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 September 30, 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
- --------------------------------------------------------------------------------
(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 October 31, 1999
----- -------------------------------
VOTING COMMON STOCK, $5.00 PAR VALUE 906,305 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 SHEETS - UNAUDITED (DOLLARS IN THOUSANDS)
SEPTEMBER 30, December 31, September 30,
1999 1998 1998
--------------- -------------- ---------------
ASSETS
Cash and due from banks $ 100,448 $ 115,795 $ 101,758
Investment securities:
Held-to-maturity 44,941 591,286 516,987
Available-for-sale 565,943 32,542 33,039
--------------- -------------- ---------------
Total securities 610,884 623,828 550,026
Federal funds sold 27,500 64,000 48,700
Gross loans 1,798,532 1,573,069 1,538,328
Less: Reserve for loan losses (32,401) (28,306) (28,147)
--------------- -------------- ---------------
Net loans 1,766,131 1,544,763 1,510,181
Other real estate owned 285 402 449
Other assets 145,596 134,980 128,385
--------------- -------------- ---------------
TOTAL ASSETS $ 2,650,844 $ 2,483,768 $ 2,339,499
=============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 384,424 $ 354,239 $ 346,148
Time & Savings 1,749,089 1,683,248 1,589,258
--------------- -------------- ---------------
Total deposits 2,133,513 2,037,487 1,935,406
Securities sold under repurchase agreements 254,350 204,702 166,619
Long-term debt 50,963 50,000 50,000
Other liabilities 15,533 17,404 17,877
--------------- -------------- ---------------
TOTAL LIABILITIES 2,454,359 2,309,593 2,169,902
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 September 30, 1999,
December 31, 1998 and June 30, 1998 - 36,409 182 182 182
Voting common stock - $5.00 par value, authorized 2,000,000;
issued and outstanding September 30, 1999 - 908,248
December 31, 1998 - 885,275; and September 30, 1998 - 886,124 4,541 4,426 4,437
Surplus 65,081 55,000 55,000
Undivided profits 117,462 102,888 97,992
Accumulated other comprehensive income 5,937 8,397 8,704
--------------- -------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 196,485 174,175 169,597
--------------- -------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,650,844 $ 2,483,768 $ 2,339,499
=============== ============== ===============
2
FIRST CITIZENS BANCORPORATION OF SOUTH CAROLINA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 % 1999 1998 %
-------- --------- ------- --------- -------- -------
INTEREST INCOME AND FEES:
Loans $ 35,836 $ 33,169 8.04 $102,283 $ 96,147 6.38
United States Government obligations 7,840 7,837 0.04 23,415 23,946 (2.22)
Mortgage-backed securities 6 12 (50.00) 23 44 (47.73)
Tax-exempt securities 357 370 (3.51) 1,023 1,210 (15.45)
Other securities and federal funds sold 263 419 (37.23) 2,259 1,925 17.35
-------- --------- --------- --------
44,302 41,807 5.97 129,003 123,272 4.65
-------- --------- --------- --------
INTEREST EXPENSE:
Deposits 14,861 15,279 (2.74) 43,714 44,963 (2.78)
Short-term borrowed funds 2,989 2,312 29.28 8,692 7,191 20.87
Long-term debt 1,038 1,035 0.29 3,100 2,542 21.95
-------- --------- --------- --------
18,888 18,626 1.41 55,506 54,696 1.48
-------- --------- --------- --------
Net interest income 25,414 23,181 9.63 73,497 68,576 7.18
Provision for loan losses 1,630 1,432 13.83 4,110 3,714 10.66
-------- --------- --------- --------
Net interest income after
provision for loan losses 23,784 21,749 9.36 69,387 64,862 6.98
-------- --------- --------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 5,011 4,222 18.69 13,735 12,111 13.41
Fees for other customer services 2,898 2,566 12.94 8,046 7,303 10.17
Gain on sale of securities 0 0 0.00 8 28 (71.43)
Other 610 545 11.93 2,168 1,808 19.91
-------- --------- --------- --------
8,519 7,333 16.17 23,957 21,250 12.74
-------- --------- --------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits 10,127 9,127 10.96 30,483 26,795 13.76
Net occupancy expense 838 828 1.21 2,388 2,286 4.46
Furniture and equipment expense 490 515 (4.85) 1,534 1,425 7.65
Depreciation expense 2,136 1,387 54.00 5,649 3,994 41.44
Amortization of intangibles 1,255 1,539 (18.45) 4,069 5,458 (25.45)
Other 7,329 6,903 6.17 21,427 18,999 12.78
-------- --------- --------- --------
22,175 20,299 9.24 65,550 58,957 11.18
-------- --------- --------- --------
Income before income taxes 10,128 8,783 15.31 27,794 27,155 2.35
Income taxes 3,505 2,999 16.87 9,643 9,388 2.72
-------- --------- --------- --------
NET INCOME $ 6,623 $ 5,784 14.51 $ 18,151 $ 17,767 2.16
======== ========= ========= ========
=====================================================================================================
NET INCOME PER COMMON SHARE -
BASIC AND DILUTED $ 7.15 $ 6.20 15.32 $ 19.59 $ 19.01 3.05
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 919,810 926,579 (0.73) 919,810 928,216 (0.91)
3
FIRST CITIZENS BANCORPORATION OF SOUTH CAROLINA AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS 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 17,769
Change in unrealized losses
on investment securities
available-for-sale, net of tax
benefit of $2,422 (4,499)
Total comprehensive income 13,270
Reacquired voting common stock (27) (1,936) (1,963)
Preferred stock dividends (128) (85)
---------- ------- -------- -------- ----------- --------------- ----------
Balance at September 30, 1998 3,282 182 4,437 55,000 97,992 8,704 169,597
Comprehensive income:
Net income 5,849
Change in unrealized losses
on investment securities
available-for-sale, net of tax
benefit of $166 (307)
Total comprehensive income 5,542
Reacquired voting common stock (11) (910) (921)
Preferred stock dividends (43) (43)
---------- ------- -------- -------- ----------- --------------- ----------
Balance at December 31, 1998 3,282 182 4,426 55,000 102,888 8,397 174,175
Comprehensive income:
Net income 18,151
Change in unrealized losses
on investment securities
available-for-sale, net of tax
benefit of $1,272 (2,460)
Total comprehensive income 15,691
Reacquired voting common stock (56) (3,451) (3,507)
Stock issued in acquisition 171 10,081 10,252
Preferred stock dividends (126) (126)
---------- ------- -------- -------- ----------- --------------- ----------
Balance at September 30, 1999 $ 3,282 $ 182 $ 4,541 $ 65,081 $ 117,462 $ 5,937 $ 196,485
========== ======= ======== ======== =========== =============== ==========
4
FIRST CITIZENS BANCORPORATION OF SOUTH CAROLINA AND SUBSIDIARY
- -----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (DOLLARS IN THOUSANDS)
Nine Months Ended
September 30,
----------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 18,151 $ 17,769
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 4,110 3,714
Depreciation and amortization 9,719 9,452
Amortization of investment securities 566 227
Provision for deferred income taxes (24,061) (19,074)
Gains on sales of premises and equipment (222) (18)
Increase in interest income accrued, not collected (909) (1,837)
(Decrease)/increase in accrued interest payable (600) 621
Originations of loans held for resale (116,406) (104,414)
Proceeds from sales of loans held for resale 122,530 103,094
Gains on sales of loans held for resale (585) (387)
Decrease in other assets 23,162 18,873
(Decrease)/increase in other liabilities (1,898) 3,268
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,557 31,288
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (170,007) (109,886)
Calls, maturities and prepayments of securities, available-for-sale 254,650 0
Purchases of investment securities, available-for-sale (225,865) (8,066)
Calls, maturities and prepayments of securities, held-to-maturity 3,505 102,299
Purchases of investment securities, held-to-maturity (1,060) (62,998)
Net decrease in interest bearing deposits in financial institutions 0 7,700
Decrease/(increase) in federal funds sold 39,800 (36,800)
Proceeds from sales of premises and equipment 3,609 2,084
Purchases of premises and equipment (11,103) (21,436)
Decrease in other real estate owned 193 123
Net decrease in intangible assets (3,974) (689)
Purchase of institutions, net of cash acquired (6,680) 0
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (116,932) (127,669)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 10,798 55,986
Increase/(decrease) in federal funds purchased and securities sold
under agreements to repurchase 49,648 (17,549)
Issuance of Bancorporation notes 963 0
Increase in long term debt 0 52,000
Principal repayments on long-term debt 0 (16,483)
Common stock issued 10,252 0
Cash dividends paid (126) (128)
Reacquired common stock (3,507) (1,963)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 68,028 71,863
DECREASE IN CASH AND DUE FROM BANKS (15,347) (24,518)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 115,795 126,276
---------- ----------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 100,448 $ 101,758
========== ==========
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(DOLLARS IN THOUSANDS)
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, except for
the following:
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133-an amendment of FASB Statement No. 133". SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued in
June 1998. It establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for 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. SFAS
No. 133, as issued, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier adoption encouraged. SFAS No. 137
amended SFAS No. 133 by delaying the effective date to all fiscal quarters of
all fiscal years beginning after June 15, 2000. The FASB continues to encourage
early adoption of SFAS No. 133.
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 obligation 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
ACQUISITIONS
(DOLLARS IN THOUSANDS)
On August 20, 1999, Bancorporation acquired The Exchange Bank of South Carolina
("Exchange Bank"), a banking corporation located in Kingstree, South Carolina.
Total cost of the acquisition, recorded as a purchase, was $15,750. The
breakdown of the purchase cost is as follows:
Cash $ 4,535
5 year Bancorporation notes @ 7.50% 90
10 year Bancorporation notes @ 7.75% 873
Bancorporation stock - 34,174 shares 10,252
------
Total consideration $15,750
=======
Goodwill associated with this acquisition will be amortized over 15 years using
the straight-line method. There are no contingent payments, options or
commitments specified in the acquisition agreement.
The following pro forma combined consolidated financial data gives effect to the
August 20, 1999 acquisition of Exchange Bank as if it had been consummated on
January 1, 1998.
(Dollars in thousands, except for per share data)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Total assets $2,650,844 $2,430,827 $2,650,844 $2,430,827
Net interest income 27,518 24,177 77,722 71,578
Other income 8,700 7,497 24,492 21,714
Net income 6,728 6,008 18,816 18,457
Basic earnings per share 7.04 6.21 19.62 19.05
7
MANAGEMENT'S OPINION
The preceding consolidated financial statements and the notes thereto are
unaudited; however, in the opinion of management, all adjustments comprising
normal recurring accruals necessary for a fair presentation of financial
statements have been recorded. 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
SELECTED AVERAGE BALANCES: 1999 1998 1999 1998
- ---------------------------------------- ----------- ----------- ----------- -----------
Total assets $2,681,373 $2,333,847 $2,651,101 $2,309,112
Gross loans 1,765,183 1,524,282 1,700,309 1,476,582
Short-term borrowed funds 255,236 187,744 256,780 196,354
Long-term debt 50,440 50,000 50,148 41,884
Noninterest bearing deposits 395,149 330,178 383,616 324,893
Total deposits 2,157,153 1,905,496 2,132,987 1,886,077
Stockholders' equity 203,783 172,536 195,787 168,303
QUALITY DATA:
- ----------------------------------------
Nonperforming assets 3,205 2,922 3,205 2,922
Net chargeoffs 379 843 1,128 1,702
Reserve for loan losses 32,401 28,147 32,401 28,147
Gross loans 1,798,532 1,538,328 1,798,532 1,538,328
RATIOS:
- ----------------------------------------
Return on assets .99% .99% .91% 1.03%
Return on equity 13.00% 13.41% 12.36% 14.08%
Nonperforming assets to gross loans .18% .19% .18% .19%
Annualized net chargeoffs to gross loans .08% .22% .08% .15%
Reserve for loan losses to gross loans 1.80% 1.83% 1.80% 1.83%
Reserve for loan losses times
nonperforming assets 10.11X 9.63X 10.11X 9.63x
INVESTMENT SECURITIES (dollars in thousands)
As of September 30, 1999, the investment portfolio was $610,884 compared to
$550,026 as of September 30, 1998. Bancorporation continues to invest primarily
in short-term U.S. Government obligations, thereby minimizing credit, interest
rate and liquidity risk. The portfolio was comprised of 90.60% U.S. Government
obligations as of September 30, 1999, as compared to 89.20% as of September 30,
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 its 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 in the first quarter to the
available-for-sale category was $568,944, with an adjustment to stockholders'
equity for $1,854, net of tax effect of $998.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
LOANS
Growth in loans was attributed primarily to competitive interest rates, special
promotions with introductory rates on home equity loans and increased emphasis
on lending to middle and small markets. The loan portfolio mix did not change
significantly and no major change is expected for the remainder of 1999. The
growth was funded primarily through core deposits and short-term borrowed funds.
CAPITAL RATIOS
September 30,
-------------
1999 1998
----- ------
Tier I leverage ratio 8.58% 8.26%
Risk-based capital ratio total 14.07% 14.39%
Tier I 12.69% 13.09%
Tier II 1.38% 1.30%
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 that 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)
The increase in net interest income in the third quarter was due to growth in
interest-earning assets, primarily commercial, consumer and home equity loans.
9
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)
QUARTER ENDED SEPTEMBER 30,
- ----------------------------------------------------
Average Volume Interest Average Rate Variance Due To
- ---------------------- ---------------- ---------- ----------------- Total
1999 1998 1999 1998 1999 1998 Rate Volume Variance
- ---------- ---------- ------- ------- ---- ---- -------- -------- ----------
INTEREST-EARNING ASSETS:
1,765,183 $1,524,282 $35,984 $33,305 8.24 8.67 Loans ($2,284) $ 4,963 $ 2,679
650,028 575,480 8,008 7,935 4.93 5.47 Taxable investment securities (846) 919 73
30,158 25,879 549 569 8.21 8.79 Non-taxable investment securities (108) 88 (20)
12,558 24,104 146 333 5.44 5.48 Federal funds sold (30) (157) (187)
- ---------- ---------- ------- ------- -------- -------- ----------
2,457,927 2,149,745 44,687 42,142 7.35 7.78 Total interest-earning assets (3,268) 5,813 2,545
NONINTEREST-EARNING ASSETS:
111,045 85,853 Cash and due from banks
82,968 72,829 Premises and equipment
29,433 25,420 Other, less reserve for loan losses
- ---------- ----------
223,446 184,102 Total noninterest-earning assets
- ---------- ----------
2,681,373 2,333,847 TOTAL ASSETS
========== ==========
INTEREST-BEARING LIABILITIES:
1,762,004 $1,575,318 $14,861 $15,279 3.41 3.85 Deposits ($2,009) $ 1,591 ($418)
Federal funds purchased and securities
255,236 187,744 2,989 2,311 4.65 4.88 sold under agreements to repurchase (107) 785 678
50,440 50,000 1,037 1,036 8.16 8.22 Long-term debt (8) 9 1
- ---------- ---------- ------ ------- -------- ------- ------
2,067,680 1,813,062 18,887 18,626 3.68 4.08 Total interest-bearing liabilities (2,124) 2,385 261
- ---------- ---------- ------ ------- -------- ------- ------
NONINTEREST-BEARING LIABILITIES:
395,149 330,178 Demand deposits
14,761 18,071 Other liabilities
- ---------- ----------
409,910 348,249 Total noninterest-bearing liabilities
- ---------- ----------
203,783 172,536 Stockholders' equity
========== ==========
TOTAL LIABILITIES AND
2,681,373 $2,333,847 STOCKHOLDERS' EQUITY
========== ==========
3.67 3.70 Interest rate spread
==== ====
$25,800 $23,516 4.25 4.34 Net Interest Margin ($1,144) $ 3,428 $ 2,284
======= ======= ==== ==== ======== ======== ==========
<FN>
* Interest income and yields are presented on a fully taxable equivalent basis using the federal income tax rate and
state tax rates, as applicable.
10
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)
NINE MONTHS ENDED SEPTEMBER 30,
- ------------------------------------------------------
Average Volume Interest Average Rate Variance Due To
- ---------------------- ------------------ ---------- ---------------- Total
1999 1998 1999 1998 1999 1998 Rate Volume Variance
- ---------- ---------- -------- -------- ---- ---- -------- ------- ----------
INTEREST-EARNING ASSETS:
1,700,309 $1,476,582 $102,715 $ 96,516 8.33 8.74 Loans ($7,778) $13,977 $ 6,199
639,355 584,775 23,812 24,232 5.08 5.54 Taxable investment securities (2,499) 2,079 (420)
30,988 28,365 1,574 1,861 8.20 8.75 Non-taxable investment securities (448) 161 (287)
56,966 35,370 1,930 1,443 4.81 5.45 Federal funds sold (292) 779 487
0 4,879 0 240 0.00 6.58 Other earning assets (240) 0 (240)
- --------- ---------- -------- -------- -------- ------- ----------
2,427,618 2,129,971 130,031 124,292 7.39 7.80 Total interest-earning assets (11,257) 16,996 5,739
NONINTEREST-EARNING ASSETS:
112,011 85,756 Cash and due from banks
82,469 67,231 Premises and equipment
29,003 26,154 Other, less reserve for loan losses
- --------- ----------
223,483 179,141 Total noninterest-earning assets
2,651,101 $2,309,112 TOTAL ASSETS
========= ==========
INTEREST-BEARING LIABILITIES:
1,749,371 $1,561,184 $ 43,715 $ 44,963 3.45 3.85 Deposits ($6,117) $ 4,869 ($1,248)
Federal funds purchased and securities
256,780 196,354 8,691 7,191 4.53 4.90 sold under agreements to repurchase (553) 2,053 1,500
50,148 41,884 3,100 2,542 8.26 8.11 Long-term debt 46 512 558
- --------- ---------- -------- -------- -------- ------- ----------
2,056,299 1,799,422 55,506 54,696 3.70 4.06 Total interest-bearing liabilities (6,624) 7,434 810
-------- -------- -------- ------- ----------
NONINTEREST-BEARING LIABILITIES:
383,616 324,893 Demand deposits
15,399 16,494 Other liabilities
399,015 341,387 Total noninterest-bearing liabilities
195,787 168,303 Stockholders' equity
- --------- ----------- TOTAL LIABILITIES AND
2,651,101 $2,309,112 STOCKHOLDERS' EQUITY
========== ==========
3.69 3.74 Interest rate spread
==== ====
$ 74,525 $ 69,596 4.26 4.37 Net interest margin ($4,633) $ 9,562 $ 4,929
======== ======== ==== ===== ======== ======= ==========
<FN>
* Interest income and rates are presented on a fully taxable equivalent basis using the federal income tax rate and
state tax rates, as applicable.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESERVE FOR LOAN LOSSES (dollars in thousands)
The reserve for loan losses reflects management's assessment of losses inherent
in the loan portfolio. Factors considered in this assessment include growth and
mix of the loan portfolio, credit quality, current and anticipated economic
conditions and historical credit loss experience.
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
RESERVE FOR LOAN LOSSES: 1999 1998 1999 1998
-------- -------- -------- --------
Balance at beginning of period $30,037 $27,558 $28,306 $26,135
Addition related to acquisition 1,113 -- 1,113 --
Provision for loan losses 1,630 1,432 4,110 3,714
-------- -------- -------- --------
Chargeoffs (704) (1,259) (2,213) (2,941)
Recoveries 325 416 1,085 1,239
-------- -------- -------- --------
Net chargeoffs (379) (843) (1,128) (1,702)
-------- -------- -------- --------
Balance at end of period $32,401 $28,147 $32,401 $28,147
-------- -------- -------- --------
Nonperforming assets $ 3,205 $ 2,922 $ 3,205 $ 2,922
Annualized net chargeoffs to:
Average loans .09% .22% .09% .15%
Loans at end of period .08% .22% .08% .15%
Reserve for loan losses 4.68% 11.98% 4.64% 8.06%
NONINTEREST INCOME AND EXPENSE (dollars in thousands)
Total noninterest income increased $1,186 or 16.17% and $2,707 or 12.74%,
respectively, for the quarter and nine months ended September 30, 1999. Growth
in both periods was primarily due to an increase in service charges on deposit
accounts.
Total noninterest expense was up $1,876 or 9.24% and $6,593 or 11.18%,
respectively, for the quarter and nine months ended September 30, 1999. Most of
the increase in both periods was due to normal operating expenses associated
with growth and expenses associated with the Year 2000 remediation and
preparation effort.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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.
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.
Expenses incurred through September 30, 1999 were $1,819. 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.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
YEAR 2000 (CONTINUED)
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
its compliance efforts. Quarterly progress reports are made to Bancorporation's
Board of Directors on the overall Y2K Program progress.
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. All 88
non-mainframe systems 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 mailed 115 environmental letters, involving heating,
air conditioning, utilities, etc, to vendors with respect to its mission
critical non-IT systems. Responses have been received from all vendors, 111
written and 4 verbal, indicating they are compliant.
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 were 35 mainframe applications to be tested and all those applications
have been tested and determined to be compliant.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
YEAR 2000 (CONTINUED)
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 have been 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.
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 other
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. Based on additional analysis and
questionnaire completion by customers, as of September 30, 1999, no customers
remain in the High Risk category.
Bancorporation has reviewed its liquidity needs in terms of being able to
respond to deposit base erosion because 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 another source of funds. Loan assets, to be used as collateral for
borrowing at the discount window, have been reviewed by the Federal Reserve. In
addition, the Bond Portfolio of the Bank has been adjusted to hold additional
government bonds maturing in the fourth quarter.
CONTINGENCY PLANS - Contingency plans for operational functions have been
established to insure continued operation in critical areas. Bancorporation has
tied individual contingency plans to the core business processes to determine
minimum requirements to provide our customers with adequate service. Business
management contingency plans for uncontrollable functions, such as phone, water
and electrical services, were completed as of June 30, 1999. All contingency
plans have been validated and are ready to implement as necessary.
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.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable.
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)
Registrant has entered into an agreement to purchase three offices from another
financial institution. Total assets purchased will be approximately $43,000 and
deposits assumed will be approximately $65,000. The premium to be paid for this
acquisition is based on deposit levels at closing and is expected to be $7,500.
This acquisition is expected to close in the first quarter of 2000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 Statement Re Computation of Earnings Per Share
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1999.
16
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: 11/12/99 By: /s/ Jay C. Case
-------- ---------------------------------------
Jay C. Case, Executive Vice President
(Chief Financial Officer)
17