTS - Bancorporation is determined to use all resources required to
resolve any significant Y2K issues. Bancorporation's estimated aggregate
expenses associated with Y2K matters are $3,000. This includes costs directly
related to solving Y2K problems, such as modifying software and hiring Y2K
consultants. The Y2K budget for 1999 is $1,420 and the remaining Y2K budget
through the year 2000 is $1,840. Expenses for the quarter ended March 31, 1999
were $311. Bancorporation is expensing all costs associated with required
system changes as those costs are incurred and such costs are being funded
through operating cash flows.
AWARENESS - During March 1997, Bancorporation developed its plan to address
the Y2K issue. Bancorporation hired consultants to direct Y2K compliance
efforts. A Y2K Program Office ("PMO") consisting of in-house personnel is
responsible for leading the overall Y2K process. The PMO is supported by the
Executive Steering Committee ("Committee"), a group of senior managers within
the organization that is chaired by the Chief Financial Officer. Both the PMO
and the Committee meet monthly to review Y2K progress. A substantial portion of
Bancorporation's data processing functions are performed by First Citizens Bank
& Trust Company, Raleigh, North Carolina ("FCBNC") on its mainframe systems
and/or systems supported by FCBNC. The PMO meets bi-monthly with FCBNC to
monitor the status of their compliance efforts. Quarterly progress reports are
made to Bancorporation's Board of Directors on the overall Y2K Program progress.
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YEAR 2000 (CONTINUED)
ASSESSMENT - During the assessment phase of Bancorporation's Y2K plan, all
systems were categorized as mainframe systems or non-mainframe systems, and as
information technology ("IT") systems or non-IT systems. Further, each system
was assigned to one of the following priority groups:
1. Mission Critical - Significantly impacts external customers,
regulatory reporting, or solvency.
2. Operationally Dependent - Impacts the amount of time, effort or type
of equipment used to accomplish the task.
3. Supporting Function - Assists in service delivery.
A general plan for dealing with each system was developed and
responsibilities for each system were assigned to the appropriate personnel.
This phase has been completed.
REMEDIATION - For each system, a determination was made as to whether
system modification, upgrade or replacement was necessary to achieve Y2K
compliance, or whether the system was already Y2K compliant. For IT mainframe
systems, FCBNC has remediated all applicable software. For IT non-mainframe
systems, FCBSC's outside consultant is responsible for coordinating remediation
with Bancorporation's staff, which, in most cases, entails the installation of
upgrades provided by outside vendors. Of 88 non-mainframe systems, 77 have been
remediated and tested.
Non-IT systems are more difficult to analyze for Y2K compliance and are
dependent on vendor feedback to determine what will be necessary to achieve Y2K
compliance. Bancorporation has mailed 101 environmental letters, involving
heating, air conditioning, utilities, etc, to vendors with respect to its
mission critical non-IT systems, which responses were due by December 31, 1998.
Responses from 75 vendors indicated they are compliant and the remaining 26
responded that they would be compliant by June 1999.
CONFIRMATION - To prove that the new, modified or updated systems are Y2K
compliant, testing is performed in an isolated environment to ensure that all
date sensitive data is accurately processed. Bancorporation, in conjunction
with FCBNC, is testing all systems with a minimum of three dates of December 31,
1999, January 3, 2000 and February 29, 2000. Additional dates are tested, if
needed, to complete testing of each system.
There are 35 mainframe applications to be tested. As of March 31, 1999, 34
have been tested and FCBNC is in the process of installing an upgrade for the
remaining applications. Bancorporation has completed 90% of its testing on all
applications, including 86% of Mission Critical applications, as of March 31,
1999. Testing on all remaining applications is due to be completed by June 30,
1999.
During early 1998, Bancorporation identified all commercial credit
customers whose existing aggregate borrowings from the Bank exceeded $300.
Discussions have been held with each customer to assess the customer's plan for
and progress toward addressing the Y2K issue. Each customer was weighted as a
high, medium or low risk based on the results of the discussions. These ratings
were based on the customer's preparedness, vulnerability and plans for Y2K
systems. Customers rated in the medium to high risk categories will be followed
up and monitored on a periodic basis. Based on these discussions,
Bancorporation's management does not believe that the impact of the Y2K issue on
its commercial loan portfolio will be material. Consumer customers are not
being monitored for Y2K as most of their loans are secured with collateral and
losses, should they occur, are not expected to be material.
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YEAR 2000 (CONTINUED)
An analysis was performed in March 1999 to determine the readiness of the
Bank's large deposit base customers, (over $500) as related to Y2K issues.
Accounts were grouped in high or low/moderate risk categories. Low/moderate
risk consists of accounts for municipalities, trust accounts, Home Office
accounts or accounts classified as low risk on the initial report done in April
1998. In the high risk category, there are accounts that do not fit into the
low/moderate risk description or were classified as high risk on the April 1998
report. Total account breakdown was 98 low/moderate and 41 high risk accounts
totaling $216,000 and $40,000, respectively. Municipalities, classified as
low/moderate risk, represented approximately $110,000. Bancorporation's
Committee will make a determination in the first half of 1999 whether further
action is needed.
Bancorporation has reviewed its liquidity needs in terms of being able
to respond to deposit base erosion as a result of Y2K concerns. Lines of credit
have been established at other financial institutions to provide a potential
source of funds and authority has been received from the Executive Committee of
Bancorporation's Board of Directors to use the Federal Reserve Discount window
as a source of funds, if needed.
CONTINGENCY PLANS - As of March 31, 1999, contingency plans for operational
functions have been established to insure continued operation in critical areas.
Bancorporation is currently tying individual contingency plans to the core
business processes to determine minimum requirements to provide our customers
with adequate service. Crisis management contingency plans for uncontrollable
functions, such as phone, water and electrical services, are 90% complete as of
March 31, 1999. Completion is pending on outside vendor testing dates and
responses concerning the vendors' contingency plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented as part of Bancorporation's
Annual Report on Form 10K for the year ended December 31, 1998.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Registrant and its subsidiaries, are not parties to, nor is any of their
property the subject of, any material or other pending legal proceeding, other
than ordinary routine proceedings incidental to their business.
Item 2. Changes in Securities.
Not Applicable.
Item 3. Defaults upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 5. Other Information (dollars in thousands).
On February 25, 1999, First Citizens Bancorporation of South Carolina, Inc.
entered into a definitive agreement to acquire The Exchange Bank of South
Carolina ("Exchange Bank") for $15,750. The acquisition is expected to be
accounted for as a purchase of Exchange and is subject to shareholder and
regulatory approvals. The transaction is expected to be completed in the second
quarter of 1999. After the acquisition, Exchange Bank will be a wholly owned
subsidiary of Bancorporation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 Statement Re Computation of Earnings Per Share
27 Financial Data Schedule
(b) A form 8-K was filed, with exhibits, by the Registrant on March 8, 1999
reporting under Item 5 its intended acquisition of Exchange Bank.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CITIZENS BANCORPORATION
OF SOUTH CAROLINA, INC.
(Registrant)
Dated: May 11, 1999 By: /s/ Jay C. Case
-------------- -------------------------------------
Jay C. Case, Executive Vice President
(Chief Financial Officer)
15